2017
YEAR
IN
REVIEW
OUR VISION
______
As a leading provider
of specialized
insurance, RLI is
focused on building
and managing a
portfolio of innovative
products and solutions
that meet customer
needs, and delivering
results that surpass
the expectations of
shareholders.
FINANCIAL
HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
In thousands, except combined ratio,
per-share data and return on equity
2017
2016
% Change
Gross premiums written
$ 885,312
$ 874,864
Net premiums written
Consolidated revenue
Net earnings
GAAP combined ratio
749,854
797,224
105,028
96.4
740,952
816,328
114,920
89.5
Total shareholders’ equity
853,598
823,572
1.2%
1.2%
-2.3%
-8.6%
7.7%
3.7%
Per-share data:
Net earnings (diluted)
$ 2.36
$ 2.59
-8.9%
Cash dividends declared:
Ordinary
Special
Book value1
Year-end closing stock price
0.83
1.75
19.33
60.66
0.79
2.00
18.74
63.13
Return on equity
12.3%
13.2%
5.1%
-12.5%
3.2%
-3.9%
-6.8%
1 With the inclusion of dividends paid (regular and special), book value per share growth
was 17% year over year.
Dear Shareholders,
Highlights of our financial achievements in 2017 include:
I am pleased to report that 2017 was another very
positive year for RLI. Our team delivered strong financial
results, provided exemplary service to our customers and
strengthened the business in a variety of important ways.
These accomplishments were achieved amid a record year
of catastrophic events, including Hurricanes Harvey in Texas,
Irma in Florida and Maria in Puerto Rico, along with the
raging fires that swept through parts of California. Following
each of these catastrophes, our team quickly and proactively
contacted policyholders residing in the areas
impacted to offer assistance. Our associates
handled all resulting claims expeditiously,
• We achieved a 96.4 combined ratio, reflecting our
underwriting discipline.
• Our return on equity was 12 percent, a testament to our
ability to maintain profitability.
• We grew book value per share by 17 percent during the
year, inclusive of dividends.
• We continued to reward shareholders through regular
dividends and a $1.75 per share special dividend. Over
the last 10 years, we have returned nearly $1.2 billion to
shareholders in the form of regular and special dividends.
professionally and with great care.
These tragic events brought forth the
unmatched customer focus of our
employees, who went the extra mile
to serve our valued policyholders and
distribution partners.
Amid these catastrophes, by virtue of
our superior underwriting discipline,
diversified product portfolio and
prudent fiscal management, we
maintained profitability and continued
to deliver shareholder value.
UNDERWRITING
RESULTS
Persisting through highly competitive market conditions and
a series of catastrophic events, RLI posted underwriting
income of $26.8 million in 2017, resulting in a 96.4 combined
ratio. This marked our 22nd consecutive year of achieving a
combined ratio below 100.
In addition to achieving profitability, we succeeded in moderately
growing our top line. Gross premiums written grew 1 percent in
2017, fueled by growth in our casualty business, which was up
4 percent from 2016.
JONATHAN E. MICHAEL
Chairman & CEO
“ Casualty
The casualty segment grew its top-line results and posted a 99.2
combined ratio for the year. Several newer products that we have
added to the segment over the past few years supported gross
premium growth. We believe these new products, combined with
our talented underwriters, will contribute to future success in our
casualty business.
Surety
Our surety segment gross premiums were down 3 percent year over
year, but the business delivered a strong 71.2 combined ratio. This
segment continues to perform well despite intense competition.
We are confident that our surety business is in a good position
to capitalize on opportunities in the years ahead and will benefit
from recent investments we have made in new talent, technology
and customer experience initiatives.
Property
Property segment gross premiums were down 6 percent year over
year and the business posted a 108.6 combined ratio. The decline
in property premiums was largely due to our recent exit from several
underperforming products. Our 2017 segment results were also
impacted by adverse market conditions, characterized by suppressed
property insurance rates and catastrophe activity in the second half
of the year. We expect competition to remain heightened within the
property market in 2018.
Throughout the year, we made strategic investments in our products,
people, processes and technology for the long-term health of our
business. We continued to invest in initiatives that will make it even
easier for customers and producers to work with us. We also made
advancements in strengthening the core competencies that drive our
success, such as attracting new underwriters with deep expertise in
the markets we serve.
STATUTORY COMBINED RATIO
Our average statutory combined ratio has beaten the industry average by more
than 16 points over the last decade.
110
100
90
80
P&C Industry*
RLI
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2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
10-YEAR AVG.
RLI
P&C Industry*
85.7
105.2
83.9
100.5
81.4
102.5
79.1
108.2
88.0
103.1
82.2
95.8
84.1
97.2
83.9
97.9
89.0
100.6
96.2
107.3
85.4
101.8
*Sources: (1) A.M. Best (2017). Aggregate & Averages – Property/Casualty, United States & Canada. 2008 – 2016.
(2) Conning (2017). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2017. Estimated for
the year ended December 31, 2017.
INVESTMENT
RESULTS
REWARDING
EXCELLENCE
Our focus at RLI has always been on consistent, long-term
performance for our investors and our approach to investments
is no different.
Positive market conditions during the year favorably impacted
our portfolio performance and returns. Our investment portfolio
produced a 7 percent total return, with the bond portfolio returning
4 percent and the equity portfolio returning 16 percent.
Investment income was up 3 percent in 2017, due to strong
operating cash flow that increased the asset base and a
broadening of invested asset classes. We maintain a diversified,
high-quality investment portfolio that ensures we are continually
able to meet our obligations to policyholders while contributing
to earnings and growth in book value.
OUR BALANCE SHEET
REMAINS STRONG
We are committed to being responsible stewards of our capital
and identifying the right areas to make strategic investments in
our business to support its growth and future success. When we
cannot find suitable investment opportunities and have excess
capital, we will return it to our shareholders. We did so again
this year by returning $113.8 million through regular quarterly
dividends and a $1.75 per share special dividend.
Our balance sheet remains strong, as demonstrated by our A+
(Superior) financial strength rating from A.M. Best. We are well-
positioned to enhance shareholder value and, as we pursue new
growth opportunities, will adhere to our profitable underwriting
principles.
In 2017, we invested in the growth and development of our
bright, talented and hardworking employees, and facilitated their
ownership in the company through our employee stock ownership
plan (ESOP) — an opportunity they value greatly. Insiders and
employees at RLI currently own 11 percent of the company.
Since it was established in 1975, the ESOP has given us a significant
advantage in recruiting and retaining the industry’s top talent.
Moreover, when our employees have an ownership stake in the
company, it provides extra motivation for them to reach higher, care
more for our customers and contribute their best to our success.
STOCK OWNERSHIP
Insiders and employees own 11 percent of the company.
11%
Insiders & ESOP
89%
Institutions &
other public investors
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OUR ROADMAP
FOR THE FUTURE
We enter 2018 on very solid footing. We will build on the momentum
we have achieved in recent years and the lessons we learned in
2017. Our exceptional underwriting discipline will once again be
a vital strength, contributing to our ongoing resilience in a highly
competitive marketplace.
We will also continue improving our customer experience to
further differentiate ourselves from competitors. Our efforts will
include process improvements that drive operational efficiency
and investments in new tools and technology that improve how
we support our customers.
In addition, we have a strategy for 2018 and beyond called Envision
RLI. This roadmap for our future will enable us to reach new
heights as we work to further solidify our position as a recognized
performance leader of the U.S. specialty insurance industry.
In the year ahead, we will continue searching for ways to grow our
existing products, while also looking for new business opportunities.
A key part of RLI’s resilience is our commitment to think differently
and evolve to meet the changing needs of customers.
To realize our vision, we will strengthen our core business by
reinforcing and enhancing key internal disciplines. This includes
fostering development opportunities for our talented workforce and
putting the best possible technology and information in the hands
of decision-makers.
We have a lot to be proud of as we look back at 2017 and a lot
to look forward to in the years ahead. On behalf of our Board of
Directors, I would like to thank our dedicated employees for their
hard work, our customers for their loyalty, and you, our valued
shareholders, for your support.
Jonathan E. Michael
Chairman & CEO
“
10-YEAR CUMULATIVE SHAREHOLDER RETURN
Over the past 10 years, RLI’s total return to shareholders has been
significantly better than that of the S&P 500 and S&P 500 P&C Index.
$400
$350
$300
$250
$200
$150
$100
$50
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
RLI
S&P 500
S&P 500 P&C Index
$100
$100
$100
110
63
71
98
80
79
111
92
86
168
94
86
164
109
103
259
144
143
284
163
165
372
166
181
398
185
209
399
226
256
Assumes $100 invested on December 31, 2007, in RLI, S&P 500 and S&P 500 P&C Index, with
reinvestment of dividends.
Comparison of 10-year annualized total return:
RLI: 14.8% | S&P 500: 8.5% | S&P 500 P&C Index: 9.9%
S&P 500 P&C Index
S&P 500
RLI
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NET EARNINGS PER SHARE
BOOK VALUE GROWTH with dividends
Each share of our stock has generated $14.06
of diluted earnings since 2012.
Over the past five years, RLI has returned more
than $600 million in dividends to its shareholders.
$1,500
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
9
0
.
3
2
1
.
3
0
9
.
2
$1,500
$1,500
$1,200
9
5
.
2
6
3
.
2
$1,200
$1,200
$900
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$900
$900
$600
• Change X Axis values to black fill
• Add 2nd decimal back in manually
$600
$600
$300
2
0
%
This element is the building block
for the column design. The %02 is
$300
a code that allows the value to be
$300
displayed on the graph.
2013
2014
2015
2016
2017
$0
$0
$0
2012
2012
2012
2014
2015
2016
2017
2016
2017
2015
2016
2017
2013
2013
2013
2014
2015
Cumulative Dividends
Cumulative Dividends
Reported Book Value
Reported Book Value
Cumulative Dividends
2014
Reported Book Value
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Cumulative Dividends
Cumulative Dividends
Cumulative Dividends
Reported Book Value
Reported Book Value
Reported Book Value
1
6
2
7
3
8
4
9
5
10
11
12
13
14
15
EXECUTIVE TEAM
1. Thomas L. Brown: Senior Vice President, CFO
(1, 2, 3, 4) • Industry experience: 37 years • Joined
RLI in 2011 as Vice President, CFO and Treasurer.
Assumed current position in 2017.
2. Todd W. Bryant: Vice President, Finance &
Controller (1, 2, 3, 4) • Industry experience: 24
years • Joined RLI in 1993 • Prior positions: vice
president, controller; assistant vice president,
financial reporting; chief accountant. Assumed
current position in 2014.
3. Seth A. Davis: Vice President, Internal Audit (2,
3, 4) • Industry experience: 22 years • Joined RLI
in 2004 • Prior positions: manager, internal audit.
Assumed current position in 2005.
5. Donald J. Driscoll: Vice President, Chief Claim
Officer (2, 3, 4) • Industry experience: 32 years •
Joined RLI in 1996 • Prior positions: vice president,
claim; assistant vice president, claim; director,
coverage and casualty claims. Assumed current
position in 2015.
6. Jeffrey D. Fick: Senior Vice President, Chief Legal
Officer (1, 2, 3, 4) • Industry experience: 13 years •
Joined RLI in 2005 • Prior positions: vice president,
human resources. Assumed current position in
2016.
7. Bryan T. Fowler: Vice President, Chief Information
Officer (2, 3, 4) • Industry experience: 20 years •
Joined RLI in 2017.
4. Aaron P. Diefenthaler: Vice President, Chief
Investment Officer and Treasurer (1, 2, 3, 4) •
Industry experience: 16 years • Joined RLI in 2012
• Prior positions: vice president, chief investment
officer. Assumed current position in 2014.
8. Aaron H. Jacoby: Vice President, Corporate
Development (1, 2, 3) • Industry experience: 17
years • Joined RLI in 2001 • Prior positions: director,
corporate development. Assumed current position
in 2004.
9. Jill C. Johnson: Vice President, Branch Operations
(2) • Industry experience: 34 years • Joined RLI in
1993 • Prior positions: assistant vice president,
risk services; operations manager. Assumed current
position in 2015.
10. Kathleen M. Kappes: Vice President, Human
Resources (2, 3, 4) • Industry experience: 15 years •
Joined RLI in 2006 • Prior positions: assistant vice
president, human resources; director, compensation
and benefits; sr. compensation and benefits analyst.
Assumed current position in 2016.
11. Craig W. Kliethermes: President & COO (2, 3, 4) •
Industry experience: 33 years • Joined RLI in 2006 •
Prior positions: executive vice president, operations;
senior vice president, risk services; vice president,
actuarial and risk services. Assumed current position
in 2016.
12. Jennifer L. Klobnak: Senior Vice President,
Operations (2, 3, 4) • Industry experience: 18 years •
Joined RLI in 2000 • Prior positions: senior vice
president, risk services; assistant vice president,
enterprise risk management; internal control director.
Assumed current position in 2016.
13. Jonathan E. Michael: Chairman & CEO (1, 2, 3, 4) •
Industry experience: 41 years • Joined RLI in 1982 •
Prior positions: president and CEO/COO of principal
insurance subsidiaries; executive vice president; vice
president, finance; controller.
14. Chris D. Randall: Vice President, Risk Services (2,
3, 4) • Industry experience: 23 years • Joined RLI in
2002 • Prior positions: assistant vice president, risk
services; reserving actuary. Assumed current position
in 2012.
15. Jean M. Stephenson: Vice President, Corporate
Secretary (1, 2, 3, 4) • Industry experience: 23 years•
Joined RLI in 1995 • Prior positions: assistant vice
president, corporate secretary; assistant corporate
secretary, corporate compliance coordinator. Assumed
current position in 2014.
1: RLI Corp.
2: RLI Insurance Company
3: Mt. Hawley Insurance Company
4: Contractors Bonding and Insurance Company
BOARD OF
DIRECTORS
Kaj Ahlmann (2, 5) • Director since 2009
• Retired Global Head of Strategic Services and
Chairman of the Advisory Board for Deutsche Bank
Barbara R. Allen (3, 5) • Director since 2006
• Retired President of Proactive Partners
Michael E. Angelina (2, 5) • Director since 2013
• Executive Director of the Academy of Risk
Management and Insurance at Saint Joseph’s
University
John T. Baily (3, 4) • Director since 2003
• Retired President of Swiss Re Capital Partners
Calvin G. Butler, Jr. (2, 3) • Director since 2016
• CEO of Baltimore Gas & Electric Company
David B. Duclos (1, 4) • Director since 2017
• Retired CEO of QBE North America
Jordan W. Graham (1, 4) • Director since 2004
• Managing Director for Quotient Partners
F. Lynn McPheeters (1, 4) • Director since 2000
• Retired Vice President & CFO of Caterpillar Inc.
Jonathan E. Michael • Director since 1997
• Chairman & CEO of RLI Corp.
Robert P. Restrepo, Jr. (1, 5) • Director since 2016
• Retired Chairman, CEO & President of State Auto
Insurance Company
James J. Scanlan (1, 2) • Director since 2015
• Retired U.S. Insurance Industry Leader of
PricewaterhouseCoopers LLP
Michael J. Stone (4, 5) • Director since 2012
• Former President & COO of RLI Insurance
Company
FIELD OFFICERS
CASUALTY
William R. Bell, III: Vice President,
Environmental Casualty (New York, NY) •
Industry experience: 30 years
PROPERTY
Robert J. Schauer: President, RLI Marine
(New York, N.Y.) • Industry experience:
30 years
Chad S. Berberich: Vice President, Executive
Products Group (Irving, Tex.) • Industry
experience: 21 years
John A. Stenhouse: Vice President, E&S
Property (Alpharetta, Ga.) • Industry
experience: 29 years
Carol J. Denzer: Vice President, Small
Commercial Lines (Peoria, Ill.) • Industry
experience: 32 years
Paul C. Dietrich: Vice President, Professional
Services Group (Bala Cynwyd, Pa.) • Industry
experience: 30 years
Dennis H. Drees: Vice President, Casualty
Brokerage (Alpharetta, Ga.) • Industry
experience: 36 years
Jeffrey D. Foering: Vice President, Energy
Casualty (Mt. Laurel, N.J.) • Industry
experience: 34 years
Grace W. Fortune: Vice President, Casualty
Large Retention Unit (Chicago, Ill.) • Industry
experience: 41 years
Daniel N. Meyer: President, RLI Transportation
(Atlanta, Ga.) • Industry experience: 17 years
Richard D. Nesbitt: Vice President, General
Binding Authority (Atlanta, Ga.) • Industry
experience: 40 years
Richard W. Quehl: Senior Vice President,
Commercial P&C (Chicago, Ill.) • Industry
experience: 48 years
Eric J. Raudins: Vice President, Specialty
Personal Lines (Broadview Heights, Oh.) •
Industry experience: 27 years
Paul J. Simoneau: Senior Vice President, E&S
Lines (Singer Island, Fl.) • Industry experience:
40 years
SURETY
Greg E. Chilson: Vice President, Surety
(Houston, Tex.) • Industry experience: 26 years
Barton W. Davis: Vice President, Contract Surety
(Peoria, Ill.) • Industry experience: 30 years
Martha K. Weissbaum: Vice President,
Commercial Surety (Oakland, Calif.) • Industry
experience: 32 years
CLAIM
Andrea J. Dean: Vice President, Claim (Peoria,
Ill.) • Industry experience: 24 years
Robert S. Handzel: Vice President, Claim
(Dewitt, N.Y.) • Industry experience: 40 years
Kevin S. Horwitz: Vice President, Claim (Peoria,
Ill.) • Industry experience: 17 years
Elizabeth K. McLaughlin: Vice President,
Chief Claim Counsel (Dewitt, N.Y.) • Industry
experience: 32 years
Ira E. Sussman: Vice President, Claim
(Chicago, Ill.) • Industry experience:
33 years
CONTRACTORS BONDING AND
INSURANCE COMPANY
Robert M. Ogle: Vice President, Contractors
Bonding and Insurance Company (Seattle,
Wash.) • Industry experience: 29 years
1: Executive Resources Committee 2: Audit Committee 3: Nominating/Corporate Governance Committee 4: Finance and Investment Committee 5: Strategy Committee
SELECTED FINANCIAL DATA
The following is
selected financial
data of RLI Corp.
and subsidiaries for
the 10 years ended
December 31, 2017.
(amounts in
thousands, except
per share data and
combined ratios)
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
OPERATING RESULTS
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings (loss)
Net cash provided from operating activities
FINANCIAL CONDITION
Total investments and cash
Total assets
Unpaid losses and settlement expenses
Total debt
Total shareholders’ equity
Statutory surplus(1)
SHARE INFORMATION(2)
Net earnings per share:
Basic
Diluted
Comprehensive earnings (loss) per share:
Basic
Diluted
Cash dividends declared per share:
Ordinary
Special
Book value per share
Closing stock price
Stock split
Weighted average shares outstanding:
Basic
Diluted
Common shares outstanding
OTHER NON-GAAP FINANCIAL INFORMATION
Net premiums written to statutory surplus(1)
GAAP combined ratio(3)
Statutory combined ratio(1)(3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
885,312
797,224
105,028
140,337
197,525
874,864
816,328
114,920
113,756
174,463
2,140,790
2,021,827
2,947,244
2,777,633
1,271,503
1,139,337
148,928
853,598
864,554
148,741
823,572
859,976
853,586
794,634
137,544
89,935
152,586
1,951,543
2,735,465
1,103,785
148,554
823,469
865,268
2.39
2.36
3.19
3.15
0.83
1.75
19.33
60.66
2.63
2.59
2.60
2.56
0.79
2.00
18.74
63.13
3.18
3.12
2.08
2.04
0.75
2.00
18.91
61.75
863,848
775,165
135,445
170,801
123,085
1,964,285
2,774,284
1,121,040
148,367
845,062
849,297
3.15
3.09
3.97
3.90
0.71
3.00
19.61
49.40
44,033
44,500
44,148
43,772
44,432
43,945
43,299
44,131
43,544
43,020
43,819
43,103
87%
96.4
96.2
86%
89.5
89.0
83%
84.5
83.9
83%
84.5
84.1
843,195
705,601
126,255
119,112
134,966
1,922,058
2,738,912
1,129,433
148,184
828,966
859,221
2.95
2.90
2.79
2.74
0.67
1.50
19.29
48.69
200%(2)
42,744
43,514
42,982
78%
83.1
82.2
784,799
660,774
103,346
129,191
702,107
619,169
126,598
147,931
36,240 (4)
117,991(4)
1,840,881
2,644,520
1,158,483
99,888
796,363
684,072
1,900,288
2,654,615
1,150,714
99,781
792,634
710,186
636,316
583,424
128,197
146,778
100,235
1,803,021
2,480,073
1,173,943
99,674
769,151
732,379
631,200
546,552
92,431
154,712
127,759
1,852,502
2,502,850
1,146,460
99,567
809,260
784,161
681,169
561,012
77,335
(3,236)
161,334
1,658,828
2,385,666
1,159,311
99,460
686,578
678,041
2.44
2.39
3.04
2.99
0.63
2.50
18.73
32.33
3.00
2.95
3.51
3.45
0.60
2.50
18.73
36.43
3.05
3.02
3.49
3.46
0.58
3.50
18.34
26.29
2.14
2.13
3.59
3.56
0.54
19.03
26.63
1.80
1.77
(0.08)
(0.07)
0.50
15.99
30.58
42,431
43,160
42,525
42,156
42,869
42,324
42,040
42,482
41,929
43,123
43,461
42,259
43,079
43,696
42,949
87%
89.0
88.0
77%
79.6
79.1(5)
66%
80.4
81.4
60%
82.8
83.9
76%
84.6
85.7
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
OPERATING RESULTS
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings (loss)
Net cash provided from operating activities
FINANCIAL CONDITION
Total investments and cash
Total assets
Total debt
Unpaid losses and settlement expenses
Total shareholders’ equity
Statutory surplus(1)
SHARE INFORMATION(2)
Net earnings per share:
Comprehensive earnings (loss) per share:
Basic
Diluted
Basic
Diluted
Cash dividends declared per share:
Ordinary
Special
Book value per share
Closing stock price
Stock split
Weighted average shares outstanding:
Basic
Diluted
Common shares outstanding
OTHER NON-GAAP FINANCIAL INFORMATION
Net premiums written to statutory surplus(1)
GAAP combined ratio(3)
Statutory combined ratio(1)(3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
885,312
797,224
105,028
140,337
197,525
874,864
816,328
114,920
113,756
174,463
2,140,790
2,021,827
2,947,244
2,777,633
1,271,503
1,139,337
148,928
853,598
864,554
148,741
823,572
859,976
853,586
794,634
137,544
89,935
152,586
1,951,543
2,735,465
1,103,785
148,554
823,469
865,268
2.39
2.36
3.19
3.15
0.83
1.75
19.33
60.66
2.63
2.59
2.60
2.56
0.79
2.00
18.74
63.13
3.18
3.12
2.08
2.04
0.75
2.00
18.91
61.75
863,848
775,165
135,445
170,801
123,085
1,964,285
2,774,284
1,121,040
148,367
845,062
849,297
3.15
3.09
3.97
3.90
0.71
3.00
19.61
49.40
44,033
44,500
44,148
43,772
44,432
43,945
43,299
44,131
43,544
43,020
43,819
43,103
87%
96.4
96.2
86%
89.5
89.0
83%
84.5
83.9
83%
84.5
84.1
843,195
705,601
126,255
119,112
134,966
1,922,058
2,738,912
1,129,433
148,184
828,966
859,221
2.95
2.90
2.79
2.74
0.67
1.50
19.29
48.69
200%(2)
42,744
43,514
42,982
78%
83.1
82.2
784,799
660,774
103,346
129,191
702,107
619,169
126,598
147,931
36,240 (4)
117,991(4)
1,840,881
2,644,520
1,158,483
99,888
796,363
684,072
1,900,288
2,654,615
1,150,714
99,781
792,634
710,186
636,316
583,424
128,197
146,778
100,235
1,803,021
2,480,073
1,173,943
99,674
769,151
732,379
631,200
546,552
92,431
154,712
127,759
1,852,502
2,502,850
1,146,460
99,567
809,260
784,161
681,169
561,012
77,335
(3,236)
161,334
1,658,828
2,385,666
1,159,311
99,460
686,578
678,041
2.44
2.39
3.04
2.99
0.63
2.50
18.73
32.33
3.00
2.95
3.51
3.45
0.60
2.50
18.73
36.43
3.05
3.02
3.49
3.46
0.58
3.50
18.34
26.29
2.14
2.13
3.59
3.56
0.54
19.03
26.63
1.80
1.77
(0.08)
(0.07)
0.50
15.99
30.58
42,431
43,160
42,525
42,156
42,869
42,324
42,040
42,482
41,929
43,123
43,461
42,259
43,079
43,696
42,949
87%
89.0
88.0
77%
79.6
79.1(5)
66%
80.4
81.4
60%
82.8
83.9
76%
84.6
85.7
(1) Ratios and surplus information are presented on a statutory basis. As discussed
in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, statutory accounting principles differ from GAAP and are
generally based on a solvency concept. Further discussion is included in note 9
to the consolidated financial statements within Item 8, Financial Statements and
Supplementary Data. Reporting of statutory surplus is a required disclosure under
GAAP.
(2) On January 15, 2014, our stock split on a 2-for-1 basis. All share and per share
data has been retroactively stated to reflect this split.
(3) See page 34 for information regarding non-GAAP financial measures.
(4) Operating cash flow for 2011 includes a $50.0 million cash deposit that we
received from a commercial surety customer in lieu of credit. The return of this
$50.0 million deposit is reflected in operating cash flow for 2012.
(5) Includes statutory results of CBIC post-acquisition.
FINANCIAL
HIGHLIGHTS
RLI STOCK
RLI Corp. common stock trades on the New York Stock Exchange
under the symbol RLI.
SHAREHOLDER INQUIRIES
Shareholders of record with requests concerning individual account
balances, stock certificates, dividends, stock transfers, tax
information or address corrections should contact the transfer
agent and registrar:
EQ Shareholder Services
P.O. Box 64856
St. Paul, MN 55164-0854
Phone: 800-468-9716 or 651-450-4064
Fax: 651-450-4085
www.shareowneronline.com
DIVIDEND REINVESTMENT PLANS
If you wish to sign up for an automatic dividend reinvestment and
stock purchase plan or to have your dividends deposited directly
into your checking, savings or money market accounts, send your
request to the transfer agent and registrar.
REQUESTS FOR ADDITIONAL INFORMATION
Electronic versions of the following documents are or will be
made available on our website: 2017 annual report on form 10-K;
2018 proxy statement; code of conduct; corporate governance
guidelines; and charters of the executive resources, audit, finance
and investment, strategy and nominating/corporate governance
committees of our board. Printed copies of these documents
are available without charge to any shareholder. To be placed on a
mailing list to receive shareholder materials, contact our corporate
headquarters.
COMPANY FINANCIAL STRENGTH RATINGS
A.M. Best:
A+ (Superior) RLI Group
Standard & Poor’s: A+ (Strong)
RLI Insurance Company
Moody’s:
A+ (Strong) Mt. Hawley Insurance
Company
A2 (Good)
A2 (Good)
RLI Insurance Company
Mt. Hawley Insurance
Company
Our financial strength ratings reflect each rating agency’s opinion of
our financial strength, operating performance and ability to meet our
obligations to policyholders and are not evaluations directed toward
the protection of investors.
CONTACTING RLI
For investor relations requests and management’s perspective on
specific issues, contact Aaron Jacoby, Vice President, Corporate
Development, at 309-693-5880 or at aaron.jacoby@rlicorp.com.
RLI Corp.
9025 N. Lindbergh Drive
Peoria, Illinois 61615-1431
Phone: 309-692-1000, or
800-331-4929
Fax: 309-692-1068
Find comprehensive
investor information
at www.rlicorp.com.
OUR
MISSION
We provide our customers with outstanding service through
innovative risk management products and solutions.
We are dedicated to carefully chosen niche markets.
We attract outstanding talent and continuously develop
our expertise.
We constantly re-evaluate, enhance and reinvigorate our
business model to create new products, services and
delivery systems.
We create long-term shareholder value by pursuing profitable
growth, underwriting for a profit and earning returns that
significantly exceed our cost of capital.
OUR
VALUES
We are talented.
We are innovative.
We are customer focused.
We are driven.
We are people of integrity.
We are respectful.
We are owners.
2017____
YEAR
IN
REVIEW
9025 N. LINDBERGH DRIVE
PEORIA, IL 61615-1431
P: 309.692.1000 | W W W. R L I C O R P. C O M
© 2018 RLI CORP.
1.15M
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧⌧⌧⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
(cid:2)(cid:2)(cid:2)(cid:2) 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)
Illinois
(State or other jurisdiction of incorporation or organization)
37-0889946
(I.R.S. Employer Identification No.)
9025 North Lindbergh Drive, Peoria, Illinois
(Address of principal executive offices)
61615
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code (309) 692-1000
Title of each class
Name of each exchange on which registered
Common Stock $1.00 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:2) No ⌧
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ⌧ No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ⌧ No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer (cid:2)
Non-accelerated filer (cid:2)
(Do not check if a smaller
reporting company)
Smaller reporting company (cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:2) No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates of the Registrant as of June 30, 2017, based upon the closing
sale price of the Common Stock on June 30, 2017 as reported on the New York Stock Exchange, was $2,125,028,624. Shares of Common Stock
held directly or indirectly by each reporting officer and director along with shares held by the Company ESOP have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant’s Common Stock, $1.00 par value, on February 7, 2018 was 44,237,951.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant’s definitive Proxy Statement for the 2018 annual meeting of shareholders to be held May 3, 2018, are
incorporated herein by reference into Part III of this document, including: “Share Ownership of Certain Beneficial Owners,”
“Board Meetings and Compensation,” “Compensation Discussion & Analysis,” “Executive Compensation,” “Equity
Compensation Plan Information,” “Executive Management,” “Corporate Governance and Board Matters,” “Audit Committee
Report” and “Proposal four: Ratification of Selection of Independent Registered Public Accounting Firm.”
Exhibit index is located on pages 122-123 of this document, which lists documents filed as exhibits or incorporated by
reference herein.
2
RLI Corp.
Index to Annual Report on Form 10-K
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Items 10-14.
Part IV
Item 15. Exhibits and Financial Statement Schedules
Page
4
23
30
30
30
30
30
32
33
61
63
111
111
111
111
111
3
Item 1. Business
PART I
RLI Corp. is an Illinois corporation that was organized in 1965. We underwrite selected property and casualty insurance
through major subsidiaries collectively known as RLI Insurance Group (the Group). We conduct operations principally through
three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI Corp. and our principal insurance
subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, Puerto Rico, the
Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus
lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam.
Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of insurance on an
admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois. We have
no material foreign operations.
As a specialty insurance company with a niche focus, we offer insurance coverages in both the specialty admitted and
excess and surplus markets. We distribute our property and casualty insurance through our branch offices that market to
wholesale and retail producers. We offer limited coverages on a direct basis to select insureds, as well as various reinsurance
coverages. In addition, from time to time, we produce a limited amount of business under agreements with managing general
agents under the direction of our product vice presidents.
We maintain a website at http://www.rlicorp.com. We make available free of charge on our website our annual report on
Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or
furnished to the Securities and Exchange Commission (SEC) as soon as reasonably practicable after such materials are filed or
furnished. Information contained on our website is not intended to be incorporated by reference in this annual report and you
should not consider that information a part of this annual report.
For the year ended December 31, 2017, the following table provides the geographic distribution of our risks insured as
represented by direct premiums earned for all coverages:
State
California
New York
Florida
Texas
Washington
New Jersey
Illinois
Arizona
Pennsylvania
Louisiana
Hawaii
Ohio
All Other
Total direct premiums earned
Direct Premiums Earned Percent of Total
(in thousands)
$
$
130,517
121,975
82,122
65,794
31,166
26,077
26,042
25,544
21,677
20,980
17,432
16,765
249,027
835,118
15.6 %
14.6 %
9.8 %
7.9 %
3.7 %
3.1 %
3.1 %
3.1 %
2.6 %
2.5 %
2.1 %
2.0 %
29.9 %
100.0 %
In the ordinary course of business, we rely on other insurance companies to share risks through reinsurance. A large
portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each
individual risk (known as facultative reinsurance). We have quota share, excess of loss and catastrophe (CAT) reinsurance
contracts that protect against losses over stipulated amounts arising from any one occurrence or event. These arrangements
allow us to pursue greater diversification of business and serve to limit the maximum net loss on catastrophes and large risks.
Reinsurance is subject to certain risks, specifically market risk, which affects the cost of and the ability to secure these
contracts, and credit risk, which is the risk that our reinsurers may not pay on losses in a timely fashion or at all. The following
table illustrates the degree to which we have utilized reinsurance during the past three years. For an expanded discussion of the
impact of reinsurance on our operations, see note 5 to the consolidated financial statements within Item 8, Financial Statements
and Supplementary Data.
4
(in thousands)
PREMIUMS WRITTEN
Direct & Assumed
Reinsurance ceded
Net
PREMIUMS EARNED
Direct & Assumed
Reinsurance ceded
Net
Year Ended December 31,
2016
2017
2015
$ 885,312 $ 874,864 $ 853,586
(135,458) (133,912) (131,615)
$ 749,854 $ 740,952 $ 721,971
$ 867,639 $ 863,180 $ 832,904
(129,702) (134,572) (132,743)
$ 737,937 $ 728,608 $ 700,161
SPECIALTY INSURANCE MARKET OVERVIEW
The specialty insurance market differs significantly from the standard market. In the standard market, products and
coverage are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis
of price. In contrast, the specialty market provides coverage for risks that do not fit the underwriting criteria of the standard
carriers. Competition tends to focus less on price and more on availability, coverage, service and other value-based
considerations. While specialty market exposures may have higher insurance risks than their standard admitted market
counterparts, we manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must
have extensive knowledge of, and expertise in, our markets. Many of our risks are underwritten on an individual basis and
tailored coverages are employed in order to respond to distinctive risk characteristics. We operate in the specialty admitted
insurance market, the excess and surplus insurance market and the specialty property and casualty reinsurance markets.
SPECIALTY ADMITTED INSURANCE MARKET
We write business in the specialty admitted market. Most of these risks are unique and hard to place in the standard
admitted market, but for marketing and regulatory reasons, they must remain with an admitted insurance company. The
specialty admitted market is subject to greater state regulation than the excess and surplus market, particularly with regard to
rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in
various state associations, such as state guaranty funds and assigned risk plans. For 2017, our specialty admitted operations
produced gross premiums written of $572.2 million, representing approximately 64 percent of our total gross premiums for the
year.
EXCESS AND SURPLUS INSURANCE MARKET
The excess and surplus market focuses on hard-to-place risks. Participating in this market allows us to underwrite non-
standard risks with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more
restrictive and more expensive than in the standard admitted market. The excess and surplus lines regulatory environment and
production model also effectively filter submission flow and match market opportunities to our expertise and appetite.
According to the 2017 edition of A.M. Best Aggregate & Averages – Property/Casualty, United States & Canada, the excess
and surplus market represented approximately $27 billion, or 4 percent, of the entire $613 billion domestic property and
casualty industry in 2017, as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of
$280.1 million, or 32 percent, of our total gross premiums written in 2017.
SPECIALTY PROPERTY AND CASUALTY REINSURANCE MARKETS
We write business in the specialty property and casualty reinsurance markets. This business can be written on an
individual risk (facultative) basis or on a portfolio (treaty) basis. We write contracts on an excess of loss and a proportional
basis. Contract provisions are written and agreed upon between the company and its reinsurance clients. The business is
typically more volatile as a result of unique underlying exposures and excess and aggregate attachments. This business requires
specialized underwriting and technical modeling. For 2017, our specialty property and casualty reinsurance operations wrote
gross premiums of $33.0 million, representing approximately 4 percent of our total gross premiums written for the year.
BUSINESS SEGMENT OVERVIEW
The segments of our insurance operations are casualty, property and surety. For additional information, see note 11 to the
consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
5
CASUALTY SEGMENT
Commercial and Personal Umbrella
Our commercial umbrella coverage is written in excess of primary liability insurance provided by other carriers and in
excess of primary liability written by us. The personal umbrella coverage is written in excess of homeowners’ and automobile
liability coverage provided by other carriers, except in Hawaii, where some underlying homeowners’ coverage is written by us.
Net premiums earned from this business totaled $115.5 million, $111.1 million and $104.6 million, or 16 percent, 15 percent
and 15 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
General Liability
Our general liability business consists primarily of coverage for third-party liability of commercial insureds including
manufacturers, contractors, apartments, real estate investment trusts (REITs) and mercantile. We also offer coverages for
security guards and in the specialized areas of onshore energy-related businesses and environmental liability for underground
storage tanks, contractors and asbestos and environmental remediation specialists. Net premiums earned from our general
liability business totaled $90.3 million, $86.9 million and $84.2 million, or 12 percent of total net premiums earned for 2017,
2016 and 2015, respectively.
Professional Services
We offer professional liability coverages focused on providing errors and omission coverage to small to medium-sized
design, technical, computer and miscellaneous professionals. Our product suite for these customers also includes a full array of
multi-peril package products including general liability, property, automobile, excess liability and workers’ compensation
coverages. This business primarily markets its products through specialty retail agents nationwide. Net premiums earned from
the professional services group totaled $78.5 million, $75.9 million and $71.0 million, or 11 percent, 10 percent and 10 percent
of total net premiums earned for 2017, 2016 and 2015, respectively.
Commercial Transportation
Our transportation insurance provides commercial automobile liability and physical damage insurance to local,
intermediate and long haul truckers, public transportation entities and equipment dealers, along with other types of specialty
commercial automobile risks. We also offer incidental, related insurance coverages including general liability, excess liability
and motor truck cargo. Our highly experienced transportation underwriters produce business through independent agents and
brokers nationwide. Net premiums earned from this business totaled $78.1 million, $81.4 million and $65.6 million, or 11
percent, 11 percent and 9 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
Small Commercial
Our small commercial business offers property and casualty insurance coverages to small contractors and other small to
medium-sized retail businesses. The coverages included in these packages are predominantly general liability, but also have
some inland marine coverages as well as commercial automobile, property and umbrella coverage. These products are
primarily marketed through retail agents. Net premiums earned from the small commercial business totaled $49.6 million,
$45.7 million and $40.4 million, or 7 percent, 6 percent and 6 percent of total net premiums earned for 2017, 2016 and 2015,
respectively.
Executive Products
We provide a suite of management liability coverages, such as directors and officers (D&O) liability insurance, fiduciary
liability and fidelity coverages, for a variety of low to moderate classes of risks, including both public and private businesses.
Our publicly traded D&O appetite generally focuses on offering excess “Side A” D&O coverage (where corporations cannot
indemnify the individual directors and officers) as well as excess full coverage D&O. Additionally, we offer representations
and warranties coverage for companies involved in mergers and acquisitions and cyber liability coverage to medium to large
size public and private businesses. Net premiums earned from the executive products business totaled $18.1 million, $18.8
million and $17.9 million, or 2 percent, 3 percent and 3 percent of total net premiums earned for 2017, 2016 and 2015,
respectively.
6
Medical Professional Liability
We provide healthcare liability coverage that is focused on long-term care and hospital liability. We also offer medical
professional liability insurance specializing in hard-to-place individuals and group physicians. This business is marketed
through wholesale brokers and retail agents. Net premiums earned from the medical professional liability business totaled
$17.1 million, $17.4 million and $12.3 million, or 2 percent of total net premiums earned for 2017, 2016 and 2015,
respectively.
Other Casualty
We offer a variety of other smaller products in our casualty segment, including home business insurance, which provides
limited liability and property coverage, on and off-site, for a variety of small business owners who work from their own home.
We have a quota share reinsurance agreement with Prime Insurance Company and Prime Property and Casualty Insurance Inc.,
the two insurance subsidiaries of Prime Holdings Insurance Services, Inc. (Prime). We assume general liability, excess,
commercial auto, property and professional liability coverages on hard-to-place risks that are primarily written in the excess
and surplus insurance market, as well as certain coverages written on an admitted basis. Additionally, we write mortgage
reinsurance, which provides credit risk transfer on pools of mortgages, and offer general liability coverage through a general
binding authority group. Net premiums earned from these lines totaled $31.4 million, $17.8 million and $16.3 million, or 4
percent, 2 percent and 2 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
PROPERTY SEGMENT
Commercial Property
Our commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire,
earthquake and difference in conditions (DIC), which can include earthquake, wind, flood and collapse coverages. We provide
insurance for a wide range of commercial and industrial risks, such as office buildings, apartments, condominiums, builders’
risks and certain industrial and mercantile structures. Net premiums earned from the commercial property business totaled
$63.1 million, $68.2 million and $75.7 million, or 9 percent, 9 percent and 11 percent of total net premiums earned for 2017,
2016 and 2015, respectively.
Marine
Our marine coverages include cargo, hull, protection and indemnity (P&I), marine liability, as well as inland marine
coverages including builders’ risks and contractors’ equipment. Although the predominant exposures are located within the
United States, there is some incidental international exposure written within these coverages. Net premiums earned from the
marine business totaled $50.9 million, $48.3 million and $47.0 million, or 7 percent of total net premiums earned for 2017,
2016 and 2015, respectively.
Specialty Personal
We offer specialized homeowners’ insurance in select locations, including homeowners’ and dwelling fire insurance
through retail agents in Hawaii and a limited amount of homeowners’ insurance in Massachusetts and North Carolina. We also
offered recreational vehicle insurance, which we began phasing out towards the end of 2016. Net premiums earned from
specialty personal coverages totaled $20.8 million, $25.0 million and $26.4 million, or 3 percent, 3 percent and 4 percent of
total net premiums earned for 2017, 2016 and 2015, respectively.
Other Property
Our other property coverages consist of newer product offerings, such as general binding authority, and lines which we
have recently exited, including property and crop reinsurance. Net premiums earned from these lines totaled $3.5 million,
$10.7 million and $21.8 million, or less than 1 percent, 1 percent and 3 percent of total net premiums earned for 2017, 2016
and 2015, respectively.
7
SURETY SEGMENT
Miscellaneous
Our miscellaneous surety coverage includes small bonds for businesses and individuals written through independent
insurance agencies throughout the United States. Examples of these types of bonds are license and permit, notary and court
bonds. These bonds are usually individually underwritten and utilize extensive automation tools for the underwriting and bond
delivery to our agents. Net premiums earned from miscellaneous surety coverages totaled $47.2 million, $46.2 million and
$42.4 million, or 6 percent, 7 percent and 6 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
Contract
We offer bonds for small to medium-sized contractors throughout the United States, underwritten on an account basis.
Typically, these are performance and payment bonds for individual construction contracts. These bonds are marketed through a
select number of insurance agencies that have surety and construction expertise. We also offer bonds for small and emerging
contractors that are reinsured through the Federal Small Business Administration. Net premiums earned from contract surety
coverages totaled $28.6 million, $28.2 million and $28.3 million, or 4 percent of total net premiums earned for 2017, 2016 and
2015, respectively.
Commercial
We offer a large variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of
industries. These risks are underwritten on an account basis and coverage is marketed through a select number of regional and
national brokers with surety expertise. Net premiums earned from commercial surety coverages totaled $27.6 million, $29.1
million and $29.5 million, or 4 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
Energy
Our energy surety coverages provide commercial surety bonds for the energy, petrochemical and refining industries both
on and off shore. These risks are primarily underwritten on an account basis and are primarily marketed through insurance
producers with expertise in these industries. Net premiums earned from energy coverages totaled $17.6 million, $18.0 million
and $16.8 million, or 2 percent of total net premiums earned for 2017, 2016 and 2015, respectively.
