____RLI protects customers from life’s uncertainties through industry-leading specialty risk management solutions and service.OUR PURPOSE FINANCIAL HIGHLIGHTS
In thousands, except combined ratio, per-share data and return on equity
2020
2019
% Change
Gross premiums written
$ 1,136,432
$ 1,065,002
Net premiums written
Consolidated revenue
Net earnings
Operating earnings1
GAAP combined ratio
892,088
983,626
157,091
117,602
92.0
Total shareholders’ equity
1,135,978
Per-share data:
860,337
1,003,591
191,642
116,110
91.9
995,388
Net earnings (diluted)
$ 3.46
$ 4.23
Operating earnings (diluted)1
2.59
2.57
Cash dividends declared:
Regular
Special
Book value2
Year-end closing stock price
0.95
1.00
25.16
104.15
0.91
1.00
22.18
90.02
Return on equity
15.1%
20.6%
6.7%
3.7%
-2.0%
-18.0%
1.3%
0.1%
14.1%
-18.2%
0.8%
4.4%
0.0%
13.4%
15.7%
-26.7%
1 See discussion of non-GAAP measures in note 1 of the SELECTED FINANCIAL DATA section on page 12 of the YEAR IN REVIEW wrap.
2 With the inclusion of dividends paid (regular and special), book value per share growth was 22% year over year.
2
Dear Shareholders,
By all accounts, 2020 was an extraordinary year.
We could not have predicted the unprecedented
challenges that the world, the insurance industry
and our business would face from the wide-ranging
impact of the COVID-19 pandemic. The industry
also experienced a highly active year of natural
catastrophes, including a record-setting hurricane
season, wildfires across a large portion of the
Western U.S. and a derecho in the Midwest.
In such a dynamic and challenging environment, we
remained grounded in our purpose. Fundamentally,
RLI exists to protect customers from life’s
uncertainties through industry-leading specialty risk
management solutions and service. As we fulfilled
that important mission over the past year, our
values guided us while we made critical decisions
about how to protect our people, help customers
and manage our business.
I’m incredibly proud of our associates’ unyielding
dedication and commitment to our customers. Amid
tremendous uncertainty and change, the entire
team stepped up and worked together to keep our
business – and our customers – moving forward.
As a result of our associates’ efforts, we achieved
outstanding financial results, including:
• Posting a 92.0 combined ratio, which marked our
25th consecutive year of underwriting profit.
• Delivering return on equity of 15.1 percent,
a testament to our sustained profitability.
• Growing book value per share by 22 percent
during the year, inclusive of dividends.
• Continuing to reward shareholders through
regular dividends and a $1.00 per share
special dividend.
In addition to these accomplishments, we
advanced many strategic initiatives that will further
differentiate RLI in the markets we serve and
position our company for future growth.
UNDERWRITING RESULTS
Throughout the year, our associates proactively
responded to the needs of our policyholders,
especially those affected by natural catastrophes,
with the highest levels of professionalism and
unparalleled claim service.
Despite the impact of these catastrophe losses on
our business, as well as the economic slowdown
from the pandemic, RLI’s underwriting performance
was strong. We posted underwriting income of
$69.6 million, resulting in a 92.0 combined ratio,
which marked our 25th consecutive year
of achieving a combined ratio below 100.
In addition to attaining underwriting profitability, we
succeeded in growing our top line. Gross premiums
written grew 7 percent to $1.1 billion in 2020,
which was primarily driven by rate increases across
most of our product portfolio.
JONATHAN E. MICHAEL
Chairman & CEO
3
STATUTORY COMBINED RATIO
Our average statutory combined ratio has outperformed the industry average by 13
points over the last decade.
110
100
90
80
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10-YEAR AVG.
RLI
P&C Industry*
79.1
108.2
88.0
103.1
82.2
95.8
84.1
97.2
83.9
97.9
89.0
100.7
96.2
103.9
94.0
99.2
91.1
98.9
91.8
100.0
87.9
100.5
*Sources:
(1) AM Best (2020). Aggregate & Averages – Property/Casualty, United States & Canada. 2011 – 2019.
(2) Conning (2020). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2020. Estimated
for the year ended December 31, 2020.
P&C Industry*
RLI
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4
CASUALTY
RLI’s casualty segment delivered 6 percent growth in gross
premiums written and a 92.2 combined ratio. Growth within
the segment was fairly widespread and largely driven by
rate increases, with our commercial excess and personal
umbrella products leading the way. Our outlook on the future
of our casualty business is positive and we anticipate further
opportunities for growth in this segment.
PROPERTY
Property segment gross premiums written were up 11 percent
year over year and the business posted a 101.7 combined
ratio. Rate increases and new business opportunities created
by market disruption supported top-line growth. However,
the unprecedented number of catastrophe events in 2020
negatively impacted segment profitability. In the year ahead,
we remain optimistic that positive rate momentum will
continue in this space, particularly in our marine, wind and
earthquake businesses.
SURETY
Surety segment gross premiums written were down 1 percent
for the year, but the business delivered a strong 74.8
combined ratio. Premium growth was hampered significantly
by the economic slowdown, which reduced demand for surety
bonds. We are cautiously optimistic that measured growth in
this segment is possible in 2021, and our underwriters are
ready to take advantage of improving market conditions.
Overall, our underwriting performance was solid and our
customer service distinguished us during the year. We will
continue to make strategic investments in our business and
remain competitive in the markets we serve by understanding
customer needs; providing stable coverage with a consistent
appetite; nurturing existing distribution partnerships;
selectively adding new risks and relationships; and
continuously optimizing our service standards.
INVESTMENT RESULTS
In addition to underwriting profit, investment income is
another significant source of earnings. Our well-balanced,
diversified investment portfolio provides consistent cash flow
to run the business, contributes to financial stability and
ensures that we can always uphold the obligations we have
made to policyholders.
In 2020, investment income was down 1.4 percent, primarily
due to a low interest rate environment, which suppressed
reinvestment rates. However, on a total return basis, our
investment portfolio performed well and was up 7.5 percent.
We continue to maintain a long-term, conservative approach to
managing our invested assets.
DELIVERING SHAREHOLDER VALUE
RLI’s business model is designed to create consistent value
for our shareholders through the thoughtful design of our
product portfolio; the careful selection of niche markets,
distribution partners and customers; the quality and character
of our people; and the strength of our balance sheet.
In 2020, we increased regular dividends for the 45th
consecutive year and paid a $1.00 per share special dividend.
Notably, RLI has returned more than $1.1 billion in dividends
and share repurchases to shareholders over the last 10 years.
5
Book value growth over time is a measure of how we
create value for shareholders. RLI’s book value, inclusive of
dividends, has also grown steadily over the past 10 years.
A CULTURE OF OWNERSHIP
Our talented team is the driving force behind our success.
They have persevered over the past year, even as work
routines and personal lives were heavily disrupted by the
COVID-19 pandemic. I believe this is a testament to our strong
ownership culture.
We hire the best and the brightest talent in the industry, and
make them owners of the company through our employee
stock ownership plan (ESOP). We empower our associates by
giving them the freedom and authority to make decisions and
help our customers.
The ESOP is foundational to our differentiated business
model. It has enhanced our financial performance over time
by providing strong accountability and alignment between
associate and shareholder interests. It also motivates
associates to instill a higher level of care and commitment
into every action – which truly made a difference over the
past year.
A STRONG FUTURE
Our ability to grow and produce an underwriting profit in the
face of significant challenges speaks volumes about the
quality of our people, the disciplined underwriting standards
we uphold and the resilience of our unique business model.
Looking ahead, I am optimistic about the future. RLI has a
diverse portfolio of specialty insurance products; a network
of strong distribution partnerships across our businesses; a
healthy balance sheet; and a talented team of associates who
are invested in the company’s success. We are well positioned
for continued growth.
We know that to deliver strong returns for our shareholders,
we must remain a sustainable organization. As such, we are
committed to continue integrating sound Environmental, Social
and Governance practices into our business as part of our
responsibility to our customers, shareholders, associates and
the communities in which we operate.
It has been a tremendous honor to serve as RLI’s CEO for the
past nineteen years. This year will be my last, as I recently
announced my planned retirement at the end of 2021.
Once I retire, Craig Kliethermes, RLI Corp. President & COO,
will assume the CEO role. Craig is a proven leader who
has driven strong operating results through a relentless
commitment to our customers and associates. I have great
confidence in his ability to lead and inspire our organization to
achieve continued success in the years to come.
I look forward to working with our associates in the year
ahead to prove, once again, that Different Works. On behalf
of our Board of Directors, thank you for your confidence and
investment in RLI.
Jonathan E. Michael
Chairman & CEO
6
10-YEAR CUMULATIVE SHAREHOLDER RETURN
Over the past 10 years, RLI’s total return to shareholders has outpaced that of the S&P 500
and S&P 500 P&C Index.