MARKETING AND DISTRIBUTION
We distribute our coverages primarily through branch offices throughout the country that market to wholesale and retail
brokers and through independent agents.
BROKERS
The largest volume of broker-generated premium is in our commercial property, general liability, commercial surety,
commercial umbrella, commercial transportation and medical professional liability coverages. This business is produced
through independent wholesale and retail brokers.
INDEPENDENT AGENTS
We target classes of insurance, such as homeowners’ and dwelling fire, home business, surety and personal umbrella,
through independent agents. Several of these products involve detailed eligibility criteria, which are incorporated into strict
underwriting guidelines and prequalification of each risk using a system accessible by the independent agent. The independent
agent cannot bind the risk unless they receive approval from our underwriters or through our automated systems.
UNDERWRITING AGENTS
We contract with certain underwriting agencies, which have limited authority to bind or underwrite business on our
behalf. The underwriting agreements involve strict underwriting guidelines and the agents are subject to audits upon request.
These agencies may receive some compensation through contingent profit commission.
8
ONLINE AND DIRECT
We are utilizing online efforts to produce and efficiently process and service business including home businesses, high
performance drivers, small commercial and personal umbrella risks and surety bonding. On a direct basis, we also assume
premium on various reinsurance treaties.
COMPETITION
Our specialty property and casualty insurance subsidiaries are part of a very competitive industry that is cyclical and
historically characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of
severe competition and excess underwriting capacity. Within the United States alone, approximately 2,600 companies actively
market property and casualty coverages. Our primary competitors in the casualty segment include Arch, Aspen, Baldwin &
Lyons, Chubb, CNA, Endurance, Great American, Great West, Hartford, Lancer, Markel, Navigators, RSUI, USLI, Travelers
and Zurich. Primary competitors in the property segment include Arch, Aspen, Chubb, CNA, Crum & Forster, Endurance,
Great American, Lexington and Travelers. Primary competitors in the surety segment are AIG, Arch, Chubb, CNA, Endurance,
Great American, HCC, Navigators, Travelers and XL. The combination of coverages, service, pricing and other methods of
competition vary from line to line. Our principal methods of meeting this competition are innovative coverages, marketing
structure and quality service to the agents and policyholders at a fair price. We compete favorably, in part, because of our
sound financial base and reputation, as well as our broad, geographic footprint in all 50 states, the District of Columbia, Puerto
Rico, the Virgin Islands and Guam. In the casualty, property and surety areas, we have experienced underwriting specialists in
our branch and home offices. We continue to maintain our underwriting and marketing standards by not seeking market share
at the expense of earnings. We have a track record of withdrawing from markets when conditions become overly adverse, and
we offer new coverages and programs where the opportunity exists to provide needed insurance coverage with exceptional
service on a profitable basis.
FINANCIAL STRENGTH RATINGS
A.M. Best financial strength ratings for the industry range from ‘‘A++’’ (Superior) to ‘‘F’’ (In liquidation) with some
companies not being rated. Standard & Poor’s financial strength ratings for the industry range from ‘‘AAA’’ (Extremely
strong) to ‘‘R’’ (Regulatory action). Moody’s financial strength ratings for the industry range from “Aaa” (Exceptional) to “C”
(Lowest). The following table illustrates the range of ratings assigned by each of the three major rating companies that has
issued a financial strength rating on our insurance companies:
A.M. Best
SECURE
Superior
Excellent
Very good
A++, A+
A, A-
B++, B+
B, B-
C++, C+
C, C-
D
E
F
S
VULNERABLE
Fair
Marginal
Weak
Poor
Under regulatory
supervision
In liquidation
Rating suspended
Standard & Poor’s
SECURE
Extremely strong
Very strong
Strong
Good
VULNERABLE
Marginal
Weak
Very weak
Extremely weak
Regulatory action
AAA
AA
A
BBB
BB
B
CCC
CC
R
Aaa
Aa
A
Baa
Ba
B
Caa
Ca
C
Moody’s
STRONG
Exceptional
Excellent
Good
Adequate
WEAK
Questionable
Poor
Very poor
Extremely poor
Lowest
Within-category modifiers
+,-
1,2,3 (1 high, 3 low)
Publications of A.M. Best, Standard & Poor’s and Moody’s indicate that ‘‘A’’ and ‘‘A+’’ ratings are assigned to those
companies that, in their opinion, have achieved exceptional overall performance compared to the standards they have
established and have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a
company’s financial and operating performance, each of the firms review the company’s profitability, leverage and liquidity, as
well as the company’s spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its
9
assets, the adequacy of its policy and loss reserves, the adequacy of its surplus, its capital structure, its risk management
practices and the experience and objectives of its management. These ratings are based on factors relevant to policyholders,
agents, insurance brokers and intermediaries and are not specifically related to securities issued by the company.
At December 31, 2017, the following ratings were assigned to our insurance companies:
A.M. Best
RLI Ins., Mt. Hawley and CBIC* (group-rated)
A+, Superior
Standard & Poor’s
RLI Ins. and Mt. Hawley
Moody’s
RLI Ins. and Mt. Hawley
* CBIC is only rated by A.M. Best
A+, Strong
A2, Good
For A.M. Best, Standard & Poor’s and Moody’s, the financial strength ratings represented above are affirmations of
previously assigned ratings. A.M. Best, in addition to assigning a financial strength rating, also assigns financial size
categories. In September 2017, RLI Ins., Mt. Hawley and CBIC, which are collectively rated as a group, were assigned a
financial size category of “XI” (adjusted policyholders’ surplus of between $750 million and $1 billion). As of December 31,
2017, the policyholders’ statutory surplus of RLI Insurance Group totaled $864.6 million, which continues to result in A.M.
Best’s financial size category “XI”.
REINSURANCE
We reinsure a portion of our insurance exposure, paying or ceding to the reinsurer a portion of the premiums received on
such policies. Earned premiums ceded to non-affiliated reinsurers totaled $129.7 million, $134.6 million and $132.7 million in
2017, 2016 and 2015, respectively. Insurance is ceded principally to reduce net liability on individual risks and to protect
against catastrophic losses. We use reinsurance as an alternative to using our own capital to take risks and reduce volatility.
Retention levels are evaluated each year to maintain a balance between the growth in surplus and the cost of reinsurance.
Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does
make the assuming reinsurer liable to the insurer to the extent of the insurance ceded.
Reinsurance is subject to certain risks, specifically market risk (which affects the cost and ability to secure reinsurance
contracts) and credit risk (which relates to the ability to collect from the reinsurer on our claims). We purchase reinsurance
from financially strong reinsurers. We evaluate reinsurers’ ability to pay based on their financial results, level of surplus,
financial strength ratings and other risk characteristics. A reinsurance committee, comprised of senior management, reviews
and approves our security guidelines and reinsurer usage. More than 94 percent of our reinsurance recoverables are due from
companies with financial strength ratings of “A” or better by A.M. Best and Standard & Poor’s rating services. For more
information regarding our largest reinsurers, see note 5 to the consolidated financial statements within Item 8, Financial
Statements and Supplementary Data.
We utilize both treaty and facultative reinsurance coverage for our risks. Treaty coverage refers to a reinsurance contract
under which the company agrees to cede all risks within a defined class of business to the reinsurer, who agrees to provide
coverage on all risks ceded without individual underwriting. Facultative coverage is applied to individual risks at the
company’s discretion and is subject to underwriting by the reinsurer. It is used for a variety of reasons, including
supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.
Much of our reinsurance is purchased on an excess of loss basis. Under an excess of loss arrangement, we retain losses on
a risk up to a specified amount and the reinsurers assume any losses above that amount. We may choose to participate in the
reinsurance layers purchased by retaining a percentage of the layer. It is common to find conditions in excess of loss covers
such as occurrence limits, aggregate limits and reinstatement premium charges. Occurrence limits cap our recovery for multiple
losses caused by the same event. Aggregate limits cap our recovery for all losses ceded during the contract term. We may be
required to pay additional premium to reinstate or have access to use the reinsurance limits for potential future recoveries
during the same contract year. Some property and surety treaties include reinstatement provisions which require us, in certain
circumstances, to pay reinstatement premiums after a loss has occurred in order to preserve coverage.
10
Excluding CAT reinsurance, the table below summarizes the reinsurance treaty coverage currently in effect. We may
purchase facultative coverage in excess of the per risk limits shown.
(in millions)
Per Risk
Product Line(s) Covered
Contract Type
Renewal
Date
First-Dollar Limit
Retention
Purchased Retention *
Maximum
General liability
Commercial umbrella and excess
Personal umbrella and eXS
Commercial transportation
Package - liability and workers' comp
Workers' compensation catastrophe
Medical professional liability
Professional services - professional liability
Executive products
Property - risk cover
Marine
Surety
Excess of Loss
Excess of Loss
Excess of Loss
Excess of Loss
Excess of Loss
Excess of Loss
Excess of Loss
Excess of Loss
Quota Share
Excess of Loss
Excess of Loss
Excess of Loss
1/1 $
1/1
1/1
1/1
1/1
1/1
1/1
4/1
7/1
1.0
1.0
1.0
0.5
1.0
11.0
1.0
1.0
N/A
$
9.0 $
9.0
9.0
4.5
10.0
14.0
9.0
9.0
25.0
1.9
1.9
1.9
1.1
1.9
11.0
1.9
3.3
8.8
1.2
2.0
1/1
6/1
4/1
1.0
2.0
24.0
28.0
2.0
73.0
9.7 **
* Maximum retention includes first-dollar retention plus any co-participation we retain through the reinsurance tower.
** A limited number of commercial and energy surety accounts are permitted to exceed the $75.0 million limit. These
accounts are subject to additional levels of review and are monitored on a monthly basis.
At each renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss
activity, the level of RLI Insurance Group’s surplus, changes in our risk appetite and the cost and availability of reinsurance
treaties. In the last renewal cycle, we maintained similar retentions on most lines of business.
PROPERTY REINSURANCE — CATASTROPHE COVERAGE
Our property CAT reinsurance reduces the financial impact of a CAT event involving multiple claims and policyholders.
Reinsurance limits purchased fluctuate due to changes in the amount of exposure we insure, reinsurance costs, insurance
company surplus levels and our risk appetite. In addition, we monitor the expected rate of return for each of our CAT lines of
business. At high rates of return, we grow the book of business and may purchase additional reinsurance to increase our
capacity. As the rate of return decreases, we shrink the book and may purchase less reinsurance as this capacity becomes
unnecessary. Our reinsurance coverage for the last three years and for 2018 are shown in the following table:
Catastrophe Coverages
(in millions)
2018
2017
2016
2015
First- Dollar
Retention
Limit
First- Dollar
Retention
Limit
First- Dollar
Retention
Limit
First- Dollar
Retention
Limit
California Earthquake
Non-California Earthquake
Other Perils
$
25
25
25
300 $
325
225
25
25
25
300 $
325
225
25
25
25
300 $
325
225
25
25
25
300
325
225
These CAT limits are in addition to the per-occurrence coverage provided by facultative and other treaty coverages. We
have participated in the CAT layers purchased by retaining a percentage of each layer throughout this period. Our participation
has varied based on price and the amount of risk transferred by each layer. Since 2014, all layers of the treaty have included
one prepaid reinstatement.
Our property CAT program continues to be applied on an excess of loss basis. It attaches after all other reinsurance has
been considered. Although covered in one program, limits and attachment points differ for California earthquakes and all other
perils. The following charts use information from our CAT modeling software to illustrate our pre-tax net retention resulting
from particular events that would generate the gross losses.
11
Catastrophe - California Earthquake
(in millions)
Projected
Gross Loss
Ceded
Losses
Net
Losses
Ceded
Losses
Net
Losses
Ceded
Losses
Net
Losses
2018
2017
2016
$
$
50
100
200
350
$
29
72
163
302
$
$
21
28
37
48
29
73
163
302
$
21
27
37
48
$
29
73
163
302
21
27
37
48
Catastrophe - Other (Earthquake outside of California, Wind, Other)
(in millions)
Projected
Gross Loss
Ceded
Losses
Net
Losses
Ceded
Losses
Net
Losses
Ceded
Losses
Net
Losses
2018
2017
2016
$
$
25
50
100
250
$
6
24
64
182
$
$
19
26
36
68
5
20
59
191
$
20
30
41
59
$
6
22
63
198
19
28
37
52
In the above table, projected losses for 2018 were estimated based on our exposure as of December 31, 2017, utilizing the
treaty structure in place as of January 1, 2018. All previous years were estimated similarly by utilizing the treaty structure in
place at the start of the listed year and the exposure at the end of the previous year.
The previous tables were generated using theoretical probabilities of events occurring in areas where our portfolio of
currently in-force policies could generate the level of loss illustrated. Actual results could vary significantly from these tables
as the actual nature or severity of a particular event cannot be predicted with any reasonable degree of accuracy. Reinsurance
limits are purchased based on the anticipated losses from large events. The largest losses shown above are possible, but have a
low probability of actually occurring. However, there is a remote chance that a larger event could occur. If the actual event
losses are larger than anticipated, we could retain additional losses above the limit of our CAT reinsurance.
We continuously monitor and quantify our exposure to catastrophes including earthquakes, hurricanes, floods, convective
storms, terrorist acts and other aggregating events. In the normal course of business, we manage our concentrations of
exposures to catastrophic events, primarily by limiting concentrations of locations insured to acceptable levels and by
purchasing reinsurance. Exposure and coverage detail is recorded for each risk location. We quantify and monitor the total
policy limit insured in each geographical region. In addition, we use third-party CAT exposure models and an internally
developed analysis to assess each risk to ensure we include an appropriate charge for assumed CAT risks. CAT exposure
modeling is inherently uncertain due to the model’s reliance on an infrequent observation of actual events and exposure data,
increasing the importance of capturing accurate policy coverage data. The model results are used both in the underwriting
analysis of individual risks and at a corporate level for the aggregate book of CAT-exposed business. From both perspectives,
we consider the potential loss produced by individual events that represent moderate-to-high loss potential at varying
probabilities and magnitudes. In calculating potential losses, we select appropriate assumptions including, but not limited to,
loss amplification and loss adjustment expense. We establish risk tolerances at the portfolio level based on market conditions,
the level of reinsurance available, changes to the assumptions in the CAT models, rating agency capital constraints,
underwriting guidelines and coverages and internal preferences. Our risk tolerances for each type of CAT, and for all perils in
aggregate, change over time as these internal and external conditions change. We are required to report to the rating agencies
estimated loss to a single event that could include all potential earthquakes and hurricanes contemplated by the CAT modeling
software. This reported loss includes the impact of insured losses based on the estimated frequency and severity of potential
events, loss adjustment expense, reinstatements paid after the loss, reinsurance recoveries and taxes. Based on the CAT
reinsurance treaty purchased on January 1, 2018, there is a 99.6 percent likelihood that the loss will be less than 14.2 percent of
policyholders’ surplus as of December 31, 2017. The exposure levels are within our tolerances for this risk.
LOSSES AND SETTLEMENT EXPENSES
OVERVIEW
Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related
settlement expenses from claims that have been reported but not paid and losses that have been incurred but not yet reported to
12
us (IBNR). Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally
utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve
estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These
estimates are based on facts and circumstances then known to us, review of historical settlement patterns, estimates of trends in
claims frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other
factors. In establishing reserves, we also take into account estimated recoveries from reinsurance, salvage and subrogation. The
reserves are reviewed regularly by a team of actuaries we employ.
Net loss and loss adjustment reserves by product line at year-end 2017 and 2016 are illustrated in the following table.
LAE is classified in the table as either allocated loss adjustment expense (ALAE) or unallocated loss adjustment expense
(ULAE). ALAE refers to estimates of claim settlement expenses that can be identified with a specific claim or case, while
ULAE cannot be identified with a specific claim. For a detailed discussion of loss reserves, refer to our critical accounting
policy in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(as of December 31, in thousands)
Product Line
Casualty segment net loss and ALAE
reserves
Commercial umbrella
Personal umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Medical professional liability
Other casualty
Property segment net loss and ALAE
reserves
Commercial property
Marine
Specialty personal
Other property
Surety segment net loss and ALAE
reserves
Miscellaneous
Contract and commercial
Energy
Latent liability net loss and ALAE reserves
Total net loss and ALAE reserves
ULAE reserves
Total net loss and LAE reserves
$
Case
9,724
21,452
78,360
28,543
81,543
12,075
11,327
16,621
6,595
21,375
11,512
1,989
3,348
2,550
(253)
2,843
6,532
$ 316,136
—
$ 316,136
2017
IBNR
Total
Case
2016
IBNR
Total
$ 99,745
39,395
149,102
81,558
38,161
34,344
44,484
10,526
31,302
$ 109,469
60,847
227,462
110,101
119,704
46,419
55,811
27,147
37,897
10,615
18,095
3,525
6,682
31,990
29,607
5,514
10,030
$
8,181
18,339
81,720
23,501
67,693
13,143
6,943
12,008
4,725
6,488
9,344
2,472
4,753
$ 82,472
35,027
135,024
73,970
30,901
27,507
45,664
8,013
21,184
$ 90,653
53,366
216,744
97,471
98,594
40,650
52,607
20,021
25,909
5,812
16,271
3,566
8,930
12,300
25,615
6,038
13,683
5,035
13,914
2,254
15,795
$ 604,532
48,844
$ 653,376
7,585
13,661
5,097
22,327
$ 920,668
48,844
$ 969,512
2,321
1,727
2,671
6,273
$ 272,302
—
$ 272,302
4,919
13,044
2,666
17,555
$ 532,525
46,286
$ 578,811
7,240
14,771
5,337
23,828
$ 804,827
46,286
$ 851,113
Following is a table of significant risk factors involved in estimating losses grouped by major product line. We distinguish
between loss ratio risk and reserve estimation risk. Loss ratio risk refers to the possible dispersion of loss ratios from year to year due
to inherent volatility in the business, such as high severity or aggregating exposures. Reserve estimation risk recognizes the difficulty
in estimating a given year’s ultimate loss liability. As an example, our property CAT business (included below in “other property”)
has significant variance in year-over-year results; however, its reserving estimation risk is relatively moderate.
13
Product line
Commercial umbrella
Significant Risk Factors
Length of
Reserve Tail
Long
Emergence
patterns relied
upon
Internal
Personal umbrella
Medium
Internal
General liability
Medical professional liability
Long
Long
Internal
External
Commercial transportation
Medium
Internal
Expected loss Reserve
ratio
variability
High
estimation
variability
High
Other risk factors
Low frequency
High severity
Loss trend volatility
Rapid growth
Unforeseen tort potential
Exposure changes/mix
Low frequency
High severity
Loss trend volatility
Unforeseen tort potential
Medium
Medium
Exposure growth/mix
Unforeseen tort potential
Medium
High
High severity
Exposure changes/mix
Unforeseen tort potential
Small volume
Loss trend volatility
High
High
High severity
Exposure growth/mix
Loss trend volatility
Unforeseen tort potential
Medium
Medium
Executive products
Long
Internal & significant external
Low frequency
High severity
Loss trend volatility
Economic volatility
Unforeseen tort potential
Small volume
High
High
Professional services
Medium
Internal & external
Small commercial
Long
Internal
Exposure growth
Highly varied exposures
Loss trend volatility
Unforeseen tort potential
Small volume
High
Medium
Exposure growth/mix
Unforeseen tort potential
Small volume
Medium
High
Other casualty
Marine
Other property
Medium
Internal & external
Small volume
Medium
Medium
Medium
Internal & external
Exposure changes/mix
High
High
Short
Internal
CAT aggregation exposure
Low frequency
High severity
Reporting delay
High
Medium
Economic volatility
Uniqueness of exposure
Medium
Medium
Surety
Medium
Internal
Runoff including asbestos &
environmental
Long
Internal & external
Loss trend volatility
Mass tort/latent exposure
High
High
On a quarterly basis, actuaries perform a ground-up reserve study of the expected value of the unpaid loss and LAE
derived using multiple standard actuarial methodologies that are described below. In addition, an emergence analysis is
completed quarterly to determine if further adjustments are necessary. The purpose of this analysis is to provide validation of
our carried loss reserves. These estimates are then compared to the carried loss reserves to determine the appropriateness of the
current reserve balance.
14
The methodologies we have chosen to incorporate are a function of data availability and are reflective of our own book of
business. From time to time, we evaluate the need to add supplementary methodologies. New methods are incorporated if it is
believed that they improve the estimate of our ultimate loss and LAE liability. All of the actuarial methods eventually converge
to the same estimate as an accident year matures. Our core methodologies are listed below with a short description and their
relative strengths and weaknesses:
Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for
current claims. These patterns are applied to current payments by accident year to yield an expected ultimate loss.
Strengths: The method reflects only the claim dollars that have been paid and is not subject to case-basis reserve changes
or changes in case reserve practices.
Weaknesses: External claims environment changes can impact the rate at which claims are settled and losses paid (e.g.
increase in attorney involvement or legal precedent). Adjustments to reflect changes in payment patterns on a prospective basis
are difficult to quantify. For losses that have occurred recently, payments can be minimal and thus early estimates are subject to
significant instability.
Incurred Loss Development — Historical case-incurred patterns (paid losses plus case reserves) for past claims are used
to estimate future case-incurred amounts for current claims. These patterns are applied to current case-incurred losses by
accident year to yield an expected ultimate loss.
Strengths: Losses are reported more quickly than paid, therefore, the estimates stabilize sooner. The method reflects
more information in the analysis than the paid loss development method.
Weaknesses: Method involves additional estimation risk if significant changes to case reserving practices have occurred.
Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are
determined. These patterns are applied to current case reserves by accident year and the result is combined with paid losses to
yield an expected ultimate loss.
Strengths: Like the incurred development method, this method benefits from using the additional information available
in case reserves that is not available from paid losses only. It also can provide a more reasonable estimate than other methods
when the proportion of claims still open for an accident year is unusually high or low.
Weaknesses: It is subject to the risk of changes in case reserving practices or philosophy. It may provide unstable
estimates when an accident year is immature and more of the IBNR is expected to come from unreported claims rather than
development on reported claims and when accident years are very mature with infrequent case reserves.
Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as
estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio for each accident year.
The expected loss ratio is then applied to the earned premium for each year to estimate the expected ultimate losses. The
current accident year expected loss ratio is also the prospective loss and ALAE ratio used in our initial IBNR generation
process.
Strengths: Reflects an estimate independent of how losses are emerging on either a paid or a case reserve basis. This
method is particularly useful in the absence of historical development patterns or where losses take a long time to emerge.
Weaknesses: Ignores how losses are actually emerging and thus produces the same estimate of ultimate loss regardless of
favorable/unfavorable emergence.
Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid
or incurred loss development method. In effect, the BF methods produce weighted average indications for each accident year.
As an example, if the current accident year for commercial automobile liability is estimated to be 20 percent paid, then the paid
loss development method would receive a weight of 20 percent and the expected loss ratio method would receive an 80 percent
weight. Over time, this method will converge with the ultimate estimated by the respective loss development method.
Strengths: Reflects actual emergence that is favorable/unfavorable, but assumes remaining emergence will continue as
previously expected. Does not overreact to the early emergence (or lack of emergence) where patterns are most unstable.
15
Weaknesses: Could potentially understate favorable or unfavorable development by putting weight on the expected loss
ratio.
In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities
being evaluated. Each estimation method has its own set of assumption variables and its own advantages and disadvantages,
with no single estimation method being better than the others in all situations, and no one set of assumption variables being
meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods, when
applied to a particular group of claims, can also change over time. Therefore, the weight given to each estimation method will
likely change by accident year and with each evaluation.
The actuarial central estimates typically follow a progression that places significant weight on the BF methods when
accident years are younger and claim emergence is immature. As accident years mature and claims emerge over time,
increasing weight is placed on the incurred development method, the paid development method and the case reserve
development method. For product lines with faster loss emergence, the progression to greater weight on the incurred and paid
development methods occurs more quickly.
For our long and medium-tail products, the BF methods are typically given the most weight for the first 36 months of
evaluation. These methods are also predominant for the first 12 months of evaluation for short-tail lines. Beyond these time
periods, our actuaries apply their professional judgment when weighting the estimates from the various methods deployed but
place significant reliance on the expected stage of development in normal circumstances.
Judgment can supersede this natural progression if risk factors and assumptions change, or if a situation occurs that
amplifies a particular strength or weakness of a methodology. Extreme projections are critically analyzed and may be adjusted,
given less credence or discarded altogether. Internal documentation is maintained that records any substantial changes in
methods or assumptions from one loss reserve study to another.
RESERVE SENSITIVITIES
There are three major parameters that have significant influence on our actuarial estimates of ultimate liabilities by
product. They are the actual losses that are reported, the expected loss emergence pattern and the expected loss ratios used in
the analyses. If the actual losses reported do not emerge as expected, it may cause us to challenge all or some of our previous
assumptions. We may change expected loss emergence patterns, the expected loss ratios used in our analysis and/or the weights
we place on a given actuarial method. The impact will be much greater and more leveraged for products with longer emergence
patterns. Our general liability product is an example of a product with a relatively long emergence pattern. We have
constructed a chart that illustrates the sensitivity of our general liability reserve estimates to these key parameters. We believe
the scenarios to be reasonable as similar favorable variations have occurred in recent years. For example, while our general
liability emergence has ranged from 6 percent to 10 percent favorable over the last three years, our emergence for all products
combined, excluding general liability, has ranged from 5 percent to 15 percent favorable. The numbers below are the changes
in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2017, resulting from the change in the
parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance of $227.5 million at
December 31, 2017, in addition to associated ULAE and latent liability reserves.
(in millions)
Result from favorable Result from unfavorable
change in parameter
change in parameter
+/-5 point change in expected loss ratio for all
accident years
+/-10% change in expected emergence patterns
+/-30% change in actual loss emergence over a
calendar year
$
$
$
Simultaneous change in expected loss ratio (5pts),
expected emergence patterns (10%), and actual loss
emergence (30%).
$
(8.8) $
(4.9) $
8.8
4.6
(10.8) $
10.8
(24.1) $
24.6
16
There are often significant inter-relationships between our reserving assumptions that have offsetting or compounding
effects on the reserve estimate. Thus, in almost all cases, it is impossible to discretely measure the effect of a single assumption
or construct a meaningful sensitivity expectation that holds true in all cases. The scenario above is representative of general
liability, one of our largest and longest-tailed products. It is unlikely that all of our products would have variations as wide as
illustrated in the example. It is also unlikely that all of our products would simultaneously experience favorable or unfavorable
loss development in the same direction or at their extremes during a calendar year. Because our portfolio is made up of a
diversified mix of products, there would ordinarily be some offsetting favorable and unfavorable emergence by product as
actual losses start to emerge and our loss estimates become more reliable.
OPERATING RATIOS
PREMIUMS TO SURPLUS RATIO
The following table shows, for the periods indicated, our insurance subsidiaries’ statutory ratios of net premiums written
to policyholders’ surplus. While there is no statutory requirement applicable to us that establishes a permissible net premiums
written to surplus ratio, guidelines established by the National Association of Insurance Commissioners (NAIC) provide that
this ratio should generally be no greater than 3 to 1. While the NAIC provides this general guideline, rating agencies often
require a more conservative ratio to maintain strong or superior ratings.
(dollars in thousands)
Statutory net premiums written
Policyholders’ surplus
Ratio
$
2017
749,854
864,554
0.9 to 1
GAAP AND STATUTORY COMBINED RATIOS
$
2016
740,952
859,976
0.9 to 1
Year Ended December 31,
2015
722,189
865,268
0.8 to 1
$
$
2014
703,152
849,297
0.8 to 1
$
2013
666,322
859,221
0.8 to 1
Our underwriting experience is best indicated by our GAAP combined ratio, which is the sum of (a) the ratio of incurred
losses and settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and other
operating expenses to net premiums earned (expense ratio). The difference between the combined ratio and 100 reflects the
per-dollar rate of underwriting income or loss, with ratios below 100 indicating underwriting profit and ratios above 100
indicating underwriting loss.
GAAP
Loss ratio
Expense ratio
Combined ratio
2017
2016
Year Ended December 31,
2015
2014
2013
54.4
42.0
96.4
48.0
41.5
89.5
42.7
41.8
84.5
43.2
41.3
84.5
41.2
41.9
83.1
We also calculate the statutory combined ratio, which is not indicative of GAAP underwriting income due to accounting
for policy acquisition costs differently for statutory accounting purposes compared to GAAP. The statutory combined ratio is
the sum of (a) the ratio of statutory loss and settlement expenses incurred to statutory net premiums earned (loss ratio) and
(b) the ratio of statutory policy acquisition costs and other underwriting expenses to statutory net premiums written (expense
ratio). The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.
Statutory
Loss ratio
Expense ratio
Combined ratio
2017
2016
Year Ended December 31,
2015
2014
2013
54.4
41.8
96.2
48.0
41.0
89.0
42.7
41.2
83.9
43.2
40.9
84.1
41.2
41.0
82.2
P&C industry combined ratio
107.3 *
100.6 **
97.9 **
97.2 **
95.8 **
* Source: Conning (2017). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2017. Estimated
for the year ended December 31, 2017.
** Source: A.M. Best (2017). Aggregate & Averages – Property/Casualty, United States & Canada. 2013 – 2016.
17
INVESTMENTS
Our investment portfolio serves as the primary resource for loss payments and secondly as a source of income to support
operations. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on growing
book value through total return. Investments of the highest quality and marketability are critical for preserving our claims-
paying ability. Our portfolio contains no derivatives or off-balance sheet structured investments. In addition, we have a
diversified investment portfolio which distributes credit risk across many issuers and a policy that limits aggregate credit
exposure. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and
has contributed significantly to our growth in book value.
Investment portfolios are managed both internally and externally by experienced portfolio managers. We follow an
investment policy that is reviewed quarterly and revised periodically, with oversight conducted by our senior officers and board
of directors.
Our investments include fixed income debt securities, common stock equity securities, exchange traded funds (ETFs) and
a small number of limited partnership interests. The fixed income portfolio declined to 78 percent of the total portfolio, and the
equity allocation increased to 19 percent of the overall portfolio. Other invested assets represented 1 percent of the total
portfolio and include investments in low income housing tax credit partnerships, membership stock in the Federal Home Loan
Bank of Chicago, an investment in a real estate fund, an investment in a business development company, and an investment in
a global credit fund. The remaining 2 percent was made up of cash and cash equivalents. As of December 31, 2017, 83 percent
of the fixed income portfolio was rated A or better and 66 percent was rated AA or better.
We classify all of the securities in our fixed income portfolio as available-for-sale, which are carried at fair value. Beyond
available operating cash flow, the available-for-sale portfolio provides an additional source of liquidity and can be used to
address potential future changes in our asset/liability structure.
Aggregate maturities for the fixed-income portfolio as of December 31, 2017, are as follows:
(in thousands)
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033 and later
Total excluding
Mtge/ABS/CMBS*
Par
Value
Amortized
$
16,265 $
61,144
49,369
107,120
93,698
90,185
107,436
140,023
102,087
114,824
59,661
60,085
72,355
38,085
8,805
52,513
Cost
16,023 $
61,881
49,958
109,626
96,946
95,511
114,083
151,353
105,450
119,943
64,811
68,203
82,229
44,455
10,367
56,038
Fair
Value
Carrying
Value
15,984 $
62,484
50,491
111,530
98,483
97,744
116,310
154,438
106,759
122,790
66,739
70,786
84,503
45,206
10,672
58,323
15,984
62,484
50,491
111,530
98,483
97,744
116,310
154,438
106,759
122,790
66,739
70,786
84,503
45,206
10,672
58,323
$
1,173,655 $
1,246,877 $
1,273,242 $
1,273,242
Mtge/ABS/CMBS*
$
390,957 $
399,534 $
398,997 $
398,997
Grand Total
$
1,564,612 $
1,646,411 $
1,672,239 $
1,672,239
*Mortgage-backed, asset-backed & commercial mortgage-backed
We had cash, short-term investments and fixed income securities maturing within one year of $50.2 million at year-end
2017. This total represented 2 percent of cash and investments, the same as the prior year. Our short-term investments consist
of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds.
18
REGULATION
STATE REGULATION
As an insurance holding company, we, as well as our insurance company subsidiaries, are subject to regulation by the
states and territories in which the insurance subsidiaries are domiciled or transact business. Registration in each insurer’s state
of domicile requires periodic reporting to such state’s insurance regulatory authority of the financial, operational and
management information regarding the insurers within the holding company system. All transactions within a holding company
system affecting insurers must have fair and reasonable terms, and the insurers’ policyholders’ surplus following any
transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. Notice to, and in some
cases consent from, regulators is required prior to the consummation of certain transactions affecting insurance company
subsidiaries of the holding company system. Each state and territory individually regulates the insurance operations of both
insurance companies and insurance agents/brokers. Most insurance regulations are designed to protect the interests of
policyholders rather than shareholders and other investors.
Two primary focuses of state regulation of insurance companies are financial solvency and market conduct practices.
Regulations designed to ensure financial solvency of insurers are enforced by various filing, reporting and examination
requirements. Marketplace oversight is conducted by monitoring and periodically examining trade practices, approving policy
forms, licensing of agents and brokers and requiring the filing and, in some cases, approval of premiums and commission rates
to ensure they are fair and equitable.
Because our insurance company subsidiaries operate in all 50 states, the District of Columbia, Puerto Rico, the Virgin
Islands and Guam, we must comply with the individual insurance laws, regulations, rules and case law of each state and
territory, including those regulating the filing of insurance rates and forms. Each of our three insurance company subsidiaries is
domiciled in Illinois, with the Illinois Department of Insurance (IDOI) as their principal insurance regulator.
As a holding company, the amount of dividends we are able to pay depends upon the funds available for distribution,
including dividends or distributions from our subsidiaries. The insurance laws applicable to our insurance company
subsidiaries impose certain restrictions on their ability to pay dividends. The insurance holding company laws require that
ordinary dividends paid by an insurance company be reported to the insurer’s domiciliary regulator prior to payment of the
dividend and that extraordinary dividends may not be paid without such regulator’s prior approval (or non-disapproval). An
extraordinary dividend is generally defined under Illinois law as a dividend that, together with all other dividends made within
the past 12 months, exceeds the greater of 100 percent of the insurer’s statutory net income for the 12-month period ending as
of December 31 of the preceding year or 10 percent of the insurer’s statutory policyholders’ surplus as of the preceding year
end. Insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no
assurance that extraordinary dividend payments would be permitted.
In addition, changes to the state insurance regulatory requirements are frequent, including changes caused by state
legislation, regulations by the state insurance regulators and court rulings. State insurance regulators are members of the NAIC.
The NAIC is a non-governmental regulatory support organization that seeks to promote uniformity and to enhance state
regulation of insurance through various activities, initiatives and programs. Among other regulatory and insurance company
support activities, the NAIC maintains a state insurance department accreditation program and proposes model laws,
regulations and guidelines for approval by state legislatures and insurance regulators. Such proposed laws and regulations
cover areas including risk assessments, corporate governance and financial and accounting rules. To the extent such proposed
model laws and regulations are adopted by states, they will apply to insurance carriers.
In December 2010, the NAIC adopted amendments to the Insurance Holding Company System Regulatory Act and
Model Regulation (Amended Holding Company Model Act). The Amended Holding Company Model Act introduces the
concept of “enterprise risk” within an insurance holding company system and imposes more extensive informational
requirements on parents and other affiliates of licensed insurers or reinsurers, with the purpose of protecting the licensed
companies from enterprise risk, including requiring an annual enterprise risk report by the ultimate controlling person
identifying the material risks within the insurance holding company system that could pose enterprise risk to the licensed
companies. An enterprise risk is generally defined as an activity or event involving affiliates of an insurer that could have a
material adverse effect on the insurer or the insurer’s holding company system. Illinois has adopted a version of the Amended
Holding Company Model Act. We are in compliance with the enterprise risk reporting requirements as adopted by Illinois.
The Own Risk and Solvency Assessment (ORSA) model act was developed by the NAIC and proposed for adoption by
each state insurance regulatory department. Illinois has adopted the Risk Management and ORSA Law, applicable to Illinois-
19
domiciled insurance companies meeting certain size requirements, including ours. The ORSA program is a key component of
an insurance company’s overall enterprise risk management (ERM) framework, which is the process by which organizations
identify, measure, monitor and manage key risks affecting the entire enterprise. An ORSA summary report, filed by us with the
IDOI each year, is an internal identification, description and assessment of the risks associated with our business plan, and the
sufficiency of capital resources to support those risks. Our ORSA summary report was filed with the IDOI in each year since
2015, and will be updated and filed annually.
The NAIC uses a risk-based capital (RBC) model to monitor and regulate the solvency of licensed property and casualty
insurance companies. Illinois has adopted a version of the NAIC’s model law. The RBC calculation is used to measure an
insurer’s capital adequacy with respect to: the risk characteristics of the insurer’s premiums written and unpaid losses and loss
adjustment expenses, rate of growth and quality of assets, among other measures. Depending on the results of the RBC
calculation, insurers may be subject to varying degrees of regulatory action. RBC is calculated annually by insurers, as of
December 31 of each year. As of December 31, 2017, each of our insurance company subsidiaries had RBC levels significantly
in excess of the company action level RBC, defined as being 200 percent of the authorized control level RBC, which would
prompt corrective action under Illinois law. RLI Insurance Company (RLI Ins.), our principal insurance company subsidiary,
had an authorized control level RBC of $157.7 million compared to actual statutory capital and surplus of $864.6 million as of
December 31, 2017, resulting in a statutory capital to authorized control level RBC ratio of 548 percent. The calculation of
RBC requires certain judgments to be made, and, accordingly, each of our insurance company subsidiaries’ current RBC may
be greater or less than the RBC calculated as of any date of determination.
Each of our insurance company subsidiaries is required to file detailed annual reports, including financial statements, in
accordance with prescribed statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct
business. The quarterly and annual financial reports filed with the states utilize statutory accounting principles (SAP) that are
different from U.S. GAAP. As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance
companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its
current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets
and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for
assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. GAAP are usually different from
those reflected in financial statements prepared under SAP.
As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations,
generally once every three to five years, of the books, records, accounts and operations of insurance companies that are
domiciled in their states. Examinations are generally carried out in cooperation with the insurance departments of other, non-
domiciliary states under guidelines promulgated by the NAIC. The most recent examination report of our insurance company
subsidiaries completed by the IDOI was issued on July 14, 2014 for the year ended December 31, 2012. The examination
report is available to the public.
Each of our insurance company subsidiaries is subject to Illinois laws and regulations that impose restrictions on the
amount and type of investments our insurance company subsidiaries may have. Such laws and regulations generally require
diversification of the insurer’s investment portfolio and limit the amounts of investments in certain asset categories, such as
below investment grade fixed income securities, real estate-related equity, other equity investments and derivatives. Failure to
comply with these laws and regulations would generally cause investments that exceed regulatory limitations to be treated as
non-admitted assets for measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying
investments.
Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For
example, states may limit an insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance
department. The state insurance department may disapprove a withdrawal plan that may lead to marketplace disruption. Laws
and regulations that limit cancellation and non-renewal, and that subject program withdrawals to prior approval requirements,
may restrict our ability to exit unprofitable marketplaces in a timely manner.
Virtually all states require licensed insurers to participate in various forms of guaranty associations in order to bear a
portion of the loss suffered by qualified policyholders of insurance companies that become insolvent. Depending upon state
law, licensed insurers can be assessed an amount that is generally equal to a small percentage of the annual premiums written
for the relevant lines of insurance in that state to pay the claims of an insolvent insurer. These assessments may increase or
decrease in the future, depending upon the rate of insurance company insolvencies. In some states, these assessments may be
wholly or partially recovered through policy fees paid by insureds. We cannot predict the amount and timing of future
20
assessments. Therefore, the liabilities we have currently established for these potential assessments may not be adequate and an
assessment may materially impact our financial condition.
In addition, the insurance holding company laws require advance approval by state insurance commissioners of any
change in control of an insurance company that is domiciled, or in some cases, having such substantial business that it is
deemed to be commercially domiciled in that state. “Control” is generally presumed to exist through the ownership of 10
percent or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance
company. In addition, insurance laws in many states contain provisions that require pre-notification to the insurance
commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions
that would constitute a change in control of our insurance company subsidiaries, including a change of control of RLI, would
generally require the party acquiring control to obtain the prior approval by the insurance departments of the insurance
company subsidiaries’ state of domicile (Illinois) or commercial domicile, if applicable. It may also require pre-acquisition
notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals could
result in a material delay of, or deter, any such transaction.
In light of the number and severity of recent U.S. company data breaches, some states have recently enacted new
insurance laws that require certain regulated entities to implement and maintain comprehensive information security programs
to safeguard the personal information of insureds. The New York State Department of Financial Services (NYDFS) recently
published a new cybersecurity regulation, which became effective on March 1, 2017, and includes ongoing compliance
deadlines over the following 24 months. This regulation requires banks, insurance companies and other financial services
institutions regulated by the NYDFS, including RLI, to establish and maintain a cybersecurity program “designed to protect
consumers and ensure the safety and soundness of New York State’s financial services industry.” We are implementing the
requirements of the regulation and are in compliance with those phases already enacted. We anticipate that the NYDFS will
examine the cybersecurity programs of financial institutions in the future and that may result in additional regulatory scrutiny,
expenditure of resources and possible regulatory actions and reputational harm.
In October 2017, the NAIC adopted a new Insurance Data Security Model Law. The law is intended to establish the
standards for data security and standards for the investigation and notification of data breaches applicable to insurance
licensees in states adopting such law, with provisions that are generally consistent with the NYDFS cybersecurity regulation
discussed above. As with all NAIC model laws, this model law must be adopted by a state before becoming law in the state.
Illinois has not adopted a version of the Insurance Data Security Model Law. The NAIC has also adopted a guidance document
that sets forth twelve principles for effective insurance regulation of cybersecurity risks. The document is based on similar
regulatory guidance adopted by the Securities Industry and Financial Markets Association and the “Roadmap for Cybersecurity
Consumer Protections,” which describes the protections to which the NAIC believes consumers should be entitled from their
insurance companies, agents and other businesses concerning the collection and maintenance of consumers’ personal
information, as well as what consumers should expect when such information has been involved in a data breach. We expect
cybersecurity risk management, prioritization and reporting to continue to be an area of significant regulatory focus by such
regulatory bodies and self-regulatory organizations.
The rates, policy terms and conditions of reinsurance agreements generally are not subject to regulation by any regulatory
authority. However, the ability of a ceding insurer to take credit for the reinsurance purchased from reinsurance companies is a
significant component of reinsurance regulation. Typically, a ceding insurer will only enter into a reinsurance agreement if it
can obtain credit against its reserves on its statutory basis financial statements for the reinsurance ceded to the reinsurer. With
respect to U.S.-domiciled ceding companies, credit is usually granted when the reinsurer is licensed or accredited in the state
where the ceding company is domiciled. States also generally permit ceding insurers to take credit for reinsurance if the
reinsurer is: (i) domiciled in a state with a credit for reinsurance law that is substantially similar to the credit for reinsurance
law in the primary insurer’s state of domicile, and (ii) meets certain financial requirements. Credit for reinsurance purchased
from a reinsurer that does not meet the foregoing conditions is generally allowed to the extent that such reinsurer secures its
obligations with qualified collateral.
FEDERAL LEGISLATION AND REGULATION
The U.S. insurance industry is not currently subject to any significant federal regulation and instead is regulated
principally at the state level. However, the federal Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and creation of the Federal Insurance Office
(summarized below) include elements that affect the insurance industry, insurance companies and public companies such as
ours.
21
The Sarbanes-Oxley Act established several significant corporate governance-related laws and SEC regulations
applicable to public companies. The Dodd-Frank Act created significant changes in regulatory structures of banking and other
financial institutions, created new governmental agencies (while merging and removing others), increased oversight of
financial institutions and enhanced regulation of capital markets. The legislation also mandates new rules affecting executive
compensation and corporate governance for public companies such as ours. Federal agencies have been given significant
discretion in drafting the rules and regulations that will implement the Dodd-Frank Act. We will continue to monitor,
implement and comply with all Dodd-Frank Act-related changes to our regulatory environment. Changes in general political,
economic or market conditions, including the recent U.S. presidential and congressional elections, could affect the scope,
timing and final implementation of the Dodd-Frank Act. We cannot predict if or when future legislation or administrative
guidance will be enacted or issued or what impact any changing regulation may have on our operations.
In addition, the Dodd-Frank Act contains insurance industry-specific provisions, including establishment of the Federal
Insurance Office (FIO) and streamlining the regulation and taxation of surplus lines insurance and reinsurance among the
states. The FIO, part of the U.S. Department of the Treasury, has limited authority and no direct regulatory authority over the
business of insurance. The FIO’s principal mandates include monitoring the insurance industry, collection of insurance
industry information and data and representation of the U.S. with international insurance regulators. Although the FIO does not
provide substantive regulation of the insurance industry at this time, we will monitor its activities carefully for any regulatory
impact on our company.
Furthermore, the Dodd-Frank Act authorized the U.S. Treasury Secretary and the Office of the U.S. Trade Representative
to negotiate covered agreements. A covered agreement is an agreement between the U.S. and one or more foreign
governments, authorities or regulatory entities, regarding prudential measures with respect to insurance or reinsurance.
Pursuant to this authority, in September 2017, the U.S. and the European Union (EU) signed a covered agreement to address,
among other things, reinsurance collateral requirements (Covered Agreement). The Covered Agreement became provisionally
effective on November 7, 2017, following completion of the EU’s procedural requirements, but must be approved by the
European Parliament before treated as “fully” effective. We cannot predict with any certainty what impact the Covered
Agreement will have on our business, whether the Covered Agreement will be implemented or what the impact of such
implementation will be on our business.
As part of the passage of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in January 2015, the
National Association of Registered Agents and Brokers (NARAB) was established by federal law, which is expected to
streamline insurance agent/broker licensing.
Other federal laws and regulations apply to many aspects of our company and its business operations. This federal
regulation includes, without limitation, laws affecting privacy and data security and credit reporting — examples of which
include the Gramm-Leach-Bliley Act, Fair Credit Reporting Act and Fair and Accurate Credit Transactions Act. It also
includes international economic and trade sanctions — examples of which include the Office of Foreign Asset Control
(OFAC), Foreign Account Tax Compliance Act and the Iran Threat Reduction and Syrian Human Rights Act (ITR/SHR).
ITR/SHR generally prohibits U.S. companies from engaging in certain transactions with the government of Iran or certain
Iranian businesses, including the provision of insurance or reinsurance. Under ITR/SHR, we must disclose whether RLI or any
of its affiliates knowingly engaged in certain specified activities identified in that law. For the year 2017, neither RLI nor its
affiliates have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act, as required
by the ITR/SHR.
LICENSES AND TRADEMARKS
We hold a U.S. federal service mark registration of our corporate logo “RLI” and several other company service marks
and trademarks with the U.S. Patent and Trademark Office. Such registrations protect our intellectual property nationwide from
deceptively similar use. The duration of these registrations is 10 years, unless renewed. We monitor our trademarks and service
marks and protect them from unauthorized use as necessary.
EMPLOYEES
As of December 31, 2017, we employed a total of 902 associates. Of the 902 total associates, 26 were part-time and 876
were full-time.
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FORWARD LOOKING STATEMENTS
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs,
intentions, goals or strategies regarding the future and are based on certain underlying assumptions by us. These forward
looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe”
and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of
general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance
industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our
reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes
and conditions and other factors and are subject to various risks, uncertainties and other factors, including, without limitation
those set forth below in “Item 1A Risk Factors.” Actual results could differ materially from those expressed in, or implied by,
these forward looking statements. We assume no obligation to update any such statements. You should review the various
risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.
Item 1A. Risk Factors
Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the
insurance industry, which may cause the price of our securities to be volatile.
The results of operations of companies in the property and casualty insurance industry historically have been subject to
significant fluctuations and uncertainties. Our profitability can be affected significantly by:
• Competitive pressures impacting our ability to write new business or retain existing business at an adequate rate,
• Rising levels of loss costs that we cannot anticipate at the time we price our coverages,
• Volatile and unpredictable developments, including man-made, weather-related and other natural CATs, terrorist
attacks or significant price changes of the commodities we insure,
• Changes in the level of reinsurance capacity,
• Changes in the amount of losses resulting from new types of claims and new or changing judicial interpretations
relating to the scope of insurers’ liabilities and
• The ability of our underwriters to accurately select and price risk and our claim personnel to appropriately deliver
fair outcomes.
In addition, the demand for property and casualty insurance, both admitted and excess and surplus lines, can vary
significantly, rising as the overall level of economic activity increases and falling as that activity decreases, causing our
revenues to fluctuate. These fluctuations in results of operations and revenues may not reflect long-term results and may cause
the price of our securities to be volatile.
Adverse changes in the economy could lower the demand for our insurance products and could have an adverse effect
on the revenue and profitability of our operations.
Factors such as business revenue, construction spending, government spending, the volatility and strength of the capital
markets and inflation can all affect the business and economic environment. These same factors affect our ability to generate
revenue and profits. Insurance premiums in our markets are heavily dependent on our customer revenues, values transported,
miles traveled and number of new projects initiated. In an economic downturn that is characterized by higher unemployment,
declines in construction spending and reduced corporate revenues, the demand for insurance products is adversely
affected. Adverse changes in the economy may lead our customers to have less need for insurance coverage, to cancel existing
insurance policies, to modify coverage or to not renew with us, all of which affect our ability to generate revenue.
Catastrophic losses, including those caused by natural disasters, such as earthquakes and hurricanes, or man-made
events such as terrorist attacks, are inherently unpredictable and could cause us to suffer material financial losses.
We face the risk of property damage resulting from catastrophic events, particularly earthquakes on the West Coast and
hurricanes and tropical storms affecting the continental U.S. or Hawaii. Since the Northridge, California earthquake in 1994,
23
most of our catastrophe-related claims have resulted from hurricanes and other seasonal storms such as tornadoes and hail
storms.
The incidence and severity of CATs are inherently unpredictable. The extent of losses from a CAT is a function of both
the total amount of insured values in the area affected by the event and the severity of the event. Most CATs are restricted to
fairly specific geographic areas. However, hurricanes and earthquakes may produce significant damage in large, heavily
populated areas. In addition to hurricanes and earthquakes, CAT losses can be due to windstorms, severe winter weather and
fires and may include terrorist events. In addition, climate change could have an impact on longer-term natural CAT trends.
Extreme weather events that are linked to rising temperatures, changing global weather patterns, sea, land and air temperatures,
as well as sea levels, rain and snow could result in increased occurrence and severity of CATs. CATs can cause losses in a
variety of our property and casualty segments, and it is possible that a catastrophic event or multiple catastrophic events could
cause us to suffer material financial losses. In addition, CAT claim costs may be higher than we originally estimate and could
cause substantial volatility in our financial results for any fiscal quarter or year. Our ability to write new business could also be
affected. We believe that increases in the value and geographic concentration of insured property, the effects of inflation and
the growth of our workers’ compensation business could also increase the severity of claims from CAT events in the future.
For information on our approaches to catastrophe risk mitigation, including reinsurance and catastrophe modeling, see the
Property Reinsurance – Catastrophe Coverage section within “Item 1. Business” and Note 1.S to the consolidated financial
statements within Item 8, Financial Statements and Supplementary Data. However, since our CAT models cannot contemplate
all possible CAT scenarios and includes underlying assumptions based on a limited set of actual events, the losses we might
incur from an actual catastrophe could be higher than our expectation of losses generated from modeled catastrophe scenarios
and our results of operations and financial condition could be materially and adversely affected.
Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would
negatively impact our profitability.
Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our
payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing
estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. Loss reserves are
estimates of the ultimate cost of claims and do not represent an exact calculation of liability. These estimates are based on
historical information and on estimates of future trends that may affect the frequency and severity of claims that may be
reported in the future. Estimating loss reserves is a difficult, complex and inherently uncertain process involving many
variables and subjective judgments. As part of the reserving process, we review historical data and consider the impact of
various factors such as:
• Loss emergence and cedant reporting patterns,
• Underlying policy terms and conditions,
• Business and exposure mix,
• Trends in claim frequency and severity,
• Changes in operations,
• Emerging economic and social trends,
•
Inflation and
• Changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for predicting future events. It also assumes that adequate historical or other data exists upon which to make
these judgments. For more information on the estimates used in the establishment of loss reserves, see the loss and settlement
expenses section of our critical accounting policies contained within Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations. However, there is no precise method for evaluating the impact of any specific
factor on the adequacy of reserves and actual results are likely to differ from original estimates. If the actual amount of insured
losses is greater than the amount we have reserved for these losses, our profitability could suffer.
24
We may suffer losses from litigation, which could materially and adversely affect our financial condition and business
operations.
As is typical in our industry, we continually face risks associated with litigation of various types, including general
commercial and corporate litigation, and disputes relating to bad faith allegations which could result in us incurring losses in
excess of policy limits. We are party to a variety of litigation matters throughout the year. Litigation is subject to inherent
uncertainties, and if there were an outcome unfavorable to us, there exists the possibility of a material adverse impact on our
results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not
materialize, we still may face substantial expense and disruption associated with the litigation.
Our reinsurers may not pay on losses in a timely fashion, or at all, which may increase our costs.
We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in
exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us
to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. That is, our reinsurers may not pay claims made
by us on a timely basis, or they may not pay some or all of these claims for a variety of reasons. Either of these events would
increase our costs and could have a materially adverse effect on our business.
If we cannot obtain adequate reinsurance protection for the risks we have underwritten, we may be exposed to greater
losses from these risks or we may reduce the amount of business we underwrite, which will reduce our revenues.
Market conditions beyond our control determine the availability and cost of the reinsurance protection that we purchase.
In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of
reinsurance. Our reinsurance agreements are generally subject to annual renewal. We cannot be sure that we can maintain our
current reinsurance protection, that we can obtain other reinsurance facilities in adequate amounts and at favorable rates or that
we can diversify our exposure among an adequate number of high quality reinsurance partners. If we are unable to renew our
expiring facilities or to obtain new reinsurance facilities on terms we deem acceptable, either our net exposures would
increase—which could increase the volatility of our results—or, if we were unwilling to bear an increase in net exposures, we
would have to reduce the level of our underwriting commitments, which would reduce our revenues.
Our investment results and, therefore, our financial condition may be impacted by changes in the business, financial
condition or operating results of the entities in which we invest, as well as changes in interest rates, government monetary
policies, general economic conditions, liquidity and overall market conditions.
We invest the premiums we receive from customers until they are needed to pay expenses or policyholder claims. Funds
remaining after paying expenses and claims remain invested and are included in retained earnings. The value of our investment
portfolio can fluctuate as a result of changes in the business, financial condition or operating results of the entities in which we
invest. In addition, fluctuations can result from changes in interest rates, credit risk, government monetary policies, liquidity of
holdings and general economic conditions. The equity portfolio will fluctuate with movements in the overall stock market.
While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is positively
correlated with movements in domestic stocks. The bond portfolio is affected by interest rate changes and movement in credit
spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-diversified portfolio of high-quality
securities with varied maturities. These fluctuations may negatively impact our financial condition. However, we attempt to
manage this risk through asset allocation, duration and security selection.
We compete with a large number of companies in the insurance industry for underwriting revenues.
We compete with a large number of other companies in our selected lines of business. During periods of intense
competition for premium (soft markets), we are vulnerable to the actions of other companies who may seek to write business
without the appropriate regard for risk and profitability. During these times, it is very difficult to grow or maintain premium
volume without sacrificing underwriting discipline and income.
We face competition both from specialty insurance companies, underwriting agencies and intermediaries, as well as
diversified financial services companies that are significantly larger than we are and that have significantly greater financial,
marketing, management and other resources. We may also face competition from new sources of capital such as institutional
investors seeking access to the insurance market, sometimes referred to as alternative capital, which may depress pricing or
limit our opportunities to write business. Some of these competitors also have greater experience and market recognition than
25
we do. We may incur increased costs in competing for underwriting revenues. If we are unable to compete effectively in the
markets in which we operate or expand our operations into new markets, our underwriting revenues may decline, as well as
overall business results.
A number of new, proposed or potential legislative or industry developments could further increase competition in our
industry. These developments include:
• An increase in capital-raising by companies in our lines of business, which could result in new entrants to our
markets and an excess of capital in the industry,
• The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of
the insurance industry, which could increase competition from standard carriers for our excess and surplus lines
of insurance business,
• Programs in which state-sponsored entities provide property insurance in CAT-prone areas or other “alternative
markets” types of coverage,
• Changing practices, which may lead to greater competition in the insurance business and
• The emergence of insurtech companies and the development of new technologies, which may lead to disruption
of current business models and the insurance value chain.
New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change,
which could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.
A downgrade in our ratings from A.M. Best, Standard & Poor’s or Moody’s could negatively affect our business.
Financial strength ratings are a critical factor in establishing the competitive position of insurance companies. Our
insurance companies are rated for overall financial strength by A.M. Best, Standard & Poor’s and Moody’s. A.M. Best,
Standard & Poor’s and Moody’s ratings reflect their opinions of our financial strength, operating performance, strategic
position and ability to meet our obligations to policyholders, and are not evaluations directed to investors. Our ratings are
subject to periodic review by such firms, and the criteria used in the rating methodologies is subject to change; as such, we
cannot assure the continued maintenance of our current ratings. All of our ratings were reviewed during 2017. A.M. Best
reaffirmed its “A+, Superior” rating for the combined entity of RLI Ins., Mt. Hawley and CBIC (group-rated). Standard &
Poor’s reaffirmed our “A+, Strong” rating for the group of RLI Ins. and Mt. Hawley. Moody’s reaffirmed our group rating of
“A2, Good” for RLI Ins. and Mt. Hawley. Because these ratings have become an increasingly important factor in establishing
the competitive position of insurance companies, if our ratings are reduced from their current levels by A.M. Best, Standard &
Poor’s or Moody’s, our competitive position in the industry, and therefore our business, could be adversely affected. A
significant downgrade could result in a substantial loss of business, as policyholders might move to other companies with
higher claims-paying and financial strength ratings.
We are subject to extensive governmental regulation, which may adversely affect our ability to achieve our business
objectives. Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and
suspensions, which may adversely affect our financial condition, results of operations and reputation.
Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other
investors. These regulations, generally administered by a department of insurance in each state and territory in which we do
business, relate to, among other things:
• Approval of policy forms and premium rates,
• Standards of solvency, including risk-based capital measurements,
• Licensing of insurers and their producers,
• Restrictions on agreements with our large revenue-producing agents,
• Cancellation and non-renewal of policies,
• Restrictions on the nature, quality and concentration of investments,
26
• Restrictions on the ability of our insurance company subsidiaries to pay dividends to us,
• Restrictions on transactions between insurance company subsidiaries and their affiliates,
• Restrictions on the size of risks insurable under a single policy,
• Requiring deposits for the benefit of policyholders,
• Requiring certain methods of accounting,
• Periodic examinations of our operations and finances,
• Prescribing the form and content of records of financial condition required to be filed and
• Requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the conduct and affairs of insurance companies and
require the filing of annual, quarterly and other reports relating to financial condition, holding company issues and other
matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business
objectives.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons,
including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or
practices that we believe may be generally followed by the industry. These practices may turn out to be different from the
interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable
regulatory requirements, insurance regulatory authorities could fine us, preclude or temporarily suspend us from carrying on
some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business. Further,
changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by
regulatory authorities could adversely affect our ability to operate our business as currently conducted.
In addition to regulations specific to the insurance industry, including the insurance laws of our principal state regulator
(Illinois), as a public company we are also subject to the rules and regulations of the U.S. Securities and Exchange Commission
and the New York Stock Exchange (NYSE), each of which regulate many areas such as financial and business disclosures,
corporate governance and shareholder matters. We are also subject to the corporation laws of Illinois, where we and our three
insurance company subsidiaries are incorporated. At the federal level, among other laws, we are subject to the Sarbanes-Oxley
Act and the Dodd-Frank Act, each of which regulate corporate governance, executive compensation and other areas, as well as
laws relating to federal trade restrictions, privacy/data security and terrorism risk insurance laws. We monitor these laws,
regulations and rules on an ongoing basis to ensure compliance and make appropriate changes as necessary. Implementing such
changes may require adjustments to our business methods, increases to our costs and other changes that could cause us to be
less competitive in our industry.
We may be unable to attract and retain qualified key employees.
We depend on our ability to attract and retain qualified executive officers, experienced underwriting talent and other
skilled employees who are knowledgeable about our business. Providing suitable succession planning for such positions is also
important. If we cannot attract or retain top-performing executive officers, underwriters and other employees, if the quality of
their performance decreases or if we fail to implement succession plans for our key staff, we may be unable to maintain our
current competitive position in the markets in which we operate or expand our operations into new markets.
We are an insurance holding company and therefore may not be able to receive adequate or timely dividends from our
insurance subsidiaries.
RLI Corp. is the holding company for our three insurance operating companies. At the holding company level, our
principal assets are the shares of capital stock of our insurance company subsidiaries. We rely largely on dividends from our
insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate
expenses and dividends to RLI Corp. shareholders. Dividend payments to RLI Corp. from our principal insurance subsidiary
are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory
authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts
necessary to pay RLI Corp. obligations and desired dividends to shareholders. Ordinary dividends, which may be paid by our
principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon income, surplus
and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month
27
period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus as of December 31 of the
preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary
dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of
the ordinary dividend limits is deemed extraordinary and requires prior approval (or non-disapproval) from the IDOI. Because
the limitations are based upon a rolling 12-month period, the presence, amount and impact of these restrictions vary over time.
Anti-takeover provisions affecting us could prevent or delay a change of control that is beneficial to you.
Provisions of our articles of incorporation and by-laws, as well as applicable Illinois law, federal and state regulations and
insurance company regulations may discourage, delay or prevent a merger, tender offer or other change of control that holders
of our securities may consider favorable. Some of these provisions impose various procedural and other requirements that
could make it more difficult for shareholders to effect certain corporate actions. These provisions could:
• Have the effect of delaying, deferring or preventing a change in control of us,
• Discourage bids for our securities at a premium over the market price,
• Adversely affect the market price, the voting and other rights of the holders of our securities or
•
Impede the ability of the holders of our securities to change our management.
Any significant interruption in the operation of our facilities, systems and business functions could adversely affect
our financial condition and results of operations.
We rely on multiple computer systems to interact with producers and customers, issue policies, pay claims, run modeling
functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our
business is highly dependent on our ability to access these systems to perform necessary business functions. Additionally, some
of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be
exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other
natural disasters, terrorist attacks, utility outages or complications encountered as existing systems are replaced or upgraded.
Any such issues could materially impact our company including the impairment of information availability, compromise
of system integrity/accuracy, misappropriation of confidential information, reduction of our volume of transactions and
interruption of our general business. Although we believe our computer systems are securely protected and continue to take
steps to ensure they are protected against such risks, we cannot guarantee that such problems will never occur. If they do,
interruption to our business and damage to our reputation, and related costs, could be significant, which could impair our
profitability.
Technology breaches or failures, including but not limited to cyber security incidents, could disrupt our operations
and result in the loss of critical and confidential information, which could adversely impact our reputation and results of
operations.
Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our
information technology systems and those of our business partners or service providers to sophisticated and targeted measures
known as advanced persistent threats. While we and our business partners and service providers employ measures to prevent,
detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous
monitoring of information technology networks and systems and maintenance of backup and protective systems), cyber
security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption
or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption
of business operations. Security breaches could expose us to a risk of loss or misuse of our or our customers’ information,
litigation and potential liability. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other
proper functioning of our technology systems could impact our operations. We may not have the resources or technical
sophistication to anticipate or prevent every type of cyber attack. A significant cyber incident, including system failure,
security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of
applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to monetary fines and other
penalties, which could be significant. It is possible that insurance coverage we have in place would not entirely protect us in the
event that we experienced a cyber security incident, interruption or widespread failure of our information technology systems.
28
We rely on third party vendors for a number of key components of our business.
We contract with a number of third party vendors to support our business. For example, we have license agreements for
services that include natural catastrophe modeling, policy management, claims processing, producer management and
accounting and financial management. The vendors range from large national companies, who are dominant in their area of
expertise and would be difficult to quickly replace, to smaller or start-up vendors with leading technology, but with shorter
operating histories and less financial resources. Failures of certain vendors to provide services could adversely affect our ability
to deliver products and services to our customers, disrupting our business and causing us to incur significant expense. If one or
more of our vendors fail to protect personal information of our customers, claimants or employees, we may incur operational
impairments, or could be exposed to litigation, compliance costs or reputation damage. We maintain a vendor management
program to establish procurement policies and to monitor vendor risk, including the financial stability of our critical vendors.
We may not be able to effectively start up or integrate new product opportunities.
Our ability to grow our business depends, in part, on our creation, implementation and acquisition of new insurance
products that are profitable and fit within our business model. New product launches as well as resources to integrate business
acquisitions are subject to many obstacles, including ensuring we have sufficient business and systems processes, determining
appropriate pricing, obtaining reinsurance, assessing opportunity costs and regulatory burdens and planning for internal
infrastructure needs. If we cannot accurately assess and overcome these obstacles or we improperly implement new insurance
products, our ability to grow profitably will be impaired.
Access to capital and market liquidity may adversely affect our ability to take advantage of business opportunities as
they arise.
Our ability to grow our business depends in part on our ability to access capital when needed. We cannot predict capital
market liquidity or the availability of capital. We also cannot predict the extent and duration of future economic and market
disruptions, the impact of government interventions into the market to address these disruptions and their combined impact on
our industry, business and investment portfolios. If our company needs capital but cannot raise it, our business and future
growth could be adversely affected.
Our success will depend on our ability to maintain and enhance effective operating procedures and manage risks on
an enterprise wide basis.
Operational risk and losses can result from, among other things, fraud, errors, failure to document transactions properly,
failure to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures
or external events. We continue to enhance our operating procedures and internal controls to effectively support our business
and our regulatory and reporting requirements. The NAIC and state legislatures have increased their focus on risks within an
insurer’s holding company system that may pose enterprise risk to insurers. The Illinois legislature has adopted the Risk
Management and ORSA Law, which requires domestic insurers to maintain a risk management framework and establishes a
legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The
ORSA law also provides that, no less than annually, an insurer must submit an ORSA summary report. Under the Illinois
insurance holding company laws, on an annual basis, we are also required to file with the IDOI an enterprise risk report, which
is intended to identify the material risks within our insurance holding company system that could pose enterprise risk to our
insurance company subsidiaries. We operate within an ERM framework designed to assess and monitor our risks. However,
assurance that we can effectively review and monitor all risks or that all of our employees will operate within the ERM
framework cannot be guaranteed. Assurances that our ERM framework will result in us accurately identifying all risks and
accurately limiting our exposures based on our assessments also cannot be guaranteed.
We may not be able to, or might not choose to, continue paying dividends on our common stock.
We have a history of paying regular, quarterly dividends and in recent years have paid special dividends. Any
determination to pay either type of dividend to our stockholders in the future will be at the discretion of our board of directors
and will depend on our results of operations, financial condition and other factors deemed relevant by our board of directors.
Our ability to pay dividends depends largely on our subsidiaries’ earnings and operating capital requirements and is subject to
the regulatory, contractual, and other constraints of our subsidiaries, including the effect of any such dividends or distributions
on the A.M. Best rating or other ratings of our insurance subsidiaries. In addition, we may choose to retain capital to support
growth or further mitigate risk, as opposed to returning excess capital to our shareholders.
29
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own five commercial buildings totaling 174,000 square feet on our 23-acre campus that serves as our corporate
headquarters in Peoria, Illinois. All of our branch offices and other company operations lease office space throughout the
country. Management considers our office facilities suitable and adequate for our current levels of operations.
Item 3. Legal Proceedings
We are party to numerous claims, losses and litigation matters that arise in the normal course of our business. Many of
such claims, losses or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the
resolution of these claims, losses and litigation matters will not have a material adverse effect on our financial condition,
results of operations or cash flows.
We are also involved in various other legal proceedings and litigation unrelated to our insurance business from time to
time that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result
of these legal matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information; Holders; Dividends
Closing Stock Price
2017
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2016
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Low
Ending
High
$ 61.61 $ 57.15 $ 60.02 $
53.01
51.02
56.99
58.67
58.68
60.93
54.62
57.36
60.66
Dividends
Declared
0.20
0.21
0.21
1.96
Closing Stock Price
Low
Ending
High
$ 68.05 $ 59.14 $ 66.86 $
61.35
66.41
54.60
68.78
71.00
68.82
68.78
68.36
63.13
Dividends
Declared
0.19
0.20
0.20
2.20
RLI Corp. common stock trades on the New York Stock Exchange under the symbol RLI. RLI has paid dividends for 166
consecutive quarters and increased quarterly dividends in each of the last 42 years. In December 2017 and 2016, RLI paid
special cash dividends of $1.75 and $2.00 per share, respectively, to shareholders. As of February 7, 2018, there were 797
registered holders of the Company’s common stock.
30
Performance
The following graph provides a five-year comparison of RLI’s total return to shareholders compared to that of the S&P
500 and S&P 500 P&C Index:
2012
2013
2014
2015
2016
2017
--------------
RLI
S&P 500
••••••••••••••••
S&P 500 P&C Index — — —
$
$
$
100
100
100
158
132
138
173
150
160
227
153
175
242
171
203
243
208
248
Assumes $100 invested on December 31, 2012, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends.
Comparison of five-year annualized total return — RLI: 19.5%, S&P 500: 15.8%, and S&P 500 P&C Index: 19.9%.
Securities Authorized for Issuance under Equity Compensation Plans
Refer to Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters,” of this document for information on securities authorized for issuance under our equity compensation plan.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities
Not applicable.
Equity Repurchases
In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares
during 2017. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be
suspended or discontinued at any time without prior notice.
31
Item 6. Selected Financial Data
The following is selected financial data of RLI Corp. and Subsidiaries for the five years ended December 31, 2017:
(amounts in thousands, except per share data and ratios)
OPERATING RESULTS
2017
2016
2015
2014
2013
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings
Net cash provided from operating activities
$
$
$
$
$
885,312
797,224
105,028
140,337
197,525
874,864
816,328
114,920
113,756
174,463
853,586
794,634
137,544
89,935
152,586
863,848
775,165
135,445
170,801
123,085
843,195
705,601
126,255
119,112
134,966
FINANCIAL CONDITION
Total investments and cash
Total assets
Unpaid losses and settlement expenses
Total debt
Total shareholders’ equity
Statutory surplus (1)
SHARE INFORMATION (2)
Net earnings per share:
Basic
Diluted
Comprehensive earnings per share:
Basic
Diluted
Cash dividends declared per share:
Ordinary
Special
Book value per share
Closing stock price
Stock Split
Weighted average shares outstanding:
Basic
Diluted
Common shares outstanding
$ 2,140,790
$ 2,947,244
$ 1,271,503
148,928
$
853,598
$
864,554
$
2,021,827
2,777,633
1,139,337
148,741
823,572
859,976
1,951,543 1,964,285 1,922,058
2,735,465 2,774,284 2,738,912
1,103,785 1,121,040 1,129,433
148,184
828,966
859,221
148,554
823,469
865,268
148,367
845,062
849,297
$
$
$
$
$
$
$
$
2.39
2.36
3.19
3.15
0.83
1.75
19.33
60.66
2.63
2.59
2.60
2.56
0.79
2.00
18.74
63.13
3.18
3.12
2.08
2.04
0.75
2.00
18.91
61.75
3.15
3.09
3.97
3.90
0.71
3.00
19.61
49.40
2.95
2.90
2.79
2.74
0.67
1.50
19.29
48.69
200 % (2)
44,033
44,500
44,148
43,772
44,432
43,945
43,299
44,131
43,544
43,020
43,819
43,103
42,744
43,514
42,982
OTHER NON-GAAP FINANCIAL INFORMATION
Net premiums written to statutory surplus (1)
GAAP combined ratio (3)
Statutory combined ratio (1)(3)
87 %
86 %
96.4
96.2
89.5
89.0
83 %
84.5
83.9
83 %
84.5
84.1
78 %
83.1
82.2
(1) Ratios and surplus information are presented on a statutory basis. As discussed in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, statutory accounting principles differ from GAAP and are
generally based on a solvency concept. Further discussion is included in note 9 to the consolidated financial statements
within Item 8, Financial Statements and Supplementary Data. Reporting of statutory surplus is a required disclosure under
GAAP.
(2) On January 15, 2014, our stock split on a 2-for-1 basis. All share and per share data has been retroactively stated to reflect
this split.
(3) See page 34 for information regarding non-GAAP financial measures.
32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property and casualty insurance through
major subsidiaries collectively known as RLI Insurance Group. As a specialty insurance company with a niche focus, we offer
insurance coverages in both the specialty admitted and excess and surplus markets. Coverages in the specialty admitted market,
such as our energy surety bonds, are for risks that are unique or hard-to-place in the standard market, but must remain with an
admitted insurance company for regulatory or marketing reasons. In addition, our coverages in the specialty admitted market
may be designed to meet specific insurance needs of targeted insured groups, such as our professional liability and package
coverages for design professionals and our stand-alone personal umbrella policy. The specialty admitted market is subject to
more state regulation than the excess and surplus market, particularly with regard to rate and form filing requirements,
restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as
state guaranty funds and assigned risk plans. We also underwrite coverages in the excess and surplus market. The excess and
surplus market, unlike the admitted market, is less regulated and more flexible in terms of policy forms and premium rates.
This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard
market. This typically results in coverages that are more restrictive and more expensive than coverages in the admitted market.
When we underwrite within the excess and surplus market, we are selective in the lines of business and type of risks we choose
to write. Using our non-admitted status in this market allows us to tailor terms and conditions to manage these exposures
effectively. Often, the development of these coverages is generated through proposals brought to us by an agent or broker
seeking coverage for a specific group of clients or loss exposures. Once a proposal is submitted, our underwriters determine
whether it would be a viable product based on our business objectives.
We focus on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters
with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and
underwrite for profit in all market conditions. In 2017, we achieved our 22nd consecutive year of profitability, averaging an
87.8 combined ratio over that period. This drives our ability to provide shareholder returns in three different ways: the
underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity
portfolio. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on generating
total return. The fixed income portfolio consists primarily of highly-rated, diversified, liquid, investment-grade securities.
Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk
asset classes. Our equity portfolio consists of a core stock portfolio weighted toward dividend-paying stocks, as well as
exchange traded funds (ETFs). Our minority equity ownership interests in Maui Jim, Inc. (Maui Jim), a manufacturer of high-
quality sunglasses, and Prime Holdings Insurance Services, Inc. (Prime), a specialty E&S insurance company, has also
enhanced financial results. We have a diversified investment portfolio and closely monitor our investment risks. Despite
periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed
significantly to our historic growth in book value.
We measure the results of our insurance operations by monitoring certain measures of growth and profitability across
three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and
profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense
components.
The casualty portion of our business consists largely of commercial umbrella, personal umbrella, general liability,
transportation and executive products coverages, as well as package business and other specialty coverages, such as professional
liability and workers’ compensation for office-based professionals. We also offer fidelity and crime coverage for commercial
insureds and select financial institutions and medical and healthcare professional liability coverage. The casualty business is
subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take
several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation
and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.
Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine
coverages. We also offer select personal lines policies, including homeowners’ coverages. Our crop, property reinsurance and
recreational vehicle products are in runoff after we discontinued our crop relationship at the end of 2015 and began curtailing
reinsurance and recreational vehicle offerings at the end of 2015 and 2016, respectively. Property insurance results are subject
to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses
caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind
storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net
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aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing
reinsurance and maintaining policy terms and conditions throughout market cycles. We also use computer-assisted modeling
techniques to provide estimates that help us carefully manage the concentration of risks exposed to catastrophic events.
The surety segment specializes in writing small to large-sized commercial and contract surety coverages, as well as those
for the energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary
and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a
relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our
insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project.
Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced
marginally higher loss ratios than other surety lines during economic downturns.
GAAP, NON-GAAP AND PERFORMANCE MEASURES
Throughout this annual report, we include certain non-generally accepted accounting principles (“non-GAAP”) financial
measures. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow
for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed
as a substitute for those determined in accordance with generally accepted accounting principles in the United States of
America (GAAP). In addition, our definitions of these items may not be comparable to the definitions used by other
companies.
Following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP
measures and explanations of their importance to our operations.
Underwriting Income
Underwriting income or profit represents one measure of the pretax profitability of our insurance operations and is
derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net
premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but
is not subtotaled. However, this information is available in total and by segment in note 11 to the consolidated financial
statements within Item 8, Financial Statements and Supplementary Data. The nearest comparable GAAP measure is earnings
before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses,
general corporate expenses, debt costs and our portion of earnings from unconsolidated investees.
Combined Ratio
The combined ratio, which is derived from components of underwriting income, is a common industry performance
measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and
settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy
acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of
the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the
combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.
For example, a combined ratio of 85 implies that for every $100 of premium we earn, we record $15 of underwriting income.
Net Unpaid Loss and Settlement Expenses
Unpaid losses and settlement expenses, as shown in the liabilities section of our balance sheets, represents the total
obligations to claimants for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The
related asset item, reinsurance balances recoverable on unpaid losses and settlement expense, is the estimate of known claims
and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net
unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these
various estimated amounts.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the
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consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results
could differ significantly from those estimates.
The most critical accounting policies involve significant estimates and include those used in determining the liability for
unpaid losses and settlement expenses, investment valuation and other-than-temporary impairment (OTTI), recoverability of
reinsurance balances, deferred policy acquisition costs and deferred taxes.
LOSSES AND SETTLEMENT EXPENSES
Overview
Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related
settlement expenses from claims that have been reported but not paid and those losses that have occurred but have not yet been
reported to us. Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally
utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve
estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These
estimates are based on facts and circumstances then known to us, review of historical settlement patterns, estimates of trends in
claims frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other
factors. In establishing reserves, we also take into account estimated recoveries from reinsurance, salvage and subrogation. The
reserves are reviewed regularly by a team of actuaries we employ.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These
variables can be affected by both internal and external events, such as changes in claims handling procedures, claim personnel,
economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for
loss and LAE is difficult to estimate. Loss reserve estimations also differ significantly by coverage due to differences in claim
complexity, the volume of claims, the policy limits written, the terms and conditions of the underlying policies, the potential
severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the
occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout
the process. We continually refine our loss reserve estimates as historical loss experience develops and additional claims are
reported and settled. We rigorously attempt to consider all significant facts and circumstances known at the time loss reserves
are established.
Due to inherent uncertainty underlying loss reserve estimates, including, but not limited to, the future settlement
environment, final resolution of the estimated liability may be different from that anticipated at the reporting date. Therefore,
actual paid losses in the future may yield a significantly different amount than currently reserved — favorable or unfavorable.
The amount by which estimated losses differ from those originally reported for a period is known as “development.”
Development is unfavorable when the losses ultimately settle for more than the levels at which they were reserved or
subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses
ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on
unresolved claims. We reflect favorable or unfavorable developments of loss reserves in the results of operations in the period
the estimates are changed.
We record two categories of loss and LAE reserves — case-specific reserves and IBNR reserves.
Within a reasonable period of time after a claim is reported, our claim department completes an initial investigation and
establishes a case reserve. This case-specific reserve is an estimate of the ultimate amount we will have to pay for the claim,
including related legal expenses and other costs associated with resolving and settling it. The estimate reflects all of the current
information available regarding the claim, the informed judgment of our professional claim personnel regarding the nature and
value of the specific type of claim and our reserving practices. During the life cycle of a particular claim, as more information
becomes available, we may revise the estimate of the ultimate value of the claim either upward or downward. We may
determine that it is appropriate to pay portions of the reserve to the claimant or related settlement expenses before final
resolution of the claim. The amount of the individual claim reserve will be adjusted accordingly and is based on the most recent
information available.
We establish IBNR reserves to estimate the amount we will have to pay for claims that have occurred, but have not yet
been reported to us, claims that have been reported to us that may ultimately be paid out differently than reflected in our case-
specific reserves and claims that have been closed but may reopen and require future payment.
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Our IBNR reserving process involves three steps: (1) an initial IBNR generation process that is prospective in nature,
(2) a loss and LAE reserve estimation process that occurs retrospectively and (3) a subsequent discussion and reconciliation
between our prospective and retrospective IBNR estimates, which includes changes in our provisions for IBNR where deemed
appropriate. These three processes are discussed in more detail in the following sections.
LAE represents the cost involved in adjusting and administering losses from policies we issued. The LAE reserves are
frequently separated into two components: allocated and unallocated. Allocated loss adjustment expense (ALAE) reserves
represent an estimate of claims settlement expenses that can be identified with a specific claim or case. Examples of ALAE
would be the hiring of an outside adjuster to investigate a claim or an outside attorney to defend our insured. The claim adjuster
typically estimates this cost separately from the loss component in the case reserve. Unallocated loss adjustment expense
(ULAE) reserves represent an estimate of claims settlement expenses that cannot be identified with a specific claim. An
example of ULAE would be the cost of an internal claim examiner to manage or investigate claims.
Our best estimate of ultimate loss and LAE reserves are proposed by our lead reserving actuary and approved by our Loss
Reserve Committee (LRC). The LRC is made up of various members of the management team including the lead reserving
actuary, chief executive officer, chief operating officer, chief financial officer, general counsel and other selected executives.
We do not use discounting (recognition of the time value of money) in reporting our estimated reserves for losses and
settlement expenses. Based on current assumptions used in calculating reserves, we believe that our reserve levels at
December 31, 2017, make a reasonable provision to meet our future obligations.
Initial IBNR Generation Process
Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to
establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE
liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied
to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and
ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and
ALAE to determine a carried IBNR reserve.
For most property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since
this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are
determined by IBNR percentages applied to premium earned. The percentages are determined based on historical reporting
patterns and are updated periodically. In addition, for assumed property reinsurance, consideration is given to data compiled for
a sizable sample of reinsurers. No deductions for paid or case reserves are made. This alternative method of determining initial
IBNR allows incurred losses and ALAE to react more rapidly to the actual emergence and is more appropriate for our property
products where final claim resolution occurs over a shorter period of time.
We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we
review insured locations exposed to the event and industry loss estimates of the event. We also consider our knowledge of
frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. These reserves are
reviewed frequently to consider actual losses reported and appropriate changes to our estimates are made to reflect the new
information.
The initial loss and ALAE ratios that are applied to earned premium are reviewed at least semi-annually. Prospective
estimates are made based on historical loss experience adjusted for exposure mix, price change and loss cost trends. The initial
loss and ALAE ratios also reflect our judgment as to estimation risk. We consider estimation risk by product and coverage
within product, if applicable. A product with greater volatility and uncertainty has greater estimation risk. Products or
coverages with higher estimation risk include, but are not limited to, the following characteristics:
• Significant changes in underlying policy terms and conditions,
• A new business or one experiencing significant growth and/or high turnover,
• Small volume or lacking internal data requiring significant utilization of external data,
• Unique reinsurance features including those with aggregate stop-loss, reinstatement clauses, commutation provisions
or clash protection,
• Longer emergence patterns with exposures to latent unforeseen mass tort,
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• Assumed reinsurance businesses where there is an extended reporting lag and/or a heavier utilization of ceding
company data and claims and product expertise,
• High severity and/or low frequency,
• Operational processes undergoing significant change and/or
• High sensitivity to significant swings in loss trends, economic change or judicial change.
The historical and prospective loss and ALAE estimates, along with the risks listed, are the basis for determining our
initial and subsequent carried reserves. Adjustments in the initial loss ratio by product and segment are made where necessary
and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors. The LRC
approves all final decisions regarding changes in the initial loss and ALAE ratios.
Loss and LAE Reserve Estimation Process
Estimates of the expected value of the unpaid loss and LAE are derived using standard actuarial methodologies on a
quarterly basis. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary.
These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.
The process of estimating ultimate payment for claims and claim expenses begins with the collection and analysis of
current and historical claim data. Data on individual reported claims, including paid amounts and individual claim adjuster
estimates, are grouped by common characteristics. There is judgment involved in this grouping. Considerations when grouping
data include the volume of the data available, the credibility of the data available, the homogeneity of the risks in each cohort
and both settlement and payment pattern consistency. We use this data to determine historical claim reporting and payment
patterns, which are used in the analysis of ultimate claim liabilities. For portions of the business without sufficiently large
numbers of policies or that have not accumulated sufficient historical statistics, our own data is supplemented with external or
industry average data as available and when appropriate. For our newer products such as medical professional liability, as well
as for executive products and professional services, we utilize external data extensively.
In addition to the review of historical claim reporting and payment patterns, we also incorporate estimated losses relative
to premium (loss ratios) by year into the analysis. The expected loss ratios are based on a review of historical loss performance,
trends in frequency and severity and price level changes. The estimates are subject to judgment including consideration given
to available internal and industry data, growth and policy turnover, changes in policy limits, changes in underlying policy
provisions, changes in legal and regulatory interpretations of policy provisions and changes in reinsurance structure. For the
most current year, these are equivalent with the ratios used in the initial IBNR generation process. Increased recognition is
given to actual emergence as the years age.
We use historical development patterns, expected loss ratios and standard actuarial methods to derive an estimate of the
ultimate level of loss and LAE payments necessary to settle all the claims occurring as of the end of the evaluation period.
Our reserve processes include multiple standard actuarial methods for determining estimates of IBNR reserves. Other
supplementary methodologies are incorporated as necessary. Mass tort and latent liabilities are examples of exposures for
which supplementary methodologies are used. Each method produces an estimate of ultimate loss by accident year. We review
all of these various estimates and assign weights to each based on the characteristics of the product being reviewed.
Our estimates of ultimate loss and LAE reserves are subject to change as additional data emerges. This could occur as a
result of change in loss development patterns, a revision in expected loss ratios, the emergence of exceptional loss activity, a
change in weightings between actuarial methods, the addition of new actuarial methodologies, new information that merits
inclusion or the emergence of internal variables or external factors that would alter our view.
There is uncertainty in the estimates of ultimate losses. Significant risk factors to the reserve estimate include, but are not
limited to, unforeseen or unquantifiable changes in:
• Loss payment patterns,
• Loss reporting patterns,
• Frequency and severity trends,
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• Underlying policy terms and conditions,
• Business or exposure mix,
• Operational or internal processes affecting the timing of loss and LAE transactions,
• Regulatory and legal environment and/or
• Economic environment.
Our actuaries engage in discussions with senior management, underwriting and the claim department on a regular basis to
ascertain any substantial changes in operations or other assumptions that are necessary to consider in the reserving analysis.