$650
$550
$450
$350
$250
$150
$50
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
RLI
S&P 500
S&P 500 P&C Index
$100
$100
$100
152
102
100
148
118
120
233
157
166
255
178
192
335
181
210
357
202
243
359
246
297
418
236
283
557
310
357
658
367
379
Assumes $100 invested on December 31, 2010, in RLI, S&P 500 and S&P 500 P&C Index, with
reinvestment of dividends.
Comparison of 10-year annualized total return: RLI: 20.7% | S&P 500: 13.9% | S&P 500 P&C Index: 14.3%
S&P 500 P&C Index
S&P 500
RLI
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7
EARNINGS PER SHARE
BOOK VALUE GROWTH with dividends
Each share of our stock has generated $14.07 of diluted
net earnings since 2015.
Over the past five years, RLI has returned more than
$490 million in dividends to shareholders.
$1,500
$1,500
Operations ROE
$1,800
Operations ROE
$1,200
$1,200
$1,500
Net EPS
Net EPS
$4.00
$4.00
$3.50
$3.50
$3.00
$3.00
$2.50
$2.50
$2.00
$2.00
$1.50
$1.50
$1.00
$1.00
$0.50
$0.50
$0.00
$0.0
3
2
.
4
3
2
.
4
6
4
.
3
9
5
.
2
7
5
.
2
2
1
.
3
9
5
.
2
3
5
.
2
8
0
.
2
9
5
.
2
6
3
.
2
0
3
.
2
8
0
.
2
0
3
.
2
6
3
.
2
5
0
.
2
3
4
.
1
5
0
.
2
7
5
.
2
3
4
.
1
2018
2019
2020
2
0
%
2
0
%
2016
2015
2017
2016
2017
2018
2019
Diluted Net Earnings Per Share
Diluted Operating Earnings Per Share1
Diluted Net Earnings Per Share
Diluted Operating Earnings Per Share1
1 See discussion of non-GAAP measures in note 1 of the
SELECTED FINANCIAL DATA on page 12 of the YEAR IN
REVIEW wrap.
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$1,200
$900
$900
$900
$600
$600
$600
2
$300
$300
0
$300
%
2
0
%
2
0
%
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2
2015
0
2014
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2014
2016
2015
2015
2017
2018
2019
2020
2016
2016
2017
2017
2018
2018
2019
2019
Cumulative Dividends
Cumulative Dividends
Reported Book Value
Cumulative Dividends
Reported Book Value
Reported Book Value
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Cumulative Dividends
Cumulative Dividends
Reported Book Value
Reported Book Value
Reported Book Value
8
EXECUTIVE TEAMTodd W. Bryant Vice President, Chief Financial OfficerIndustry experience - 27 yearsSeth A. Davis Vice President, ControllerIndustry experience - 25 yearsAaron P. Diefenthaler Vice President, Chief Investment Officer & TreasurerIndustry experience - 19 yearsPatrick D. Ferrell Vice President, Internal Audit Industry experience - 28 yearsJeffrey D. Fick Senior Vice President, Chief Legal Officer & Corporate SecretaryIndustry experience - 16 yearsBryan T. Fowler Vice President, Chief Information Officer Industry experience - 23 years Lisa T. Gates Vice President, Marketing & Communications Industry experience - 10 yearsRobert S. Handzel Vice President, Chief Claim Officer Industry experience - 43 yearsKevin S. HorwitzVice President, Innovation Management and Policy Development Industry experience - 20 yearsKathleen M. Kappes Vice President, Human ResourcesIndustry experience - 18 yearsCraig W. Kliethermes President & COO Industry experience - 36 yearsJonathan E. MichaelDirector since 1997Chairman & CEO, RLI Corp. Kaj Ahlmann (2, 3) Director since 2009Retired Global Head of Strategic Services and Chairman, Advisory Board for Deutsche BankMichael E. Angelina (2, 5) Director since 2013Executive in Residence, Maguire Academy of Insurance and Risk Management, Saint Joseph’s UniversityJohn T. Baily (2, 3) Director since 2003Retired President, Swiss Re Capital PartnersCalvin G. Butler, Jr. (2, 3) Director since 2016Senior Executive Vice President, Exelon and CEO, Exelon UtilitiesDavid B. Duclos (1, 4) Director since 2017 Retired CEO, QBE, North AmericaSusan S. Fleming (3, 4) Director since 2018 Executive Educator, Speaker and Angel Investor Jordan W. Graham (1, 4) Director since 2004 Managing Director, Quotient PartnersCraig W. Kliethermes (4, 5) Director since 2021 President & COO, RLI Corp.Robert P. Restrepo, Jr. (1, 5) Director since 2016 Retired Chairman, CEO & President, State Auto Insurance CompanyDebbie S. Roberts (1, 5) Director since 2018Executive Vice President and COO, PaneraMichael J. Stone (4, 5) Director since 2012 Former President & COO, RLI Insurance Company BOARD OF DIRECTORS1: Human Capital and Compensation Committee 2: Audit Committee 3: Nominating/Corporate Governance Committee4: Finance and Investment Committee 5: Strategy Committee9 SURETY
Greg E. Chilson
Vice President, Surety
Industry experience - 29 years
Barton W. Davis
Vice President, Surety Underwriting
Industry experience - 33 years
Robert G. Kirk
Vice President, Commercial Surety
Industry experience - 30 years
Brian A. Schick
Vice President, Contract Surety
Industry experience - 26 years
CLAIM
Matthew R. Campen
Vice President, Claim
Industry experience - 17 years
William J. Irish
Vice President, Claim
Industry experience - 34 years
Nicolas C. Mesco
Vice President, Claim
Industry experience - 13 years
EXECUTIVE TEAM (Cont.)
Jennifer L. Klobnak
Senior Vice President, Operations
Industry experience - 21 years
Elizabeth K. McLaughlin
Vice President, Chief Claim Counsel
Industry experience - 35 years
Jonathan E. Michael
Chairman & CEO
Industry experience - 44 years
Christopher D. Randall
Vice President, Risk Services
Industry experience - 26 years
Kathleen A. Taylor
Vice President, Accounting & Branch Operations
Industry experience - 24 years
FIELD
OFFICERS
CASUALTY
William R. Bell, III
Vice President, Environmental E&S
Industry experience - 33 years
Chad S. Berberich
Vice President, Executive Products Group
Industry experience - 24 years
Paul C. Dietrich
Vice President, Professional Services Group
Industry experience - 33 years
Justin D. Doss
Vice President, Sales & Marketing,
Transactional Insurance Solutions
Industry experience - 21 years
Dennis H. Drees
Vice President, Casualty Brokerage
Industry experience - 39 years
Jeffrey D. Foering
Vice President, Energy Casualty
Industry experience - 37 years
Robert W. Hartje
Vice President, Excess Liability
Industry experience - 35 years
Jill C. Johnson
Vice President, Personal Lines
Industry experience - 37 years
Daniel N. Meyer
President, RLI Transportation
Industry experience - 20 years
Richard D. Nesbitt
Vice President, General Binding Authority
Industry experience - 43 years
Eric J. Raudins
Senior Vice President, Transactional
Insurance Solutions
Industry experience - 30 years
Paul J. Simoneau
Senior Vice President, E&S Lines
Industry experience - 43 years
Eric D. White
Vice President, Commercial Transactional
Insurance Solutions
Industry experience - 20 years
CONTRACTORS BONDING AND
INSURANCE COMPANY
Robert M. Ogle
Vice President, Contractors Bonding
and Insurance Company
Industry experience - 32 years
PROPERTY
Blake A. Ahrens
Vice President, Inland Marine
Industry experience - 24 years
Robert J. Schauer
President, RLI Marine
Industry experience - 33 years
Jonathan D. Ward
Vice President, E&S Property
Industry experience - 18 years
10
SELECTED FINANCIAL DATA
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
The following is
selected financial
data of RLI Corp.
and subsidiaries
for the 10 years
ended December
31, 2020.
Amounts in
thousands, except
per share data and
combined ratios.