A considerable degree of judgment in the evaluation of all these factors is involved in the analysis of reserves. The human
element in the application of judgment is unavoidable when faced with uncertainty. Different experts will choose different
assumptions based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected
by various qualified experts may differ significantly from each other. We consider this uncertainty by examining our historic
reserve accuracy and through an internal peer review process.
Given the substantial impact of the reserve estimates on our financial statements, we subject the reserving process to
significant diagnostic testing and reasonability checks. In addition, there are data validity checks and balances in our front-end
processes. Data anomalies are researched and explained to reach a comfort level with the data and results. Leading indicators
such as actual versus expected emergence and other diagnostics are also incorporated into the reserving processes.
Determination of Our Best Estimate
Upon completion of our loss and LAE estimation analysis, the results are discussed with the LRC. As part of this
discussion, the analysis supporting the actuarial central estimate of the IBNR reserve by product is reviewed. The actuaries also
present explanations supporting any changes to the underlying assumptions used to calculate the indicated central estimate. A
review of the resulting variance between the indicated reserves and the carried reserves takes place. Our actuaries make a
recommendation to management in regards to booked reserves that reflect their analytical assessment and view of estimation
risk. After discussion of these analyses and all relevant risk factors, the LRC determines whether the reserve balances require
adjustment. Resulting reserve balances have always fallen within our actuaries’ reasonable range of estimates.
As a predominantly excess and surplus lines and specialty admitted insurer serving niche markets, we believe there are
several reasons to carry, on an overall basis, reserves above the actuarial central estimate. We believe we are subject to above-
average variation in estimates and that this variation is not symmetrical around the actuarial central estimate.
One reason for the variation is the above-average policyholder turnover and changes in the underlying mix of exposures
typical of an excess and surplus lines business. This constant change can cause estimates based on prior experience to be less
reliable than estimates for more stable, admitted books of business. Also, as a niche market insurer, there is little industry-level
information for direct comparisons of current and prior experience and other reserving parameters. These unknowns create
greater-than-average variation in the actuarial central estimates.
Actuarial methods attempt to quantify future outcomes. However, insurance companies are subject to unique exposures
that are difficult to foresee at the point coverage is initiated and, often, many years subsequent. Judicial and regulatory bodies
involved in interpretation of insurance contracts have increasingly found opportunities to expand coverage beyond that which
was intended or contemplated at the time the policy was issued. Many of these policies are issued on an “all risk” and
occurrence basis. Aggressive plaintiff attorneys have often sought coverage beyond the insurer’s original intent. Some
examples would be the industry’s ongoing asbestos and environmental litigation and court interpretations of exclusionary
language for mold and construction defect.
We believe that because of the inherent variation and the likelihood that there are unforeseen and under-quantified
liabilities absent from the actuarial estimate, it is prudent to carry loss reserves above the actuarial central estimate. Most of our
variance between the carried reserve and the actuarial central estimate is in the most recent accident years for our casualty
segment, where the most significant estimation risks reside. These estimation risks are considered when setting the initial loss
ratios. In the cases where these risks fail to materialize, favorable loss development will likely occur over subsequent
accounting periods. It is also possible that the risks materialize above the amount we considered when booking our initial loss
reserves. In this case, unfavorable loss development is likely to occur over subsequent accounting periods.
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Our best estimate of loss and LAE reserves may change as a result of a revision in the actuarial central estimate, the
actuary’s certainty in the estimates and processes and our overall view of the underlying risks. From time to time, we
benchmark our reserving policies and procedures and refine them by adopting industry best practices where appropriate. A
detailed, ground-up analysis of the actuarial estimation risks associated with each of our products and segments, including an
assessment of industry information, is performed annually. This information is used when determining management’s best
estimate of booked reserves.
Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate settlement
values. Periodic adjustments to these estimates will likely occur as the actual loss emergence reveals itself over time. Our loss
reserving processes reflect accepted actuarial practices and our methodologies result in a reasonable provision for reserves as of
December 31, 2017.
INVESTMENT VALUATION AND OTTI
Throughout each year, we and our investment managers buy and sell securities to achieve investment objectives in
accordance with investment policies established and monitored by our board of directors and executive officers.
We classify our investments in securities into one of three categories: trading, held-to-maturity or available-for-sale. We
do not hold any securities classified as trading or held-to-maturity. Available-for-sale securities are carried at fair value with
unrealized gains and losses recorded as a component of comprehensive earnings and shareholders’ equity, net of deferred
income taxes.
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly
transaction between market participants on the measurement date.
We determined the fair value of certain financial instruments based on their underlying characteristics and relevant
transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
We regularly evaluate our fixed income and equity securities using both quantitative and qualitative criteria to determine
impairment losses for other-than-temporary declines in the fair value of the investments. The following are some of the key
factors we consider for determining if a security is other-than-temporarily impaired:
• The length of time and the extent to which the fair value has been less than cost,
• The probability of significant adverse changes to the cash flows on a fixed income investment,
• The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer
seeking protection from creditors under the bankruptcy laws, or the issuer proposing a voluntary reorganization
under which creditors are asked to exchange their claims for cash or securities having a fair value substantially
lower than par value of their claims,
• The probability that we will recover the entire amortized cost basis of our fixed income securities prior to
maturity or
• For our equity securities, our expectation of recovery to cost within a reasonable period of time.
Quantitative criteria considered during this process include, but are not limited to: the degree and duration of current fair
value as compared to the cost (amortized, in certain cases) of the security, degree and duration of the security’s fair value being
below cost and, for fixed maturities, whether the issuer is in compliance with the terms and covenants of the security.
Qualitative criteria include the credit quality, current economic conditions, the anticipated speed of cost recovery, the financial
health of and specific prospects for the issuer, as well as the absence of intent to sell or requirement to sell fixed income
securities prior to recovery. In addition, we consider price declines of fixed income securities in our OTTI analysis where such
price declines provide evidence of declining credit quality, and we distinguish between price changes caused by credit
deterioration as opposed to rising interest rates.
Key factors that we consider in the evaluation of credit quality include:
• Changes in technology that may impair the earnings potential of the investment,
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• The discontinuance of a segment of business that may affect future earnings potential,
• Reduction or elimination of dividends,
• Specific concerns related to the issuer’s industry or geographic area of operation,
• Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and
• A downgrade in credit quality by a major rating agency.
For mortgage-backed securities and asset-backed securities that have significant unrealized loss positions and major
rating agency downgrades, credit impairment is assessed using a cash flow model that estimates likely payments using
security-specific collateral and transaction structure. All of our mortgage-backed and asset-backed securities remain AAA-
rated by one of the major rating agencies and the fair value is not significantly less than amortized cost.
Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is
triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will
be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire
amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be
required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the
security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it
will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit
loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive
income.
Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we
have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities,
we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than
not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors
could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying
investment’s cost basis.
RECOVERABILITY OF REINSURANCE BALANCES
Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are
reported separately as assets, rather than being netted with the related liabilities, since reinsurance does not relieve us of our
liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. Additionally, the
same uncertainties associated with estimating unpaid losses and settlement expenses impact the estimates for the ceded portion
of such liabilities. We continually monitor the financial condition of our reinsurers. As part of our monitoring efforts, we
review their annual financial statements, Securities and Exchange Commission (SEC) filings for those reinsurers that are
publicly traded, A.M. Best and S&P rating developments and insurance industry developments that may impact the financial
condition of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including one
based on average default by S&P rating. Based upon our review and testing, our policy is to charge to earnings, in the form of
an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure
that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover.
DEFERRED POLICY ACQUISITION COSTS
We defer commissions, premium taxes and certain other costs that are incrementally or directly related to the successful
acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they
are based on contingent or performance criteria beyond the basic acquisition of the insurance contract, or when efforts to obtain
or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to
premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such
deferred costs to their estimated realizable value. This would also give effect to the premiums to be earned and anticipated
losses and settlement expenses, as well as certain other costs expected to be incurred as the premiums are earned. Judgments as
to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated
future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums
and acquisition costs.
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DEFERRED TAXES
We record deferred tax assets and liabilities to the extent that temporary differences between the tax basis and GAAP
basis of an asset or liability result in future taxable or deductible amounts. Our deferred tax assets relate to expected future tax
deductions arising from claim reserves and future taxable income related to changes in our unearned premium. We also have a
significant amount of deferred tax liabilities from unrealized gains on the investment portfolio and deferred acquisition costs.
Periodically, management reviews our deferred tax positions to determine if it is more likely than not that the assets will be
realized. These reviews include, among other things, the nature and amount of the taxable income and expense items, the
expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical
profitability of businesses expected to provide future earnings. Furthermore, management considers tax-planning strategies it can
use to increase the likelihood that the tax assets will be realized. After conducting the periodic review, if management determines
that the realization of the tax asset does not meet the more likely than not criteria, an offsetting valuation allowance is recorded,
thereby reducing net earnings and the deferred tax asset in that period. In addition, management must make estimates of the tax
rates expected to apply in the periods in which future taxable items are realized. Such estimates include determinations and
judgments as to the expected manner in which certain temporary differences, including deferred amounts related to our equity
method investment, will be recovered. These estimates enter into the determination of the applicable tax rates and are subject to
change based on the circumstances.
We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to
uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered material to
the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to
unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they
occur, would be included in income tax expense in the period in which they are incurred.
Additional discussion of other significant accounting policies may be found in note 1 to the consolidated financial
statements within Item 8, Financial Statements and Supplementary Data.
RESULTS OF OPERATIONS
Consolidated revenue, as displayed in the table that follows, totaled $797.2 million for 2017, compared to $816.3 million
for 2016 and $794.6 million in 2015.
CONSOLIDATED REVENUE
(in thousands)
Net premiums earned
Net investment income
Net realized gains
Total consolidated revenue
2017
Year ended December 31,
2016
$ 737,937 $ 728,608 $ 700,161
54,644
39,829
$ 797,224 $ 816,328 $ 794,634
53,075
34,645
54,876
4,411
2015
Consolidated revenue declined slightly in 2017, due to lower amounts of realized gains recognized during the year.
However, both net premiums earned from insurance operations and net investment income increased in 2017. Net premiums
earned were up 1 percent, driven by results from our casualty segment. The growth from casualty offset a decline from our
property segment, while the surety segment was flat for the year. Net premiums earned also increased on an overall basis in
2016 and 2015, with growth of 4 percent and 2 percent, respectively. Premium results for each of these periods were impacted
by recent exits from certain product lines, including our recreational vehicles (RV) and treaty reinsurance lines in 2016 and our
crop and facultative reinsurance lines in 2015. Investment income increased by 3 percent in 2017, compared to a 3 percent
decline during the prior year. The increase was primarily due to a larger asset base in 2017 as well as an increase in other
invested assets. We recorded net realized gains on our investment portfolio in each of the past three years. The majority of
gains realized over this period related to sales activities versus calls or maturities. Sales activity was largely due to normal
portfolio rebalancing, as well as raising cash to support special dividends paid in each of the last three years. Net realized gains
41
for 2017 and 2016 included $3.4 million and $7.2 million, respectively, of non-cash realized losses on goodwill and definite-
lived intangible asset impairments, while 2015 reflects a $6.7 million gain related to the sale of RLI Indemnity Company.
NET EARNINGS
(in thousands)
Underwriting income
Net investment income
Net realized gains
Interest expense on debt
General corporate expenses
Equity in earnings of unconsolidated investees
Earnings before income taxes
Income tax benefit (expense)
Net earnings
2015
$
Year ended December 31,
2017
2016
26,844 $
76,125 $ 108,558
54,876
54,644
53,075
4,411
39,829
34,645
(7,426)
(7,426)
(7,426)
(11,340)
(10,170)
(9,837)
10,914
10,833
17,224
84,589 $ 157,082 $ 196,682
(59,138)
20,439
(42,162)
$ 105,028 $ 114,920 $ 137,544
$
Net earnings for 2017 totaled $105.0 million, down from $114.9 in the prior year. The components of net earnings
differed significantly from prior years, due to record levels of hurricane losses during 2017 and the passage of The Tax Cuts
and Jobs Act of 2017 (TCJA). Catastrophe losses totaled $39.8 million in 2017, with Hurricanes Harvey, Irma and Maria
responsible for $36.0 million of the total, which added 4 points to the combined ratio. These hurricanes collectively represented
the largest wind-related catastrophe loss in company history, and contributed heavily to the lower underwriting income result in
2017. Catastrophe losses in 2016 were $16.3 million, split evenly between amounts related to spring storms and Hurricane
Matthew, while 2015 results included $12.1 in spring and winter storm losses. Apart from the catastrophe impact, results for
each of these years also reflected a combination of positive underwriting results for the current accident year and favorable loss
reserve development on prior accident years. The ex-catastrophe loss ratio has trended higher for the current accident year in
2017. The increase was largely driven by an overall shift in mix of business towards our casualty segment, as well as higher
loss trends on certain lines within casualty. Favorable development in prior accident years’ reserves was similar in each of the
past two years, as results for 2017 included $38.9 million in favorable development, compared to $42.0 million in 2016. The
impact was greater in 2015, as favorable development in prior accident years’ reserves totaled $65.4 million, primarily due to
larger amounts from our casualty segment. Further discussion of reserve development can be found in note 6 to the
consolidated financial statements within Item 8, Financial Statements and Supplementary Data. In total, underwriting income
was $26.8 million in 2017, compared to $76.1 million in 2016 and $108.6 million in 2015. These results translate to combined
ratios of 96.4 for 2017, 89.5 for 2016 and 84.5 for 2015. Our ability to continue to produce underwriting income, and to do so
at margins which have consistently outperformed the broader industry, is a testament to our underwriters’ discipline throughout
the insurance cycle and our continued commitment to underwriting for a profit. We believe our underwriting discipline can
differentiate us from the broader insurance market by ensuring sound risk selection and appropriate pricing which helps slow
the pace of deterioration in our underwriting results.
We recorded an overall tax benefit in 2017 due to the impact of tax reform legislation enacted in late 2017. Among other
provisions, the new law lowered the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. As a
result, we revalued deferred tax items as of year-end 2017 to reflect the lower rate. The revaluation reduced our net deferred tax
liability and income tax expense by $32.8 million and decreased the effective tax rate by 38.8 percent. Additional information
on the impact of tax reform and the revaluing of our deferred tax inventory can be found in note 7 to the consolidated financial
statements within Item 8, Financial Statements and Supplementary Data.
Incentive and profit-sharing amounts earned by executives, managers and associates are predominately influenced by
corporate performance including net earnings excluding after-tax net realized gains or losses, combined ratio and return on
capital. Return on capital measures components of comprehensive earnings against a minimum required return on capital.
Return on capital is the primary measure of executive bonus achievement and a significant component of manager and
associate incentive targets. Incentive and profit sharing-related expenses attributable to the favorable reserve developments
totaled $5.9 million, $6.6 million and $11.0 million for 2017, 2016 and 2015, respectively. An additional $7.7 million in
incentive and profit-sharing-related expenses was recorded in 2017 in connection with the tax reform benefits recognized
during the year. These performance-related expenses impact policy acquisition, insurance operating and general corporate
expenses line items in the financial statements. Partially offsetting the 2017, 2016 and 2015 increases were $4.9 million, $2.6
million and $1.9 million, respectively, in reductions to incentive and profit-sharing amounts earned due to losses associated
with natural catastrophe activity.
Equity in earnings of unconsolidated investees totaled $17.2 million in 2017. Maui Jim contributed $14.4 million, up
from $9.7 million and $9.9 million in 2016 and 2015, respectively. The remaining $2.8 million of equity in earnings of
42
unconsolidated investees relates to our equity investment in Prime, up from $1.1 million and $1.0 million in 2016 and 2015,
respectively.
RLI INSURANCE GROUP
The 2017 fiscal year was marked by a significant increase in U.S. catastrophe losses, as Hurricanes Harvey, Irma and
Maria all made landfall during the third quarter. For the industry, this marked the most active year of U.S. catastrophes in over
20 years, and represented one of the costliest hurricane seasons in U.S. history. These losses served to erode some of the excess
capital that has entered the marketplace in recent years, and modest increases to property primary and reinsurance rates started
to emerge by the end of the year. Despite the large magnitude of these losses, the industry remains well capitalized, and the
expectation is that the 2017 catastrophes do not represent a capital event for most insurers. Rather, the losses have been
characterized as earnings events that do not call into question the adequacy of the insurance industry’s capital position. This is
the case for RLI, as we remain adequately capitalized subsequent to these events, despite the fact that lower underwriting
earnings were recorded during the year. The 2017 fiscal year marked our 22nd consecutive year of achieving an underwriting
profit, as income from our casualty and surety segments outweighed the catastrophe-driven loss from our property segment.
Prior to the record hurricane activity, the trends and market conditions seen for much of 2017 were unchanged from the
prior year in many respects. Competition in the industry remained intense across all of our segments, excess capital remains in
the industry and elevated commercial auto loss trends were a focus for the industry and for RLI. Our efforts to address the
problem areas within our transportation business made significant progress, as the combination of seeking adequate rate, non-
renewing underperforming accounts and enhancing our processes led to steady improvements in results as the year progressed.
While we continue to monitor this business closely, the transportation re-underwriting initiated in the fourth quarter of 2016
was completed in the second half of 2017. Our willingness to address underperforming businesses quickly is indicative of our
disciplined underwriting approach, which we believe differentiates us from others in the industry. Despite the challenges in
commercial auto, the industry benefited from favorable loss development in 2017 as a whole.
While not specific to the insurance industry and not a direct influence on our pretax underwriting performance, the
passing of tax reform was also noteworthy in 2017. The enactment led to a one-time adjustment to our net deferred tax liability,
which resulted in a $32.8 million reduction to our 2017 tax expense. Because our incentive and profit-sharing plans are
influenced by corporate performance, including impacts such as this, we recorded an additional one-time $7.7 million in
expenses related to this tax benefit. Of this total, $7.0 million is recorded in 2017 underwriting expenses. The segment level
impact is discussed in the Underwriting Income sections that follow.
While overall pricing in our portfolio remained flat in 2017, we achieved top line growth of 1 percent during the year.
New product initiatives within our casualty segment, coupled with modest rate increases on some casualty lines, more than
offset the negative impact to premium from transportation re-underwriting, depressed pricing for catastrophe exposed business
and product exits in recent years. These exits included RV and treaty reinsurance in 2016. Excluding the impact of these exits,
gross premiums written for 2017 increased 4 percent.
The following tables and narrative provide a more detailed look at individual segment performance over the last three years.
43
GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial and personal
umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Medical professional liability
Other casualty
Total
Gross Premiums Written
Net Premiums Earned
2017
% Change
2016
% Change
2015
2017
2016
2015
$ 137,265
95,217
84,019
92,449
53,302
55,598
21,847
45,752
$ 585,449
2 % $ 134,000
91,557
4 %
83,672
0 %
(13)% 105,697
51,391
51,291
21,060
21,680
4 % $ 560,348
4 %
8 %
4 %
111 %
4 % $ 128,343 $ 115,543 $ 111,079 $ 104,598
84,165
5 %
71,034
4 %
65,564
16 %
40,410
7 %
17,892
(2)%
12,292
51 %
16,293
16 %
8 % $ 519,670 $ 478,603 $ 454,843 $ 412,248
86,853
75,872
81,402
45,660
18,755
17,449
17,773
90,283
78,508
78,061
49,601
18,086
17,072
31,449
87,099
80,199
91,237
47,926
52,106
13,992
18,768
PROPERTY
Commercial property
Marine
Specialty personal
Other property
Total
SURETY
Miscellaneous
Contract
Commercial
Energy
Total
Grand total
Casualty
$ 96,770
59,663
17,804
1,301
$ 175,538
0 % $ 96,701
52,638
13 %
25,867
(31)%
10,931
(88)%
(6)% $ 186,137
$ 46,461
29,441
29,954
18,469
$ 124,325
$ 885,312
(4)% $ 48,184
30,540
(4)%
30,098
(0)%
(6)%
19,557
(3)% $ 128,379
1 % $ 874,864
(9)% $ 106,048 $ 63,117 $ 68,165 $ 75,749
50,931
47,016
(2)%
26,395
20,793
(2)%
(51)%
21,764
3,505
(11)% $ 208,370 $ 138,346 $ 152,167 $ 170,924
48,301
24,981
10,720
53,685
26,470
22,167
29,118
32,597
19,503
9 % $ 44,328 $ 47,237 $ 46,235 $ 42,372
28,269
5 %
29,529
(8)%
0 %
16,819
2 % $ 125,546 $ 120,988 $ 121,598 $ 116,989
2 % $ 853,586 $ 737,937 $ 728,608 $ 700,161
28,240
29,105
18,018
28,573
27,625
17,553
Gross premiums written from the casualty segment totaled $585.4 million, up 4 percent in 2017, following increases of 8
percent in 2016 and 2015. The segment was able to grow its top line during 2017 despite a 13 percent decline from
transportation, which occurred as a result of ongoing re-underwriting efforts during much of the year. Re-underwriting actions
began during the fourth quarter of 2016 in response to higher commercial auto loss trends, and resulted in a combination of rate
increases on retained accounts and exits from certain underperforming classes of business. Transportation re-underwriting was
completed during the latter part of 2017 with price increases obtained across all classes, in particular for commercial auto.
While down on a full year basis, an increase in gross premiums written was posted by transportation in the fourth quarter of
2017. This business posted growth of 16 percent and 27 percent, respectively, in the two previous years.
Notwithstanding transportation, all products within the segment posted top line growth. Growth was led by other
casualty, most notably our assumed reinsurance business with Prime and recently launched general binding authority (GBA)
business. Gross premiums written have more than doubled for Prime, up $16.2 million during 2017, while GBA contributed
$5.8 million. The growth from Prime follows 18 percent and 11 percent increases in 2016 and 2015, respectively, due to
expansion into new classes of business. Exposure growth from both mature and newer products led to premium increases
within our executive products and general liability lines. Gross premiums written were up 8 percent in 2017 for executive
products, driven by growth from newer products such as cyber liability. This growth more than offset a continued trend of
lower prices for executive products offerings, as low single digit rate declines have been experienced in each of the past three
years. General liability growth was 4 percent and 5 percent in 2017 and 2016, respectively, due to exposure growth from new
product initiatives such as energy casualty and mortgage reinsurance that were launched in 2016. Growth from general liability
was achieved despite pricing that has continued to trend slightly lower in recent years. Umbrella also posted a modest top line
increase, up 2 percent, as both commercial and personal accounts contributed to growth during 2017. This result reflects
slightly improved pricing for all coverages, as well as exposure growth attributable to our new energy casualty offering. Except
44
for a small decline in commercial umbrella rates during 2015, pricing has been flat to slightly up for each of the past three
years across our umbrella businesses, and has contributed to continued growth in gross premiums over these periods.
Other products contributing to growth included small commercial and medical professional liability. Small commercial
posted premium growth of 4 percent for 2017, after increasing 7 percent and 14 percent in 2016 and 2015, respectively. The
growth in each of these years was exposure driven as prices for these coverages have been flat to down slightly over this
timeframe. Medical professional liability premiums increased modestly during 2017, due to exposure growth from health care
liability coverages within the group, which more than offset ongoing price declines and competitive pressures in other
coverages. Premiums were flat for our professional services group during 2017, following modest growth achieved in 2016 and
2015. Professional services continued to benefit from improved pricing, in particular for our architects and engineers lines,
consistent with trends seen in these lines over the two previous years.
Property
Gross premiums written in the property segment decreased 6 percent in 2017 after decreasing 11 percent in 2016 and 21
percent in 2015. These results reflect exits from RV and treaty reinsurance in 2016, and facultative reinsurance and crop
reinsurance in 2015. For each of the exited lines, factors such as poor underwriting performance, lack of scale or unfavorable
market conditions were key considerations in the decisions to exit. The exception is our exit from crop reinsurance, which
occurred due to the acquisition of the cedant company. For 2017, excluding the impact of the exits from RV and treaty
reinsurance, gross premiums written from the property segment were up 6 percent.
The market for our E&S property coverages continued to be challenging in 2017. While the losses from Hurricanes
Harvey, Irma and Maria have had a positive impact on prices for wind-exposed catastrophe coverages, the overall market
remains flush with capital, which may limit the duration and magnitude of further price strengthening. Following the spike in
hurricane activity, renewal rates on catastrophe coverages improved, with wind-exposed accounts showing mid-single digit
increases during the fourth quarter of 2017. Although rate change on wind and earthquake exposed catastrophe coverages
remained negative on a year-to-date basis, the rate of decline was slower than that of recent years. By comparison, low double
digit rate decreases were experienced throughout 2016 and 2015. In total, our commercial property business was able to
achieve a flat top line in 2017, as modest exposure growth served to offset rate declines from the catastrophe exposed
coverages. This result follows declines of 9 percent in 2016 and 2015. Marine contributed significantly to growth during the
year, up 13 percent due to a combination of exposure growth and modestly higher prices for inland marine. Premiums from
marine were down 2 percent in 2016 after increasing slightly in 2015, with results for each of those periods reflecting slightly
improved pricing.
Specialty personal lines include property coverage for Hawaii homeowners, which posted a 7 percent increase in gross
premiums written during 2017, after increasing 8 percent in 2016 and flat in 2015. Growth from this line has been primarily
exposure driven as rates have been relatively flat over this timeframe. Specialty personal offerings also included our RV
product, which we exited at the end of 2016 due to under performance. RV accounted for less than $1.0 million in gross
premiums written in 2017, compared to $10.4 million and $13.4 million during 2016 and 2015, respectively. From an
underwriting income standpoint, the exit from RV is expected to benefit property segment results, as this product sustained
underwriting losses in each year of operation. Other property, which includes reinsurance premiums, has also declined in 2017
due to recent product exits. Premiums in 2016 related specifically to our treaty reinsurance business, while the results prior to
2016 included both treaty and facultative reinsurance. Facultative reinsurance was discontinued in 2015. In the latter part of
2016, we also discontinued our treaty reinsurance offering, due to a combination of lack of scale, increased loss activity and
unfavorable market conditions.
Surety
Gross premiums written from our surety segment declined 3 percent in 2017, following modest growth of 2 percent and 6
percent in 2016 and 2015, respectively. The decline in the current year resulted from decreases within each of our surety
products. Miscellaneous surety was down 4 percent, largely due to targeted reductions to select programs during the year. This
product posted steady increases in the two preceding years, with both new and existing programs contributing to the growth in
those periods. Contract surety was also down 4 percent in 2017, as certain accounts which no longer met our underwriting
appetite were non-renewed. Contract surety was up 5 percent in 2016 due largely to growth from bonds targeted to smaller
contractors, following a period of slight decline in the year prior. Commercial surety was down slightly in 2017 as efforts to
selectively trim the portfolio continued. These efforts to upgrade the portfolio in favor of retaining higher quality, lower risk
accounts began in 2016, and also led to a decline in that period. Commercial surety was up 7 percent in 2015. For energy
surety, similar efforts to upgrade the portfolio have taken place over the past year. These activities, combined with the impact
45
of continued lower energy prices and soft market conditions, contributed to the 6 percent decline in 2017. Gross premiums
written from energy surety for 2016 were up slightly, following an 8 percent increase achieved in 2015 as we capitalized on
opportunities provided by energy industry consolidation.
UNDERWRITING INCOME (LOSS)
(in thousands)
Casualty
Property
Surety
Total
2017
2016
$
$
3,904 $
(11,859)
34,799
26,844 $
36,329 $
12,832
26,964
76,125 $
2015
46,263
29,025
33,270
108,558
COMBINED RATIO
Casualty
Property
Surety
Total
Casualty
2017
2016
2015
99.2
108.6
71.2
96.4
92.0
91.6
77.8
89.5
88.8
83.1
71.5
84.5
Underwriting income for the casualty segment was $3.9 million in 2017, which translates into a combined ratio of 99.2.
The current accident year combined ratio in 2017 was higher than prior years, primarily due to higher loss ratio selections on
transportation and other auto-related exposures. Changes in mix of business, due in part to growth from more recent product
launches, has also served to increase the current accident year loss ratio since we take a conservative approach to loss ratio
selection for new products. Slightly higher catastrophe losses also impacted results in 2017, as hurricane losses were sustained
during the year on certain casualty-oriented products that include ancillary property exposures.
Favorable development on prior accident years’ loss reserves benefited underwriting earnings in each of the past three
years, though the benefit in 2017 was smaller than the two previous years. The total benefit from favorable development on
prior years’ reserves was $17.5 million for 2017, with the bulk of the development attributable to accident years 2014 through
2016. Products which generated the majority of the favorable development included umbrella, general liability, executive
products, small commercial and professional services. The reduced benefit for 2017 was driven mainly by lower levels of
favorable development on our general liability, commercial umbrella and small commercial lines compared to the two previous
years. Our transportation business experienced adverse development on prior years’ reserves for the second consecutive year,
though the level of adverse development was considerably smaller in 2017. We began re-underwriting our transportation book
in the fourth quarter 2016 in response to adverse commercial auto loss trends, with a focus on obtaining appropriate rate
increases and improving risk selection. While some unfavorable development was experienced in the first quarter of 2017, loss
development results improved for the remainder of the year. Our transportation re-underwriting efforts were completed during
the second half of 2017. In total, prior accident years’ reserve development for transportation was unfavorable by $7.4 million
and $15.4 million in 2017 and 2016, respectively, and favorable by $5.4 million in 2015.
Comparatively, overall results for the casualty segment in 2016 included favorable development of $32.4 million, with
the bulk of the development attributable to general liability, executive products, small commercial and umbrella across accident
years 2009 through 2015. For 2015, results included favorable development of $45.7 million, with the bulk of the development
related to accident years 2006 through 2014. Most product lines within the segment experienced favorable development, with
general liability, umbrella and small commercial representing the majority of the release.
The segment’s loss ratio was 63.9 in 2017, compared to 57.1 in 2016 and 53.0 in 2015. The loss ratio increased in 2017
due in part to the lower benefit from favorable development on prior years’ reserves. A higher current accident year loss ratio
also contributed to the increase during 2017, due to shifts in product mix, higher loss ratio selections and modest amount of
catastrophe losses mentioned above. From a current accident year standpoint, 2016 and 2015 reflected positive underwriting
performance. The expense ratio for the casualty segment was 35.3 in 2017, compared to 34.9 in 2016 and 35.8 in 2015. An
additional $3.9 million of incentive and profit-sharing expenses was recognized in connection with tax reform benefits during
2017, accounting for nearly 1 point of the expense ratio. Adjusting for this one-time impact, the expense ratio has trended
lower in the past three years, as the increase in premiums has allowed for improved leveraging of our expense base.
46
Property
The property segment produced an underwriting loss of $11.9 million for 2017, which translates into a 108.6 combined
ratio. The underwriting loss was driven by $38.4 million in catastrophe losses during the year, the bulk of which related to
hurricane activity occurring in the third quarter. Property segment losses attributable to Hurricanes Harvey, Irma and Maria
totaled $34.9 million, and amounted to the largest wind loss in the company’s history. The majority of our losses related to
Hurricanes Harvey and Irma, and were associated with our commercial property and marine lines. The catastrophe losses
resulted in an underwriting loss on the 2017 accident year. Comparatively, catastrophe losses were relatively small in each of
the two prior years. For 2016, losses related to Hurricane Matthew and seasonal wind storm losses combined to impact the
segment by $15.8 million, while 2015 results included $11.8 million in losses from winter and spring storms. Accident year
results for the previous two years reflected profitable underwriting performance, driven by commercial property lines in 2016,
and improved loss ratios from marine in 2015.
Partially offsetting the catastrophe losses described above, favorable development in prior years’ reserves benefited
underwriting results in each of the past three years. Results for 2017 included $12.1 million of favorable development in prior
years’ reserves, largely from marine and commercial property, compared to $4.8 million and $11.8 million in 2016 and 2015,
respectively. Marine and other property reinsurance were drivers of the favorable development during 2016 and 2015, with
each year partially offset by adverse development from RV.
The segment’s loss ratio was 61.5 in 2017 compared to 46.9 in 2016 and 40.9 in 2015. The record catastrophe losses in
2017 added nearly 28 points to the loss ratio, compared to 10 points and 7 points of impact from catastrophe losses in 2016 and
2015, respectively. Higher current accident year losses from our fire business also contributed to the loss ratio increase in 2017.
These items were partially offset by approximately 7 points of favorable development on prior years’ reserves in 2017,
compared to 1 point and 6 points of benefit in the two previous years. Results for 2015 reflected the improved current accident
year loss ratio performance resulting from marine re-underwriting efforts. The expense ratio for the property segment was 47.1
in 2017 compared to 44.7 in 2016 and 42.2 in 2015. An additional $1.8 million of incentive and profit-sharing expenses was
recognized in connection with tax reform benefits during 2017, which added approximately 1 point to the expense ratio.
Beyond this one-time impact in 2017, the expense ratio has trended higher in the past three years, driven largely by the overall
decline in earned premium and the relative fixed nature of certain expenses.
Surety
Underwriting income totaled $34.8 million in 2017, which translates into a combined ratio of 71.2. Underwriting
performance for each of the past three years reflects a combination of positive current accident year results and favorable
development in prior accident years’ loss reserves. From a current accident year standpoint this segment has continued to
deliver strong performance, with each product line contributing underwriting profit. The current accident year combined ratio
result in each of the past three years has been in the low 80s, though the result for 2016 was slightly higher due to increased
current accident year losses from energy surety and contract surety. While all years benefited from favorable development in
prior years’ reserves, the amount of favorable development was higher during 2017. Results for 2017 included $9.3 million of
favorable development in prior years’ reserves, compared to $4.8 million and $7.9 million in 2016 and 2015, respectively.
The segment’s loss ratio was 9.0 in 2017, compared to 15.2 in 2016 and 9.2 in 2015. The higher amount of favorable
development on prior years’ reserves was the primary driver of the lower loss ratio in 2017. The above mentioned losses in
2016 on energy and contract surety also contributed to the modestly higher loss ratio in that period. The expense ratio for the
segment was 62.2 in 2017, compared to 62.6 in 2016 and 62.3 in 2015. The slight improvement in 2017 was driven by shifts in
product mix and smaller amounts of reinstatement premium related to ceded loss activity on prior accident years. In addition,
$1.4 million of incentive and profit-sharing expenses was recognized in connection with tax reform benefits during 2017,
which added approximately 1 point to the expense ratio. No such expense amounts were present in 2016 or 2015 results.
47
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS
During 2017, net investment income increased by 3 percent. The increase was primarily due to a larger asset base in
2017, as well as the increase in other invested assets. The average annual yields on our investments were as follows for 2017,
2016 and 2015:
PRETAX YIELD
Taxable (on book value)
Tax-exempt (on book value)
Equities (on fair value)
AFTER-TAX YIELD
Taxable (on book value)
Tax-exempt (on book value)
Equities (on fair value)
2017
2016
2015
3.20 %
2.57 %
2.71 %
3.20 %
2.64 %
2.85 %
3.42 %
2.75 %
2.94 %
2.08 %
2.44 %
2.31 %
2.08 %
2.50 %
2.43 %
2.22 %
2.61 %
2.51 %
The after-tax yield reflects the different tax rates applicable to each category of investment. Our taxable fixed income
securities are subject to our corporate tax rate of 35.0 percent, our tax-exempt municipal securities are subject to a tax rate of
5.3 percent and our dividend income is generally subject to a tax rate of 14.2 percent. During 2017, the average after-tax yield
on the taxable fixed income portfolio was 2.1 percent, the same as the prior year, while the average after-tax yield on the tax-
exempt portfolio decreased to 2.4 percent.
Despite bond prices falling during the final quarter of the year, the fixed income portfolio increased by $67.0 million
during the year as the majority of operating cash flows were used for fixed income purchases. The tax-adjusted total return on a
mark-to-market basis was 4.4 percent. Due to strong equity market returns in 2017, our equity portfolio increased by $31.3
million to $400.5 million. The total return for the year on the equity portfolio was 15.8 percent.
Our investment results for the last five years are shown in the following table:
Net
Investment
Income (2)(3)
Net Realized
Gains
(Losses) (3)
Average
Invested
Assets (1)
1,881,470
1,943,172
1,957,914
1,986,685
2,081,309
$ 1,970,110 $
52,763
55,608
54,644
53,075
54,876
54,193 $
Pre-tax
Annualized
Return on
Change in
Unrealized
Appreciation
(3)(4)
(10,923)
55,180
(71,049)
(2,313)
53,719
4,923
22,036
32,182
39,829
34,645
4,411
26,621 $
Avg.
Invested
Assets
3.4 %
7.4 %
1.2 %
4.3 %
5.4 %
4.3 %
Tax
Equivalent
Annualized
Return on
Avg.
Invested
Assets
3.7 %
7.7 %
1.5 %
4.6 %
5.8 %
4.7 %
(in thousands)
2013
2014
2015
2016
2017
5-yr Avg.
(1) Average amounts at beginning and end of year (inclusive of cash and short-term investments).
(2) Investment income, net of investment expenses.
(3) Before income taxes.
(4) Relates to available-for-sale fixed income and equity securities.
We realized a total of $4.4 million in net gains in 2017. Included in this number is $10.3 million in net realized gains in
the equity portfolio, $1.7 million in net realized losses in the fixed income portfolio and $4.2 million in other net realized
losses, $3.4 million of which related to a non-cash impairment charge on goodwill and definite-lived intangibles. In 2016, we
realized $34.6 million in net gains. Included in this number is $38.7 million in net realized gains in the equity portfolio, $4.2
million in net realized gains in the fixed income portfolio and $8.3 million in other net realized losses, $7.2 million of which
related to a non-cash impairment charge on goodwill. In 2015, we realized $39.8 million in net gains. Included in this number
is $22.1 million in net realized gains in the equity portfolio, $10.8 million in net realized gains in the fixed income portfolio
and $6.9 million in other net realized gains related to the sale of RIC.
48
We regularly evaluate the quality of our investment portfolio. When we determine that a specific security has suffered an
other-than-temporary decline in value, the investment’s value is adjusted by reclassifying the decline from unrealized to
realized losses. This has no impact on shareholders’ equity. We recognized $2.6 million and $0.1 million in impairment losses
in 2017 and 2016, respectively. All losses were taken on fixed income securities we no longer had the intent to hold until
recovery. We did not recognize any OTTI losses during 2015.
As of December 31, 2017, we held three securities in our equity portfolio that were in unrealized loss positions. The total
unrealized loss on these securities was $0.9 million. With respect to both the significance and duration of the unrealized loss
positions, we have no equity securities in an unrealized loss position of greater than 20 percent for more than six consecutive
months.
The fixed income portfolio contained 346 positions at an unrealized loss as of December 31, 2017. Of these 346
securities, 133 have been in an unrealized loss position for 12 consecutive months or longer and represent $5.1 million in
unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under
the contractual terms of the securities. Based on our analysis, our fixed income portfolio is of a high credit quality and we
believe we will recover the amortized cost basis.
Key components to our OTTI procedures are discussed in our critical accounting policy on investment valuation and
OTTI and in note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
Based on our analysis, we have concluded that the securities in an unrealized loss position were not other-than-temporarily
impaired at December 31, 2017.
INVESTMENTS
We maintain a diversified investment portfolio with an 80 percent fixed income and 20 percent equity target. We
continually monitor economic conditions, our capital position and the insurance market to determine our tactical equity
allocation. As of December 31, 2017, the portfolio had a fair value of $2.1 billion, an increase of $119.0 million from the end
of 2016.
We determined the fair value of certain financial instruments based on their underlying characteristics and relevant
transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. For additional information, see notes 1 and 2 to the consolidated financial statements within Item 8,
Financial Statements and Supplementary Data.
As of December 31, 2017, our investment portfolio had the following asset allocation breakdown:
PORTFOLIO ALLOCATION
(in thousands)
Asset Class
U. S. government
U.S. agency
Non-U.S. govt & agency
Agency MBS
ABS/CMBS**
Corporate
Municipal
Total fixed income
Equities
Short-term investments
Other invested assets
Cash
Total portfolio
Cost or
Amortized
Unrealized
% of Total
Gain/(Loss) Fair Value
$
Fair Value
Cost
92,561 $
18,541
7,501
329,129
70,405
508,128
620,146
91,689 $
18,778
7,588
328,471
70,526
519,022
636,165
(872)
237
87
(658)
121
10,894
16,019
$ 1,646,411 $ 1,672,239 $ 25,828
400,492 $ 218,490
$
—
$
29
—
$ 1,896,443 $ 2,140,790 $ 244,347
182,002 $
9,980 $
33,808
24,271
33,779
24,271
9,980 $
Quality*
4.3 % AAA
0.9 % AAA
0.4 % BBB+
15.3 % AAA
3.3 % AAA
24.2 % BBB+
29.7 % AA
78.1 % AA-
18.7 %
0.5 %
1.6 %
1.1 %
100.0 %
* Quality ratings provided by Moody’s, S&P and Fitch
** Non-agency asset-backed and commercial mortgage-backed
49
Quality in the previous table and in all subsequent tables is an average of each bond’s credit rating, adjusted for its
relative weighting in the portfolio.
Fixed income represented 78 percent of our total 2017 portfolio, down 1 percent from 2016. As of December 31, 2017,
the fair value of our fixed income portfolio consisted of 38 percent AAA-rated securities, 28 percent AA-rated securities, 17
percent A-rated securities, 11 percent BBB-rated securities and 6 percent non-investment grade or non-rated securities. This
compares to 35 percent AAA-rated securities, 30 percent AA-rated securities, 18 percent A-rated securities, 11 percent BBB-
rated securities and 6 percent non-investment grade or non-rated securities in 2016.
In selecting the maturity of securities in which we invest, we consider the relationship between the duration of our fixed
income investments and the duration of our liabilities, including the expected ultimate payout patterns of our reserves. We
believe that both liquidity and interest rate risk can be minimized by such asset/liability management. As of December 31,
2017, our fixed income portfolio’s duration was 5.0 years.
Our equity portfolio had a fair value of $400.5 million at December 31, 2017, entirely classified as available-for-sale.
Equities comprised 19 percent of our total 2017 portfolio, up 1 percent over 2016. Securities within the equity portfolio are
well diversified and are primarily invested in large-cap issues with a focus on dividend income. Our strategy is value oriented
and security selection takes precedence over market timing. Likewise, low turnover throughout our long investment horizon
minimizes transaction costs and taxes.
FIXED INCOME PORTFOLIO
As of December 31, 2017, our fixed income portfolio had the following rating distributions:
FAIR VALUE
(in thousands)
Bonds:
AAA
AA
A
BBB
Below
Investment
Grade
No Rating Fair Value
U.S. government & agency (GSE) $ 105,650 $
Non-U.S. government & agency
Corporate - financial
All other corporate
Corporate financial - private
placements
All other corporate - private
placements
Municipal
—
—
10,119
—
120,474
—
4,817 $
—
6,443
10,028
— $
—
87,986
92,040
7,588
40,384
106,230
— $
—
—
15,449
— $
— $
—
—
—
110,467
7,588
134,813
233,866
4,059
19,463
7,395
3,696
—
34,613
—
440,044
25,088
68,940
16,177
—
73,850
—
615
6,707
115,730
636,165
Structured:
GSE - RMBS
ABS - utility
ABS - credit cards
ABS - auto loans
All other ABS
GSE - CMBS
CMBS
Total
$ 247,116 $
247,116
1,903
5,207
28,503
4,811
81,355
30,102
$ 635,240 $ 465,391 $ 293,517 $ 177,774 $ 92,995 $ 7,322 $ 1,672,239
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
1,903
5,207
28,503
4,811
81,355
30,102
50
Mortgage-Backed, Commercial Mortgage-Backed and Asset-Backed Securities
The following table summarizes the distribution of our mortgage-backed securities (MBS) portfolio by investment type,
as of the dates indicated:
AGENCY MBS
(in thousands)
2017
Planned amortization class
Sequential
Pass-throughs
Total
2016
Planned amortization class
Sequential
Pass-throughs
Total
Amortized
Cost
Fair Value
% of Total
$
$
$
$
35,871 $
82,766
210,492
329,129 $
35,410
81,355
211,706
328,471
40,283 $
28,778
213,941
283,002 $
40,048
28,220
215,801
284,069
10.8 %
24.8 %
64.4 %
100.0 %
14.1 %
9.9 %
76.0 %
100.0 %
Our allocation to agency mortgage-backed securities totaled $328.5 million as of December 31, 2017. MBS represented
20 percent of the fixed income portfolio compared to $284.1 million or 18 percent of that portfolio as of December 31, 2016.