11
Operating Results
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings
Operating earnings(1)
Net cash provided by operating activities
Financial Condition
Total investments and cash
Total assets
Unpaid losses and settlement expenses
Total debt
Total shareholders’ equity
Statutory surplus(2)
Share Information(3)
Net earnings per share(1):
Basic
Diluted
Comprehensive earnings per share:
Basic
Diluted
Operating earnings per share(1):
Basic
Diluted
Cash dividends declared per share:
Regular
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(2)
Combined ratio(4)
Statutory combined ratio(2)(4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,136,432
983,626
157,091
213,310
117,602
263,259
2,837,081
3,938,485
1,750,049
149,489
1,135,978
1,121,592
1,065,002
1,003,591
191,642
258,687
116,110
276,917
2,560,360
3,545,721
1,574,352
149,302
995,388
1,029,671
983,216
818,123
64,179
30,182
92,088
217,102
2,194,230
3,105,065
1,461,348
149,115
806,842
829,775
885,312
797,224
105,028
140,337
102,161
197,525
2,140,790
2,947,244
1,271,503
148,928
853,598
864,554
874,864
816,328
114,920
113,756
92,401
174,463
2,021,827
2,777,633
1,139,337
148,741
823,572
859,976
3.49
3.46
4.74
4.70
2.61
2.59
0.95
1.00
25.16
104.15
45,000
45,376
45,143
80%
92.0
91.8
4.28
4.23
5.78
5.72
2.60
2.57
0.91
1.00
22.18
90.02
44,734
45,257
44,869
84%
91.9
91.1
1.45
1.43
0.68
0.67
2.08
2.05
0.87
1.00
18.13
68.99
2.39
2.36
3.19
3.15
2.32
2.30
0.83
1.75
19.33
60.66
44,358
44,835
44,504
44,033
44,500
44,148
99%
94.7
94.0
87%
96.4
96.2
2.63
2.59
2.60
2.56
2.11
2.08
0.79
2.00
18.74
63.13
43,772
44,432
43,945
86%
89.5
89.0
853,586
794,634
137,544
89,935
111,654
152,586
1,951,543
2,735,465
1,103,785
148,554
823,469
865,268
863,848
775,165
135,445
170,801
114,526
123,085
1,964,285
2,774,284
1,121,040
148,367
845,062
849,297
843,195
705,601
126,255
119,112
111,932
134,966
1,922,058
2,738,912
1,129,433
148,184
828,966
859,221
784,799
660,774
103,346
129,191
86,854
1,840,881
2,644,520
1,158,483
99,888
796,363
684,072
702,107
619,169
126,598
147,931
115,525
1,900,288
2,654,615
1,150,714
99,781
792,634
710,186
36,240(5)
117,991(5)
3.18
3.12
2.08
2.04
2.58
2.53
0.75
2.00
18.91
61.75
3.15
3.09
3.97
3.90
2.66
2.61
0.71
3.00
19.61
49.40
43,299
44,131
43,544
83%
84.5
83.9
43,020
43,819
43,103
83%
84.5
84.1
2.95
2.90
2.79
2.74
2.62
2.57
0.67
1.50
19.29
48.69
200%(3)
42,744
43,514
42,982
78%
83.1
82.2
2.44
2.39
3.04
2.99
2.05
2.01
0.63
2.50
18.73
32.22
42,431
43,160
42,525
87%
89.0
88.0
3.00
2.95
3.51
3.45
2.74
2.69
0.60
2.50
18.73
36.43
42,156
42,869
42,324
77%
79.6
79.1(6)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Operating Results
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings
Operating earnings(1)
Net cash provided by operating activities
Financial Condition
Total investments and cash
Total assets
Total debt
Unpaid losses and settlement expenses
Total shareholders’ equity
Statutory surplus(2)
Share Information(3)
Net earnings per share(1):
Comprehensive earnings per share:
Operating earnings per share(1):
Cash dividends declared per share:
Regular
Special
Book value per share
Closing stock price
Stock split
Weighted average shares outstanding:
Basic
Diluted
Basic
Diluted
Basic
Diluted
Basic
Diluted
Common shares outstanding
Other Non-GAAP Financial Information
Net premiums written to statutory surplus(2)
Combined ratio(4)
Statutory combined ratio(2)(4)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,136,432
983,626
157,091
213,310
117,602
263,259
2,837,081
3,938,485
1,750,049
149,489
1,135,978
1,121,592
1,065,002
1,003,591
191,642
258,687
116,110
276,917
2,560,360
3,545,721
1,574,352
149,302
995,388
1,029,671
983,216
818,123
64,179
30,182
92,088
217,102
2,194,230
3,105,065
1,461,348
149,115
806,842
829,775
885,312
797,224
105,028
140,337
102,161
197,525
2,140,790
2,947,244
1,271,503
148,928
853,598
864,554
874,864
816,328
114,920
113,756
92,401
174,463
2,021,827
2,777,633
1,139,337
148,741
823,572
859,976
3.49
3.46
4.74
4.70
2.61
2.59
0.95
1.00
25.16
104.15
45,000
45,376
45,143
80%
92.0
91.8
4.28
4.23
5.78
5.72
2.60
2.57
0.91
1.00
22.18
90.02
44,734
45,257
44,869
84%
91.9
91.1
1.45
1.43
0.68
0.67
2.08
2.05
0.87
1.00
18.13
68.99
2.39
2.36
3.19
3.15
2.32
2.30
0.83
1.75
19.33
60.66
44,358
44,835
44,504
44,033
44,500
44,148
99%
94.7
94.0
87%
96.4
96.2
2.63
2.59
2.60
2.56
2.11
2.08
0.79
2.00
18.74
63.13
43,772
44,432
43,945
86%
89.5
89.0
853,586
794,634
137,544
89,935
111,654
152,586
1,951,543
2,735,465
1,103,785
148,554
823,469
865,268
863,848
775,165
135,445
170,801
114,526
123,085
1,964,285
2,774,284
1,121,040
148,367
845,062
849,297
843,195
705,601
126,255
119,112
111,932
134,966
1,922,058
2,738,912
1,129,433
148,184
828,966
859,221
784,799
660,774
103,346
129,191
86,854
36,240(5)
1,840,881
2,644,520
1,158,483
99,888
796,363
684,072
702,107
619,169
126,598
147,931
115,525
117,991(5)
1,900,288
2,654,615
1,150,714
99,781
792,634
710,186
3.18
3.12
2.08
2.04
2.58
2.53
0.75
2.00
18.91
61.75
3.15
3.09
3.97
3.90
2.66
2.61
0.71
3.00
19.61
49.40
43,299
44,131
43,544
83%
84.5
83.9
43,020
43,819
43,103
83%
84.5
84.1
2.95
2.90
2.79
2.74
2.62
2.57
0.67
1.50
19.29
48.69
200%(3)
42,744
43,514
42,982
78%
83.1
82.2
2.44
2.39
3.04
2.99
2.05
2.01
0.63
2.50
18.73
32.22
42,431
43,160
42,525
87%
89.0
88.0
3.00
2.95
3.51
3.45
2.74
2.69
0.60
2.50
18.73
36.43
42,156
42,869
42,324
77%
79.6
79.1(6)
(1) Operating earnings and operating earnings per share are non-GAAP financial measures
and consist of our GAAP net earnings adjusted by net realized gains/(losses), net
unrealized gains/(losses) on equity securities that are recognized through net earnings
in 2018 and forward and taxes related thereto. Net earnings and net earnings per
share are the GAAP financial measures that are most directly comparable to operating
earnings and operating earnings per share.
(2) 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.
(3) 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.
(4) See page 32 for information regarding non-GAAP financial measures.
(5) 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.
(6) Includes statutory results of CBIC post-acquisition.
12
INVESTOR INFORMATION
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:
Computershare
1-800-736-3001 (U.S. and Canada)
1-781-575-3100 (Outside U.S. and Canada)
Dividend Reinvestment
If you wish to enroll in our direct stock purchase and dividend
reinvestment plan, or to have your dividends deposited directly
into your checking, savings or money market accounts, you can
enroll online at computershare.com/investor, or complete and
submit an enrollment form, which can be obtained by contacting
Computershare.
Requests For Additional Information
Electronic versions of the following documents are or will be made
available on our website: 2020 annual report on form 10-K; 2021
proxy statement; code of conduct; corporate governance guidelines;
and charters of the human capital and compensation, 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.
13
Company Financial Strength Ratings
AM Best:
A+ (Superior) RLI Group
Standard & Poor’s: A+ (Strong)
RLI Insurance Company
A+ (Strong) Mt. Hawley Insurance
Company
Moody’s:
A2
A2
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 Diefenthaler, Vice President,
Chief Investment Officer and Treasurer, at 309-693-5846 or
at aaron.diefenthaler@rlicorp.com.
RLI Corp.
9025 N. Lindbergh Drive
Peoria, Illinois 61615-1431
Phone: 309-692-1000 or
800-331-4929
Fax: 309-692-1068
Comprehensive investor information is available at rlicorp.com.
OUR MISSION
____
OUR VALUES
____
We provide industry-leading specialty
We are talented.
risk management solutions that are
convenient, tailored and fill unmet
customer needs.
We create long-term shareholder
value through the thoughtful design
of our product portfolio; the careful
We are innovative.
We are customer focused.
We are driven.
We are people of integrity.
We are respectful.
selection of niche markets, distribution
We are owners.
partners and customers; the quality
and character of our people; and the
strength of our balance sheet.
© 2019 RLI CORP. • 800
© 2021 RLI CORP.
9025 N. LINDBERGH DRIVE
PEORIA, IL 61615-1431
P: 309.692.1000 | R L I C O R P. C O M
9025 N. LINDBERGH DRIVE
PEORIA, IL 61615-1431
P: 309.692.1000 | R L I C O R P. C O M
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, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
For the transition period from to
Commission File Number 001-09463
RLI CORP.
(Exact name of registrant as specified in its charter)
Delaware
(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)
Registrant’s telephone number, including area code (309) 692-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock $0.01 par value
Trading Symbol(s)
RLI
Name of each exchange on which registered
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 ☐
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 ☐ No ☒
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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the Registrant as of June 30, 2020, based upon the closing sale
price of the Common Stock on June 30, 2020 as reported on the New York Stock Exchange, was $3,331,599,363. 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, $0.01 par value, on February 8, 2021 was 45,149,351.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant’s definitive Proxy Statement for the 2021 annual meeting of shareholders are incorporated herein by
reference into Part III of this document.
2
RLI Corp.
Index to Annual Report on Form 10-K
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Items 10-14.
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Page
4
21
29
29
30
30
31
31
32
54
56
96
96
96
97
97
3
Item 1. Business
PART I
RLI Corp. was founded in 1965. References to “the Company,” “we,” “our,” “us” or like terms refer to the business of RLI
Corp. and its subsidiaries. We underwrite select property and casualty insurance through major subsidiaries collectively known as RLI
Insurance 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 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 make our annual report on Form 10-K, 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) available free of charge on our website
(rlicorp.com). In addition, copies of our annual report are available without charge to any shareholder. 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. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company.
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 reinsurance contracts that protect against
losses over stipulated amounts arising from any one occurrence or event. These arrangements allow the Company 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 affect 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.
(in thousands)
PREMIUMS WRITTEN
Direct and Assumed
Reinsurance ceded
Net
PREMIUMS EARNED
Direct and Assumed
Reinsurance ceded
Net
Year Ended December 31,
2019
2018
2020
$ 1,136,432 $ 1,065,002 $
(204,665 )
860,337 $
(244,344 )
892,088 $
$
$ 1,090,259 $ 1,021,294 $
(182,183 )
839,111 $
(224,512 )
865,747 $
$
983,216
(160,041 )
823,175
938,160
(146,794 )
791,366
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
reinsurance markets.
4
SPECIALTY ADMITTED INSURANCE MARKET
We write business in the specialty admitted market. Many 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 2020, our specialty admitted operations produced gross premiums written of
$720.6 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 the Company 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
AM Best, the excess and surplus market represented less than 10 percent of the entire $712 billion domestic property and casualty
industry in 2020, as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of $388.4 million,
or 34 percent, of our total gross premiums written in 2020.
SPECIALTY REINSURANCE MARKETS
We write business in the specialty reinsurance markets. This business is generally written 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. For 2020, our specialty reinsurance operations wrote gross premiums of $27.4 million, representing approximately 2
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 12 to the
consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
CASUALTY SEGMENT
Commercial Excess and Personal Umbrella
Our commercial excess coverage is written in excess of primary liability insurance provided by other carriers and in excess of
primary liability written by the Company. The personal umbrella coverage is generally written in excess of homeowners’ and
automobile liability coverage provided by other carriers. Net premiums earned from this business totaled $178.2 million,
$140.5 million and $124.4 million, or 21 percent, 17 percent and 16 percent of total net premiums earned for 2020, 2019 and 2018,
respectively.
General Liability
Our general liability business consists primarily of coverage for third-party liability of commercial insureds including
manufacturers, contractors, apartments 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 $91.7 million, $98.9 million
and $93.9 million, or 11 percent, 12 percent and 12 percent of total net premiums earned for 2020, 2019 and 2018, 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 $85.2 million, $81.3 million and $80.0 million, or 10 percent of total net premiums earned for 2020, 2019 and
2018, respectively.
5
Commercial Transportation
Our transportation insurance provides commercial automobile liability and physical damage insurance to local, intermediate and
long haul truckers, public transportation entities and other types of specialty commercial automobile risks. We also offer incidental,
related insurance coverages including general liability, excess liability and motor truck cargo. We produce business through
independent agents and brokers nationwide. Net premiums earned from this business totaled $64.6 million, $83.2 million and
$81.1 million, or 7 percent, 10 percent and 10 percent of total net premiums earned for 2020, 2019 and 2018, 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 $63.4 million, $55.7 million and $51.5
million, or 7 percent, 7 percent and 6 percent of total net premiums earned for 2020, 2019 and 2018, respectively.
Executive Products
We provide a suite of management liability coverages, such as directors and officers (D&O) liability insurance, fiduciary
liability, employment practice liability and fidelity coverages, for a variety of risk classes, 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 excess cyber liability
coverage to medium to large-sized public and private businesses. Net premiums earned from the executive products business totaled
$26.5 million, $27.1 million and $21.3 million, or 3 percent of total net premiums earned for 2020, 2019 and 2018, 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 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 written in the excess and surplus and admitted insurance markets. Additionally, we
write mortgage reinsurance, which provides credit risk transfer on pools of mortgages, and offer general liability and package
coverages through a general binding authority (GBA) group. We provided healthcare liability coverage focused on long-term care and
medical professional liability insurance specializing in hard-to-place individuals and group physicians, but exited these businesses on
a runoff basis in 2019. Net premiums earned from these lines totaled $59.9 million, $71.8 million and $71.3 million, or 7 percent, 8
percent and 9 percent of total net premiums earned for 2020, 2019 and 2018, respectively.
PROPERTY SEGMENT
Marine
Our marine coverages include cargo, hull, protection and indemnity, 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 $81.9
million, $74.9 million and $59.8 million, or 10 percent, 9 percent and 8 percent of total net premiums earned for 2020, 2019 and 2018,
respectively.
Commercial Property
Our commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire,
earthquake, wind and difference in conditions (DIC), which can include earthquake, 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 $79.4 million, $68.3
million and $71.5 million, or 9 percent, 8 percent and 9 percent of total net premiums earned for 2020, 2019 and 2018, respectively.
Specialty Personal
We offer specialized homeowners’ insurance, primarily homeowners’ and dwelling fire insurance through retail agents in
Hawaii. Net premiums earned from specialty personal coverages totaled $19.6 million, $19.3 million and $16.9 million, or 2 percent, 3
percent and 2 percent of total net premiums earned for 2020, 2019 and 2018, respectively.
6
Other Property
Our other property coverages consist of newer product offerings, such as general binding authority, and lines which we have
recently exited. Net premiums earned from these lines totaled $2.8 million, $1.5 million and $1.1 million, or less than 1 percent of
total net premiums earned for 2020, 2019 and 2018, respectively.
SURETY SEGMENT
Commercial
We offer a large variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries,
including the financial, healthcare and on and offshore energy, petrochemical and refining 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 $42.9 million, $43.6 million and $43.4 million, or 5 percent of total net
premiums earned for 2020, 2019 and 2018, respectively.
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 and
principals. Net premiums earned from miscellaneous surety coverages totaled $42.3 million, $44.7 million and $47.0 million, or 5
percent, 5 percent and 6 percent of total net premiums earned for 2020, 2019 and 2018, 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 $27.3
million, $28.3 million and $28.2 million, or 3 percent, 3 percent and 4 percent of total net premiums earned for 2020, 2019 and 2018,
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 excess and commercial transportation 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.
7
DIGITAL AND DIRECT
We utilize digital efforts to produce and efficiently process and service business including home businesses, high performance
driver’s education, 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, Berkley, Chubb, CNA, Great American, Great
West, Hartford, James River, Kinsale, Lancer, Markel, Protective, RSUI, Sompo, USLI, Travelers and Zurich. Primary competitors in
the property segment include Arch, Aspen, Chubb, CNA, Crum and Forster, Great American, Lexington, Sompo and Travelers.
Primary competitors in the surety segment are AIG, Arch, AXA XL, Berkley, Chubb, CNA, Great American, Hartford, HCC, Sompo
and Travelers. 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, consistency and quality service to the agents and policyholders at a fair
price. We compete favorably, in part, because of our sound financial condition 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
standards by not seeking market share at the expense of underwriting profit. We have a track record of withdrawing from markets
when conditions become overly adverse and offering new coverages and programs where the opportunity exists to provide needed
insurance coverage with exceptional service on a profitable basis.