We believe MBS investments add diversification, liquidity, credit quality and additional yield to our portfolio. Our
objective for the MBS portfolio is to provide reasonable cash flow stability where we are compensated for the call risk
associated with residential refinancing. The MBS portfolio includes mortgage-backed pass-through securities and collateralized
mortgage obligations (CMO) which include planned amortization classes (PACs) and sequential pay structures. A mortgage
pass-through is a security consisting of a pool of residential mortgage loans which returns principal and interest cash flows to
investors each month. A CMO has a more finite payment structure and can reduce the risks associated with prepayment. CMO
securities are divided into maturity classes that are paid off under certain expected interest rate conditions. PACs are securities
whose cash flows are designed to remain constant in a variety of mortgage prepayment environments. Sequential pay structures
are a type of CMO where each risk tranche is paid off in a particular order. Our MBS portfolio does not include interest-only
securities or principal-only securities. As of December 31, 2017, all of the securities in our MBS portfolio were rated AAA and
issued by Government Sponsored Enterprises (GSEs) such as the Governmental National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).
Variability in the average life of principal repayment is an inherent risk of owning mortgage-related securities. However,
we reduce our portfolio’s exposure to prepayment risk by seeking characteristics that tighten the probable scenarios for
expected cash flows. As of December 31, 2017, the MBS portfolio contained 64 percent of pure pass-throughs compared to 76
percent as of December 31, 2016. An additional 25 percent of the MBS portfolio was invested in sequential payer, up from 10
percent in 2016.
51
The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities
portfolio as of the dates indicated:
ABS/CMBS
(in thousands)
2017
CMBS
Auto
Business
Equipment
Utility
Credit card
Other
Total
2016
CMBS
Auto
Business
Equipment
Utility
Credit card
Other
Total
Amortized
Cost
Fair Value
% of Total
$
$
$
$
29,807 $
28,664
657
3,866
1,924
5,187
300
70,405 $
24,179 $
42,602
1,149
5,259
4,655
15,647
300
93,791 $
30,102
28,503
653
3,860
1,903
5,207
298
70,526
24,693
42,345
1,149
5,265
4,576
15,584
298
93,910
42.7 %
40.4 %
0.9 %
5.5 %
2.7 %
7.4 %
0.4 %
100.0 %
26.3 %
45.1 %
1.2 %
5.6 %
4.9 %
16.6 %
0.3 %
100.0 %
An asset-backed security (ABS) or commercial mortgage-backed security (CMBS) is a securitization collateralized by the
cash flows from a specific pool of underlying assets. These asset pools can include items such as credit card payments, auto
loans and residential or commercial mortgages. As of December 31, 2017, ABS/CMBS investments were $70.5 million (4
percent) of the fixed income portfolio, compared to $93.9 million (6 percent) as of December 31, 2016. All of the securities in
the ABS/CMBS portfolio were rated AAA as of December 31, 2017. We believe that ABS/CMBS investments add
diversification and additional yield to the portfolio while often adding superior cash flow stability over mortgage pass-throughs
or CMOs.
When making investments in MBS/ABS/CMBS, we evaluate the quality of the underlying collateral, the structure of the
transaction (which dictates how any losses in the underlying collateral will be distributed) and prepayment risks. All of our
collateralized securities carry the highest credit rating by one or more major rating agencies and continue to pay according to
contractual terms. We had $4.4 million in unrealized losses in these asset classes as of December 31, 2017.
Municipal Fixed Income Securities
As of December 31, 2017, municipal bonds totaled $636.2 million (38 percent) of our fixed income portfolio, compared
to $627.3 million (39 percent) as of December 31, 2016. We believe municipal fixed income securities can provide
diversification and additional tax-advantaged yield to our portfolio. Our objective for the municipal fixed income portfolio is to
provide reasonable cash flow stability and increased after-tax yield.
Our municipal fixed income portfolio is comprised of general obligation (GO) and revenue securities. The revenue
sources include sectors such as sewer and water, public improvement, school, transportation and colleges and universities.
As of December 31, 2017, approximately 43 percent of the municipal fixed income securities in the investment portfolio
were GO and the remaining 57 percent were revenue based. Eighty-eight percent of our municipal fixed income securities were
rated AA or better, while 99 percent were rated A or better.
Corporate Debt Securities
As of December 31, 2017, our corporate debt portfolio totaled $519.0 million (31 percent) of the fixed income portfolio
compared to $508.4 million (32 percent) as of December 31, 2016. The corporate allocation includes floating rate bank loans
52
and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.
Non-investment grade bonds totaled $93.0 million at the end of 2017. The corporate debt portfolio has an overall quality rating
of BBB+, diversified among 563 issues.
The following table illustrates our corporate debt exposure to the financial and non-financial sectors as of December 31,
2017, including fair value, cost basis and unrealized gains and losses:
CORPORATES
(in thousands)
Bonds:
Corporate - financial
All other corporate
Financials - private placements
All other corporate - private placements
Total
Amortized
Gross
Unrealized
Cost
Fair Value
Gains
Gross
unrealized
losses
$
$
130,685 $
228,682
33,902
114,859
508,128 $
134,813 $
233,866
34,613
115,730
519,022 $
4,312 $
5,710
839
1,714
12,575 $
(184)
(526)
(128)
(843)
(1,681)
We believe corporate debt investments add diversification and additional yield to our portfolio. Because corporates make
up a large portion of the fixed income opportunity set, the corporate debt investments will continue to be a significant part of
our investment program.
The amortized cost and fair value of fixed income securities at December 31, 2017, by contractual maturity, are shown as
follows:
TOTAL FIXED INCOME
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mtge/ABS/CMBS*
Total fixed income
Amortized Cost Fair Value
16,023 $
$
15,984
322,988
598,041
336,229
398,997
$ 1,646,411 $ 1,672,239
318,411
586,340
326,103
399,534
* Mortgage-backed, asset backed and commercial mortgage-backed
EQUITY SECURITIES
As of December 31, 2017, our equity portfolio totaled $400.5 million (19 percent) of the investment portfolio, compared
to $369.2 million (18 percent) as of December 31, 2016. The securities within the equity portfolio remain primarily invested in
large-cap issues with a focus on dividend income. In addition, we have investments in three broadly diversified, exchange
traded funds (ETFs) that represent market indexes similar to the Russell 1000 Index, the S&P 500 Index, and the S&P 500
Utilities Index. No one fund makes up more than 50 percent of the ETF allocation, and the philosophy mirrors that of the
actively managed equity portfolio, with a preference for dividend income and lower anticipated volatility than the market (as
measured by the S&P 500). We did not recognize any impairment losses in the equity portfolio during 2017 or 2016.
INTEREST AND CORPORATE EXPENSE
We incurred $7.4 million of interest expense on outstanding debt during 2017, 2016 and 2015. We completed a public
debt offering in October 2013, issuing $150.0 million in senior notes, and used a portion of the proceeds to repay $100.0
million in senior notes that were originally set to mature in January 2014. At December 31, 2017, 2016 and 2015, our long-
term debt consisted of $150.0 million in senior notes maturing September 15, 2023, and paying interest semi-annually at the
rate of 4.875 percent.
As discussed previously, general corporate expenses tend to fluctuate relative to our incentive compensation plans. Our
compensation model measures components of comprehensive earnings against a minimum required return on our capital.
Bonuses are earned as we generate earnings in excess of this required return. In 2017, 2016 and 2015, we exceeded the
53
required return, resulting in the accrual of executive bonuses. Increased levels of comprehensive earnings in 2017 resulted in
higher variable compensation earned. In addition, other general corporate expenses were up due to certain non-recurring
expenses.
INVESTEE EARNINGS
We maintain a 40 percent equity interest in Maui Jim, a manufacturer of high-quality sunglasses. Maui Jim’s chief
executive officer owns a controlling majority of the outstanding shares of Maui Jim. Maui Jim is a private company, and as
such, the market for its stock is limited. Our investment in Maui Jim is carried at the holding company, RLI Corp., level as it is
not core to our insurance operations. As a minority shareholder, we are subject to the decisions of the controlling shareholder,
which may impact the value of our investment. In 2017, we recorded $14.4 million in earnings from this investment compared
to $9.7 million in 2016 and $9.9 million in 2015. Sunglass sales were up 9 percent in 2017, after increasing 2 percent in 2016
and decreasing 2 percent in 2015. In addition to the increased sales, foreign exchange gains in 2017, compared to foreign
exchange losses in 2016 and benefits associated with tax reform, led to Maui Jim’s increase in earnings for 2017.
In 2016, we received a dividend from Maui Jim. Dividends from Maui Jim have been irregular in nature and while they
provide added liquidity when received, we do not rely on those dividends to meet our liquidity needs. While these dividends do
not flow through the investee earnings line, they do result in the recognition of a tax benefit, which is discussed in the income
tax section that follows.
As of December 31, 2017, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services,
Inc. (Prime). Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and
surplus lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. As a minority
shareholder, we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In
2017, we recorded $2.8 million in investee earnings for Prime, compared to $1.1 million in 2016 and $1.0 million in 2015.
Additionally, we maintain a 25 percent quota share reinsurance treaty with Prime, which contributed $29.6 million of gross
premiums written and $21.0 million of net premiums earned during 2017, compared to $13.4 million of gross premiums
written and $11.4 million of net premiums earned during 2016 and $11.3 million of gross premiums written and $10.9 million
of net premiums earned during 2015.
INCOME TAXES
Our effective tax rates were -24.2 percent, 26.8 percent and 30.1 percent for 2017, 2016 and 2015, respectively. Effective
rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was significantly lower
in 2017, primarily as the result of recent tax reform. Additionally, catastrophic losses incurred in the third quarter resulted in
significantly lower pretax earnings and the change in accounting for excess tax benefits on share-based compensation further
decreased the effective tax rate.
The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law on December 22, 2017. Among other provisions, the
TCJA lowered the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. As a result, we revalued
deferred tax items as of year-end 2017 to reflect the lower rate. The revaluation reduced our net deferred tax liability and
income tax expense by $32.8 million and decreased the effective tax rate by 38.8 percent.
Except for the following two aspects, we have completed the accounting for the tax effects of the enactment of the TCJA
as of December 31, 2017. First, we provisionally recorded $2.3 million in deferred tax expense for an expected disallowance of
deductions related to certain performance based compensation, including bonuses and stock options. As there is a lack of
clarity on whether some amounts could be grandfathered in as deductible, we were unable to complete our analysis. Once the
IRS provides more guidance on the deductibility of certain compensation classes, we will finalize the tax expense adjustments
for this aspect of the TCJA changes. Second, the IRS has not yet published the factors for us to calculate the discount on loss
reserves under the basis required by the TCJA. Although there is currently no net impact from the tax law changes, the gross
deferred tax assets will likely increase as the discounting factors are expected to delay the deductibility of loss reserves. Once
the revised discount factors are obtained, we can implement the new discounting methodology related to this aspect of the
TCJA changes and will recognize the adjustment ratably over the allowed eight-year period beginning in 2018.
In 2017, the company adopted FASB ASU 2016-09, which requires the excess tax benefit on share-based compensation
to flow through income tax expense. Prior to the adoption, excess tax benefits on share-based compensation were recorded
directly to shareholders’ equity and had no impact on the effective tax rate. Due to the new accounting method, we recognized
a $5.8 million tax benefit in 2017, decreasing the effective tax rate by 6.9 percent.
54
Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. The investees do not have a
policy or pattern of paying dividends. As a result, we record a deferred tax liability on the earnings at the recently revised
corporate capital gains rate of 21 percent in anticipation of recovering our investments through means other than through the
receipt of dividends, such as a sale. In the fourth quarter of 2017, Maui Jim gave notification that a $9.9 million dividend
would be paid in January 2018. Even though no dividend was received in 2017, we were aware that the lower tax rate
applicable to affiliated dividends (7.35 percent in 2018) would be applied when the dividend was paid in 2018 and we therefore
recorded a $1.4 million tax benefit in 2017. We received a $9.9 million dividend from Maui Jim in the fourth quarter of 2016
and recognized a $2.8 million tax benefit from applying the lower tax rate applicable to affiliated dividends (7 percent in 2016),
as compared to the corporate capital gains rate on which the deferred tax liabilities were based. No dividends were received
from unconsolidated investees in 2015. Standing alone, the dividend resulted in a 1.6 percent and 1.8 percent reduction to the
2017 and 2016 effective tax rates, respectively.
Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Special dividends paid to
the ESOP in 2017, 2016 and 2015 resulted in tax benefits of $1.9 million, $2.4 million and $2.5 million, respectively. These tax
benefits reduced the effective tax rate for 2017, 2016 and 2015 by 2.3 percent, 1.5 percent and 1.2 percent, respectively.
In addition, our pretax earnings in 2017 included $25.4 million of investment income that is partially exempt from federal
income tax, compared to $24.9 million and $25.1 million in 2016 and 2015, respectively.
NET UNPAID LOSSES AND SETTLEMENT EXPENSES
The primary liability on our balance sheet relates to unpaid losses and settlement expenses, which represents our
estimated liability for losses and related settlement expenses before considering offsetting reinsurance balances recoverable.
The largest asset on our balance sheet, outside of investments, is the reinsurance balances recoverable on unpaid losses and
settlement expenses, which serves to offset this liability.
The liability can be split into two parts: (1) case reserves representing estimates of losses and settlement expenses on
known claims and (2) IBNR reserves representing estimates of losses and settlement expenses on claims that have occurred but
have not yet been reported to us. Our gross liability for both case and IBNR reserves is reduced by reinsurance balances
recoverable on unpaid losses and settlement expenses to calculate our net reserve balance. This net reserve balance increased to
$969.5 million at December 31, 2017, from $851.1 million as of December 31, 2016. This reflects incurred losses of $401.6
million in 2017 offset by paid losses of $283.2 million compared to incurred losses of $349.8 million offset by $304.6 million
paid in 2016. For more information on the changes in loss and LAE reserves by segment, see note 6 to the consolidated
financial statements within Item 8, Financial Statements and Supplementary Data.
Gross reserves (liability) and the reinsurance balances recoverable (asset) are generally subject to the same influences that
affect net reserves, though changes to our reinsurance agreements can cause reinsurance balances recoverable to behave
differently. Total gross loss and LAE reserves increased to $1.3 billion at December 31, 2017 from $1.1 billion at
December 31, 2016 while ceded loss and LAE reserves increased to $302.0 million from $288.2 million over the same period.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our
underwriting operations and income earned on our investment portfolio, (2) investing cash flows related to the purchase, sale
and maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt and shares
outstanding. The following table summarizes these three cash flows over the last three years:
(in thousands)
Operating cash flows
Investing cash flows (uses)
Financing cash flows (uses)
2017
2016
$ 197,525 $ 174,463 $ 152,586
(60,597)
(111,528)
(53,622)
(113,653)
(81,212)
(110,311)
2015
We have posted positive operating cash flow in each of the last three years. Variations in operating cash flow between
periods are largely driven by the volume and timing of premium receipt, claim payments, reinsurance and taxes. In addition,
fluctuations in insurance operating expenses impact operating cash flow. During 2017, the majority of cash flow uses were
55
related to financing and investing activities, and associated with the payments of dividends and net purchases of investments,
respectively.
We have entered into certain contractual obligations that require us to make recurring payments. The following table
summarizes our contractual obligations as of December 31, 2017:
CONTRACTUAL OBLIGATIONS
(in thousands)
Loss and settlement expense reserves
Long-term debt
Operating leases
Other invested assets
Total
Less than 1
More than
Payments due by period
yr.
1-3 yrs.
3-5 yrs.
$ 353,003 $ 482,956 $ 232,506 $ 203,038 $ 1,271,503
150,000
32,626
27,959
$ 382,498 $ 497,065 $ 242,688 $ 359,837 $ 1,482,088
150,000
6,644
155
—
5,589
23,906
—
10,017
165
—
10,376
3,733
5 yrs.
Total
Loss and settlement expense reserves represent our best estimate of the ultimate cost of settling reported and unreported
claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various
complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the
reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed
and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by periods
are based on our historical claims payment experience. Due to the uncertainty inherent in the process of estimating the timing
of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed
above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances
recoverable on unpaid loss and settlement reserves are reported separately as assets, instead of being netted with the related
liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on unpaid
loss and settlement reserves totaled $302.0 million at December 31, 2017, compared to $288.2 million in 2016.
The next largest contractual obligation relates to long-term debt outstanding. On October 2, 2013, we completed a public
debt offering of $150.0 million in senior notes maturing September 15, 2023, (a 10-year maturity) and paying interest semi-
annually at the rate of 4.875 percent. The notes were issued at a discount resulting in proceeds, net of discount and
commission, of $148.6 million. We are not party to any off-balance sheet arrangements. See note 4 to the consolidated
financial statements within Item 8, Financial Statements and Supplementary Data for more information on our long term debt.
Additionally, see note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data
for information on our obligations for other invested assets.
Our primary objective in managing our capital is to preserve and grow shareholders’ equity and statutory surplus to
improve our competitive position and allow for expansion of our insurance operations. Our insurance subsidiaries must
maintain certain minimum capital levels in order to meet the requirements of the states in which we are regulated. Our
insurance companies are also evaluated by rating agencies that assign financial strength ratings that measure our ability to meet
our obligations to policyholders over an extended period of time.
We have historically grown our shareholders’ equity and/or policyholders’ surplus as a result of three sources of funds:
(1) earnings on underwriting and investing activities, (2) appreciation in the value of our investments and (3) the issuance of
common stock and debt.
At December 31, 2017, we had cash, short-term investments and other investments maturing within one year of
approximately $50.2 million and an additional $323.0 million of investments maturing between 1 to 5 years. We maintain a
revolving line of credit with JP Morgan Chase Bank N.A., which permits us to borrow up to an aggregate principal amount of
$40.0 million. This facility was entered into during the second quarter of 2014 and replaced the previous $25.0 million facility
which expired on May 31, 2014. Under certain conditions, the line may be increased up to an aggregate principal amount of
$65.0 million. The facility has a four-year term that expires on May 28, 2018. As of and during the year ended December 31,
2017, no amounts were outstanding on the revolving line of credit.
Additionally, two of our insurance companies, RLI Ins. and Mt. Hawley, are members of the Federal Home Loan Bank of
Chicago (FHLBC). Membership in the Federal Home Loan Bank system provides both companies access to an additional
source of liquidity via a secured lending facility. Based on qualifying assets at year end, aggregate borrowing capacity is
56
approximately $20 million. However, under certain circumstances, that capacity may be increased based on additional FHLBC
stock purchased and available collateral. Our membership allows each insurance subsidiary to determine tenor and structure at
the time of borrowing. During the fourth quarter of 2017, we borrowed and repaid $5.5 million from the FHLBC. The
borrowing occurred due to a timing difference between dividends paid and received at one of our subsidiaries. As of the year
ended December 31, 2017, there were no outstanding borrowings with the FHLBC.
We believe that cash generated by operations, cash generated by investments and cash available from financing activities
will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. We have consistently
generated positive operating cash flow. The primary factor in our ability to generate positive operating cash flow is
underwriting profitability, which we have achieved for 22 consecutive years.
OPERATING ACTIVITIES
The following list highlights some of the major sources and uses of cash flow from operating activities:
Sources
Premiums received
Loss payments from reinsurers
Investment income (interest & dividends)
Unconsolidated investee dividends from affiliates
Funds held
Uses
Claims
Ceded premium to reinsurers
Commissions paid
Operating expenses
Interest expense
Income taxes
Funds held
Our largest source of cash is from premiums received from our customers, which we receive at the beginning of the
coverage period for most policies. Our largest cash outflow is for claims that arise when a policyholder incurs an insured loss.
Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various
investment securities that earn interest and dividends. We use cash to pay commissions to brokers and agents, as well as to pay
for ongoing operating expenses such as salaries, rent, taxes and interest expense. We also utilize reinsurance to manage the risk
that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when
losses subject to our reinsurance coverage are paid.
The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are
made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be
significant, so their timing can influence cash flows from operating activities in any given period. We are subject to the risk of
incurring significant losses on catastrophes, both natural (such as earthquakes and hurricanes) and man-made (such as
terrorism). If we were to incur such losses, we would have to make significant claims payments in a relatively concentrated
period of time.
INVESTING ACTIVITIES
The following list highlights some of the major sources and uses of cash flow from investing activities:
Sources
Proceeds from bonds sold, called or matured
Proceeds from stocks sold
Uses
Purchase of bonds
Purchase of stocks
Acquisitions
Purchase of property & equipment
We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims,
as well as the capital we hold for our shareholders. As of December 31, 2017, our portfolio had a carrying value of $2.1 billion.
Portfolio assets at December 31, 2017, increased by $119.0 million, or 6 percent, from December 31, 2016.
Our overall investment philosophy is designed to first protect policyholders by maintaining sufficient funds to meet
corporate and policyholder obligations and then generate long-term growth in shareholders’ equity. Because our existing and
projected liabilities are sufficiently funded by the fixed income portfolio, we can improve returns by investing a portion of the
surplus (within limits) in a risk assets portfolio largely made up of equities. As of December 31, 2017, 47 percent of our
57
shareholders’ equity was invested in equities, compared to 45 percent at December 31, 2016 and 46 percent at December 31,
2015.
The fixed income portfolio is structured to meet policyholder obligations and optimize the generation of after-tax
investment income and total return.
FINANCING ACTIVITIES
In addition to the previously discussed operating and investing activities, we also engage in financing activities to manage
our capital structure. The following list highlights some of the major sources and uses of cash flow from financing activities:
Sources
Proceeds from stock offerings
Proceeds from debt offerings
Short-term borrowing
Shares issued under stock option plans
Uses
Shareholder dividends
Debt repayment
Share buy-backs
Our capital structure is comprised of equity and debt obligations. As of December 31, 2017, our capital structure
consisted of $148.9 million in 10-year maturity senior notes (long-term debt) and $853.6 million of shareholders’ equity. Debt
outstanding comprised 15 percent of total capital as of December 31, 2017.
At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company subsidiaries to meet
our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp.
shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are
restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory
authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts
necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of December 31, 2017, our holding
company had $853.6 million in equity. This includes amounts related to the equity of our insurance subsidiaries, which is
subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is
comprised primarily of investments and cash, including $23.5 million in liquid investment assets, which approximates half of
our annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest,
general corporate obligations and ordinary dividend payments to our shareholders. If necessary, the holding company also has
other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder
dividends, which include a revolving line of credit, as well as access to the capital markets.
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are
subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend
distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10
percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-
month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they
be paid from earned surplus. In 2017, 2016 and 2015, our principal insurance subsidiary paid ordinary dividends totaling
$107.0 million, $123.6 million and $125.0 million, respectively, to RLI Corp. Any dividend distribution in excess of the
ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI).
No extraordinary dividends were paid in 2017, 2016 or 2015. Given the amount of dividends paid during the prior rolling 12-
month period, the net assets of our principal insurance subsidiary are restricted through the third quarter of 2018 and cannot be
distributed to RLI Corp. without prior approval of the IDOI. However, in addition to the unrestricted liquid net assets that RLI
Corp. had on hand as of December 31, 2017, RLI Corp. has other anticipated cash inflows and access to lines of credit that
would cover normal annual holding company expenditures as they are incurred and become payable.
Our 167th consecutive dividend payment was declared in February 2018 and will be paid on March 20, 2018, in the
amount of $0.21 per share. Since the inception of cash dividends in 1976, we have increased our annual dividend every year.
OUTLOOK FOR 2018
The insurance industry is expected to post a sizable underwriting loss in 2017, with an estimated combined ratio of 107 as
a direct result of the elevated catastrophe losses experienced during the year. Insurance margins had already declined by year-
over-year rate reductions, impacted in part by excess capital in the market. Prior to 2017, however, benefits on prior year
reserves and benign loss cost inflation had continued to support industry results. In 2017, catastrophe activity was heavier,
58
reserve releases were smaller and the industry continued to experience an increase in loss cost inflation across several casualty
lines.
The 2017 catastrophes have resulted in risk bearers taking a moment of temporary reflection. Most reinsurers have acted
rationally by taking the opportunity to moderately raise rates on underperforming contracts. Primary carriers are evaluating
underwriting authority, rate adequacy and market opportunities. We are regularly faced with new entrants into the specialty
insurance market, which requires a deep understanding and discipline to be successful. We believe we are in a good position to
capitalize on this uncertainty. Our focus on narrow and deep talent in selected niche markets, combined with a disciplined
underwriting culture and a compensation plan that reinforces ownership and accountability, allows us to act quickly and with
confidence when opportunities arise. Our underwriters will continue to select the risks that should allow some underwriting
margin regardless of the market rate even if that results in a temporarily smaller top line. We look to remain good stewards of
the capital we are entrusted with and are optimistic that we will find worthy opportunities to put it to use.
We enter 2018 with a strong foundation, underlying momentum and unrealized potential. We spent a good portion of
2017 repositioning our portfolio by exiting some businesses in our property segment and addressing underperforming auto-
related exposures. We did not just prune business, we also invested heavily in new casualty businesses, technology and
improving the customer experience. Although we are not on the cutting edge of insurtech, we will continue to find ways to
partner and learn from this wave of new ideas to become more effective, efficient and even easier to do business with. We did
this in 2017 by partnering with one company to assess our exposures and triage the most pressing claims from the hurricanes.
As 2017 progressed, we saw a strengthening economy which increased underlying exposures and demand for insurance.
We expect the recently passed tax reform to add further fuel to economic expansion, in addition to benefitting our bottom line
in 2017 and beyond. This, coupled with the potential additional investments in the country’s infrastructure, could positively
impact the construction industry, which a third of our insurance and surety businesses protect.
Our products are designed and underwritten by individuals with deep expertise. We are a niche participant in our chosen
markets, offering convenient solutions to consumers who have unique needs, difficulty finding coverage or a need for
specialized claims-handling. Our ownership culture and focus on underwriting discipline, coupled with a diverse portfolio of
specialty products, have served us well in all markets. We expect price stabilization and some firming throughout 2018, which
should allow current accident years’ margins to stabilize or improve slightly. We also expect moderate growth in our top line
and an underwriting profit overall, assuming normal catastrophe activity. Some additional detail by segment follows.
CASUALTY
We believe the top line momentum is sustainable into 2018. We expect the market disruption in commercial and personal
auto to continue and we will take advantage of opportunities that meet our risk appetite. Our consistent and disciplined
underwriting will continue to differentiate us. Automobile rate increases will persist, but we do expect at a diminutive pace.
With this momentum, we expect our transportation division to grow in 2018. In our personal umbrella business, we expect to
start seeing payback for investments in technology to enhance the customer experience and in our efforts to build relationships
and expand distribution. The build out of a countrywide, admitted package capability will be completed in 2018. The slow,
careful rollout to producers has begun with niche classes and will accelerate during the year. At the same time, we expect
continued expansion of our package for professionals, as well as growth from our small contractor’s package as we make the
product available in more states. The newer products launched in the last couple of years, including general binding authority,
energy casualty, healthcare liability, cyber liability and mortgage reinsurance, are all building scale, which should continue.
We anticipate that our growth from our reinsurance partnership with Prime will begin to moderate. Our established casualty
businesses will likely remain steady unless there is more disruption in the market. We will keep a watchful eye on casualty loss
cost trends. We believe the plaintiff bar has become more active and juries have become more receptive to reach beyond
liability and put as much or more weight on an injured party’s needs than ever before. If this trend continues, loss cost inflation
will rise which will drive more demand but may also increase loss severity. Overall, we expect more top line growth and
current accident year underwriting margins to remain close to break-even for the near term.
PROPERTY
For the first time in several years, the property segment has the opportunity to grow in 2018. Commercial property, which
focuses on catastrophe coverages, is seeing broad rate stabilization and rate increases in loss impacted areas. Reinsurance costs
are expected to rise and should result in the primary carriers passing on this expense to their insureds. The degree of rate
change will likely be less than what the industry was hoping for, following a year of nearly $85 billion in catastrophe losses,
but any increase will improve a product line where margins were getting too thin relative to the risk. Investments in marketing
59
and new production sources will benefit our Hawaii homeowners and marine business units. Bottom-line profitability should
return assuming a more normal catastrophe year. The expense ratio should decline modestly with expected growth across all
property business units.
SURETY
The surety division competes in the most difficult market conditions of all of our segments. There is pressure to loosen
underwriting standards, credit terms, indemnification provisions and rates while increasing commissions. Poor decision-
making could eventually result in an aggregation of severe losses to the undisciplined surety. We hold firm and steadfast in
these conditions. We will remain consistent and disciplined in our underwriting approach, though our top line has declined
some as a result. This segment is highly impacted by the regulatory environment and overall economic conditions, particularly
to those existing in the public construction sector. We remain focused on what we can control – adding value by investing in
people, service and technology that differentiates us for the future. Surety is coming off their best year of underwriting
performance since the segment was launched in 1992. This level of profitability would be difficult to achieve in 2018.
However, with our diligent underwriting, we expect to continue producing an underwriting profit and to outperform in this
segment despite ongoing pressure on the top line.
INVESTMENTS
Our portfolio exhibited strong total return results again in 2017 as tighter credit spreads in fixed income insulated the
portfolio from the uplift in short term Treasury yields. We were pleased to establish a positive net investment income result
over several quarters and expect that profile to be supported by our invested asset base and overall market yields. The equity
portfolio finished the year with double digit returns, however, conservatism and positioning in our strategy left us behind the
S&P 500 for the calendar year.
Capital markets volatility was markedly muted during 2017, while returns were fairly robust. On the heels of a
presidential election cycle, markets moved in one cohesive uptrend for most of the last twelve months based on optimism for
fiscal stimulus, the potential for growth and the possibility of lower levels of Federal regulation. Throughout the year, gross
domestic product shifted to levels above recent averages and the unemployment rate steadily declined. In this relatively robust
macroeconomic setting, the U.S. central bank found enough rationale to raise short term rates on three occasions in 2017.
Confidence in annual growth for the new year will likely perpetuate a trend of Federal Reserve tightening despite few signs of
inflation. With short term interest rates reacting to monetary policy, two-year Treasury yields increased by nearly 0.7 percent
during the year and the differential between short term and long term rates compressed significantly. Unless inflation
expectations move higher, this ‘flat’ yield curve condition should persist in 2018. Any expectations that prices and wages
accelerate, will be met with higher long term yields.
We are cautiously optimistic that conditions will remain supportive of asset prices, however we will remain disciplined in
our approach to risk management and continue to regularly rebalance our portfolio positions. In the near term, the TCJA will
require a reevaluation of the relative value of tax preferenced investments, including municipal holdings.
A delicate transition from monetary policy stimulus to one centered in fiscal policies has begun and market expectations
are high for a smooth hand-off. Although, corporate fundamentals will be the standard bearer for the efficacy of tax reform in
2018, the second order impacts on consumer spending and medium-term growth have significant potential. Regardless of
outcome, our strategy will continue to support insurance operations through investment income and sponsor long-term growth
in book value through surplus-assigned strategies.
PROSPECTIVE ACCOUNTING STANDARDS
Prospective accounting standards are those which we have not implemented because the implementation date has not yet
occurred. For a discussion of relevant prospective accounting standards, see note 1.D. to the consolidated financial statements
within Item 8, Financial Statements and Supplementary Data.
60
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK DISCLOSURE
Market risk is a general term describing the potential economic loss associated with adverse changes in the fair value of
financial instruments. Management of market risk is a critical component of our investment decisions and objectives. We
manage our exposure to market risk by using the following tools:
• Monitoring the fair value of all financial assets on a constant basis,
• Changing the character of future investment purchases as needed and
• Maintaining a balance between existing asset and liability portfolios.
FIXED INCOME AND INTEREST RATE RISK
The most significant short-term influence on our fixed income portfolio is a change in interest rates. Because there is
intrinsic difficulty predicting the direction and magnitude of interest rate moves, we attempt to minimize the impact of interest
rate risk on the balance sheet by matching the duration of assets to that of our liabilities. Furthermore, the diversification of
sectors and given issuers is core to our risk management process, increasing the granularity of individual credit risk. Liquidity
and call risk are elements of fixed income that we regularly evaluate to ensure we are receiving adequate compensation. Our
fixed income portfolio has a meaningful impact on financial results and is a key component in our enterprise risk simulations.
Interest rate risk can also affect our income statement due to its impact on interest expense. As of December 31, 2017 and
2016, we had no short-term debt obligations. We maintain a debt obligation that is long-term in nature and carries a fixed
interest rate. As such, our interest expense on this obligation is not subject to changes in interest rates. As this debt is not due
until 2023, we will not assume additional interest rate risk in our ability to refinance this debt for more than five years.
EQUITY PRICE RISK
Equity price risk is the potential that we will incur economic loss due to the decline of common stock prices. Beta
analysis is used to measure the sensitivity of our equity portfolio to changes in the value of the S&P 500 Index (an index
representative of the broad equity market). Our current equity portfolio has a beta of 0.9 in comparison to the S&P 500 with a
beta of 1.0. This lower beta statistic reflects our long-term emphasis on maintaining a value-oriented, dividend-driven
investment philosophy for our equity portfolio.
SENSITIVITY ANALYSIS
The tables that follow detail information on the market risk exposure for our financial investments as of December 31,
2017. Listed on each table is the December 31, 2017 fair value for our assets and the expected pretax reduction in fair value
given the stated hypothetical events. This sensitivity analysis assumes the composition of our assets remains constant over the
period being measured and also assumes interest rate changes are reflected uniformly across the yield curve. For example, our
ability to hold non-trading securities to maturity mitigates price fluctuation risks. For purposes of this disclosure, market-risk-
sensitive instruments are all classified as held for non-trading purposes, as we do not hold any trading securities. The examples
given are not predictions of future market events, but rather illustrations of the effect such events may have on the fair value of
our investment portfolio.
As of December 31, 2017, our fixed income portfolio had a fair value of $1.7 billion. The sensitivity analysis uses
scenarios of interest rates increasing 100 and 200 basis points from their December 31, 2017, levels with all other variables
held constant. Such scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $92.6 million
and $181.7 million, respectively.
As of December 31, 2017, our equity portfolio had a fair value of $400.5 million. The base sensitivity analysis uses
market scenarios of the S&P 500 Index declining both 10 percent and 20 percent. These scenarios would result in approximate
decreases in the equity fair value of $34.3 million and $68.6 million, respectively.
While the declines in market value outlined below are modeled as instantaneous changes, we would expect movements in
capital markets to occur over time, with investment income offering an offset to any decrease in prices.
61
Under the assumptions of rising interest rates and a decreasing S&P 500 Index, the fair value of our assets will decrease
from their present levels by the indicated amounts.
Effect of a 100-basis-point increase in interest rates and a 10 percent decline in the S&P 500:
(in thousands)
Held for non-trading purposes:
Fixed income securities
Equity securities
Total non-trading
12/31/17 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 1,672,239 $
400,492
$ 2,072,731 $
(92,566) $
—
(92,566) $
—
(34,320)
(34,320)
Effect of a 200-basis-point increase in interest rates and a 20 percent decline in the S&P 500:
(in thousands)
Held for non-trading purposes:
Fixed income securities
Equity securities
Total non-trading
12/31/17 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 1,672,239 $
(181,689) $
400,492
—
$ 2,072,731 $
(181,689) $
—
(68,640)
(68,640)
Comparatively, under the assumptions of falling interest rates and an increasing S&P 500 Index, the fair value of our
assets will increase from their present levels by the indicated amounts.
Effect of a 100-basis-point decrease in interest rates and a 10 percent increase in the S&P 500:
(in thousands)
Held for non-trading purposes:
Fixed income securities
Equity securities
Total non-trading
12/31/17 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 1,672,239 $
400,492
$ 2,072,731 $
87,916 $
—
87,916 $
—
34,320
34,320
Effect of a 200-basis-point decrease in interest rates and 20 percent increase in the S&P 500:
(in thousands)
Held for non-trading purposes:
Fixed income securities
Equity securities
Total non-trading
12/31/17 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 1,672,239 $
400,492
$ 2,072,731 $
174,656 $
—
174,656 $
—
68,640
68,640
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Earnings and Comprehensive Earnings
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Page
64
65
66
67
68-108
109
63
Consolidated Balance Sheets
(in thousands, except per share data)
Assets
Investments and Cash:
Fixed income:
Available-for-sale, at fair value (amortized cost - $1,646,411 in 2017 and $1,596,227
in 2016)
Equity securities available-for-sale, at fair value (cost - $182,002 in 2017 and
$187,573 in 2016)
Short-term investments, at cost which approximates fair value
Other invested assets
Cash
Total investments and cash
Accrued investment income
Premiums and reinsurance balances receivable, net of allowances for uncollectible
amounts of $16,935 in 2017 and $15,981 in 2016
Ceded unearned premiums
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of
allowances for uncollectible amounts of $10,014 in 2017 and $10,699 in 2016
Deferred policy acquisition costs, net
Property and equipment, at cost, net of accumulated depreciation of $47,676 in 2017
and $41,999 in 2016
Investment in unconsolidated investees
Goodwill and intangibles
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Unpaid losses and settlement expenses
Unearned premiums
Reinsurance balances payable
Funds held
Income taxes - deferred
Bonds payable, long-term debt
Accrued expenses
Other liabilities
Total liabilities
Shareholders’ equity:
Common stock ($1 par value, authorized 100,000,000 shares, issued 67,078,569 shares
in 2017 and 66,874,911 shares in 2016, and outstanding 44,148,355 shares in 2017 and
43,944,697 shares in 2016)
Paid-in capital
Accumulated other comprehensive earnings, net of tax
Retained earnings
Deferred compensation
Treasury stock, at cost (22,930,214 shares in 2017 and 2016)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2017
2016
$ 1,672,239
$ 1,605,209
400,492
9,980
33,808
24,271
$ 2,140,790
15,166
$
369,219
5,015
24,115
18,269
$ 2,021,827
14,593
$
134,351
57,928
301,991
77,716
126,387
52,173
288,224
73,147
55,849
90,067
59,302
14,084
$ 2,947,244
54,606
72,240
64,371
10,065
$ 2,777,633
$ 1,271,503
451,449
21,624
74,560
53,768
148,928
52,848
18,966
$ 2,093,646
$ 1,139,337
433,777
17,928
72,742
64,494
148,741
51,992
25,050
$ 1,954,061
$
67,079
233,077
157,919
788,522
8,640
(401,639)
853,598
$
$ 2,947,244
$
66,875
229,779
122,610
797,307
11,496
(404,495)
823,572
$
$ 2,777,633
64
2015
2017
53,075
34,740
(95)
54,876
6,970
(2,559)
Years ended December 31,
2016
$ 737,937 $ 728,608 $ 700,161
54,644
39,829
—
$ 797,224 $ 816,328 $ 794,634
$ 401,584 $ 349,778 $ 299,045
241,078
249,612
51,480
53,093
7,426
7,426
9,837
10,170
$ 729,859 $ 670,079 $ 608,866
10,914
$ 84,589 $ 157,082 $ 196,682
252,515
56,994
7,426
11,340
10,833
17,224
$
(29,741)
9,302 $ 41,034 $ 52,104
7,034
1,128
$ (20,439) $ 42,162 $ 59,138
$ 105,028 $ 114,920 $ 137,544
35,309
(47,609)
$ 140,337 $ 113,756 $ 89,935
(1,164)
$
$
2.39 $
3.19 $
2.63 $
2.60 $
3.18
2.08
$
$
2.36 $
3.15 $
2.59 $
2.56 $
3.12
2.04
44,033
44,500
43,772
44,432
43,299
44,131
Consolidated Statements of Earnings and Comprehensive Earnings
(in thousands, except per share data)
Net premiums earned
Net investment income
Net realized gains
Other-than-temporary-impairment losses on investments
Consolidated revenue
Losses and settlement expenses
Policy acquisition costs
Insurance operating expenses
Interest expense on debt
General corporate expenses
Total expenses
Equity in earnings of unconsolidated investees
Earnings before income taxes
Income tax expense (benefit):
Current
Deferred
Income tax expense (benefit):
Net earnings
Other comprehensive earnings (loss), net of tax
Comprehensive earnings
Basic:
Net earnings per share
Comprehensive earnings per share
Diluted:
Net earnings per share
Comprehensive earnings per share
Weighted average number of common shares outstanding
Basic
Diluted
See accompanying notes to consolidated financial statements.
65
Consolidated Statements of Shareholders’ Equity
Common
Shareholders’ Common
Total
Accumulated
Other
(in thousands, except per share data)
Balance, January 1, 2015
Net earnings
Other comprehensive earnings (loss), net
of tax
Deferred compensation under Rabbi trust
plans
Stock option excess tax benefit
Exercise of stock options
Dividends paid ($2.75 per share)
Balance, December 31, 2015
Net earnings
Other comprehensive earnings (loss), net
of tax
Deferred compensation under Rabbi trust
plans
Stock option excess tax benefit
Exercise of stock options
Dividends paid ($2.79 per share)
Balance, December 31, 2016
Net earnings
Other comprehensive earnings (loss), net
of tax
Deferred compensation under Rabbi trust
plans
Stock option excess tax benefit
Exercise of stock options
Dividends paid ($2.58 per share)
Balance, December 31, 2017
Shares
43,102,715 $
— $
Stock
Equity
845,062 $ 66,033 $ 213,737 $
— $
137,544 $
— $
171,383 $ 786,908 $
— $ 137,544 $
13,769 $
— $
Paid-in
Capital
Comprehensive Retained
Earnings (Loss) Earnings
Deferred
Compensation
Treasury Stock
at Cost
(406,768)
—
—
(47,609)
—
—
(47,609)
—
—
—
—
—
441,413
—
—
11,413
(3,364)
(119,577)
—
—
441
—
—
11,413
(3,805)
—
—
—
—
—
—
—
— (119,577)
43,544,128 $
— $
823,469 $ 66,474 $ 221,345 $
— $
114,920 $
— $
123,774 $ 804,875 $
— $ 114,920 $
(3,122)
—
—
—
10,647 $
— $
3,122
—
—
—
(403,646)
—
—
(1,164)
—
—
(1,164)
—
—
—
—
—
400,569
—
—
9,576
(741)
(122,488)
—
—
401
—
—
9,576
(1,142)
—
—
—
—
—
—
—
— (122,488)
43,944,697 $
— $
823,572 $ 66,875 $ 229,779 $
— $
105,028 $
— $
122,610 $ 797,307 $
— $ 105,028 $
849
—
—
—
11,496 $
— $
(849)
—
—
—
(404,495)
—
—
35,309
—
—
35,309
—
—
—
—
—
203,658
—
—
—
3,502
(113,813)
—
—
204
—
—
—
3,298
—
—
—
—
—
—
—
— (113,813)
44,148,355 $
853,598 $ 67,079 $ 233,077 $
157,919 $ 788,522 $
(2,856)
—
—
—
8,640 $
2,856
—
—
—
(401,639)
See accompanying notes to consolidated financial statements.