FINANCIAL STRENGTH RATINGS
Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Publications
of AM Best, Standard & Poor’s and Moody’s indicate that A and A+ ratings are assigned to those companies that, in their opinion,
have a superior ability to meet ongoing insurance obligations, a strong capacity to meet financial commitments or a low credit risk,
respectively. The ratings are independent opinions of an insurer’s financial strength and ability to meet ongoing insurance policy and
contract obligations, based on a comprehensive quantitative and qualitative analysis of balance sheet strength, operating performance,
business profile and enterprise risk 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, 2020, the following ratings were assigned to our insurance companies:
AM 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 AM Best
A+, Strong
A2
For AM Best, Standard & Poor’s and Moody’s, the financial strength ratings represented above are affirmations of previously
assigned ratings. AM Best, in addition to assigning a financial strength rating, also assigns financial size categories. In November
2020, RLI Ins., Mt. Hawley and CBIC, which are collectively rated as a group, were assigned a financial size category of XII
(adjusted policyholders’ surplus of between $1 billion and $1.25 billion). As of December 31, 2020, the policyholders’ statutory
surplus of RLI Insurance Group totaled $1.1 billion, which continues to result in AM Best’s financial size category of XII.
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 $224.5 million, $182.2 million and $146.8 million in 2020, 2019
and 2018, 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.
8
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 strive to 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 88 percent of our reinsurance recoverables are due from companies with financial strength
ratings of A or better by AM Best and Standard & Poor’s rating services.
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 the Company, in certain circumstances, to pay reinstatement
premiums after a loss has occurred in order to preserve coverage.
Excluding catastrophe (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.
Per Risk
(in millions)
Product Line(s) Covered
General liability
Commercial excess
Personal umbrella
Commercial transportation
Package - liability and workers' comp
Workers' compensation catastrophe
Professional services - professional liability
Executive products
Property - risk cover
Marine
Surety
Contract Type
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
Renewal Attachment Limit
Date
Point
Maximum
1/1 $
1/1
1/1
1/1
1/1
1/1
4/1
7/1
1/1
6/1
4/1
Purchased Retention *
1.9
9.0 $
1.9
9.0
1.9
9.0
1.9
9.0
1.9
10.0
— **
14.0
3.3
9.0
3.8
25.0
1.8
24.0
2.0
28.0
9.7 ***
73.0
1.0 $
1.0
1.0
1.0
1.0
11.0
1.0
N/A
1.0
2.0
2.0
* Maximum retention includes first-dollar retention plus any co-participation we retain through the reinsurance tower.
** The workers’ compensation catastrophe treaty responds after our package liability and workers’ compensation excess of loss
treaty with no additional retention.
*** A limited number of commercial 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,
including earthquakes, hurricanes, floods, convective storms, terrorist acts and other aggregating events. 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 may reduce
exposure and may purchase less reinsurance as this capacity becomes unnecessary. Our reinsurance coverage for 2019 through 2021
are shown in the following table:
9
Catastrophe Coverages
(in millions)
California Earthquake
Non-California Earthquake
Other Perils
2021
2020
2019
First- Dollar
Retention
Limit
First- Dollar
Retention
Limit
First- Dollar
Retention
Limit
$
25 $
25
25
500 $
525
375
25 $
25
25
500 $
525
375
25 $
25
25
400
425
275
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. All layers of the treaty include 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.
Catastrophe - California Earthquake
(in millions)
Modeled
Gross Loss
Ceded
Losses
$
50 $
100
200
300
450
2021
29 $
73
164
257
397
Net
Losses
Ceded
Losses
21 $
27
36
43
53
2020
29 $
73
164
258
397
Net
Losses
Ceded
Losses
21 $
27
36
42
53
Catastrophe - Other (Earthquake outside of California, Wind, Other)
(in millions)
Modeled
Gross Loss
Ceded
Losses
$
25 $
50
100
200
300
2021
6 $
24
63
142
224
Net
Losses
Ceded
Losses
19 $
26
37
58
76
2020
7 $
24
63
145
225
Net
Losses
Ceded
Losses
18 $
26
37
55
75
2019
29 $
73
163
257
396
2019
7 $
24
63
144
226
Net
Losses
Net
Losses
21
27
37
43
54
18
26
37
56
74
In the above table, projected losses for 2021 were estimated based on our exposure as of December 31, 2020, utilizing the treaty
structure in place as of January 1, 2021. 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 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 lower 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 regularly monitor and quantify our exposure to catastrophes. 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
10
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 use 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, 2021, there is a 99.6 percent likelihood that the net
loss will be less than 7.0 percent of policyholders’ statutory surplus as of December 31, 2020. 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 (case reserves) and losses that have been incurred but not yet
reported (IBNR) to the Company. 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 the Company, 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 2020 and 2019 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.
11
(as of December 31, in thousands)
Product Line
Casualty segment net loss and ALAE
reserves
Commercial excess
Personal umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Other casualty
Property segment net loss and ALAE
reserves
Marine
Commercial property
Specialty personal
Other property
Surety segment net loss and ALAE reserves
Commercial
Miscellaneous
Contract
Latent liability net loss and ALAE reserves
Total net loss and ALAE reserves
ULAE reserves
Total net loss and LAE reserves
Case
2020
IBNR
Total
Case
2019
IBNR
Total
$
16,816 $ 156,302 $ 173,118 $
102,801
39,289
63,512
233,223
173,158
60,065
128,435
90,710
37,725
129,851
61,218
68,633
73,021
58,113
14,908
90,097
20,971
69,126
169,306
131,747
37,559
14,967 $ 135,180 $ 150,147
76,062
32,390
234,641
58,236
120,594
35,076
139,940
83,619
63,690
16,660
85,949
24,921
146,640
35,442
43,672
176,405
85,518
56,321
47,030
61,028
111,198
13,321
29,572
2,381
785
30,824
23,164
4,314
2,165
44,145
52,736
6,695
2,950
13,506
10,461
1,746
982
26,299
15,603
4,794
3,266
39,805
26,064
6,540
4,248
2,565
389
(61 )
4,387
12,556
5,135
6,538
13,479
10,314
5,961
9,498
17,467
$ 349,305 $ 902,061 $ 1,251,366 $ 336,930 $ 800,630 $ 1,137,560
52,275
$ 349,305 $ 957,015 $ 1,306,320 $ 336,930 $ 852,905 $ 1,189,835
8,889
5,249
7,264
12,914
15,121
5,524
6,477
17,866
1,425
712
2,234
4,553
52,275
54,954
54,954
—
—
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.
12
Product line
Commercial excess
Length of
reserve tail
Long
Emergence
patterns relied
upon
Internal
Personal umbrella
Medium
Internal
General liability
Long
Internal
Professional services
Medium
Internal & external
Commercial transportation
Medium
Internal
Small commercial
Long
Internal
Executive products
Long
Internal & significant external
Expected loss Reserve
ratio
estimation
variability variability
High
High
Medium
Medium
Medium
High
Medium
Medium
Medium
Medium
Medium
Medium
High
High
Other risk factors
Low frequency
High severity
Loss trend volatility
Exposure growth
Unforeseen tort potential
Exposure changes/mix
Low frequency
High severity
Loss trend volatility
Exposure growth
Unforeseen tort potential
Exposure changes/mix
Unforeseen tort potential
Highly varied exposures
Loss trend volatility
Unforeseen tort potential
High severity
Exposure change/mix
Loss trend volatility
Unforeseen tort potential
Exposure growth/mix
Unforeseen tort potential
Small volume
Low frequency
High severity
Loss trend volatility
Economic volatility
Unforeseen tort potential
Exposure growth/mix
Heavily reinsured
Other casualty
Marine
Other property
Medium
Internal & external
Small volume
Medium
Medium
Medium
Internal & external
Exposure growth/mix
High
High
Short
Internal
Surety
Medium
Internal
Runoff including asbestos & environmental
Long
Internal & external
CAT aggregation exposure
Low frequency
High severity
Economic volatility
Uniqueness of exposure
Loss trend volatility
Mass tort/latent exposure
High
Medium
Medium
Medium
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. 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.
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 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.
13
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 change in 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.
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
14
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 more evaluation periods than the
short-tailed lines. 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 the Company 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. The following chart 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, our general liability emergence has ranged from 16 percent to 22 percent
favorable and our management liability emergence has ranged from 4 percent to 34 percent adverse over the last three years, while our
overall emergence for all products combined has ranged from 18 percent to 33 percent favorable. The numbers below are the changes
in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2020, resulting from the change in the parameters
shown. These parameters were applied to a general liability net loss and LAE reserve balance of $233.2 million, in addition to
associated ULAE and latent liability reserves, at December 31, 2020.
(in millions)
+/-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%).
Result from
favorable
change in parameter
$
$
$
(14.2 ) $
(6.3 ) $
(10.0 ) $
Result from
unfavorable
change in parameter
14.0
5.7
9.8
$
(29.8 ) $
30.2
There are often significant interrelationships 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 the Company that establishes a permissible net premiums
written to surplus ratio, guidelines established by the National Association of Insurance Commissioners (NAIC) provide that this ratio
15
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
2019
2020
Year Ended December 31,
2018
$ 892,088 $ 860,337 $ 823,175 $ 749,854 $ 740,952
859,976
1,121,592 1,029,671
0.9 to 1
0.8 to 1
864,554
0.9 to 1
829,775
1.0 to 1
0.8 to 1
2017
2016
COMBINED RATIO AND STATUTORY COMBINED RATIO
Our underwriting experience is best indicated by our 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.
Loss ratio
Expense ratio
Combined ratio
2020
Year Ended December 31,
2018
2017
2019
51.2
40.8
92.0
49.3
42.6
91.9
54.1
40.6
94.7
54.4
42.0
96.4
2016
48.0
41.5
89.5
We also calculate the statutory combined ratio, which is not indicative of underwriting income due to accounting for policy
acquisition costs differently for statutory accounting purposes. 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
Statutory loss ratio
Statutory expense ratio
Statutory combined ratio
2020
2019
Year Ended December 31,
2018
2017
2016
51.0
40.8
91.8
49.3
41.8
91.1
54.1
39.9
94.0
54.4
41.8
96.2
48.0
41.0
89.0
P&C industry combined ratio
100.0 *
98.9 **
99.2 **
103.9 **
100.7 **
*
**
Source: Conning (2020). Property-Casualty Forecast & Analysis: By Line of Insurance, Fourth Quarter 2020. Estimated for
the year ended December 31, 2020.
Source: AM Best (2020). Aggregate & Averages – Property/Casualty, United States & Canada. 2016 – 2019.
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. In
addition, we have a diversified investment portfolio that 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. Our portfolio does not contain derivatives.
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 was 77 percent of the total portfolio, the same as last year,
while the equity allocation was 19 percent of the overall portfolio, up from 18 percent the previous year. Other invested assets
represented 2 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, investments in private funds and investments in restricted stock. The remaining 2 percent
was made up of cash and cash equivalents. As of December 31, 2020, 83 percent of the fixed income portfolio was rated A or better
and 63 percent was rated AA or better.
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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 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, 2020, are as follows:
(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
ABS/CMBS/MBS*
Total available-for-sale
Amortized
Cost
Fair Value
$
92,561 $
489,451
525,083
357,134
597,238
93,689
519,920
575,940
386,633
620,444
$ 2,061,467 $ 2,196,626
*
Asset-backed, commercial mortgage-backed and mortgage-backed securities
We had cash and fixed income securities maturing within one year of $155.9 million at year-end 2020. This total represented 5
percent of cash and investments, a slight increase from year-end 2019.
REGULATION
STATE REGULATION
As an insurance holding company, we and 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.
The primary focus of state regulation of insurance companies is financial solvency and market conduct practices. Regulations
designed to ensure the 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
adequate.
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 its 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 Illinois insurance laws applicable to our insurance company subsidiaries impose
certain restrictions on their ability to pay dividends. The Illinois insurance holding company laws require that ordinary dividends paid
by an insurance company be reported to the IDOI 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. The IDOI has broad authority 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 departments and court rulings. State insurance regulators are members of the National Association
of Insurance Commissioners (NAIC). The NAIC is a non-governmental regulatory support organization that seeks to promote
uniformity and 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 adoption 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.
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Illinois has adopted the Amended Holding Company Model Act, which imposes reporting obligations on parents and other
affiliates of licensed insurers or reinsurers, with the purpose of protecting the licensed companies from enterprise risk. The Amended
Holding Company Model Act requires the ultimate controlling person (in our case RLI Corp.) to file an annual enterprise risk report
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. We report on these risks on an annual basis and are in compliance with this
law.
Illinois has adopted the Own Risk and Solvency Assessment (ORSA) model act. ORSA is applicable to Illinois domiciled
insurance companies that meet 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. The Company files an ORSA summary report with the IDOI each year,
which includes an internal identification, description and assessment of the risks associated with our business plan and the sufficiency
of capital resources to support those risks.
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, 2020, 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
Ins., our principal insurance company subsidiary, had an authorized control level RBC of $203.9 million compared to actual statutory
capital and surplus of $1.1 billion as of December 31, 2020, resulting in statutory capital that is more than five times the authorized
control level. 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
generally accepted accounting principles in the United States of America (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 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 November 27, 2018 for the five-year period ending December 31, 2017. 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
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insurers can be assessed a small percentage of the annual premiums written for the relevant lines of insurance in that state to contribute
to paying the claims of insolvent insurers. 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 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 Ins., 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 enacted new insurance laws that
require certain regulated entities to implement and maintain comprehensive information security programs to safeguard the personal
information of insureds. In 2017, the New York State Department of Financial Services (NYDFS) enacted a cybersecurity regulation.
This regulation requires banks, insurance companies and other financial services institutions regulated by the NYDFS 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 have implemented the requirements of the regulation and are in compliance with it. 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 companies domiciled 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. 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: (1) 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 (2) 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.
Insurers are also subject to state laws regulating claim handling practices. The NAIC created a model unfair claims practices law
which most states have fully or partially adopted. These laws and regulations set the standards by which insurers must investigate and
resolve claims; however, a private cause of action for violation is not available to claimants. These laws typically prohibit: (1)
misrepresentation of policy provisions, (2) failing to adopt and act promptly when claims are presented and (3) refusing to pay claims
without an investigation. Market conduct examinations or insurance regulator investigations may be prompted through annual reviews
or excessive numbers of complaints against an insurer. After an investigation or market conduct review by an insurance regulator,
insurers found to be in violation of these laws and regulations face potential fines, cease and desist orders, remediation orders or loss
of authority to write business in the particular state.
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.
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,
19
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
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 U.S. presidential and congressional
elections, could affect the scope, timing and final implementation of the Dodd-Frank Act.
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, monitoring the extent to which traditionally
underserved communities and consumers have access to affordable non-health insurance products, collecting insurance industry
information and data and representing 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.
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. There has been little progress in implementing the provisions of NARAB to date.
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) 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 Corp. or any of its affiliates knowingly engaged in certain specified activities identified in that law. For the year
2020, neither RLI Corp. 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 name “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.
HUMAN CAPITAL
RLI is a specialty underwriting company whose achievement emanates from our entrepreneurial and ownership culture. We
strive to hire top underwriting and claim talent, who often work in branch locations closer to our customers, throughout the United
States. Underwriters have the resources and authority to operate within established underwriting guidelines and a share of the rewards
when they succeed. Compensation plans are designed to reward profitability and shareholder value creation to better align
compensation with the longer-term nature of insurance products and stakeholder expectations. We solicit employee feedback to help
ensure employees are engaged, feel valued and are contributing to our success.
As of December 31, 2020, the Company employed 875 associates throughout the United States, 863 of whom were full time.
We prefer to utilize our own underwriting, claims and support staff, given the complex nature of our products. The niche markets we
operate within require unique experience and deep knowledge to select appropriate risks and serve our customers. Ensuring a seamless
transfer of knowledge as employees retire and developing newer talent continues to be a focus of the Company. We enable employees
to maintain and expand industry knowledge and technical expertise through education and training as well as memberships to industry
and trade associations. We leverage the services of a limited number of third-party contractors when it is difficult to hire employees
that address a needed skill set outside of our core insurance functions, or when efficiencies can be gained.
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Human Capital Oversight
At the Board of Directors level, oversight of human capital is provided by the Human Capital and Compensation Committee
(HCCC). Executive oversight for human capital is provided by the Company’s Vice President of Human Resources, who reports to the
Chairman & CEO. Key responsibilities of the Vice President of Human Resources include providing effective programs related to
staffing and succession planning, employee recruiting and development, compensation and benefits, and compliance, which are
monitored by the HCCC.
Compensation and Benefits
We compensate employees through a competitive compensation (Total Rewards) program that includes a base salary or hourly
wage, annual incentives for all full-time employees, long-term incentives for management, retirement benefits, as well as health,
disability and life insurance. We utilize various information sources, including local, regional and national compensation surveys, to
establish competitive pay targets for each position in the company to ensure its Total Rewards program attracts and retains a talented
workforce.
An important element of the Total Rewards program is to promote alignment of employee and shareholder interests, which is
achieved through the Company’s Employee Stock Ownership Plan (ESOP) and long-term incentive plan (LTIP). The ESOP is a
qualified retirement plan that provides shares of stock to employees based on the profitability of the Company, while management is
granted stock options and restricted stock units through the LTIP. Management, at the level of vice president and above, is subject to
stock ownership guidelines requiring them to hold Company shares valued at a multiple of their base salary, depending on their role.
As of December 31, 2020, 9 percent of RLI Corp. shares were owned by insiders.
Diversity and Inclusion
We strive to cultivate an exceptional workforce to perpetuate our ownership culture, deliver excellent customer service and
continue to achieve superior business results. Our goal is to attract, develop and retain the best talent from diverse backgrounds, while
promoting a culture where different viewpoints are valued and individuals feel respected, are treated fairly and have an opportunity to
excel in their chosen careers.