66
2017
2016
2015
$
105,028 $
114,920 $
137,544
(4,411)
6,944
16,368
(573)
(7,964)
3,696
1,818
(5,755)
(13,767)
(4,569)
856
132,166
17,672
(3,019)
(29,741)
—
(34,645)
6,430
17,699
285
17,275
(19,628)
18,488
660
9,620
(3,318)
(3,750)
35,552
11,683
12,573
1,128
(9,576)
(39,829)
5,406
15,006
(249)
10,911
(457)
2,773
1,128
37,262
(4,706)
(7,406)
(17,255)
20,682
7,069
7,034
(11,413)
(17,224)
—
197,525 $
(10,833)
9,900
174,463 $
(10,914)
—
152,586
(430,727) $
(20,719)
(4,965)
(9,238)
—
—
(19,112)
(557,067) $
(36,335)
—
(16,155)
—
(850)
(7,722)
(665,422)
(39,905)
—
(10,035)
(1,711)
—
(4,642)
168,760
36,573
—
128
408
2,063
329,091
89,909
2,564
1,688
—
—
436,680
53,110
6,637
76
7,500
135
$
$
195,617
(81,212) $
141,255
(53,622) $
156,980
(60,597)
$
$
— $
3,502
(113,813)
(110,311) $
$
9,576 $
(741)
(122,488)
(113,653) $
11,413
(3,364)
(119,577)
(111,528)
$
6,002 $
7,188 $
(19,539)
$
18,269 $
11,081 $
30,620
$
24,271 $
18,269 $
11,081
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net realized gains
Depreciation
Other items, net
Change in:
Accrued investment income
Premiums and reinsurance balances receivable (net of direct write-offs and commutations)
Reinsurance balances payable
Funds held
Ceded unearned premium
Reinsurance balances recoverable on unpaid losses
Deferred policy acquisition costs
Accrued expenses
Unpaid losses and settlement expenses
Unearned premiums
Income taxes:
Current
Deferred
Stock option excess tax benefit
Changes in investment in unconsolidated investees:
Undistributed earnings
Dividends received
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of:
Fixed income, available-for-sale
Equity securities, available-for-sale
Short-term investments, net
Property and equipment
Investment in equity method investee
Acquisition of agency
Other
Proceeds from sale of:
Fixed income, available-for-sale
Equity securities, available-for-sale
Short-term investments, net
Property and equipment
Subsidiary or agency
Other
Proceeds from call or maturity of:
Fixed income, available-for-sale
Net cash used in investing activities
Cash flows from financing activities:
Stock option excess tax benefit
Proceeds from stock option exercises
Cash dividends paid
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
See accompanying notes to consolidated financial statements.
67
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
RLI Corp., an insurance holding company, is an Illinois corporation that was organized in 1965. We underwrite select
property and casualty insurance coverages through major subsidiaries collectively known as RLI Insurance Group (the Group).
We conduct operations principally through three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI
Corp. and our principal insurance subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District
of Columbia, Puerto Rico, the Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI
Ins., writes surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin
Islands and Guam. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of
insurance on an admitted basis in all 50 states and the District of Columbia.
B. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting
principles in the United States of America (GAAP), which differ in some respects from those followed in reports to insurance
regulatory authorities. The consolidated financial statements include the accounts of our holding company and our subsidiaries.
All significant intercompany balances and transactions have been eliminated. Certain reclassifications were made to 2016 and
2015 to conform to the classifications used in the current year. The Company has evaluated subsequent events through the date
these consolidated financial statements were issued. There were no subsequent events requiring adjustment to the financial
statements or disclosure.
C. ADOPTED ACCOUNTING STANDARDS
ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that,
prospectively, all tax effects related to share-based payments be made through the income statement at the time of settlement as
opposed to excess tax benefits being recognized in additional paid-in capital under the previous guidance. The ASU also
removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to
be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally,
all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash
flows, a change from the previous requirement to present tax benefits as an inflow from financing activities and an outflow
from operating activities. Finally, entities will be allowed to withhold an amount up to the employees’ maximum individual tax
rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the
award. The change in withholding requirements will be applied on a modified retrospective approach.
We adopted ASU 2016-09 on January 1, 2017. The guidance’s primary impact on our financial statements relates to the
provision concerning the recognition of tax effects through the income statement in 2017 and forward. Excess tax benefits of
$5.8 million were recognized during 2017 as a reduction to income tax expense rather than as an increase to additional paid-in-
capital. The future impact to our income statement will vary depending upon the level of intrinsic value associated with option
exercises in a particular period, as well as distributions from our deferred compensation plans. Additionally, the changes in
cash flow presentation resulted in $5.8 million more operating cash flows and $5.8 million less financing cash flows for 2017
than would have been recognized under the previous guidance. We have historically estimated the number of forfeitures as part
of our option valuation process and will continue to do so under the new guidance. As no aspect of the guidance that requires
retrospective adoption impacted the Company, no prior period adjustments were made.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2017-04 was issued to simplify the subsequent measurement of goodwill. This update changes the impairment test
by requiring an entity to compare the fair value of a reporting unit with its carrying amount as opposed to comparing the
carrying amount of goodwill with its implied fair value. We adopted ASU 2017-04 during the second quarter of 2017 to
coincide with the annual testing of our energy surety, small commercial and miscellaneous and contract surety reporting units.
68
As most of our assets and liabilities associated with a reporting unit are measured at fair value, the impact of measuring the
impairment at the reporting unit level rather than at the goodwill asset level was believed to be minimal.
D. PROSPECTIVE ACCOUNTING STANDARDS
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
ASU 2014-09 was issued to clarify and remove inconsistencies within revenue recognition requirements. The core
principle of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. To achieve that core principle, the transaction price for a contract is allocated among separately identifiable
performance obligations and a portion of the transaction price is recognized as revenue when the associated performance
obligation has been completed or transferred to the customer. All contracts and fulfillment activities within the scope of Topic
944, Financial Services – Insurance, investment income, investment related gains and losses and equity in earnings of
unconsolidated investees are outside the scope of this ASU.
This ASU was originally effective for interim and annual reporting periods beginning after December 15, 2016. However,
in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date, which deferred the effective date to interim and annual periods beginning after December 15, 2017. Upon
adoption on January 1, 2018, the guidance will be retrospectively applied to each prior reporting period. However, nearly all
(over 99 percent) of our consolidated revenue is scoped out and therefore exempt from the guidance contained within this
ASU. For the remaining portion, we believe our current revenue recognition policy aligns with the new guidance and that there
will not be any changes to the way we recognize revenue once this ASU is adopted. Although the recognition of earnings from
equity method investees is out of scope from the update, the recognition of revenue by our two equity method investees would
be subject to the new guidance if the revenue streams are within this update’s scope. Any top line impact would affect the net
income of each of the equity method investees, upon which we calculate our portion of earnings to recognize. We do not
expect a material impact to our earnings, as the revenue generated by both of our equity method investees will either be outside
the scope of this update or largely unaffected by the changes. Furthermore, this guidance becomes effective for private
companies in periods beginning after December 15, 2018 and will therefore not impact our 2018 results.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities
This ASU was issued to improve the recognition and measurement of financial instruments. The new guidance makes
targeted improvements to GAAP as follows:
a. Requires equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
b. Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment;
c. Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet;
d. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes;
e. Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value
of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial instruments;
f. Requires separate presentation of financial assets and financial liabilities by measurement category and form of
financial asset on the balance sheet or the accompanying notes to the financial statements; and
g. Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-
for-sale securities in combination with the entity’s other deferred tax assets.
This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. The primary impact this
guidance will have on our financial statements relates to the provision requiring the recognition of changes in the fair value of
equity securities through the income statement rather than through other comprehensive income. Upon adoption in 2018, a
$142.2 million cumulative-effect adjustment will be made to move net unrealized gains and losses from accumulated other
comprehensive income to retained earnings. The impact to our income statement will vary depending upon the level of
volatility in the performance of the securities held in our equity portfolio and the overall market.
69
ASU 2016-02, Leases (Topic 842)
ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees,
leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This
update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value,
for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on
a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases,
interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of
comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity
while the interest component will be included in the operating section of the statement of cash flows.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is
permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a
modified retrospective approach. We do not have any financing leases, but recognized $6.8 million of operating lease expenses
in 2017 and had $32.6 million of undiscounted future operating lease liabilities that would have to be discounted to present
value and added to the balance sheet with a corresponding right-of-use asset if the guidance were applicable at December 31,
2017. We do not expect that there will be a materially different annual rental expense upon adoption.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial
instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will
require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net
amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating
to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments
would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit
losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account
through which amounts can be reversed, rather than through an irreversible write-down.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is
permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective
approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting
period presented. We do not have any assets measured at amortized cost that would be impacted by this update. Additionally,
as our fixed income portfolio is weighted towards higher rated bonds (83 percent rated A or better and 66 percent rated AA or
better at December 31, 2017) and we purchase reinsurance from financially strong reinsurers, we do not expect that our credit
losses will be material.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-15 was issued to reduce the diversity in practice of how certain cash receipts and payments, for which current
guidance is silent, are classified in the statement of cash flows. The update addresses eight specific issues, including contingent
consideration payments made after a business combination, distributions received from equity method investees and the
classification of cash receipts and payments that have aspects of more than one class of cash flows. This ASU is effective for
annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the update will be applied using the
retrospective transition method. We do not expect a material impact on our statement of cash flows.
70
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income
ASU 2018-02 was issued as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) on December 22,
2017. Accounting guidance required deferred tax items to be revalued based on the new tax laws (the most significant of which
reduced the corporate tax rate to 21 percent from 35 percent) and to include the change in income from continuing operations.
Since other comprehensive income was not affected by the revaluation of the deferred tax items, the net accumulated other
comprehensive income (AOCI) balance was reflective of the historic 35 percent tax rate instead of the newly enacted rate, a
difference that is referred to as a stranded tax effect. This ASU allows for the option to reclassify the stranded tax effects
resulting from the implementation of the TCJA out of AOCI and into retained earnings. ASU 2018-02 does not replace the
guidance requiring changes from the enactment of other tax laws or rates to be included within income from continuing
operations and is applicable only to changes from the TCJA.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is
permitted. As the adoption of ASU 2016-01 in 2018 will result in the reclassification of the entire unrealized balance on equity
securities from AOCI into retained earnings, only the stranded tax effects on the unrealized balances of our fixed income
securities and equity method investees will be impacted. Upon adoption of ASU 2018-02, a $4.1 million reclassification of the
remaining stranded tax effects will be applied in the period of adoption or retrospectively to each period in which the effects of
the TCJA changes are recognized. As there is no income statement impact and the balance sheet effect is limited to a
reclassification within the equity section, there will not be a material impact to our financial statements.
E. INVESTMENTS:
We classify our investments in all debt and equity securities into one of three categories: available-for-sale, held-to-
maturity or trading.
AVAILABLE-FOR-SALE SECURITIES
Debt and equity securities not included as held-to-maturity or trading are classified as available-for-sale and reported at
fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate
component of comprehensive earnings and shareholders’ equity, net of deferred income taxes. All of our debt and equity
securities are classified as available-for-sale.
HELD-TO-MATURITY SECURITIES
Debt securities that we have the positive intent and ability to hold to maturity are classified as held-to-maturity and
carried at amortized cost. Except for declines that are other-than-temporary, changes in the fair value of these securities are not
reflected in the financial statements. We do not hold any debt security classified as held-to-maturity.
TRADING SECURITIES
Debt and equity securities purchased for short-term resale are classified as trading securities. These securities are reported
at fair value with unrealized gains and losses included in earnings. We do not hold any debt securities classified as trading.
OTHER THAN TEMPORARY IMPAIRMENT
We regularly evaluate our fixed income and equity securities using both quantitative and qualitative criteria to determine
impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for
determining if a security is other-than-temporarily impaired:
• The length of time and the extent to which the fair value has been less than cost,
• The probability of significant adverse changes to the cash flows on a fixed income investment,
• The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer
seeking protection from creditors under the bankruptcy laws, the issuer proposing a voluntary reorganization
under which creditors are asked to exchange their claims for cash or securities having a fair value substantially
lower than par value,
71
• The probability that we will recover the entire amortized cost basis of our fixed income securities prior to
maturity or
• For our equity securities, our expectation of recovery to cost within a reasonable period of time.
Quantitative criteria considered during this process include, but are not limited to: the degree and duration of current fair
value as compared to the cost (amortized, in certain cases) of the security, degree and duration of the security’s fair value being
below cost and, for fixed maturities, whether the issuer is in compliance with terms and covenants of the security. Qualitative
criteria include the credit quality, current economic conditions, the anticipated speed of cost recovery, the financial health of
and specific prospects for the issuer, as well as our absence of intent to sell or requirement to sell fixed income securities prior
to maturity. In addition, we consider price declines of securities in our other-than-temporary impairment (OTTI) analysis,
where such price declines provide evidence of declining credit quality, and we distinguish between price changes caused by
credit deterioration, as opposed to rising interest rates. See note 2 for further discussion of OTTI.
Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and
discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to
earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of
the investments sold on the settlement date.
F. CASH, SHORT-TERM INVESTMENTS AND OTHER INVESTED ASSETS
Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original
maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Short-term investments are
carried at cost. We have not experienced losses on these instruments. Other invested assets includes an investment in three low
income housing tax credit partnerships (LIHTC), carried at amortized cost, membership in the Federal Home Loan Bank of
Chicago (FHLBC), carried at cost, an investment in a real estate fund, carried at cost, an investment in a business development
company (BDC), carried at fair value, and an investment in a global credit fund, carried at fair value. Due to the nature of cash,
short-term investments, the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value.
G. REINSURANCE
Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are
reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve us of our
legal liability to our policyholders.
We continuously monitor the financial condition of our reinsurers. As part of our monitoring efforts, we review their
annual financial statements, quarterly disclosures and Securities and Exchange Commission (SEC) filings for those reinsurers
that are publicly traded. We also review insurance industry developments that may impact the financial condition of our
reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the A.M. Best and
Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverable
tests, including one based on average default by S&P rating. Based upon our review and testing, our policy is to charge to
earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an
ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to
recover.
H. POLICY ACQUISITION COSTS
We defer commissions, premium taxes and certain other costs that are incrementally or directly related to the successful
acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they
are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain
or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to
premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such
deferred costs to their estimated realizable value. This would also give effect to the premiums to be earned and anticipated
losses and settlement expenses, as well as certain other costs expected to be incurred as the premiums are earned. Judgments as
to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated
future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums
and acquisition costs.
72
I. PROPERTY AND EQUIPMENT
Property and equipment are presented at cost less accumulated depreciation and are depreciated on a straight-line basis
for financial statement purposes over periods ranging from 3 to 10 years for equipment and up to 30 years for buildings and
improvements.
J.
INVESTMENT IN UNCONSOLIDATED INVESTEES
We maintain a 40 percent interest in the equity and earnings of Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality
sunglasses, which is accounted for by the equity method. We also maintain a similar minority representation on their board of
directors. Maui Jim’s chief executive officer owns a controlling majority of the outstanding shares of Maui Jim. We carry this
investment at the holding company level as it is not core to our insurance operations. Our investment in Maui Jim was $77.7
million in 2017 and $62.6 million in 2016. In 2017, we recorded $14.4 million in investee earnings for Maui Jim, compared to
$9.7 million in 2016 and $9.9 million in 2015. Maui Jim recorded net income of $34.4 million in 2017, $26.9 million in 2016
and $23.7 million in 2015. Additional summarized financial information for Maui Jim for 2017 and 2016 is outlined in the
following table:
(in millions)
Total assets
Total liabilities
Total equity
2017
2016
$ 259.4 $ 246.9
112.4
134.5
88.0
171.4
Approximately $66.3 million of undistributed earnings from Maui Jim are included in our retained earnings as of
December 31, 2017. In 2016, we received dividends of $9.9 million from Maui Jim. No dividends were received in 2017 or
2015.
As of December 31, 2017, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services,
Inc. (Prime), which is accounted for by the equity method. Prime writes business through two Illinois domiciled insurance
carriers, Prime Insurance Company, an excess and surplus lines company, and Prime Property and Casualty Insurance Inc., an
admitted insurance company. Our investment in Prime was $12.4 million at December 31, 2017 and $9.6 million at December
31, 2016. In 2017, we recorded $2.8 million in investee earnings for Prime, compared to $1.1 million in 2016 and $1.0 million
in 2015. Additionally, we maintain a 25 percent quota share reinsurance treaty with Prime, which contributed $29.6 million of
gross premiums written and $21.0 million of net premiums earned during 2017, compared to $13.4 million of gross premiums
written and $11.4 million of net premiums earned during 2016 and $11.3 million of gross premiums written and $10.9 million
of net premiums earned during 2015.
We perform annual impairment reviews of our investments in unconsolidated investees, which take into consideration
current valuation and operating results. Based upon the most recent reviews, the assets were not impaired.
K. INTANGIBLE ASSETS
Goodwill and intangibles totaled $59.3 million and $64.4 million at December 31, 2017 and 2016, respectively, as
detailed in the following table.
73
Goodwill and Intangible Assets
(in thousands)
Goodwill
Energy surety
Miscellaneous and contract surety
Small Commercial
Medical professional liability *
Total goodwill
Intangibles
State insurance licenses
Definite-lived intangibles, net of accumulated amortization of $5,678
at 12/31/17 and $5,546 at 12/31/16
Total intangibles
Total goodwill and intangibles
2017
2016
$ 25,706 $ 25,706
15,110
5,246
5,208
$ 49,657 $ 51,270
15,110
5,246
3,595
$
7,500 $
7,500
2,145
5,601
9,645 $ 13,101
$
$ 59,302 $ 64,371
* The medical professional liability goodwill balance reflects a cumulative non-cash impairment charge of $8.8 million and
$7.2 million as of December 31, 2017 and 2016, respectively.
As the amortization of goodwill and indefinite-lived intangible assets is not permitted, the assets are tested for
impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired.
Annual impairment testing was performed on each of our goodwill and indefinite-lived intangible assets during 2017. Based
upon these reviews, our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and
state insurance license indefinite-lived intangible asset were not impaired. In addition, as of December 31, 2017, there were no
triggering events on the above mentioned goodwill and intangible assets that would suggest an updated review was necessary.
As previously disclosed for our medical professional liability reporting unit, rate and volume declines coupled with
adverse loss experience resulted in a triggering event during the second quarter of 2016. A fair value was determined by using
a weighted average of a market approach valuation and income approach (or discounted cash flow method) valuation. It was
determined that the carrying cost of our medical professional liability goodwill exceeded the fair value, resulting in a $7.2
million non-cash impairment charge. Further adverse loss experience triggered the need to test the medical professional
liability reporting unit during the second quarter of 2017, resulting in an additional $3.4 million non-cash impairment charge. A
fair value for the medical professional liability reporting unit’s agency relationships, carried as a definite-lived intangible, was
determined by using a discounted cash flow valuation. The carrying value exceeded the fair value, resulting in a $1.8 million
non-cash impairment charge. Similar to in 2016, a fair value for the medical professional liability reporting unit’s goodwill was
determined by using a weighted average of a market approach and discounted cash flow valuation. The carrying value
exceeded the fair value, resulting in a $1.6 million non-cash impairment charge. All impairment charges were recorded as net
realized losses in the respective period’s consolidated statement of earnings. The annual impairment testing indicated no
further impairment and no additional triggering events occurred subsequent to the second quarter of 2017.
The definite-lived intangible assets are amortized against future operating results based on their estimated useful lives.
Amortization of intangible assets was $0.7 million, $0.9 million and $0.9 million for 2017, 2016 and 2015, respectively. We
anticipate we will recognize amortization expense of $0.5 million in 2018, 2019 and 2020, $0.2 million in 2021 and $0.1
million in 2022. In addition to the aforementioned $1.8 million reduction due to the medical professional liability impairment,
the asset sale of an agency in 2017 also reduced the definite-lived intangibles by $1.0 million.
74
L. UNPAID LOSSES AND SETTLEMENT EXPENSES
The liability for unpaid losses and settlement expenses represents estimates of amounts needed to pay reported and
unreported claims and related expenses. The estimates are based on certain actuarial and other assumptions related to the
ultimate cost to settle such claims. Such assumptions are subject to occasional changes due to evolving economic, social and
political conditions. All estimates are periodically reviewed and, as experience develops and new information becomes known,
the reserves are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are
determined. Due to the inherent uncertainty in estimating reserves for losses and settlement expenses, there can be no assurance
that the ultimate liability will not exceed recorded amounts. If actual liabilities do exceed recorded amounts, there will be an
adverse effect. Furthermore, we may determine that recorded reserves are more than adequate to cover expected losses, which
would lead to a reduction in our reserves.
M. INSURANCE REVENUE RECOGNITION
Insurance premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums
are calculated on a monthly pro rata basis.
N. INCOME TAXES
We file a consolidated federal income tax return. Federal income taxes are accounted for using the asset and liability
method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. The effect on deferred taxes for a
change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that all or some of the deferred tax assets will not be realized.
We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to
uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered
material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or
decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax
uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.
As an insurance company, we are subject to minimal state income tax liabilities. On a state basis, since the majority of
our income is from insurance operations, we pay premium taxes which are calculated as a percentage of gross premiums
written in lieu of state income taxes. Premium taxes are a component of policy acquisition costs.
O. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or
other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When
inclusion of these items increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive.
Under these circumstances, the diluted net earnings or net loss per share is computed excluding these items.
75
The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations
contained in the consolidated financial statements:
(in thousands, except per share data)
For the year ended December 31, 2017
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
For the year ended December 31, 2016
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
For the year ended December 31, 2015
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
P. COMPREHENSIVE EARNINGS
Income
(Numerator)
Weighted Average
Shares
(Denominator)
Per Share
Amount
$ 105,028
—
44,033 $
467
2.39
$ 105,028
44,500 $
2.36
$ 114,920
—
43,772 $
660
2.63
$ 114,920
44,432 $
2.59
$ 137,544
—
43,299 $
832
3.18
$ 137,544
44,131 $
3.12
Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment
securities, net of tax. In reporting the components of comprehensive earnings, we used a 35 percent tax rate. Other
comprehensive income (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax
expense (benefit) of $19.0 million, $(0.6) million and $(25.3) million for 2017, 2016 and 2015, respectively.
The following table illustrates the changes in the balance of each component of accumulated other comprehensive
earnings for each period presented in the consolidated financial statements:
Unrealized Gains/Losses on Available-for-Sale Securities
(in thousands)
For the Year Ended December 31,
2015
2016
2017
Beginning balance
Other comprehensive earnings before reclassifications
Amounts reclassified from accumulated other comprehensive earnings
Net current-period other comprehensive earnings (loss)
Ending balance
26,740
40,887
(5,578) (27,904)
$ 122,610 $ 123,774 $ 171,383
(26,199)
(21,410)
$ 35,309 $ (1,164) $ (47,609)
$ 157,919 $ 122,610 $ 123,774
76
The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from
accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated
other comprehensive earnings by the respective line items of net earnings are presented in the following table:
Amount Reclassified from Accumulated Other Comprehensive Earnings
(in thousands)
Component of Accumulated
Other Comprehensive Earnings
For the Year Ended December 31,
2015
2016
2017
Affected line item in the
Statement of Earnings
Unrealized gains and losses on available-for-sale
securities
$
11,141 $ 43,024 $
32,939 Net realized investment gains
(95)
(2,559)
8,582 $ 42,929 $
(3,004)
5,578 $ 27,904 $
(15,025)
$
$
Other-than-temporary impairment
(OTTI) losses on investments
32,939 Earnings before income taxes
—
(11,529) Income tax expense
21,410 Net earnings
Q. FAIR VALUE DISCLOSURES
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly
transaction between market participants on the measurement date. We determined the fair value of certain financial instruments
based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used
to establish each level:
• Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for
identical assets.
• Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices
for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are
observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated
by observable market data.
• Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant
inputs are unobservable. Financial assets are classified based upon the lowest level of significant input that is used to
determine fair value.
As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to
determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and
inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value,
including the general classification of such assets pursuant to the fair value hierarchy.
Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model
which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The
pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these
techniques are classified as Level 2. All Corporate, Agencies, Government and Municipal securities are deemed Level 2.
Mortgage-backed Securities (MBS)/Collateralized Mortgage Obligations (CMO) and Asset-backed Securities
(ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data.
Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of
accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche,
benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate CMO volatility, an option
adjusted spread model is used in combination with models that simulate interest rate paths to determine market price
information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects
77
changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMO and ABS with
corroborated, observable inputs are classified as Level 2. All of our MBS/CMO and ABS are deemed Level 2.
For all of our fixed income securities classified as Level 2, as described above, we periodically conduct a review to assess
the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First,
we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices
from securities brokers and compare them to the prices provided by our pricing services. In our comparisons, if discrepancies
are found, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our
pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values
of our Level 2 securities provided by our pricing services are reasonable.
Common Stock: For common stock securities, we receive prices from a nationally recognized pricing service. All of our
common stock holdings are deemed Level 1 as exchange traded equities have readily observable price levels (fair value based
on quoted market prices). As such, we have determined that the fair values of our Level 1 securities provided by our pricing
service are reasonable.
Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their
carrying amounts are reasonable estimates of fair value. Our investments in a business development company and a global
credit fund, classified as other invested assets, are measured using the investments’ net asset value per share and are not
categorized within the fair value hierarchy. The fair value of our long-term debt is discussed further in note 4.
R. STOCK-BASED COMPENSATION
We expense the estimated fair value of employee stock options and similar awards. We measure compensation cost for
awards of equity instruments to employees based on the grant-date fair value of those awards and recognize compensation
expense over the service period that the awards are expected to vest.
The tax effects related to share-based payments were made through net earnings in 2017. In 2016 and 2015, the tax
effects of share-based compensation were recognized in additional paid-in capital under the alternative transition method. The
alternative transition method used simplified methods to determine the impact on the additional paid-in capital pool and
consolidated statements of cash flows.
See note 8 for further discussion and related disclosures regarding stock options.
S. RISKS AND UNCERTAINTIES:
Certain risks and uncertainties are inherent to our day-to-day operations and to the process of preparing our consolidated
financial statements. The more significant risks and uncertainties, as well as our attempt to mitigate, quantify and minimize
such risks, are presented below and throughout the notes to the consolidated financial statements.
Insurance Risks
We compete with a large number of other companies in our selected lines of business. During periods of intense
competition for premium, we are vulnerable to the actions of other companies who may seek to write business without the
appropriate regard for risk and profitability. The insurance industry is currently operating under highly competitive conditions
and, as a result, margins in the industry are under pressure. During these times, it is very difficult to grow or maintain premium
volume without sacrificing underwriting discipline and income. Our profitability can be affected significantly by the ability of
our underwriters to accurately select and price risk and our claim personnel to appropriately deliver fair outcomes. We attempt
to mitigate this risk by incentivizing our underwriters to maximize underwriting profit and remain disciplined in pricing and
selecting risks. If we are unable to compete effectively in the markets in which we operate or expand our operations into new
markets, our underwriting revenues may decline, as well as overall business results.
Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would
negatively impact our profitability. As of December 31, 2017 we had $1.3 billion of gross loss and LAE reserves. Significant
periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that
loss. As part of the reserving process, we review historical data and consider the impact of various factors such as trends in
claim frequency and severity, emerging economic and social trends, inflation and changes in the regulatory and litigation
78
environments. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our
profitability could suffer.
Catastrophe Exposures
Our insurance coverages include exposure to catastrophic events. We monitor all catastrophe exposures by quantifying
our exposed policy limits in each region and by using computer-assisted modeling techniques. Additionally, we limit our risk
to such catastrophes through restraining the total policy limits written in each region and by purchasing reinsurance. Our major
catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. In 2017, for this coverage, we had
reinsurance protection of $300 million in excess of $25 million first-dollar retention for earthquakes in California and $325
million in excess of a $25 million first-dollar retention for earthquakes outside of California. These amounts are subject to
certain co-participations by us on losses in excess of the $25 million retentions. Our second largest catastrophe exposure is to
losses caused by wind storms to commercial properties throughout the Gulf and East Coasts, as well as to homes we insure in
Hawaii. In 2017, these coverages were supported by $225 million in excess of a $25 million first-dollar retention in traditional
catastrophe reinsurance protection, subject to certain co-participations by us in the excess layers. In addition, we have
incidental exposure to international catastrophic events.
Our catastrophe reinsurance treaty renewed on January 1, 2018. We purchased the same limits over the same first-dollar
retention amounts outlined above, subject to certain retentions by us in the excess layers. We actively manage our catastrophe
program to keep our net retention in line with risk tolerances and to optimize the risk/return trade off.
Environmental Exposures
We are subject to environmental claims and exposures primarily through our commercial umbrella, general liability and
discontinued assumed casualty reinsurance lines of business. Although exposure to environmental claims exists in these lines
of business, we seek to mitigate or control the extent of this exposure on the vast majority of this business through the
following methods: (1) our policies include pollution exclusions that have been continually updated to further strengthen them,
(2) our policies primarily cover moderate hazard risks and (3) we began writing this business after the insurance industry
became aware of the potential pollution liability exposure and implemented changes to limit exposure to this hazard.
We offer coverage for low to moderate environmental liability exposures for small contractors and asbestos and mold
remediation specialists. We also provide limited coverage for individually underwritten underground storage tanks. The overall
exposure is mitigated by focusing on smaller risks with low to moderate exposures. Risks that have large-scale exposures are
avoided including petrochemical, chemical, mining, manufacturers and other risks that might be exposed to superfund sites.
This business is covered under our casualty ceded reinsurance treaties.
We made loss and settlement expense payments on environmental liability claims and have loss and settlement expense
reserves for others. We include this historical environmental loss experience with the remaining loss experience in the
applicable line of business to project ultimate incurred losses and settlement expenses as well as related incurred but not
reported (IBNR) loss and settlement expense reserves.
Although historical experience on environmental claims may not accurately reflect future environmental exposures, we
used this experience to record loss and settlement expense reserves in the exposed lines of business. See further discussion of
environmental exposures in note 6.
Reinsurance
Reinsurance does not discharge us from our primary liability to policyholders, and to the extent that a reinsurer is unable
to meet its obligations, we would be liable. We continuously monitor the financial condition of prospective and existing
reinsurers. As a result, we purchase reinsurance from a number of financially strong reinsurers. We provide an allowance for
reinsurance balances deemed uncollectible. See further discussion of reinsurance exposures in note 5.
Investment Risk
Our investment portfolio is subject to market, credit and interest rate risks. The equity portfolio will fluctuate with
movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the
market, the portfolio is positively correlated with movements in domestic stocks. The bond portfolio is affected by interest rate
changes and movement in credit spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-
79
diversified portfolio with high-quality securities with varied maturities. Downturns in the financial markets could have a
negative effect on our portfolio. However, we attempt to manage this risk through asset allocation, duration and security
selection.
Liquidity Risk
Liquidity is essential to our business and a key component of our concept of asset-liability matching. Our liquidity may
be impaired by an inability to collect premium receivable or reinsurance recoverable balances in a timely manner, an inability
to sell assets or redeem our investments, an inability to access funds from our insurance subsidiaries, unforeseen outflows of
cash or large claim payments or an inability to access debt or equity capital markets. This situation may arise due to
circumstances that we may be unable to control, such as a general market disruption, an operational problem that affects third
parties or us, or even by the perception among market participants that we, or other market participants, are experiencing
greater liquidity risk.
Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and
competitive position by increasing our borrowing costs or limiting our access to the capital markets.
Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of
assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and
expenses. The most significant of these amounts is the liability for unpaid losses and settlement expenses. Other estimates
include investment valuation and OTTIs, the collectability of reinsurance balances, recoverability of deferred tax assets and
deferred policy acquisition costs. These estimates and assumptions are based on management’s best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, which management believes to be reasonable under the circumstances. We adjust
such estimates and assumptions when facts and circumstances dictate. Although recorded estimates are supported by actuarial
computations and other supportive data, the estimates are ultimately based on our expectations of future events. As future
events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the
consolidated financial statements in future periods.
External Factors
Our insurance subsidiaries are highly regulated by the state in which they are incorporated and by the states in which they
do business. Such regulations, among other things, limit the amount of dividends, impose restrictions on the amount and types
of investments and regulate rates insurers may charge for various coverages. We are also subject to insolvency and guaranty
fund assessments for various programs designed to ensure policyholder indemnification. We generally accrue an assessment
during the period in which it becomes probable that a liability has been incurred from an insolvency and the amount of the
related assessment can be reasonably estimated.
The National Association of Insurance Commissioners (NAIC) has developed Property/Casualty Risk-Based Capital
(RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in its overall operations. The RBC
formula uses the statutory annual statement to calculate the minimum indicated capital level to support investment and
underwriting risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated
RBC capital deficiency, if any. We regularly monitor our subsidiaries’ internal capital requirements and the NAIC’s RBC
developments. As of December 31, 2017, we determined that our capital levels are well in excess of the minimum capital
requirements for all RBC action levels and that our capital levels are sufficient to support the level of risk inherent in our
operations. See note 9 for further discussion of statutory information and related insurance regulatory restrictions.
In addition, ratings are a critical factor in establishing the competitive position of insurance companies. Our insurance
companies are rated by A.M. Best, S&P and Moody’s. Their ratings reflect their opinions of an insurance company’s and an
insurance holding company’s financial strength, operating performance, strategic position and ability to meet its obligations to
policyholders.
80
2. INVESTMENTS
A summary of net investment income is as follows:
NET INVESTMENT INCOME
(in thousands)
Interest on fixed income securities
Dividends on equity securities
Interest on cash, short-term investments and other invested assets
Gross investment income
Less investment expenses
Net investment income
2015
2017
10,506
945
2016
$ 48,343 $ 46,834 $ 48,064
11,407
10,929
11
120
$ 59,794 $ 57,883 $ 59,482
(4,838)
(4,808)
(4,918)
$ 54,876 $ 53,075 $ 54,644
Pretax net realized investment gains (losses) and net changes in unrealized gains (losses) on investments for the years
ended December 31 are summarized as follows:
REALIZED/UNREALIZED GAINS
(in thousands)
Net realized gains (losses):
Fixed income:
Available-for-sale
Available-for-sale OTTI
Equity securities
Sale of subsidiary (RLI Indemnity Company)*
Other
Total
Net changes in unrealized gains (losses) on investments:
Fixed income:
Available-for-sale
Equity securities
Other invested assets
Investment in unconsolidated investees
Total
Net realized gains (losses) and changes in unrealized gains
(losses) on investments
2017
2016
2015
$
859 $
4,314 $ 10,832
—
22,107
6,698
192
$ 4,411 $ 34,645 $ 39,829
(95)
38,709
—
(8,283)
(2,559)
10,282
—
(4,171)
$ 16,846 $ (10,972) $ (26,929)
(44,120)
—
(1,886)
$ 54,323 $ (1,791) $ (72,935)
36,844
29
604
8,659
—
522
$ 58,734 $ 32,854 $ (33,106)
*See note 13 for further discussion on the sale of RLI Indemnity Company.
During 2017, we recorded $4.4 million in net realized gains, which included $3.4 million of other non-cash realized
losses from goodwill and definite-lived intangible impairments. In addition, we recorded a change in net unrealized gains of
$54.3 million. The majority of our net realized gains were due to sales of equity securities. The change in unrealized gains was
due to strong equity market returns as well as spread compression in fixed income credit sectors. For 2017, the net realized
gains (losses) and changes in unrealized gains (losses) on investments totaled $58.7 million.
81
The following is a summary of the disposition of fixed income securities and equities for the years ended December 31,
with separate presentations for sales and calls/maturities.
SALES
(in thousands)
2017
Available-for-sale
Equities
2016
Available-for-sale
Equities
2015
Available-for-sale
Equities
CALLS/MATURITIES
(in thousands)
2017
Available-for-sale
2016
Available-for-sale
2015
Available-for-sale
FAIR VALUE MEASUREMENTS
Proceeds
From Sales
Gross Realized
Gains
Losses
Realized
Gain (Loss)
Net
$ 169,002 $
2,406 $ (1,670) $
36,573
13,178
(2,896)
736
10,282
$ 329,091 $
89,909
7,158 $ (3,287) $
39,668
(959)
3,871
38,709
$ 436,680 $ 14,691 $ (4,067) $ 10,624
22,107
25,985
(3,878)
53,110
Proceeds
Gains
Losses
Gross Realized
Net
Realized
Gain (Loss)
$ 195,617 $
262 $
(139) $
123
$ 141,255 $
445 $
(2) $
443
$ 156,980 $
217 $
(9) $
208
Assets measured at fair value on a recurring basis as of December 31, 2017, are summarized below:
Significant
Quoted in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
— $
—
—
—
—
—
—
400,492
400,492 $ 1,672,239 $
91,689 $
18,778
7,588
328,471
70,526
519,022
636,165
—
91,689
— $
18,778
—
7,588
—
328,471
—
70,526
—
519,022
—
636,165
—
—
400,492
— $ 2,072,731
(in thousands)
Available-for-sale securities:
U.S. government
U.S. agency
Non-U.S. govt. & agency
Agency MBS
ABS/CMBS*
Corporate
Municipal
Equity
Total available-for-sale securities
$
*Non-agency asset-backed & commercial mortgage-backed
82
Assets measured at fair value on a recurring basis as of December 31, 2016, are summarized below:
Significant
(in thousands)
Available-for-sale securities:
U.S. government
U.S. agency
Non-U.S. govt. & agency
Agency MBS
ABS/CMBS*
Corporate
Municipal
Equity
Quoted in Active
Markets for
Identical Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
— $
—
—
—
—
—
—
369,219
369,219 $ 1,605,209 $
76,563 $
5,813
9,151
284,069
93,910
508,367
627,336
—
76,563
— $
5,813
—
9,151
—
284,069
—
93,910
—
508,367
—
627,336
—
—
369,219
— $ 1,974,428
Total available-for-sale securities
$
*Non-agency asset-backed & commercial mortgage-backed
As noted in the previous tables, we did not have any assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) as of December 31, 2017 and 2016. Additionally, there were no securities transferred in or out of
levels 1 or 2 during 2017 or 2016.
The amortized cost and estimated fair value of fixed income securities at December 31, 2017, by contractual maturity, are
shown as follows:
(in thousands)
Available-for-sale:
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mtge/ABS/CMBS*
Total available-for-sale
Amortized Cost
Fair Value
$
16,023 $
318,411
586,340
326,103
399,534
1,646,411 $
$
15,984
322,988
598,041
336,229
398,997
1,672,239
* Mortgage-backed, asset-backed & commercial mortgage-backed
Expected maturities may differ from contractual maturities due to call provisions on some existing securities. At
December 31, 2017, the net unrealized appreciation of available-for-sale fixed income and equity securities totaled $244.3
million pretax. At December 31, 2016, the net unrealized appreciation of available-for-sale fixed maturities and equity
securities totaled $190.6 million pretax.
83
In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed income
and equity securities as of December 31, 2017 and 2016:
2017
(in thousands)
Available-for-sale:
U.S. government
U.S. agency
Non-U.S. govt. & agency
Agency MBS
ABS/CMBS*
Corporate
Municipal
Total fixed income
Equity securities
Total available-for-sale
2016
(in thousands)
Available-for-sale:
U.S. government
U.S. agency
Non-U.S. govt. & agency
Agency MBS
ABS/CMBS*
Corporate
Municipal
Total fixed income
Equity securities
Total available-for-sale
Amortized
Gross Unrealized
Cost
Fair Value
Gains
Losses
$
23 $
92,561 $
18,541
7,501
329,129
70,405
508,128
620,146
91,689 $
18,778
7,588
328,471
70,526
519,022
636,165
(895)
(110)
(56)
(4,078)
(315)
(1,681)
(1,253)
$ 1,646,411 $ 1,672,239 $ 34,216 $ (8,388)
(856)
$ 1,828,413 $ 2,072,731 $ 253,562 $ (9,244)
347
143
3,420
436
12,575
17,272
219,346
400,492
182,002
Amortized
Gross Unrealized
Cost
Fair Value
Gains
Losses
$
88 $
76,563 $
5,813
9,151
284,069
93,910
508,367
627,336
77,054 $
5,473
9,517
283,002
93,791
503,041
624,349
(579)
—
(368)
(3,568)
(557)
(5,670)
(6,588)
$ 1,596,227 $ 1,605,209 $ 26,312 $ (17,330)
(1,266)
$ 1,783,800 $ 1,974,428 $ 209,224 $ (18,596)
340
2
4,635
676
10,996
9,575
182,912
369,219
187,573
* Non-agency asset-backed & commercial mortgage-backed
Mortgage-Backed, Commercial Mortgage-Backed and Asset-Backed Securities
Gross unrealized losses in the collateralized securities bond portfolio increased to $4.4 million in 2017 as interest rates
increased during the last four months of the year. All of our collateralized securities carry the highest credit rating by one or
more major rating agencies and continue to pay according to contractual terms.
For all fixed income securities at an unrealized loss at December 31, 2017, we believe it is probable that we will receive
all contractual payments in the form of principal and interest. In addition, we are not required to, nor do we intend to sell these
investments prior to recovering the entire amortized cost basis of each security, which may be at maturity. We do not consider
these investments to be other-than-temporarily impaired at December 31, 2017.
Corporate Bonds
Gross unrealized losses in the corporate bond portfolio decreased to $1.7 million in 2017 from $5.7 million at the end of
2016 as credit spreads remained at historically tight levels during the year. The corporate bond portfolio has an overall rating of
BBB+.
84
Municipal Bonds
As of December 31, 2017, municipal bonds totaled $636.2 million with gross unrealized losses of $1.3 million.
Unrealized losses decreased during the year due to strong investor demand for the sector. As of December 31, 2017,
approximately 43 percent of the municipal fixed income securities in the investment portfolio were general obligations of state
and local governments and the remaining 57 percent were revenue based. Eighty-eight percent of our municipal fixed income
securities were rated AA or better while 99 percent were rated A or better.
Equity Securities
Our equity portfolio consists of common stocks and exchange traded funds (ETF). Gross unrealized losses in the equity
portfolio decreased $0.4 million to $0.9 million in 2017. Given our intent to hold and expectation of recovery to cost within a
reasonable period of time, we do not consider any of our equities to be other-than-temporarily impaired.
Impairment Analysis
Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is
triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will
be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire
amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be
required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the
security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it
will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit
loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive
income.
Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we
have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities,
we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than
not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors
could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying
investment’s cost basis.
The following table is also used as part of our impairment analysis and displays the total value of securities that were in an
unrealized loss position as of December 31, 2017, and December 31, 2016. The table segregates the securities based on type,
noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The table
further classifies the securities based on the length of time they have been in an unrealized loss position.