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 the Company. 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
Insurance Industry
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,
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• 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.
Our business is concentrated in several key states and a change in our business in one of those states could disproportionately
affect our financial condition or results of operations.
Although we operate in all 50 states, 51 percent of our direct premiums earned were generated in four states in 2020: California
– 17 percent; New York – 14 percent: Florida – 10 percent; and Texas – 10 percent. An interruption in our operations, or a negative
change in the business environment, insurance market or regulatory environment in one or more of these states could have a
disproportionate effect on our business and direct premiums earned.
We compete with a large number of companies in the insurance industry to underwrite premium and their actions could ultimately
impact our overall results.
We compete with a large number of other companies in our selected lines of business. We are vulnerable to the actions of other
companies who may seek to write business without the appropriate regard for risk and profitability, especially during periods of
intense competition for premium. During these times, it is very difficult to grow or maintain premium volume without sacrificing
underwriting discipline and income.
We face competition 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 stronger brand awareness than we do. We may incur increased costs in competing
for premium. If we are unable to compete effectively in the markets we operate in or are not successful expanding our operations into
new markets, the amount of premium we write 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,
including:
• 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.
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A downgrade in our ratings from AM Best, Standard & Poor’s or Moody’s could negatively affect our business.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Our insurance
companies are rated for overall financial strength by AM Best, Standard & Poor’s and Moody’s. AM Best, Standard & Poor’s and
Moody’s ratings are independent opinions of an insurer’s financial strength and ability to meet ongoing insurance policy and contract
obligations, based on a comprehensive quantitative and qualitative analysis of balance sheet strength, operating performance, business
profile and enterprise risk management. These financial strength ratings are based on factors relevant to policyholders, agents,
insurance brokers and intermediaries and are not specifically related to securities issued by the company. The view of required capital
may differ between rating agencies, as well as from RLI Corp.’s own view of desired capital. 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 2020. AM 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
and kept the group on negative outlook, indicating they believe the group may be downgraded over the next six to 24 months.
Moody’s reaffirmed our group rating of A2 for RLI Ins. and Mt. Hawley. If our ratings are significantly reduced from their current
levels by AM Best, Standard & Poor’s or Moody’s, our competitive position in the industry, and therefore our business, could be
adversely affected. A measurable downgrade could result in a substantial loss of business, as policyholders might move to other
companies with greater 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 stakeholders.
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,
• Restrictions on the ability of our insurance company subsidiaries to pay dividends to the Company,
• 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.
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
23
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 initiate investigations or other proceedings, fine the Company, preclude or temporarily suspend the
Company from carrying on some or all of its activities or otherwise penalize the Company. 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 Delaware, where we 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 the Company to be less competitive in the industry.
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 the Company and
the 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. Changes in industry practices, and in legal, legislative, regulatory, judicial, social and other conditions under which we
operate may require us to pay claims we did not intend to cover when we wrote the policies. These changes may serve to extend the
time for making claims, extend coverage and increase damages. These changes may not become apparent until after we have issued
policies or bonds that are affected by the changes and, consequently, we may not know the extent of our liability and the impact to our
financial performance until many years after a policy or bond was issued. The effects of these and other coverage issues are difficult to
predict and could have a materially adverse effect on our financial performance.
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,
• Emerging coverage issues,
• Trends in claim frequency and severity,
• Changes in operations,
• Emerging economic and social trends,
• State reviver statutes that permit claims after a statute of limitation has expired,
• Inflation in amounts awarded by courts and juries 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 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
24
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.
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 the Company to suffer material financial losses. Our approaches to
catastrophic risk mitigation are largely based on estimates and modeling and, thus, may be inadequate to cover the losses from
such events. Climate change could further increase the severity and volatility of weather-related 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. We also face risk from lava flows in Hawaii impacting our
homeowners’ business and from wildfires, particularly on the West Coast. Since the Northridge, California earthquake in 1994, 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 occur from 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 products, and it
is possible that a catastrophic event or multiple catastrophic events could cause the Company 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.
We use models to help assess exposure to catastrophic events against established thresholds. CAT models cannot contemplate
all possible CAT scenarios and include 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, which could
have a materially adverse effect on our results of operations and financial condition. To address uncertainty related to CAT models,
we also monitor against thresholds using non-modeled metrics.
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.
Our reinsurers may not pay on losses in a timely fashion, or at all, which may increase our costs and have an adverse effect on our
business.
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 the Company to the
extent the risk is transferred or ceded to the reinsurer, it does not relieve the Company (the reinsured) of its liability to its
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. That is, our reinsurers may not pay claims made by the
Company 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 or at prices we deem acceptable, we may be
exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which would 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, obtain other reinsurance facilities in adequate amounts and at favorable rates, or 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.
25
Financial and Investment
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, value of goods transported, miles
traveled and number of new projects initiated. In an economic downturn 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 or desire for insurance coverage, to cancel existing insurance policies, to
modify coverage or to not renew with the Company, all of which affect our ability to generate revenue. In addition, as approximately a
third of our business relates to the construction industry, our results of operations could be significantly impacted in an economic
downturn if the construction industry is affected disproportionally.
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.
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 IDOI. 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 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.
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 AM Best rating or other ratings of our
insurance subsidiaries. In addition, we may choose to retain capital to support growth or further mitigate risk, instead of returning
excess capital to our shareholders.
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
26
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.
Operational
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 an enterprise risk report with the IDOI, 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 enterprise risk
management (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 the Company accurately identifying all risks and accurately limiting our exposures based on our assessments
also cannot be guaranteed.
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 or acquisition of new insurance products that
are profitable and fit within our business model. Our ability to grow profitably requires that we identify market opportunities, which
may include acquisitions, and that we attract and retain underwriting and claims expertise to support that growth. 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 effectively or accurately assess and overcome these obstacles, or
we improperly implement new insurance products, our ability to grow profitably could be impaired.
We may be unable to attract and retain qualified key employees.
We depend on our ability to attract and retain experienced underwriting and claim talent, who have deep knowledge of the niche
business we write, and other skilled employees. If we cannot attract or retain top-performing executive officers, underwriters and other
employees, the quality of their performance decreases or we fail to implement succession plans for our key employees, 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 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
software that we use to model natural catastrophes, process claims, and manage policies, producers and financial processes. 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 fewer 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 the Company 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 security and stability of our critical vendors.
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.
27
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 secure and continue to take steps to ensure they are protected
against such risks, we cannot guarantee such problems will not occur. If they do, interruption to our business and damage to our
reputation and related costs, could be significant, which could impair our profitability.
Epidemics, pandemics and public health outbreaks, including the ongoing coronavirus (COVID-19) pandemic, could adversely
affect our business, including revenues, profitability, results of operations and/or cash flows, in a manner and to a degree that
could be material.
Epidemics, pandemics and other public health outbreaks generally result in significant disruptions in economic activity and
financial markets. The cumulative effects on the Company could include, without limitation:
• Reduced demand for our insurance policies due to reduced economic activity, which could negatively impact our
revenues,
• Reduced cash flows from our policyholders, delaying premium payments,
• Increased costs and disruption of operations due to employees working remotely or unavailability of our employees,
• Increased claims, losses, litigation and related expenses,
• Legislative, regulatory and judicial actions in response to the public health outbreak, including, but not limited to, actions
prohibiting us from cancelling insurance policies in accordance with our policy terms, requiring us to cover losses when
our underwriting intent in those policies was not to provide coverage or was to exclude coverage, ordering us to provide
premium refunds, granting extended grace periods for payment of premiums and providing for extended periods of time to
pay premiums that are past due,
• Policyholder losses from pandemic-related claims could be greater than our reserves for those losses,
• Volatility and declines in financial markets could reduce the fair market value, or result in the impairment, of invested
assets held by the Company and
• The decline in interest rates which could reduce future investment results.
Although we have investigated and closed a substantial number of COVID-19-related claims without payment, state and federal
courts could rule that such claims are covered under our policies. Court decisions upholding our position that these COVID-19 related
claims are not covered under our policies could also be overturned on appeal. These actions could result in an increase in claims and
paid losses, which could have a materially adverse effect on our financial performance. Such appellate court decisions may take
several years to become final and their ultimate outcome is uncertain at this time.
We have experienced declines in premium in select product lines and established loss and defense reserves for others as a result
of COVID-19. The extent and duration of the premium declines cannot be determined and could continue to negatively impact our
operating results. While other impacts that could result from pandemics have not manifested to a significant degree for RLI through
the end of 2020, circumstances continue to change and we could be affected in different ways in the future. To the extent the COVID-
19 pandemic adversely affects our business and financial results, it may also heighten many of the other risks described herein.
If we are unable to keep pace with the technological advancements in the insurance industry, our ability to compete effectively
could be impaired.