85
(in thousands)
U.S. Government
Fair value
Cost or amortized cost
Unrealized Loss
U.S. Agency
Fair value
Cost or amortized cost
Unrealized Loss
Non-U.S. Government
Fair value
Cost or amortized cost
Unrealized Loss
Agency MBS
Fair value
Cost or amortized cost
Unrealized Loss
ABS/CMBS*
Fair value
Cost or amortized cost
Unrealized Loss
Corporate
Fair value
Cost or amortized cost
Unrealized Loss
Municipal
Fair value
Cost or amortized cost
Unrealized Loss
Subtotal, fixed income
Fair value
Cost or amortized cost
Unrealized Loss
Equity securities
Fair value
Cost or amortized cost
Unrealized Loss
Total
Fair value
Cost or amortized cost
Unrealized Loss
December 31, 2017
12 Mos.
& Greater
Total
December 31, 2016
12 Mos.
& Greater
< 12 Mos.
Total
< 12 Mos.
$ 58,009 $ 30,888 $ 88,897 $ 48,500 $
58,443
31,349
89,792
49,079
$
(434) $
(461) $
(895) $
(579) $
— $ 48,500
49,079
—
(579)
— $
$ 10,917 $
11,027
$
(110) $
— $ 10,917 $
—
— $
(110) $
11,027
— $
—
— $
— $
—
— $
—
—
—
$
$
— $
—
— $
1,840 $
1,896
(56) $
1,840 $
1,896
(56) $
7,647 $
8,015
(368) $
— $
—
— $
7,647
8,015
(368)
$ 122,130 $ 111,306 $ 233,436 $ 175,858 $
123,559
113,955
237,514
179,238
$ (1,429) $ (2,649) $ (4,078) $ (3,380) $
5,737 $ 181,595
5,925
185,163
(188) $ (3,568)
$ 23,406 $ 21,587 $ 44,993 $ 48,907 $
23,491
21,817
45,308
49,372
$
(85) $
(230) $
(315) $
(465) $
5,272 $ 54,179
54,736
5,364
(557)
(92) $
$ 86,946 $ 28,600 $ 115,546 $ 144,353 $ 15,535 $ 159,888
165,558
(891) $ (1,681) $ (2,626) $ (3,044) $ (5,670)
117,227
146,979
18,579
(790) $
29,491
87,736
$
$ 71,059 $ 60,049 $ 131,108 $ 250,930 $
71,534
60,827
132,361
257,518
$
(475) $
(778) $ (1,253) $ (6,588) $
— $ 250,930
—
257,518
— $ (6,588)
$ 372,467 $ 254,270 $ 626,737 $ 676,195 $ 26,544 $ 702,739
720,069
$ (3,323) $ (5,065) $ (8,388) $ (14,006) $ (3,324) $ (17,330)
635,125
690,201
259,335
375,790
29,868
$
$
4,373 $
4,581
(208) $
2,156 $
2,804
(648) $
6,529 $
7,385
(856) $
7,438 $
8,029
(591) $
9,411
1,973 $
2,648
10,677
(675) $ (1,266)
$ 376,840 $ 256,426 $ 633,266 $ 683,633 $ 28,517 $ 712,150
730,746
$ (3,531) $ (5,713) $ (9,244) $ (14,597) $ (3,999) $ (18,596)
642,510
698,230
262,139
380,371
32,516
*Non-agency asset-backed & commercial mortgage-backed
86
As of December 31, 2017, we held three equity securities that were in unrealized loss positions. The total unrealized loss
on these securities was $0.9 million. In considering both the significance and duration of the unrealized loss position, we have
no equity securities in an unrealized loss position of greater than 20 percent for more than six consecutive months.
The fixed income portfolio contained 346 securities in an unrealized loss position as of December 31, 2017. Of these 346
securities, 133 have been in an unrealized loss position for 12 consecutive months or longer and represent $5.1 million in
unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under
the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for
which we are not more likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment
is recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of a high credit quality and we
believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of
our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form
of principal and interest. There were no OTTI losses recognized in other comprehensive earnings in the periods presented. Key
factors that we consider in the evaluation of credit quality include:
• Changes in technology that may impair the earnings potential of the investment,
• The discontinuance of a segment of business that may affect future earnings potential,
• Reduction or elimination of dividends,
• Specific concerns related to the issuer’s industry or geographic area of operation,
• Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and
• Downgrades in credit quality by a major rating agency.
Based on our analysis, we concluded that the securities in an unrealized loss position were not other-than-temporarily
impaired at December 31, 2017 and 2016. There were $2.6 million and $0.1 million in losses associated with OTTI of
securities in 2017 and 2016, respectively. We did not recognize any impairment losses during 2015.
As required by law, certain fixed maturity investments amounting to $42.2 million at December 31, 2017, were on
deposit with either regulatory authorities or banks.
Other Invested Assets
Other invested assets shown on the balance sheet as of December 31, 2017 include investments in three low income
housing tax credit (LIHTC) partnerships, carried at cost, membership stock in the Federal Home Loan Bank of Chicago
(FHLBC), carried at cost, an investment in a real estate fund, carried at cost, an investment in a business development company
(BDC), carried at fair value, and an investment in a global credit fund, carried at fair value. Our LIHTC interests had a balance
of $15.5 million at December 31, 2017 compared to $17.5 million at December 31, 2016 and recognized a total tax benefit of
$2.4 million during 2017 compared to $1.9 million during 2016 and $1.1 million during 2015. Our unfunded commitment for
our LIHTC investments totaled $3.1 million at December 31, 2017 and will be paid out in installments through 2025. Our
investment in FHLBC stock totaled $1.0 million at the end of 2017, compared to $1.6 million at the end of 2016. As of
December 31, 2017, $18.9 million of investments were pledged as collateral with the FHLBC to ensure timely access to the
secured lending facility that ownership of the FHLBC stock provides. During the fourth quarter of 2017, we borrowed and
repaid $5.5 million from the FHLBC. The borrowing occurred due to a timing difference between dividends paid and received
at one of our subsidiaries. As of December 31, 2017, there were no outstanding borrowings with the FHLBC. Our investment
in the real estate fund was carried at $2.5 million, which approximated fair value at December 31, 2017, compared to a carrying
value of $5.0 million, which approximated fair value at December 31, 2016. During 2017, we made an investment in a BDC
which had a fair value of $7.3 million at December 31, 2017. The investment in the BDC is restricted from being transferred
until after a qualified IPO unless prior consent is provided by the BDC. Our unfunded commitments related to this investment
totaled $17.7 million at December 31, 2017. Additionally in 2017, we made an investment in a global credit fund that
specializes in consumer loans. This investment had a fair value of $7.5 million and unfunded commitments of $7.2 million as
of December 31, 2017.
87
3. POLICY ACQUISITION COSTS
Policy acquisition costs deferred and amortized to income for the years ended December 31 are summarized as follows:
(in thousands)
Deferred policy acquisition costs (DAC), beginning of year
Deferred:
Direct commissions
Premium taxes
Ceding commissions
Net deferred
Amortized
DAC, end of year
Policy acquisition costs:
Amortized to expense - DAC
Period costs:
Ceding commission - contingent
Other underwriting expenses
Total policy acquisition costs
4. DEBT
2017
2016
$ 73,147 $ 69,829 $ 65,123
2015
11,651
(18,096)
$ 157,723 $ 150,390 $ 146,507
11,087
11,759
(17,403)
(17,488)
$ 151,278 $ 144,661 $ 140,191
135,485
141,343
$ 77,716 $ 73,147 $ 69,829
146,709
$ 146,709 $ 141,343 $ 135,485
(3,575)
109,381
(1,834)
(1,524)
107,427
109,793
$ 252,515 $ 249,612 $ 241,078
As of December 31, 2017, outstanding debt balances totaled $148.9 million, net of unamortized discount and debt
issuance costs, all of which were our long-term senior notes.
On October 2, 2013, we completed a public debt offering, issuing $150.0 million in senior notes maturing September 15,
2023, and paying interest semi-annually at the rate of 4.875 percent. The notes were issued at a discount resulting in proceeds,
net of discount and commission, of $148.6 million. The amount of the discount is being charged to income over the life of the
debt on an effective-yield basis. On December 12, 2013, a portion of the proceeds were used to redeem the $100.0 million in
senior notes that were to mature on January 15, 2014, and the remaining proceeds were made available for general corporate
purposes. The estimated fair value for the senior note was $160.3 million as of December 31, 2017. The fair value of our long-
term debt is based on the limited observable prices that reflect thinly traded securities and is therefore classified as a level 2
liability within the fair value hierarchy.
We incurred $7.4 million of interest expense on our senior notes in each of the last three years. The average rate on debt
was 4.91 percent in 2017, 2016 and 2015.
We maintain a revolving line of credit with JP Morgan Chase Bank N.A., which permits us to borrow up to an aggregate
principal amount of $40.0 million. This facility was entered into during the second quarter of 2014 and replaced the previous
$25.0 million facility which expired on May 31, 2014. Under certain conditions, the line may be increased up to an aggregate
principal amount of $65.0 million. This facility has a four-year term that expires on May 28, 2018. As of and during the years
ended December 31, 2017, 2016 and 2015, no amounts were outstanding on these facilities.
5. REINSURANCE
In the ordinary course of business, our insurance subsidiaries assume and cede premiums and selected insured risks with
other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as
treaties and, in some instances, by negotiation on each individual risk (known as facultative reinsurance). In addition, there are
several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses
over stipulated amounts arising from any one occurrence or event. The arrangements allow us to pursue greater diversification
of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of
exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, we monitor the
concentration of risks exposed to catastrophic events.
Through the purchase of reinsurance, we also generally limit our net loss on any individual risk to a maximum of $3.0
million, although retentions can vary.
88
Premiums written and earned along with losses and settlement expenses incurred for the years ended December 31 are
summarized as follows:
(in thousands)
WRITTEN
Direct
Reinsurance assumed
Reinsurance ceded
Net
EARNED
Direct
Reinsurance assumed
Reinsurance ceded
Net
LOSSES AND SETTLEMENT EXPENSES INCURRED
Direct
Reinsurance assumed
Reinsurance ceded
Net
2017
2016
2015
$ 848,153 $ 844,430 $ 819,130
34,456
(131,615)
$ 749,854 $ 740,952 $ 721,971
37,159
(135,458)
30,434
(133,912)
$ 835,118 $ 835,294 $ 797,180
35,724
27,886
(132,743)
(134,572)
$ 737,937 $ 728,608 $ 700,161
32,521
(129,702)
$ 486,986 $ 405,873 $ 307,445
23,184
(31,584)
$ 401,584 $ 349,778 $ 299,045
16,072
(101,474)
13,196
(69,291)
At December 31, 2017, we had prepaid reinsurance premiums and recoverables on paid and unpaid losses and settlement
expenses totaling $349.7 million. More than 94 percent of our reinsurance recoverables are due from companies with financial
strength ratings of “A” or better by A.M. Best and S&P rating services.
The following table displays net reinsurance balances recoverable, after consideration of collateral, from our top 10
reinsurers as of December 31, 2017. These reinsurers all have financial strength ratings of “A” or better by A.M. Best and
Standard and Poor’s ratings services. Also shown are the amounts of written premium ceded to these reinsurers during the
calendar year 2017.
Net Reinsurer
Exposure as of Percent of
12/31/2017
Total
Ceded
Premiums
Written
Percent of
A.M. Best
Rating
S & P
Rating
$
(dollars in thousands)
Munich Re / HSB
A+, Superior
Swiss Re / Westport Ins. Corp. A+, Superior
A+, Superior
Endurance Re
A, Excellent
Aspen UK Ltd.
A+, Superior
Berkley Insurance Co.
A, Excellent
Transatlantic Re
A++, Superior AA+, Very Strong
General Re
A+, Superior
Scor Reinsurance Co.
A++, Superior A+, Strong
Tokio Millennium Re
Hannover Ruckversicherung
A+, Superior
All other reinsurers*
Total ceded exposure
59,277
47,680
29,771
26,204
17,404
15,726
14,997
14,226
14,133
13,649
96,643
$ 349,710
AA-, Very Strong
AA-, Very Strong
A, Strong
A, Strong
A+, Strong
A+, Strong
AA-, Very Strong
AA-, Very Strong
17.0 % $
13.6 %
8.5 %
7.5 %
5.0 %
4.5 %
4.3 %
4.1 %
4.0 %
3.9 %
27.6 %
100.0 % $
24,747
10,671
5,695
6,895
5,589
6,212
3,694
5,433
7,775
7,302
51,445
135,458
Total
18.3 %
7.9 %
4.2 %
5.1 %
4.1 %
4.6 %
2.7 %
4.0 %
5.7 %
5.4 %
38.0 %
100.0 %
* All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of
shareholders’ equity.
Ceded unearned premiums and reinsurance balances recoverable on paid losses and settlement expenses are reported
separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve us of our liability to
policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the
financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring
efforts, we review their annual financial statements and SEC filings for those reinsurers that are publicly traded. We also
review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk
associated with our reinsurance balances recoverable by monitoring the A.M. Best and S&P ratings of our reinsurers. In
89
addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment based analysis using the
average default rating percentage by S&P rating, which assists us in assessing the sufficiency of the existing allowance.
Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.
Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers.
This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance
balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of
conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are
specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers.
When we write-off such a balance, it is done in full. We then re-evaluate the remaining allowance and determine whether the
balance is sufficient as detailed above and if needed, an additional allowance is recognized and income charged. The amounts
of allowances for uncollectible amounts on paid and unpaid recoverables were $15.9 million and $10.0 million, respectively, at
December 31, 2017. At December 31, 2016, the amounts were $15.2 million and $10.7 million, respectively. We have no
receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.
6. HISTORICAL LOSS AND LAE DEVELOPMENT
The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the years 2017, 2016 and 2015:
(in thousands)
Unpaid losses and LAE at beginning of year:
Gross
Ceded
Net
Increase (decrease) in incurred losses and LAE:
Current accident year
Prior accident years
Total incurred
Loss and LAE payments for claims incurred:
Current accident year
Prior accident year
Total paid
2017
2016
2015
$ 1,139,337 $ 1,103,785 $ 1,121,040
(335,106)
785,934
(297,844)
805,941 $
(288,224)
851,113 $
$
$
$
440,452 $
(38,868)
401,584 $
391,772 $
(41,994)
349,778 $
364,472
(65,427)
299,045
$
(73,392) $
(209,793)
(71,853)
(207,185)
$ (283,185) $ (304,606) $ (279,038)
(70,540) $
(234,066)
Net unpaid losses and LAE at end of year
$
969,512 $
851,113 $
805,941
Unpaid losses and LAE at end of year:
Gross
Ceded
Net
$ 1,271,503 $ 1,139,337 $ 1,103,785
(297,844)
805,941
(288,224)
851,113 $
(301,991)
969,512 $
$
The differences from our initial reserve estimates emerged as changes in our ultimate loss expectations as we performed our
reserve analysis process. The recognition of the changes in initial reserve estimates occurred over time as claims were reported,
initial case reserves were established, initial reserves were reviewed in light of additional information and ultimate payments were
made on the collective set of claims incurred as of that evaluation date. The new information on the ultimate settlement value of
claims is continually updated until all claims in a defined set are settled. As a small specialty insurer with a diversified product
portfolio, our experience will ordinarily exhibit fluctuations from period to period. While we attempt to identify and react to
systematic changes in the loss environment, we also must consider the volume of experience directly available to us and interpret
any particular period’s indications with a realistic technical understanding of the reliability of those observations.
The following is information about incurred and paid loss development as of December 31, 2017, net of reinsurance, as well
as cumulative claim frequency, the total of IBNR liabilities included within the net incurred loss amounts and average historical
claims duration as of December 31, 2017. The loss information has been disaggregated so that only losses that are expected to
develop in a similar manner are grouped together. This has resulted in the presentation of loss information for our property and
surety segments at the segment level, while information for our casualty segment has been separated in four groupings: primary
occurrence, excess occurrence, claims made and transportation. Primary occurrence includes select lines within the professional
90
services product along with general liability, small commercial and other casualty products. Excess occurrence encompasses
commercial and personal umbrella, while claims made includes select lines within the professional services product and medical
professional liability and executive products. Reported claim counts represent claim events on a specified policy rather than
individual claimants and includes claims that did not or are not expected to result in an incurred loss. The information about
incurred and paid claims development for the years ended December 31, 2008 to 2016 is presented as unaudited required
supplementary information.
Casualty - Primary Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2008*
$
96,829 $
2009*
100,454 $
85,476
2010*
91,734 $
119,957
87,875
2011*
83,367 $
99,765
96,582
91,139
2012*
78,218 $
91,441
93,589
98,428
91,807
2013*
74,174 $
86,888
88,820
94,145
78,406
80,823
2014*
73,859 $
82,651
85,034
89,622
65,893
67,297
88,092
2015*
73,696 $
81,138
80,289
86,342
61,072
62,882
79,497
94,835
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
1,505
2,068
2,216
3,413
4,100
9,631
17,335
33,109
54,413
93,852
5,423
5,705
6,107
5,839
5,148
4,267
4,190
4,201
3,920
3,496
2016*
74,837 $
80,518
78,685
83,181
59,028
60,329
71,592
84,975
101,950
2017
74,672 $
80,350
78,991
82,193
59,488
60,162
67,237
83,579
96,753
119,741
$ 803,166
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008*
2009*
$
3,022 $
9,399 $
1,972
2010*
20,539 $
9,233
2,587
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
33,605 $
24,115
13,025
5,924
2012*
48,108 $
43,702
29,312
17,124
5,897
2013*
56,288 $
58,460
44,051
32,978
14,539
6,334
2014*
62,511 $
65,913
55,992
48,822
23,889
13,021
11,436
2017
69,605
75,948
69,514
71,413
47,970
40,609
40,270
33,020
24,186
13,154
Total $ 485,689
7,705
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 325,182
2016*
67,572 $
74,920
66,399
67,358
43,276
34,786
29,545
19,902
10,142
2015*
64,814 $
70,220
61,929
60,769
33,822
22,366
18,771
10,157
* Presented as unaudited required supplementary information.
Years
1
8.8 %
2
11.9 %
3
17.0 %
4
19.0 %
5
15.5 %
6
7
8
9
10
8.7 %
6.1 %
4.3 %
2.5 %
2.7 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
91
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
308
268
381
964
1,417
4,654
9,801
22,168
39,381
58,246
638
566
499
578
837
925
844
608
486
287
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
103
302
490
693
2,156
5,773
13,240
19,844
30,727
46,522
300
383
502
682
803
1,042
1,302
1,332
1,481
1,534
Casualty - Excess Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008*
$
35,209 $
2009*
22,666 $
30,267
2010*
17,347 $
19,719
29,314
2011*
14,472 $
14,981
24,244
26,272
2012*
13,869 $
12,893
22,111
17,148
29,042
2013*
13,862 $
12,966
18,932
17,443
21,558
39,984
2014*
13,816 $
12,459
20,044
18,641
21,021
34,824
50,889
2015*
13,695 $
12,601
22,044
19,160
21,885
26,857
39,095
53,672
2017
2016*
13,487 $ 13,671 $
11,982
21,018
20,959
21,231
25,425
35,119
50,857
56,341
12,055
20,530
21,295
22,433
25,599
32,274
47,392
49,385
62,863
$ 307,497
2008*
2009*
2010*
$
115 $
3,224 $
956
8,212 $
3,947
7
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
11,231 $
6,585
6,002
2,169
2017
2012*
11,755 $
9,460
10,705
5,145
1,315
2013*
11,938 $
11,001
13,282
6,981
3,573
1,060
2014*
12,163 $
10,808
15,512
8,793
8,843
5,701
1,899
2016*
13,183 $ 13,281
11,786
11,780
19,256
19,175
17,769
16,494
17,747
16,879
16,967
14,545
18,852
11,002
19,571
10,127
3,396
1,068
17
Total $ 138,642
20,108
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 188,963
2015*
13,166 $
11,776
17,302
10,772
15,380
10,967
4,006
2,048
* Presented as unaudited required supplementary information.
Years
1
4.1 %
2
16.4 %
3
21.9 %
4
19.2 %
5
6
7
8
9
10
8.8 %
7.8 %
6.2 %
2.6 %
0.1 %
0.7 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Casualty - Claims Made
(in thousands, except number of claims)
2008*
$
11,083 $
2009*
12,754 $
12,918
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2010*
2011*
2012*
2013*
2014*
3,915 $
13,703
13,690
3,043 $
9,687
15,556
17,416
7,811 $
13,562
9,776
17,454
27,576
6,878 $
11,710
10,429
12,260
26,144
40,095
5,568 $
13,117
11,689
10,619
20,727
41,488
53,929
2015*
4,848 $
12,810
10,581
8,510
19,590
44,054
55,386
55,006
2016*
4,584 $
12,053
9,175
7,720
18,022
40,288
58,152
47,831
59,992
2017
4,528 $
11,827
9,024
7,852
17,612
38,473
55,350
42,206
67,760
60,572
$ 315,204
2008*
2009*
2010*
$
9 $
227 $
113
703 $
442
259
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
705 $
773
1,548
330
2014*
2013*
2012*
2016*
707 $
712 $
2015*
4,385 $
3,413
2,308
1,949
433
5,176
3,626
4,508
4,086
792
4,380 $
10,678
5,733
5,947
6,898
7,073
1,705
2017
4,424
11,475
8,485
6,835
14,378
29,678
35,755
16,774
14,558
2,455
Total $ 144,817
854
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 171,241
4,424 $
11,398
6,956
6,209
10,968
26,121
27,923
10,738
2,060
11,217
5,749
5,637
9,218
18,425
9,775
2,215
* Presented as unaudited required supplementary information.
Years
1
2.8 %
2
14.8 %
3
18.4 %
4
14.7 %
5
8.9 %
6
14.7 %
7
26.7 %
8
9
10
6.2 %
0.8 %
0.0 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
92
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
23
36
52
71
129
702
1,698
6,051
11,987
17,396
2,834
2,644
2,842
2,469
2,282
2,849
3,093
3,167
3,879
3,361
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
20
58
85
300
335
698
534
1,727
3,759
24,892
2,718
2,631
2,850
3,027
2,639
2,995
4,558
4,070
3,352
2,609
Casualty - Transportation
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008*
32,071 $
$
2009*
27,752 $
26,349
2010*
25,520 $
23,366
27,239
2011*
23,497 $
23,174
23,390
22,957
2012*
24,255 $
22,929
24,912
23,479
21,452
2013*
24,110 $
22,613
25,593
25,747
22,203
32,742
2014*
23,764 $
22,340
23,981
25,272
22,924
32,853
38,361
2015*
23,673 $
21,958
23,625
25,431
23,511
32,989
33,015
38,561
2017
2016*
23,690 $ 23,672 $
21,969
23,701
25,376
23,689
37,673
36,452
46,258
50,430
21,926
23,786
25,167
23,620
38,811
38,590
47,021
53,519
55,640
$ 351,752
2008*
$
6,153 $
2009*
10,821 $
5,035
2010*
14,489 $
8,698
6,296
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
18,359 $
14,613
10,116
5,295
2017
2015*
2012*
21,110 $
19,933
15,475
9,485
4,466
2013*
23,293 $
21,100
20,045
14,477
8,533
5,306
2014*
23,387 $
21,325
21,792
19,443
12,394
11,978
7,125
2016*
23,616 $ 23,628
21,650
21,650
23,533
23,488
23,941
23,537
22,566
20,931
33,480
28,220
27,457
19,676
29,554
20,709
18,354
8,923
7,979
Total $ 232,142
94
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 119,704
23,614 $
21,640
23,063
22,375
17,318
19,761
13,933
6,984
* Presented as unaudited required supplementary information.
Years
1
19.3 %
2
18.7 %
3
19.4 %
4
20.3 %
5
10.8 %
6
7
8
9
10
5.4 %
1.3 %
0.4 %
0.0 %
0.1 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Property
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2008*
75,951 $
$
2009*
79,774 $
59,975
2010*
78,378 $
55,821
63,194
2011*
78,946 $
52,286
59,145
70,246
2012*
2013*
75,974 $
49,534
55,427
66,924
85,485
76,089 $
48,969
53,937
64,976
80,155
63,864
2014*
75,281 $
48,857
54,153
63,724
79,181
62,090
56,587
2015*
75,313 $
48,707
52,927
62,770
77,569
62,173
49,441
59,863
2017
2016*
75,288 $ 75,217 $
49,267
52,964
62,570
79,175
62,114
48,801
56,103
62,900
49,323
52,952
62,456
78,125
61,914
48,761
53,958
55,594
90,803
$ 629,103
2008*
31,573 $
$
2009*
59,695 $
25,464
2010*
66,028 $
40,775
25,274
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
69,811 $
43,758
43,091
27,676
2017
2013*
2012*
71,938 $
46,004
47,743
48,756
39,074
73,619 $
48,031
50,055
55,778
66,509
32,208
2014*
74,692 $
48,297
52,729
59,099
72,057
50,840
30,550
2016*
74,827 $ 74,896
49,173
49,051
52,851
52,719
61,834
61,428
76,152
75,640
60,520
59,259
46,528
46,148
50,197
49,348
46,921
33,134
41,314
Total $ 560,386
150
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 68,867
2015*
74,766 $
48,329
52,426
60,272
73,705
57,407
43,380
32,184
* Presented as unaudited required supplementary information.
Years
1
51.5 %
2
31.6 %
3
4
5
6
7
8
9
10
7.4 %
3.6 %
3.1 %
0.9 %
0.7 %
0.6 %
0.2 %
0.1 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
93
Surety
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2008*
2009*
2010*
2011*
2012*
$
8,055 $
4,045 $
15,474
3,469 $
4,896
13,961
3,267 $
4,708
8,205
13,842
2,832 $
4,246
6,630
17,832
17,114
2013*
2,850 $
4,146
7,076
17,792
11,452
16,080
2014*
2,877 $
4,551
6,810
17,321
8,667
7,516
16,450
2015*
2,856 $
4,288
7,136
16,766
8,180
6,170
8,106
16,958
As of December 31, 2017
Cumulative
Number of
Reported
Claims
Total IBNR
3
7
32
31
104
108
349
1,724
3,018
14,938
2,084
1,660
1,533
1,669
1,459
1,398
1,318
1,149
1,167
793
2016*
2,939 $
4,923
7,645
16,695
7,867
5,399
5,225
12,957
18,928
2017
2,818 $
5,990
6,850
16,480
7,471
5,271
4,427
11,113
11,062
16,127
$ 87,609
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
AY
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008*
2009*
2010*
$
643 $
2,110 $
892
2,722 $
1,914
1,724
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2011*
2,665 $
2,382
3,205
8,160
2012*
2014*
2016*
2,731 $
2,493
5,702
16,932
1,883
2,816 $
4,336
7,151
17,403
6,726
2,856
722
2013*
2,745 $
3,490
7,092
17,151
6,680
1,116
2017
2,931
5,978
7,269
17,086
7,406
5,098
4,059
7,695
5,817
979
Total $ 64,318
84
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 23,375
2015*
2,803 $
3,919
7,285
17,212
7,416
4,701
4,283
3,192
2,919 $
3,908
7,822
17,086
7,536
4,911
4,166
6,719
3,087
* Presented as unaudited required supplementary information.
Years
1
23.8 %
2
42.0 %
3
13.6 %
4
5
6
7
8
4.6 %
4.0 %
2.8 %
0.8 %
-2.9%
9
19.3 %
10
0.4 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
94
The following is a reconciliation of the net incurred and paid loss development tables to the liability for unpaid losses and
settlement expenses in the consolidated balance sheet:
Reconciliation of the Disclosure of Incurred and Paid Loss Development to the Liability for Unpaid Losses and
Settlement Expenses
(in thousands)
Net outstanding liabilities:
December 31, 2017
December 31, 2016
Casualty - Primary Occurrence
Casualty - Excess Occurrence
Casualty - Claims Made
Casualty - Transportation
Property
Surety
Unallocated loss adjustment expenses
Allowance for uncollectible reinsurance balances recoverable on unpaid losses and
settlement expenses
Other
$
Liabilities for unpaid loss and settlement expenses, net of reinsurance
$
Reinsurance recoverable on unpaid claims:
Casualty - Primary Occurrence
Casualty - Excess Occurrence
Casualty - Claims Made
Casualty - Transportation
Property
Surety
Allowance for uncollectible reinsurance balances recoverable on unpaid losses and
settlement expenses
Other
$
Total reinsurance balances recoverable on unpaid losses and settlement expenses
$
325,182 $
188,963
171,241
119,704
68,867
23,375
48,844
10,014
13,322
969,512 $
36,158 $
74,400
117,436
46,590
28,613
7,079
(10,014)
1,729
301,991 $
293,256
163,801
152,031
98,604
47,769
24,388
46,286
10,699
14,279
851,113
43,662
69,858
113,891
41,173
17,548
10,606
(10,699)
2,185
288,224
Total gross liability for unpaid loss and settlement expenses
$
1,271,503 $
1,139,337
DETERMINATION OF IBNR
Initial carried IBNR reserves are determined through a reserve estimation process. For most casualty and surety products,
this process involves the use of an initial loss and allocated loss adjustment expense (ALAE) ratio that is applied to the earned
premium for a given period. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to
determine a carried IBNR reserve. For most property products, the IBNR reserves are determined by IBNR percentages applied
to premium earned. The percentages are determined based on historical reporting patterns and are updated periodically. No
deductions for paid or case reserves are made. Shortly after natural or man-made catastrophes, we review insured locations
exposed to the event and model losses based on our own exposures and industry loss estimates of the event. We also consider
our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe.
Adjustments to the initial loss ratio by product and segment are made where necessary and reflect updated assumptions
regarding loss experience, loss trends, price changes and prevailing risk factors.
Actuaries perform a ground-up reserve study of the expected value of the unpaid loss and LAE derived using multiple
standard actuarial methodologies on a quarterly basis. Each method produces an estimate of ultimate loss by accident year. We
review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed.
These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.
In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary.
Upon completion of our loss and LAE estimation analysis, a review of the resulting variance between the indicated
reserves and the carried reserves takes place. Our actuaries make a recommendation to management in regards to booked
reserves that reflect their analytical assessment and view of estimation risk. After discussion of these analyses and all relevant
risk factors, the Loss Reserve Committee, a panel of management including the lead reserving actuary, chief executive officer,
chief operating officer, chief financial officer and other executives, confirms the appropriateness of the reserve balances.
95
DEVELOPMENT OF IBNR RESERVES
The following table summarizes our prior accident years’ loss reserve development by segment for 2017, 2016 and 2015:
(FAVORABLE)/UNFAVORABLE RESERVE DEVELOPMENT BY SEGMENT
(in thousands)
Casualty
Property
Surety
Total
2015
2017
2016
$ (17,462) $ (32,401) $ (45,654)
(11,848)
(7,925)
$ (38,868) $ (41,994) $ (65,427)
(12,134)
(9,272)
(4,793)
(4,800)
A discussion of significant components of reserve development for the three most recent calendar years follows:
2017. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2017.
The casualty segment contributed $17.5 million in favorable development, inclusive of unallocated loss and adjustment expenses
(ULAE). Accident years 2014, 2015 and 2016 contributed significantly to the favorable development. This was predominantly
caused by favorable frequency and severity trends that continued to be better than our long-term expectations. In addition, we
believe this to be the result of our underwriters’ risk selection, which has mostly offset price declines and loss cost inflation.
Nearly all of our casualty products contributed to the favorable development. Within the primary occurrence grouping, the general
liability product contributed $4.6 million to our favorable development with all coverages contributing to the favorable
development in 2017. Small commercial products were the second largest contributor with $3.2 million in favorable development.
Within the excess occurrence grouping, personal and commercial umbrella were favorable by $1.1 million and $9.9 million,
respectively. Within the claims made grouping, our executive products had favorable contributions of $4.4 million, while medical
professional liability was adverse $3.7 million. Transportation was adverse $7.4 million for the year, but posted favorable
experience during the last three quarters of the year.
The marine product was the primary driver of the favorable development in the property segment. Marine contributed $6.8
million of the $12.1 million total favorable property development, inclusive of ULAE. Accident years 2015 and 2016 contributed
to the marine products’ favorable development. Commercial property was favorable $3.2 million.
The surety segment experienced favorable development of $9.3 million, inclusive of ULAE. The majority of the favorable
development was from accident year 2016. Contract and commercial surety products were the main contributors with favorable
development of $4.4 million and $3.5 million, respectively. Energy surety had favorable development of $1.5 million and
miscellaneous surety had unfavorable development of $0.1 million.
2016. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2016.
The casualty segment contributed $32.4 million in favorable development, inclusive of ULAE, which is excluded from the
incurred loss and loss adjustment expense tables above. Accident year 2015 contributed significantly to the favorable development,
with accident years 2010 to 2014 also continuing to develop favorably. The favorable development in 2016 was smaller than 2015
but continued to reflect favorable frequency and severity trends. In addition, the risk selection by our underwriters continued to
provide better results than estimated in our reserving process. Within the primary occurrence grouping, the general liability
product contributed $17.6 million to our favorable development. Small commercial products were favorable by $6.2 million.
Within the excess occurrence grouping, commercial umbrella was favorable by $13.8 million which was offset by adverse
development in our personal umbrella product of $4.9 million. Within the claims made grouping, executive products contributed
$14.7 million in favorable development and miscellaneous professional liability had $0.8 million of favorable development.
Transportation experienced unfavorable development of $15.4 million as adverse commercial loss trends resulted in an increase in
case reserves for accident years 2013 through 2015.
Marine contributed $2.1 million of the $4.8 million total favorable property development, inclusive of ULAE. Accident
years 2013 through 2015 contributed to the marine products’ favorable development. Assumed property contributed $2.5 million
of favorable development offsetting the unfavorable development of $0.2 million in other direct property products.
The surety segment experienced favorable development of $4.8 million, inclusive of ULAE. The majority of the favorable
development was from accident year 2015, which offset the unfavorable development from accident years 2008 through 2011 and
2014. Commercial and energy surety products were the main contributors with favorable development of $1.7 million and $1.9
96
million, respectively. Miscellaneous surety had favorable development of $1.1 million and contract surety had favorable
development of $0.1 million.
2015. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2015.
Development from the casualty segment totaled $45.7 million, inclusive of ULAE. The largest amounts of favorable development
came from accident years 2010 through 2014. We continued to experience emergence that was generally better than previously
estimated, but to a lesser degree in 2015 than in the previous year. Frequency and severity trends have been favorable relative to
initial estimates and we believe this is largely due to risk selection by our underwriters, which has been effective in offsetting loss
cost trends and a competitive pricing environment. Within the primary occurrence grouping, our general liability and small
commercial products experienced favorable development of $15.4 million and $6.6 million, respectively. Although the habitational
classes within general liability produced adverse development, it was more than offset by favorable development from the
construction classes. However, the professional services product, experienced adverse development totaling $3.2 million in 2015.
Within the excess occurrence grouping, our commercial umbrella product experienced $10.7 million of favorable development
while the casualty runoff business experienced $5.4 million of adverse development, primarily on the 1983 accident year. The
claims made and transportation groupings had favorable contributions of $3.9 million and $5.4 million, respectively.
Our marine product was the predominant driver of the favorable development in the property segment, accounting for $9.2
million of the $11.8 million total favorable development for the segment, inclusive of ULAE. The accident years making the
largest contributions were 2010 through 2014. The inland marine and cargo coverages were responsible for the majority of the
favorable loss experience. Our assumed property products contributed $4.9 million of favorable development with the majority of
that coming from loss reductions on previous hurricanes and storms. Development on direct property products business was also
favorable overall. Our recreational vehicle product experienced $1.3 million of adverse development, mostly due to auto physical
damage coverages.
The surety segment experienced $7.9 million of favorable development, inclusive of ULAE. The majority of the favorable
development came from the 2014 accident year, which served to offset the unfavorable development from accident years 2010 and
2013. Commercial, contract and energy surety contributed favorable development of $4.0 million, $2.2 million and $2.0 million,
respectively. Miscellaneous surety experienced adverse development totaling $0.3 million.
ENVIRONMENTAL, ASBESTOS AND MASS TORT EXPOSURES
We are subject to environmental site cleanup, asbestos removal and mass tort claims and exposures through our commercial
umbrella, general liability and discontinued assumed casualty reinsurance lines of business. The majority of the exposure is in the
excess layers of our commercial umbrella and assumed reinsurance books of business.
The following table represents paid and unpaid environmental, asbestos and mass tort claims data (including incurred but not
reported losses) as of December 31, 2017, 2016 and 2015:
(in thousands)
Loss and LAE Payments (Cumulative):
Gross
Ceded
Net
Unpaid Losses and LAE at End of Year:
Gross
Ceded
Net
2017
2016
2015
$ 132,883 $ 130,358 $ 119,632
(62,463)
(66,644)
$ 65,376 $ 63,714 $ 57,169
(67,507)
$ 28,042 $ 28,815 $ 41,062
(12,559)
$ 22,327 $ 23,828 $ 28,503
(5,715)
(4,987)
Our environmental, asbestos and mass tort exposure is limited, relative to other insurers, as a result of entering the affected
liability lines after the insurance industry had already recognized environmental and asbestos exposure as a problem and adopted
appropriate coverage exclusions. The majority of our reserves are associated with products that went into runoff at least two
decades ago. Some are for assumed reinsurance, some are for excess liability business and some followed from the acquisition of
Underwriters Indemnity Company in 1999.
Calendar year 2017 included an increase in inception-to-date paid losses, offsetting a decrease in unpaid losses. The activity
was related to payments on previously reserved claims. In aggregate, inception-to-date incurred losses increased on a gross and
net.
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While our environmental exposure is limited, the ultimate liability for this exposure is difficult to assess because of the
extensive and complicated litigation involved in the settlement of claims and evolving legislation on issues such as joint and
several liability, retroactive liability and standards of cleanup. Additionally, we participate primarily in the excess layers of
coverage, where accurate estimates of ultimate loss are more difficult to derive than for primary coverage.
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities are summarized as follows:
(in thousands)
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses
Unearned premium offset
Deferred compensation
Stock option expense
Other
Deferred tax assets before allowance
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
2017
2016
16,528
1,435
2,283
578
$ 20,020 $ 17,330
26,712
4,727
4,114
685
$ 40,844 $ 53,568
—
$ 40,844 $ 53,568
—
Net unrealized appreciation of securities
Deferred policy acquisition costs
Discounting of unpaid losses and settlement expenses - TCJA
implementation offset
Book/tax depreciation
Intangible assets
Undistributed earnings of unconsolidated investees
Other
Total deferred tax liabilities
Net deferred tax liability
$ 51,448 $ 66,973
25,602
16,320
9,466
3,159
584
13,431
204
—
4,819
1,980
18,397
291
$ 94,612 $ 118,062
$ (53,768) $ (64,494)
Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2017, 2016 and
2015, differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income from
continuing operations as demonstrated in the following table:
(in thousands)
Provision for income taxes at the statutory federal tax rates
Increase (reduction) in taxes resulting from:
Enactment of Tax Cuts and Jobs Act (TCJA)
Excess tax benefit on share-based compensation
Dividends received deduction
ESOP dividends paid deduction
Tax-exempt interest income
Unconsolidated investee dividends
Other items, net
Total
2017
2016
2015
$ 29,606
35.0 % $ 54,979 35.0 % $ 68,839 35.0 %
—
—
—
—
(32,821) (38.8)%
(6.9)%
(2.4)%
(3.4)%
(5.5)%
(1.6)%
(0.6)%
— %
— %
(2,278) (1.2)%
(3,377) (1.7)%
(4,214) (2.1)%
— %
0.1 %
$ (20,439) (24.2)% $ 42,162 26.8 % $ 59,138 30.1 %
— %
— %
(2,216) (1.4)%
(3,302) (2.1)%
(4,263) (2.7)%
(2,772) (1.8)%
(264) (0.2)%
(5,798)
(2,025)
(2,905)
(4,671)
(1,351)
(474)
—
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Our effective tax rates were -24.2 percent, 26.8 percent and 30.1 percent for 2017, 2016 and 2015, respectively. Effective
rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was significantly lower
in 2017, primarily as the result of recent tax reform. Additionally, catastrophic losses incurred in the third quarter resulted in
significantly lower pretax earnings and the change in accounting for excess tax benefits on share-based compensation further
decreased the effective tax rate.
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The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law on December 22, 2017. Among other provisions, the
TCJA lowered the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. As a result, we revalued
deferred tax items as of year-end 2017 to reflect the lower rate. The revaluation reduced our net deferred tax liability and
income tax expense by $32.8 million and decreased the effective tax rate by 38.8 percent.
Except for the following two aspects, we have completed the accounting for the tax effects of the enactment of the TCJA
as of December 31, 2017. First, we provisionally recorded $2.3 million in deferred tax expense for an expected disallowance of
deductions related to certain performance based compensation, including bonuses and stock options. As there is a lack of
clarity on whether some amounts could be grandfathered in as deductible, we were unable to complete our analysis. Once the
IRS provides more guidance on the deductibility of certain compensation classes, we will finalize the tax expense adjustments
for this aspect of the TCJA changes. Second, the IRS has not yet published the factors for us to calculate the discount on loss
reserves under the basis required by the TCJA. Although there is currently no net impact from the tax law changes, the gross
deferred tax assets will likely increase as the discounting factors are expected to delay the deductibility of loss reserves. Once
the revised discount factors are obtained, we can implement the new discounting methodology related to this aspect of the
TCJA changes and will recognize the adjustment ratably over the allowed eight-year period beginning in 2018.
In 2017, the company adopted FASB ASU 2016-09, which requires the excess tax benefit on share-based compensation
to flow through income tax expense. Prior to the adoption, excess tax benefits on share-based compensation were recorded
directly to shareholders’ equity and had no impact on the effective tax rate. Due to the new accounting method, we recognized
a $5.8 million tax benefit in 2017, decreasing the effective tax rate by 6.9 percent.
Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. The investees do not have a
policy or pattern of paying dividends. As a result, we record a deferred tax liability on the earnings at the recently revised
corporate capital gains rate of 21 percent in anticipation of recovering our investments through means other than through the
receipt of dividends, such as a sale. In the fourth quarter of 2017, Maui Jim gave notification that a $9.9 million dividend would be
paid in January 2018. Even though no dividend was received in 2017, we were aware that the lower tax rate applicable to affiliated
dividends (7.35 percent in 2018) would be applied when the dividend was paid in 2018 and we therefore recorded a $1.4 million
tax benefit in 2017. We received a $9.9 million dividend from Maui Jim in the fourth quarter of 2016 and recognized a $2.8
million tax benefit from applying the lower tax rate applicable to affiliated dividends (7 percent in 2016), as compared to the
corporate capital gains rate on which the deferred tax liabilities were based. No dividends were received from unconsolidated
investees in 2015. Standing alone, the dividends resulted in a 1.6 percent and 1.8 percent reduction to the 2017 and 2016 effective
tax rates, respectively.
Dividends paid to our ESOP also result in a tax deduction. Dividends paid to the ESOP in 2017, 2016 and 2015 resulted in
tax benefits of $2.9 million, $3.3 million and $3.4 million, respectively. These tax benefits reduced the effective tax rate for 2017,
2016 and 2015 by 3.4 percent, 2.1 percent and 1.7 percent, respectively.
We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is
more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the results of future
operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, we believe when these
deferred items reverse in future years, our taxable income will be taxed at an effective rate of 21 percent.
Federal and state income taxes paid in 2017, 2016 and 2015, amounted to $10.4 million, $26.9 million and $44.2 million,
respectively.
Although we are not currently under audit by the Internal Revenue Service (IRS), tax years 2014 through 2017 remain
open and are subject to examination.
8. EMPLOYEE BENEFITS
EMPLOYEE STOCK OWNERSHIP, 401(K) AND INCENTIVE PLANS
We maintain ESOP, 401(k) and incentive plans covering executives, managers and associates. Funding of these plans is
primarily dependent upon reaching predetermined levels of operating return on equity, combined ratio and Market Value
Potential (MVP). MVP is a compensation model that measures components of comprehensive earnings against a minimum
required return on our capital. Bonuses are earned as we generate earnings in excess of this required return. While some
management incentive plans may be affected somewhat by other performance factors, the larger influence of corporate
performance ensures that the interests of our executives, managers and associates correspond with those of our shareholders.
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Our 401(k) plan allows voluntary contributions by employees and permits ESOP diversification transfers for employees
meeting certain age and service requirements. We provide a basic 401(k) contribution of 3 percent of eligible compensation.
Participants are 100 percent vested in both voluntary and basic contributions. Additionally, an annual discretionary profit-
sharing contribution may be made to the ESOP and 401(k), subject to the achievement of certain overall financial goals and
board approval. Profit-sharing contributions vest after three years of plan service.
Our ESOP and 401(k) cover all employees meeting eligibility requirements. ESOP and 401(k) profit-sharing contributions are
determined annually by our board of directors and are expensed in the year earned. ESOP and 401(k)-related expenses (basic and
profit-sharing) were $12.5 million, $11.7 million and $11.6 million, for 2017, 2016 and 2015, respectively.
During 2017, the ESOP purchased 124,186 shares of RLI stock on the open market at an average price of $58.02 ($7.2
million) relating to the contribution for plan year 2016. Shares held by the ESOP as of December 31, 2017, totaled 3,206,518
and are treated as outstanding in computing our earnings per share. During 2016, the ESOP purchased 112,608 shares of RLI
stock on the open market at an average price of $64.20 ($7.2 million) relating to the contribution for plan year 2015. During
2015, the ESOP purchased 178,492 shares of RLI stock on the open market at an average price of $49.98 ($8.9 million) relating
to the contribution for plan year 2014. The above mentioned ESOP purchases relate only to our annual contributions to the plan
and do not include amounts or shares resulting from the reinvestment of dividends.
Annual awards are provided to executives, managers and associates through our incentive plans, provided certain
financial and operational goals are met. Annual expenses for these incentive plans totaled $19.7 million, $19.2 million and
$20.4 million for 2017, 2016 and 2015, respectively.
DEFERRED COMPENSATION
We maintain rabbi trusts for deferred compensation plans for directors, key employees and executive officers through
which our shares are purchased. The employer stock in the plan is classified and accounted for as equity, in a manner
consistent with the accounting for treasury stock.
In 2017, the trusts purchased 7,464 shares of our common stock on the open market at an average price of $58.66 ($0.4
million). In 2016, the trusts purchased 6,702 shares of our common stock on the open market at an average price of $61.61
($0.4 million). In 2015, the trusts purchased 9,348 shares of our common stock on the open market at an average price of
$53.15 ($0.5 million). At December 31, 2017, the trusts’ assets were valued at $33.2 million.
STOCK PLANS
Our RLI Corp. Omnibus Stock Plan (omnibus plan) was in place from 2005 to 2010. The omnibus plan provided for
equity-based compensation, including stock options, up to a maximum of 3,000,000 shares (subject to adjustment for changes
in our capitalization and other events). Between 2005 and 2010, we granted 2,458,059 stock options under this plan, including
incentive stock options (ISOs). The omnibus plan was replaced in 2010.
In 2010, our shareholders approved the RLI Corp. Long-Term Incentive Plan (2010 LTIP), which provides for equity-
based compensation and replaced the omnibus plan. In conjunction with the adoption of the 2010 LTIP, effective May 6, 2010,
options were no longer granted under the omnibus plan. The 2010 LTIP provided for equity-based compensation, including stock
options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and
other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced
in 2015.
In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-
based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015,
options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, stock
options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the
2015 LTIP is limited to employees and directors of the company or any affiliate. The granting of awards under the 2015 LTIP is
solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under
the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s
approval in 2015, we have granted 1,448,575 awards under the 2015 LTIP, including 497,825 in 2017.
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Stock Options
Under the 2015 LTIP, as under the 2010 LTIP and omnibus plan, we grant stock options for shares with an exercise price
equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization,
including special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably
over a five-year period and expire eight years after grant.
For most participants, the requisite service period and vesting period will be the same. For participants who are retirement
eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed
to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during
the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the
attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.
Shares issued may be less than the number of shares actually exercised, as our plan allows net settlement to cover the
option exercise price and taxes due upon option exercise. Shares netted are valued at the closing stock price at the time of
option exercise. In these instances, the actual number of shares issued will be less than the options exercised and can result in a
decrease to shareholders’ equity. Specifically, when options are exercised with significant intrinsic value (i.e. market value in
excess of exercise price) and the exercise is facilitated via net settlement, amounts withheld for taxes result in a decrease in
shareholders’ equity. During 2016 and 2015, the aggregate intrinsic value of options exercised was $31.3 million and $32.1
million, respectively. A majority of these options were exercised via net settlement with taxes withheld at the statutory
minimum rate. As shown in the consolidated statements of shareholders’ equity, the exercise of options in 2016 and 2015
resulted in a decrease to paid-in-capital, as the taxes withheld pursuant to net settlement exceeded amounts paid in for options
that were exercised using cash. This was not the case in 2017 as the intrinsic value of the options exercised was not as
significant ($12.8 million). Therefore, the exercise of options in 2017 resulted in an increase to paid-in-capital. Prior to the
adoption of FASB ASU 2016-09 in 2017, shareholders’ equity was also impacted by corporate tax deductions allowed as a
result of option exercises. This tax benefit offset our current tax liability and was recorded as an increase to paid-in-capital.
Beginning in 2017, all tax effects related to share-based payments are required to be recorded in net earnings and will directly
impact our effective tax rate. See note 7 for the impact in 2017. For 2016 and 2015, refer to our consolidated statements of
shareholders’ equity for the impact to paid-in capital from this tax benefit in those years.
On November 9, 2017, the board of directors declared a $1.75 per share special cash dividend to be paid on December 27,
2017, to shareholders of record at the close of business on November 30, 2017. Similarly, on November 10, 2016, the board of
directors declared a $2.00 per share special cash dividend to be paid on December 23, 2016, to shareholders of record at the
close of business on November 30, 2016. On November 12, 2015, the board of directors declared a $2.00 per share special cash
dividend to be paid on December 22, 2015, to shareholders of record at the close of business on November 30, 2015. To
preserve the intrinsic value of the options, the board also approved, pursuant to the terms of our various stock option plans, a
proportional adjustment to the exercise price (equivalent to the special dividend) for all outstanding non-qualified options in
relation to the 2015 special dividend. This adjustment did not result in any incremental compensation expense as the aggregate
fair value, aggregate intrinsic value and the ratio of the exercise price to the market price were approximately equal
immediately before and after the adjustments. No adjustments were made in 2017 or 2016.
The following tables summarize option activity in 2017, 2016 and 2015:
Outstanding options at January 1, 2017
Options granted
Options exercised
Options canceled/forfeited
Outstanding options at December 31, 2017
Exercisable options at December 31, 2017
Number of
Options
Weighted
Average
Exercise
Weighted
Average
Remaining
Contractual
Outstanding
Price
Life
Aggregate
Intrinsic
Value
(in 000’s)
2,207,110 $ 40.90
482,375 $ 57.12
(390,870) $ 26.07
(41,600) $ 48.30
2,257,015 $ 46.80
975,055 $ 38.66
$ 12,779
4.88 $ 32,620
3.25 $ 21,780
101
Outstanding options at January 1, 2016
Options granted
Options exercised
Options canceled/forfeited
Outstanding options at December 31, 2016
Exercisable options at December 31, 2016
Number of
Options
Weighted
Average
Exercise
Weighted
Average
Remaining
Contractual
Outstanding
Price
Life
Aggregate
Intrinsic
Value
(in 000’s)
2,582,220 $ 32.42
440,750 $ 63.54
(756,380) $ 24.87
(59,480) $ 44.39
2,207,110 $ 40.90
862,605 $ 31.23
$ 31,328
4.93 $ 49,531
3.27 $ 27,523
Number of
Options
Outstanding
Weighted
Average
Exercise
Weighted
Average
Remaining
Contractual
Price
Life
Aggregate
Intrinsic
Value
(in 000’s)
Outstanding options at January 1, 2015
Options granted
Options exercised
Options canceled/forfeited
Outstanding options at December 31, 2015
Exercisable options at December 31, 2015
2,892,717 $ 26.65
563,500 $ 49.01
(865,957) $ 19.23
(8,040) $ 32.12
2,582,220 $ 32.42
899,680 $ 23.60
$ 32,135
5.32 $ 75,725
3.98 $ 34,327
The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are
approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to
retirement eligible employees are fully expensed when granted, the approach allows for a more even expense distribution
throughout the year.
In 2017, 482,375 options were granted with an average exercise price of $57.12 and an average fair value of $8.00. Of these
grants, 384,750 were granted at the board meeting in May with a calculated fair value of $7.91. We recognized $4.4 million of
expense during 2017 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax
benefit of $1.5 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding
and unvested options was $5.7 million, which will be recognized over the remainder of the vesting period.
In 2016, 440,750 options were granted with an average exercise price of $63.54 and an average fair value of $11.38. Of
these grants, 345,750 were granted at the board meeting in May with a calculated fair value of $11.42. We recognized $4.1 million
of expense during 2016 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax
benefit of $1.4 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding
and unvested options was $6.2 million, which will be recognized over the remainder of the vesting period.
In 2015, 563,500 options were granted with an average exercise price of $49.01 and an average fair value of $9.25. Of these
grants, 412,000 were granted at the board meeting in May with a calculated fair value of $8.94. We recognized $4.1 million of
expense during 2015 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax
benefit of $1.4 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding
and unvested options was $5.7 million, which will be recognized over the remainder of the vesting period.
The fair value of options were estimated using a Black-Scholes based option pricing model with the following weighted-
average grant-date assumptions and weighted-average fair values as of December 31:
Weighted-average fair value of grants
Risk-free interest rates
Dividend yield
Expected volatility
Expected option life
2017
$ 8.00
2016
$ 11.38
2015
$ 9.25
1.90 %
3.60 %
22.95 %
1.21 %
1.61 %
23.06 %
1.54 %
1.81 %
22.91 %
5.05 years
5.04 years
5.21 years
The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life.
The dividend yield for 2017 was determined based on the average annualized quarterly dividends paid during the most recent
102
five-year period and incorporated a consideration for special dividends paid in recent history. The dividend yield in 2016 and
2015 was calculated based on the average annualized dividends paid during the most recent five-year period, exclusive of
consideration for special dividends. The expected volatility was calculated based on the median of the rolling volatilities for the
expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption
that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for
the demographics of the current year’s grant.
Restricted Stock Units
In addition to stock options, restricted stock units (RSUs) were granted for the first time in May 2017. RSUs have a grant
date value equal to the closing stock price of the Company’s stock on the dates the shares are granted. Generally, these units have
a three-year cliff vesting. For participants who become retirement eligible, defined by the plan as those individuals whose age and
years of service equals 75, the units become fully vested. In addition, the RSUs have dividend participation which accrues and is
settled in additional shares with all granted stock units at the end of the three-year period.
As of December 31, 2017, 15,450 RSUs have been granted and 15,300 remain outstanding. The weighted average grant date
fair value was $56.71. We recognized $0.4 million of expense on these units during 2017. Total unrecognized compensation
expense relating to outstanding and unvested RSUs was $0.5 million, which will be recognized over the remainder of the three-
year vesting period.
9. STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS
The statutory financial statements of our three insurance companies are presented on the basis of accounting practices
prescribed or permitted by the Illinois Department of Insurance (IDOI), which has adopted the NAIC statutory accounting
principles as the basis of its statutory accounting principles. We do not use any permitted statutory accounting principles that
differ from NAIC prescribed statutory accounting principles. In converting from statutory to GAAP, typical adjustments
include deferral of policy acquisition costs, the inclusion of statutory non-admitted assets and the inclusion of net unrealized
holding gains or losses in shareholders’ equity relating to fixed maturities.
The NAIC has risk based capital (RBC) requirements for insurance companies to calculate and report information under a
risk-based formula, which measures statutory capital and surplus needs based upon a regulatory definition of risk relative to the
company’s balance sheet and mix of products. As of December 31, 2017, each of our insurance subsidiaries had an RBC
amount in excess of the authorized control level RBC, as defined by the NAIC. RLI Insurance Company (RLI Ins.), our
principal insurance company subsidiary, had an authorized control level RBC of $157.7 million, $127.0 million and $123.6
million as of December 31, 2017, 2016 and 2015, respectively, compared to actual statutory capital and surplus of $864.6
million, $860.0 million and $865.3 million, respectively, for these same periods.
Year-end statutory surplus for 2017 presented in the table below includes $106.9 million of RLI stock (cost basis of $64.6
million) held by Mt. Hawley Insurance Company, compared to $104.4 million and $117.5 million in 2016 and 2015,
respectively. The Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our
GAAP consolidated financial statements.
The following table includes selected information for our insurance subsidiaries for the year ending and as of
December 31:
(in thousands)
Consolidated net income, statutory basis
Consolidated surplus, statutory basis
2017
2016
$ 72,889 $ 128,165 $ 178,502
$ 864,554 $ 859,976 $ 865,268
2015
As discussed in note 1.A., our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or
principal, insurance subsidiary. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance
company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and
dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance
subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance
regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in
amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of December 31, 2017, our holding
company had $853.6 million in equity. This includes amounts related to the equity of our insurance subsidiaries, which is subject to
regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is comprised primarily of
103
investments and cash, including $23.5 million in liquid assets, which approximates half of our annual holding company
expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and
ordinary dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity
that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving
line of credit, as well as access to capital markets.
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are
subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend
distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10
percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-
month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they
be paid from earned surplus. In 2017, 2016 and 2015, our principal insurance subsidiary paid ordinary dividends totaling
$107.0 million, $123.6 million and $125.0 million, respectively, to RLI Corp. Any dividend distribution in excess of the
ordinary dividend limits is deemed extraordinary and requires prior approval from the IDOI. No extraordinary dividends were
paid in 2017, 2016 or 2015. Given the amount of dividends paid during the prior rolling 12-month period, the net assets of our
principal insurance subsidiary are restricted until the end of the third quarter of 2018 and cannot be distributed to RLI Corp.
without prior approval of the IDOI. However, in addition to the unrestricted liquid net assets that RLI Corp. had on hand as of
December 31, 2017, RLI Corp. has other anticipated cash inflows and access to lines of credit that would cover normal annual
holding company expenditures as they are incurred and become payable.
10. COMMITMENTS AND CONTINGENT LIABILITIES
We are party to numerous claims, losses and litigation matters that arise in the normal course of our business. Many of such
claims, losses or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the resolution of
these claims and losses will not have a material adverse effect on our financial condition, results of operations or cash flows. We
are also involved in various other legal proceedings and litigation unrelated to our insurance business that arise in the ordinary
course of business operations. Management believes that any liabilities that may arise as a result of these legal matters will not
have a material adverse effect on our financial condition or results of operations.
We have operating lease obligations for regional office facilities. These leases expire in various years through 2034.
Expenses associated with these leases totaled $6.8 million in 2017, $6.4 million in 2016 and $6.1 million in 2015. Minimum
future rental payments under non-cancellable leases are as follows:
(in thousands)
2018
2019
2020
2021
2022
2023-2034
Total minimum future rental payments
$
$
5,589
5,238
5,138
5,026
4,991
6,644
32,626
As of December 31, 2017, we also had $17.7 million of unfunded commitments related to our investment in a business
development company, $7.2 million of unfunded commitments related to an investment in a global credit fund that specializes
in consumer loans and $3.1 million of unfunded commitments related to our low income housing tax credit investments. See
note 2 for more information on these investments.
11. OPERATING SEGMENT INFORMATION
The segments of our insurance operations include casualty, property and surety. The casualty portion of our business
consists largely of commercial umbrella, personal umbrella, general liability, transportation and executive products coverages, as
well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-
based professionals. We offer fidelity and crime coverage for commercial insureds and select financial institutions and medical
and healthcare professional liability coverage in the excess and surplus market. We also assume a limited amount of hard-to-
place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and
related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty
104
segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of
coverage and the amount of compensation due for injuries or losses.
Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine
coverages. We also offer select personal lines policies, including homeowners’ coverages. Our crop, property reinsurance and
recreational vehicle products are in runoff after we discontinued our crop relationship at the end of 2015 and began curtailing
reinsurance and recreational vehicle offerings at the end of 2015 and 2016, respectively. Property insurance results are subject
to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses
caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind
storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net
aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing
reinsurance and maintaining policy terms and conditions throughout market cycles. We also use computer-assisted modeling
techniques to provide estimates that help us carefully manage the concentration of risks exposed to catastrophic events.
The surety segment specializes in writing small to large-sized commercial and contract surety coverages, as well as those
for the energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary
and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a
relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our
insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project.
Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced
marginally higher loss ratios than other surety lines during economic downturns.
Net investment income consists of the interest and dividend income streams from our investments in fixed income and
equity securities. Interest and general corporate expenses include the cost of debt, other director and shareholder relations costs
and other compensation-related expenses incurred for the benefit of the corporation, but not attributable to the operations of our
insurance segments. Investee earnings represent our share in Maui Jim and Prime earnings. We own 40 percent of Maui Jim, a
privately-held company which operates in the sunglass and optical goods industries, and 23 percent of Prime Holdings
Insurance Services, Inc., a privately-held insurance company which specializes in hard-to-place risks in the excess and surplus
market and has recently expanded into certain coverages in the admitted market. Our investment in Maui Jim, which is carried
at the holding company, is unrelated to our core insurance operations.
The following table summarizes our segment data based on the internal structure and reporting of information as it is used by
management. The net earnings of each segment are before taxes and include revenues (if applicable), direct product or segment
costs (such as commissions and claims costs), as well as allocated support costs from various support departments. While
depreciation and amortization charges have been included in these measures via our expense allocation system, the related assets
are not allocated for management use and, therefore, are not included in this schedule.
REVENUES
(in thousands)
Casualty
Property
Surety
Net premiums earned
Net investment income
Net realized gains
Total
2015
2017
138,346
120,988
152,167
121,598
2016
$ 478,603 $ 454,843 $ 412,248
170,924
116,989
$ 737,937 $ 728,608 $ 700,161
54,644
39,829
$ 797,224 $ 816,328 $ 794,634
53,075
34,645
54,876
4,411
105
INSURANCE EXPENSES
(in thousands)
Loss and settlement expenses:
Casualty
Property
Surety
Total net loss and settlement expenses
Policy acquisition costs:
Casualty
Property
Surety
Total policy acquisition costs
Other insurance expenses:
Casualty
Property
Surety
Total other insurance expenses
Total
NET EARNINGS (LOSSES)
(in thousands)
Casualty
Property
Surety
Net underwriting income
Net investment income
Net realized gains
General corporate expense and interest on debt
Equity in earnings of unconsolidated investees
Total earnings before incomes taxes
Income tax expense (benefit)
Total
2017
2016
2015
$ 305,679 $ 259,907 $ 218,414
69,851
10,780
$ 401,584 $ 349,778 $ 299,045
85,027
10,878
71,350
18,521
$ 136,135 $ 128,566 $ 119,529
57,214
64,335
$ 252,515 $ 249,612 $ 241,078
54,167
66,879
51,070
65,310
14,108
10,001
$ 32,885 $ 30,040 $ 28,042
14,834
8,604
$ 56,994 $ 53,093 $ 51,480
$ 711,093 $ 652,483 $ 591,603
13,819
9,234
2015
2016
$
(11,859)
34,799
2017
3,904 $ 36,329 $ 46,263
29,025
12,832
33,270
26,964
$ 26,844 $ 76,125 $ 108,558
54,644
39,829
(17,263)
10,914
$ 84,589 $ 157,082 $ 196,682
$ (20,439) $ 42,162 $ 59,138
$ 105,028 $ 114,920 $ 137,544
54,876
4,411
(18,766)
17,224
53,075
34,645
(17,596)
10,833
106
The following table further summarizes revenues by major product type within each segment:
NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial and personal umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Medical professional liability
Other casualty
Total
PROPERTY
Commercial property
Marine
Specialty personal
Other property
Total
SURETY
Miscellaneous
Contract
Commercial
Energy
Total
Grand total
Year ended December 31,
2016
2017
2015
$ 115,543 $ 111,079 $ 104,598
84,165
71,034
65,564
40,410
17,892
12,292
16,293
$ 478,603 $ 454,843 $ 412,248
90,283
78,508
78,061
49,601
18,086
17,072
31,449
86,853
75,872
81,402
45,660
18,755
17,449
17,773
$ 63,117 $ 68,165 $ 75,749
47,016
26,395
21,764
$ 138,346 $ 152,167 $ 170,924
48,301
24,981
10,720
50,931
20,793
3,505
28,573
27,625
17,553
$ 47,237 $ 46,235 $ 42,372
28,269
29,529
16,819
$ 120,988 $ 121,598 $ 116,989
$ 737,937 $ 728,608 $ 700,161
28,240
29,105
18,018
12. UNAUDITED INTERIM FINANCIAL INFORMATION
Select unaudited quarterly information is as follows:
(in thousands, except per share data)
2017
Net premiums earned
Net investment income
Net realized gains (losses)
Earnings (losses) before income taxes
Net earnings
Basic earnings per share(1)
Diluted earnings per share(1)
2016
Net premiums earned
Net investment income
Net realized gains (losses)
Earnings (losses) before income taxes
Net earnings
Basic earnings per share(1)
Diluted earnings per share(1)
First
Second
Third
Fourth
Year
13,005
624
26,443
19,828
$ 183,285 $ 184,331 $ 182,025 $ 188,296 $ 737,937
54,876
4,411
84,589
105,028
2.39
2.36
14,187
35
(862)
1,734
0.04 $
0.04 $
14,446
5,111
24,972
57,258
13,238
(1,359)
34,036
26,208
0.45 $
0.45 $
1.30 $
1.29 $
0.60 $
0.59 $
$
$
13,370
11,400
45,593
31,393
$ 176,918 $ 180,226 $ 183,595 $ 187,869 $ 728,608
53,075
34,645
157,082
114,920
2.63
2.59
13,153
11,283
38,006
32,187
13,504
9,252
31,142
22,263
13,048
2,710
42,341
29,077
0.51 $
0.50 $
0.72 $
0.71 $
0.73 $
0.72 $
0.67 $
0.65 $
$
$
(1) Since the weighted-average shares for the quarters are calculated independently of the weighted-average shares for the
year, quarterly earnings per share may not total to annual earnings per share.
107
13. ACQUISITIONS AND DISPOSITIONS
On November 3, 2015, RLI Corp completed the sale of its subsidiary RLI Indemnity Company (RIC) to Clear Blue
Financial Holdings, LLC for net sale proceeds of $7.5 million that were primarily generated from the transfer of insurance
licenses. RIC was sold as a “shell,” with all business and cash flows from the company being retained by RLI Insurance Group.
At the time of the sale, RIC had minimal assets and written premium and was transferring all premium and loss cash flows to
RLI Ins. through a 100 percent quota share reinsurance agreement. RLI Ins. will continue to reinsure all RIC bond and
insurance liabilities that existed at the date of sale, adjust claims and service the remaining in-force polices and bonds until they
terminate or are moved into RLI Ins.
108
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of RLI Corp.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of RLI Corp. and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of earnings and comprehensive earnings, shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and
financial statement schedules I to VI (collectively, the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control
– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Report on Controls and Procedures. Our responsibility is to express an opinion on the Company’s
consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
109
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1983.
Chicago, Illinois
February 23, 2018
110
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in accountants or disagreements with accountants on any matters of accounting principles or
practices or financial statement disclosure.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this
evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and
procedures were effective as of December 31, 2017.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting
was effective as of December 31, 2017.
Our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report on page 109 of this report.
There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31,
2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
Items 10 to 14.
PART III
Items 10 through 14 (inclusive) of this Part III are not included herein because the Company will file a definitive Proxy
Statement with the SEC that will include the information required by such Items, and such information is incorporated herein
by reference. The Company’s Proxy Statement will be filed with the SEC and delivered to stockholders in connection with the
Annual Meeting of Shareholders to be held on May 3, 2018, and the information under the following captions is included in
such incorporation by reference: “Share Ownership of Certain Beneficial Owners,” “Board Meetings and Compensation,”
“Compensation Discussion & Analysis,” “Executive Compensation,” “Equity Compensation Plan Information,” “Executive
Management,” “Corporate Governance and Board Matters,” “Audit Committee Report” and “Proposal Four: Ratification of
Selection of Independent Registered Public Accounting Firm.”
Item 15. Exhibits and Financial Statement Schedules
(a) (l-2) See Item 8 for Consolidated Financial Statements included in this report.
PART IV
(3) Exhibits. See Exhibit Index on pages 122-123.
(b) Exhibits. See Exhibit Index on pages 122-123.
(c) Financial Statement Schedules. See Index to Financial Statement Schedules on page 112.
111
INDEX TO FINANCIAL STATEMENT SCHEDULES
Data Submitted Herewith:
Schedules:
Reference (Page)
I. Summary of Investments - Other than Investments in Related Parties at December 31, 2017.
II. Condensed Financial Information of Registrant, as of and for the three years ended December 31, 2017.
III. Supplementary Insurance Information, as of and for the three years ended December 31, 2017.
IV. Reinsurance for the three years ended December 31, 2017.
V. Valuation and Qualifying Accounts for the three years ended December 31, 2017.
VI. Supplementary Information Concerning Property-Casualty Insurance Operations for the three years
ended December 31, 2017.
113
114-116
117-118
119
120
121
Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent
information has been included in the financial statements, and notes thereto, or elsewhere herein.
112
RLI CORP. AND SUBSIDIARIES
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2017
Column A
(in thousands)
Type of Investment
Fixed maturities:
Bonds:
Available-for-sale:
U.S. Government
U.S. Agency
Non-U.S. Government & Agency
Agency MBS
ABS/CMBS*
Corporate
Municipal
Total available-for-sale
Total fixed maturities
Equity securities:
Common stock:
Available-for-sale:
Ind Misc & all other
ETFs (Ind/misc)
Total equity securities
Cash & short-term investments
Other invested assets
Total investments and cash
Column B
Column C
Cost (1)
Fair Value
Column D
Amount at
which shown in
the balance sheet
$
92,561 $
18,541
7,501
329,129
70,405
508,128
620,146
91,689 $
18,778
7,588
328,471
70,526
519,022
636,165
$ 1,646,411 $ 1,672,239 $
$ 1,646,411 $ 1,672,239 $
91,689
18,778
7,588
328,471
70,526
519,022
636,165
1,672,239
1,672,239
$
$
108,815 $
73,187
182,002 $
34,251
33,779
256,360 $
144,132
400,492 $
34,251
33,808
$ 1,896,443 $ 2,140,790 $
256,360
144,132
400,492
34,251
33,808
2,140,790
* Non-agency asset-backed & commercial mortgage-backed
Note: See notes 1E and 2 of Notes to Consolidated Financial Statements. See also the accompanying report of independent
registered public accounting firm on page 109 of this report.
(1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
113
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
(in thousands, except share data)
ASSETS
Cash
Short-term investments, at cost which approximates fair value
Accounts receivable, affiliates
Investments in subsidiaries
Investments in unconsolidated investee
Fixed income:
$
2017
2016
204 $
70
1,057
912,515
77,720
21
23
127
882,095
62,604
Available-for-sale, at fair value (amortized cost - $23,184 in 2017 and $45,901 in 2016)
Property and equipment, at cost, net of accumulated depreciation of $1,426 in 2017 and $1,523
in 2016
Income taxes receivable - current
Other assets
Total assets
23,210
45,885
1,982
1,542
156
2,213
858
329
$ 1,018,456 $ 994,155
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Income taxes - deferred
Bonds payable, long-term debt
Interest payable, long-term debt
Other liabilities
Total liabilities
$
$
13,207 $
148,928
2,153
570
19,145
148,741
2,153
544
164,858 $ 170,583
Shareholders’ equity:
Common stock ($1 par value, authorized 100,000,000 shares, issued 67,078,569 shares in 2017
and 66,874,911 shares in 2016, and outstanding 44,148,355 shares in 2017 and 43,944,697
shares in 2016)
Paid in capital
Accumulated other comprehensive earnings, net of tax
Retained earnings
Deferred compensation
Treasury shares at cost (22,930,214 shares in 2017 and 2016)
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
67,079 $
233,077
157,919
788,522
8,640
(401,639)
66,875
229,779
122,610
797,307
11,496
(404,495)
$
853,598 $ 823,572
$ 1,018,456 $ 994,155
See Notes to Consolidated Financial Statements. See also the accompanying report of independent registered public accounting
firm on page 109 of this report.
114
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)—(continued)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Years ended December 31,
(in thousands)
Net investment income
Net realized gains (losses)
Equity in earnings of unconsolidated investee
Selling, general and administrative expenses
Interest expense on debt
Loss before income taxes
Income tax benefit
Net earnings (loss) before equity in net earnings of subsidiaries
Equity in net earnings of subsidiaries
Net earnings
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period
Less: reclassification adjustment for gains (losses) included in net earnings
Other comprehensive income (loss) - parent only
Equity in other comprehensive earnings (loss) of subsidiaries/investees
Other comprehensive earnings (loss)
Comprehensive earnings
2017
2016
2015
$
942 $
(360)
9,764
(10,170)
(7,426)
647 $
(36)
14,436
(11,340)
(7,426)
810
139
9,893
(9,837)
(7,426)
$ (3,719) $ (7,250) $ (6,421)
(5,499)
(922)
138,466
113,703
$ 105,028 $ 114,920 $ 137,544
(16,601)
$ 12,882 $
92,146
(8,467)
1,217 $
$
$
21 $
6
27 $
308 $
(131)
177 $
(40)
(90)
(130)
(47,479)
$ 35,309 $ (1,164) $ (47,609)
$ 140,337 $ 113,756 $ 89,935
35,282
(1,341)
See Notes to Consolidated Financial Statements. See also the accompanying report of independent registered public accounting
firm on page 109 of this report.
115
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands)
Cash flows from operating activities
Earnings before equity in net earnings of subsidiaries
Adjustments to reconcile net losses to net cash provided by (used in) operating
activities:
2017
2016
2015
$
12,882 $
1,217 $
(922)
Net realized (gains) losses
Depreciation
Other items, net
Change in:
Affiliate balances receivable/payable
Federal income taxes
Stock option excess tax benefit
Changes in investment in unconsolidated investee:
Undistributed earnings
Dividends received
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of:
Fixed income, available-for-sale
Short-term investments, net
Sale of:
Fixed income, available-for-sale
Short-term investments, net
Property and equipment
Call or maturity of:
Fixed income, available-for-sale
Cash dividends received-subsidiaries
Net cash provided by investing activities
Cash flows from financing activities
Stock option excess tax benefit
Proceeds from stock option exercises
Cash dividends paid
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
36
77
595
360
196
560
(139)
237
530
(930)
(6,874)
—
(535)
9,762
(9,576)
4,211
14,227
(11,413)
(14,436)
—
(8,650) $
(9,764)
9,900
2,120 $
(9,893)
—
(3,162)
(5,773) $ (12,844) $ (16,031)
—
(47)
—
$
$
24,771
—
128
4,981
63
—
7,048
91
—
3,499
107,000
9,507
6,859
125,000
123,600
$ 129,578 $ 122,659 $ 125,615
$
— $
3,502
(124,247)
11,413
9,576 $
(3,364)
(741)
(130,698)
(133,771)
$ (120,745) $ (124,936) $ (122,649)
(196)
$
374
178
183 $
21
204 $
(157) $
178
21 $
$
Interest paid on outstanding debt amounted to $7.3 million for 2017, 2016 and 2015, respectively. See Notes to Consolidated
Financial Statements. See also the accompanying report of independent registered public accounting firm on page 109 of this
report.
116
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 2017, 2016 and 2015
(in thousands)
Year ended December 31, 2017
Casualty segment
Property segment
Surety segment
$
Deferred policy Unpaid losses
acquisition
costs
Unearned
and settlement premiums,
expenses, gross
gross
Net
premiums
earned
Incurred losses
and settlement
expenses
current year
44,358 $ 1,127,787 $ 296,751 $ 478,603 $
13,029
20,329
138,346
120,988
107,304
36,412
84,010
70,688
323,141
97,161
20,150
RLI Insurance Group
$
77,716 $ 1,271,503 $ 451,449 $ 737,937 $
440,452
Year ended December 31, 2016
Casualty segment
Property segment
Surety segment
$
39,131 $ 1,021,506 $ 276,096 $ 454,843 $
13,115
20,901
152,167
121,598
84,425
73,256
76,989
40,842
292,308
76,143
23,321
RLI Insurance Group
$
73,147 $ 1,139,337 $ 433,777 $ 728,608 $
391,772
Year ended December 31, 2015
Casualty segment
Property segment
Surety segment
$
35,464 $
13,332
21,033
993,717 $ 260,227 $ 412,248 $
88,808
73,059
170,924
116,989
77,584
32,484
264,068
81,699
18,705
RLI Insurance Group
$
69,829 $ 1,103,785 $ 422,094 $ 700,161 $
364,472
NOTE 1: Investment income is not allocated to the segments, therefore net investment income has not been provided.
See the accompanying report of independent registered public accounting firm on page 109 of this report.
117
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(continued)
As of and for the years ended December 31, 2017, 2016 and 2015
(in thousands)
Year ended December 31, 2017
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2016
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2015
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Incurred
losses and
settlement
expenses
prior year
Policy
acquisition
costs
Other
operating
expenses
Net
premiums
written
$ (17,462) $ 136,135 $ 32,885 $ 494,649
137,031
118,174
(12,134)
(9,272)
14,108
10,001
51,070
65,310
$ (38,868) $ 252,515 $ 56,994 $ 749,854
$ (32,401) $ 128,566 $ 30,040 $ 470,082
149,170
121,700
13,819
9,234
54,167
66,879
(4,793)
(4,800)
$ (41,994) $ 249,612 $ 53,093 $ 740,952
$ (45,654) $ 119,529 $ 28,042 $ 435,409
166,659
119,903
(11,848)
(7,925)
14,834
8,604
57,214
64,335
$ (65,427) $ 241,078 $ 51,480 $ 721,971
See the accompanying report of independent registered public accounting firm on page 109 of this report.
118
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV—REINSURANCE
Years ended December 31, 2017, 2016 and 2015
(in thousands)
2017
Casualty segment
Property segment
Surety segment
Direct
amount
Ceded to
other
companies
Assumed
from other
companies
Net
amount
Percentage
of amount
assumed
to net
$ 536,085 $
172,668
126,365
86,190 $ 28,708 $ 478,603
138,346
3,285
37,607
120,988
528
5,905
6.0 %
2.4 %
0.4 %
RLI Insurance Group premiums earned
$ 835,118 $ 129,702 $ 32,521 $ 737,937
4.4 %
2016
Casualty segment
Property segment
Surety segment
$ 528,691 $
179,460
127,143
89,635 $ 15,787 $ 454,843
152,167
38,353
121,598
6,584
11,060
1,039
3.5 %
7.3 %
0.9 %
RLI Insurance Group premiums earned
$ 835,294 $ 134,572 $ 27,886 $ 728,608
3.8 %
2015
Casualty segment
Property segment
Surety segment
$ 484,435 $
190,678
122,067
84,311 $ 12,124 $ 412,248
170,924
42,731
116,989
5,701
22,977
623
2.9 %
13.4 %
0.5 %
RLI Insurance Group premiums earned
$ 797,180 $ 132,743 $ 35,724 $ 700,161
5.1 %
See the accompanying report of independent registered public accounting firm on page 109 of this report.
119
RLI CORP. AND SUBSIDIARIES
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2017, 2016 and 2015
(in thousands)
Balance
at beginning
of period
Amounts
charged
to expense
Amounts
recovered
(written off)
Balance
at end of
period
2017 Allowance for uncollectible reinsurance
$
25,911 $
— $
— $
25,911
2016 Allowance for uncollectible reinsurance
$
25,911 $
— $
— $
25,911
2015 Allowance for uncollectible reinsurance
$
26,404 $
— $
(493) $
25,911
See the accompanying report of independent registered public accounting firm on page 109 of this report.
120
RLI CORP. AND SUBSIDIARIES
SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years ended December 31, 2017, 2016 and 2015
(in thousands)
Affiliation with
Registrant (1)
Deferred policy
Claims and
acquisition
costs
claim adjustment
expense reserves
Unearned
premiums,
gross
Net
premiums
earned
Net
investment
income
2017
2016
2015
2017
2016
2015
$
$
$
77,716 $
73,147 $
69,829 $
1,271,503 $
1,139,337 $
1,103,785 $
451,449 $
433,777 $
422,094 $
737,937 $
728,608 $
700,161 $
54,876
53,075
54,644
Claims and claim adjustment
expenses incurred related to:
Current
year
Prior
year
Amortization
of deferred
acquisition costs
Paid claims and
claim adjustment
expenses
Net
premiums
written
$
$
$
440,452 $
391,772 $
364,472 $
(38,868) $
(41,994) $
(65,427) $
252,515 $
249,612 $
241,078 $
283,185 $
304,606 $
279,038 $
749,854
740,952
721,971
(1) Consolidated property-casualty insurance operations.
See the accompanying report of independent registered public accounting firm on page 109 of this report.
121
Exhibit No.
Description of Document
Reference (page)
EXHIBIT INDEX
3.1
3.2
4.1
10.1
Amended and Restated Articles of Incorporation
Restated By-Laws
Senior Indenture
Incorporated by reference to the Company’s Form 8-K
filed May 5, 2017.
Incorporated by reference to the Company’s Form 8-K
filed May 5, 2017.
Incorporated by reference to the Company’s Form 8-K
filed October 2, 2013.
The RLI Corp. Directors’ Irrevocable Trust
Agreement*
Attached as Exhibit 10.1.
10.2
RLI Corp. Omnibus Stock Plan*
Incorporated by reference to the Company’s Form 8-K
filed on May 9, 2005.
10.3
10.4
RLI Corp. Nonemployee Directors’ Deferred
Compensation Plan, as amended*
Incorporated by reference to the Company’s Form 10-K
filed February 25, 2009.
RLI Corp. Executive Deferred Compensation Plan,
as amended*
Attached as Exhibit 10.4.
10.5
Key Employee Excess Benefit Plan, as amended*
10.6
RLI Corp. 2010 Long-Term Incentive Plan*
Incorporated by reference to the Company’s Form 10-K
filed February 25, 2009.
Incorporated by reference to the Company’s Form 8-K
filed on May 6, 2010.
10.7
10.8
10.9
RLI Corp. Annual Incentive Compensation Plan*
Attached as Exhibit 10.7.
Market Value Potential (MVP), Executive Incentive
Program Guideline*
Attached as Exhibit 10.8.
Advances, Collateral Pledge, and Security
Agreement (Federal Home Loan Bank of Chicago)
Incorporated by reference to the Company’s Form 8-K
filed September 26, 2014.
10.10
Credit Agreement (JP Morgan Chase Bank N.A.)
10.11
RLI Corp. 2015 Long-Term Incentive Plan*
Incorporated by reference to the Company’s Form 8-K
filed June 3, 2014.
Incorporated by reference to the Company’s Form 8-K
filed on May 7, 2015.
11.0
Statement re: computation of per share earnings
Refer to Note 1.O., “Earnings per share,” on page 75.
* Management contract or compensatory plan.
122
Exhibit No.
Description of Document
Reference Page
EXHIBIT INDEX
21.1
23.1
31.1
31.2
32.1
32.2
Subsidiaries of the Registrant
Consent of KPMG LLP
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Page 125
Page 126
Page 127
Page 128
Page 129
Page 130
101
XBRL-Related Documents
Attached as Exhibit 101
123
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RLI Corp.
(Registrant)
By:
/s/ Thomas L. Brown
Thomas L. Brown
Senior Vice President, Chief Financial Officer
Date:
February 23, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Jonathan E. Michael
By:
/s/ Thomas L. Brown
Jonathan E. Michael, Chairman & CEO
(Principal Executive Officer)
Thomas L. Brown, Senior Vice President,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ Kaj Ahlmann
Kaj Ahlmann, Director
By:
/s/ Jordan W. Graham
Jordan W. Graham, Director
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ Barbara R. Allen
Barbara R. Allen, Director
By:
/s/ F. Lynn McPheeters
F. Lynn McPheeters, Director
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ Michael E. Angelina
By:
/s/ Jonathan E. Michael
Michael E. Angelina, Director
Jonathan E. Michael, Director
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ John T. Baily
John T. Baily, Director
By:
/s/ Robert P. Restrepo, Jr.
Robert P. Restrepo, Jr., Director
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ Calvin G. Butler, Jr.
By:
/s/ James J. Scanlan
Calvin G. Butler, Jr., Director
James J. Scanlan, Director
Date:
February 23, 2018
Date:
February 23, 2018
By:
/s/ David B. Duclos
David B. Duclos, Director
By:
/s/ Michael J. Stone
Michael J. Stone, Director
Date:
February 23, 2018
Date:
February 23, 2018
124
Subsidiaries of the Registrant
The following companies are subsidiaries of the Registrant as of December 31, 2017.
Name
RLI Corp.
RLI Insurance Company
Mt. Hawley Insurance Company
RLI Underwriting Services, Inc.
RLI Insurance Agency Ltd.
Safe Fleet Insurance Services, Inc.
Data & Staff Service Co.
Contractors Bonding and Insurance Company
Exhibit 21.1
Jurisdiction of Percentage
Incorporation Ownership
Delaware
Illinois
Illinois
Illinois
Canada
California
Washington
Illinois
100%
100%
100%
100%
100%
100%
100%
100%
125
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
RLI Corp.:
We consent to the incorporation by reference in the registration statements (Nos. 333-01637, 333-28625, 333-75251, 333-
117714, 333-124450, 333-125354, 333-166614 and 333-203957) on Form S-8 and registration statement (No. 333-185534) on
Form S-3 of RLI Corp. of our report dated February 23, 2018, with respect to the consolidated balance sheets of RLI Corp. as
of December 31, 2017 and 2016, and the related consolidated statements of earnings and comprehensive earnings,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related
notes and financial statement schedules I to VI (collectively, the “consolidated financial statements”), and the effectiveness of
internal control over financial reporting as of December 31, 2017, which report appears in the December 31, 2017 annual
report on Form 10-K of RLI Corp.
/s/ KPMG LLP
Chicago, Illinois
February 23, 2018
126
CERTIFICATION
Exhibit 31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jonathan E. Michael, certify that:
I have reviewed this annual report on Form 10-K of RLI Corp.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2018
/s/ Jonathan E. Michael
Jonathan E. Michael
Chairman & CEO
127
Exhibit 31.2
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION
I, Thomas L. Brown, certify that:
I have reviewed this annual report on Form 10-K of RLI Corp.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2018
/s/ Thomas L. Brown
Thomas L. Brown
Senior Vice President, Chief Financial Officer
128
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of RLI Corp. (the “Company”) on Form 10-K for the period ending December 31, 2017
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jonathan E. Michael, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Jonathan E. Michael
Jonathan E. Michael
Chairman & CEO
February 23, 2018
129
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of RLI Corp. (the “Company”) on Form 10-K for the period ending December 31, 2017
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas L. Brown, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Thomas L. Brown
Thomas L. Brown
Senior Vice President, Chief Financial Officer
February 23, 2018
130