Our operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers
and other business partners. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing
commitment of significant resources to maintain or upgrade to current standards and serve our customers. If we are unable to keep
pace with the advancements being made in technology, our ability to compete with other insurance companies who have advanced
technological capabilities will be negatively affected. Further, if we are unable to effectively update or replace our key legacy
technology systems as they become obsolete or as emerging technology renders them competitively inefficient, our competitive
position, security and our cost structure could be adversely affected.
28
Technology breaches or failures, including but not limited to cyber security incidents, could disrupt our operations, result in the
loss of critical and confidential information and expose us to additional liabilities, 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. Like other companies, RLI Corp. is also subject to insider threats that may impact the confidentiality, integrity or
availability of our data. We, 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). However, 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 the Company 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 remediation costs, monetary fines and other penalties, which could be significant. We have cyber insurance, but it is
possible that the coverage we have in place would not entirely protect the Company in the event that we experienced a cyber security
incident, interruption or widespread failure of our information technology systems.
We may suffer losses from litigation, which could materially and adversely affect our financial condition and business operations.
We continually face risks associated with litigation of various types, including general commercial and corporate litigation, and
disputes relating to bad faith allegations that could result in the Company 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 unfavorable
outcome, 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.
Anti-takeover provisions affecting the Company could prevent or delay a change of control that is beneficial to you.
Provisions of our certificate of incorporation and by-laws, as well as applicable Delaware 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 the Company,
• 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.
In particular, we are subject to Section 203 of the Delaware General Corporation Law which, under certain circumstances,
restricts our ability to engage in a business combination, such as a merger or sale of assets, with any stockholder that, together with
affiliates, owns 15 percent or more of our common stock, which similarly could prohibit or delay the accomplishment of a change of
control transaction.
Item 1B. Unresolved Staff Comments - None.
Item 2. Properties
We own five commercial buildings totaling 173,000 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.
29
Item 3. Legal Proceedings
Information on our legal proceedings is set forth in note 10 to the Consolidated Financial Statements included under Item 8,
Financial Statements and Supplementary Data.
Item 4. Mine Safety Disclosures - Not applicable.
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
RLI Corp. common stock trades on the New York Stock Exchange under the symbol RLI. RLI Corp. has paid dividends for 178
consecutive quarters and increased quarterly dividends in each of the last 45 years. In December 2020 and 2019, RLI Corp. paid
special cash dividends of $1.00 per share to shareholders. As of February 8, 2021, there were 853 registered holders of the Company’s
common stock.
Performance
The following graph provides a five-year comparison of RLI Corp.’s total return to shareholders compared to that of the S&P
500 and S&P 500 P&C Index:
RLI
S&P 500
S&P 500 P&C Index
$
--------------
••••••••••••••••
— — —
100 $
100
100
107 $
112
116
107 $
136
142
125 $
130
135
167 $
171
170
197
203
181
2015
2016
2017
2018
2019
2020
Assumes $100 invested on December 31, 2015, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends.
Comparison of five-year annualized total return — RLI: 14.5%, S&P 500: 15.2% and S&P 500 P&C Index: 12.5%.
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 last repurchased shares in 2011. 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.
Item 6. Selected Financial Data – Not applicable.
31
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 (Group). Our focus is on niche markets and developing unique products that
are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer
service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In 2020, we
achieved our 25th consecutive year of underwriting profitability. Over the 25-year period, we averaged an 88.4 combined ratio. This
drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from
our investment portfolio and long-term appreciation in our equity portfolio.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business
segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through
combined ratios, which are further subdivided into their respective loss and expense components.
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 further 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 12 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, net unrealized gains or losses on equity
securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net
earnings to underwriting income follows:
(in thousands)
Net earnings
Income tax expense
Earnings before income taxes
Equity in earnings of unconsolidated investees
General corporate expenses
Interest expense on debt
Net unrealized gains on equity securities
Net realized gains
Net investment income
Net underwriting income
Combined Ratio
Year ended December 31,
2019
2020
$
$
$
157,091 $
32,750
189,841 $
(20,233 )
10,265
7,603
(32,101 )
(17,885 )
(67,893 )
69,597 $
191,642
41,092
232,734
(20,960 )
12,686
7,588
(78,090 )
(17,520 )
(68,870 )
67,568
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.
32
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 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, 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 the Company. 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 the Company, 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 claim 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 current estimated losses differ from those estimated for a period at a prior valuation date 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 development 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 case 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 the Company, claims that have been reported to the Company 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.
33
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, chief legal officer 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, 2020, 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 certain 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 expected loss ratios and loss
development assumptions. The loss development assumptions are typically based on historical reporting patterns but could consider
alternative sources of information. The IBNR percentages are reviewed and updated periodically. 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,
• Assumed reinsurance businesses where there is an extended reporting lag and/or a heavier utilization of ceding company
data and claims and product expertise,
34
• 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 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. In some analyses, including 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 liabilities arising out of directors and officers, management liability, workers’ compensation and medical errors and
omissions exposures, 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,
• Underlying policy terms and conditions,
• Business or exposure mix,
35
• 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, underwriters 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 and external 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 both their analytical assessment and relevant qualitative factors, such as their view of estimation
risk. After discussion of these analyses, recommendations 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 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 offer broad coverages (with named exclusion) and are issued
on an occurrence basis. Claimants have at times sought coverage beyond the insurer’s original intent, including seeking to void or
limit exclusionary language.
Because of the variation and the likelihood that there are unforeseen and under-quantified liabilities absent from the actuarial
estimate, we believe there are circumstances where it is prudent to enhance our normal reserving process. Generally, these are
circumstances where we have qualitative information and knowledge of increased risk, but those circumstances have not occurred
within the history of our quantitative data. In these situations, we will rely on that qualitative information, usually from our claim team
or underwriting staff, and make an enhancement to our normal process. In general, these enhancements will result in an increased
overall reserve level compared to reserves based only on quantitative information. In the cases where these risks fail to materialize,
favorable loss development will likely occur in subsequent periods. It is also possible that the risks materialize above the enhanced
reserve level, in which case unfavorable loss development will likely occur in subsequent periods.
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
reserve 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.
36
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,
2020.
INVESTMENT VALUATION
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.
Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings. We classify our
investments in fixed income 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.
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 the Company of its 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 Securities and Exchange Commission (SEC) filings for 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 AM Best and Standard & Poor’s (S&P) ratings of our
reinsurers. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance
placements.
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 balance recoverable from the reinsurer are specifically identified and charged to earnings in
the form of an allowance for uncollectible amounts. We subject our remaining reinsurance balances receivable to detailed
recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and record an
additional allowance for unrecoverable amounts from reinsurers. This credit 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 incremental direct costs that relate to the successful acquisition of new or renewal insurance contracts, including
commissions and premium taxes. 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 process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs
expected to be incurred, but does not consider investment income. 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.
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
37
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.
IMPACT OF COVID-19
The coronavirus (COVID-19) pandemic has impacted individuals, businesses and the economy throughout 2020. As an
employee-owned company, the health and well-being of our customers, partners and associates is our highest priority. While a large
percentage of our associates are still working from home, our processes and controls continue to operate effectively and we have been
able to maintain the highest service and support levels possible for our customers.
It is difficult to predict how and to what extent the economic slowdown will impact our revenues in the coming quarters. To
date, the product line that has experienced the greatest impact has been public transportation. Many of our passenger transportation
customers have been unable to effectively operate under social-distancing protocols and stay-at-home orders. For the year ended
December 31, 2020, transportation gross written premium was down $42.2 million when compared to 2019. We expect transportation
premium to continue to be down from prior periods until the use of public transportation increases, which may not be until after a
vaccine or effective treatment is readily available or there is a significant reduction in cases. Additionally, slowdowns in the
construction industry contributed to premium declines for our general liability and surety products. A number of our products support
the construction industry, and revenues may continue to be impacted as long as this sector experiences disruption. However, our
personal lines products, management liability products and property businesses have seen little to no impact on premium from the
pandemic.
We have been fair and flexible with our customers in modifying exposures and payment terms, and are in compliance with any
applicable state regulatory directives on such changes. Insureds continue to make payments in accordance with the agreed upon
schedules, and we have not experienced a material increase in the amount of expense associated with uncollectible receivables.
The loss exposure arising out of the spread of COVID-19 and resulting shutdown will take time to resolve. We do not offer
event cancellation, travel, trade credit or pandemic-related coverages, which would be more directly impacted by the COVID-19
pandemic. The Company has received a number of claims, the majority of which relate to business interruption. We are reviewing the
individual circumstances of each claim submitted and will fulfill our obligation to pay if coverage applies. The derivative implications
that COVID-19 has on the economy may have negative implications on products that are correlated with the credit cycle, including,
but not limited to, some of our executive products and surety offerings. Additionally, the professional services and executive product
groups may be affected by claims made against companies who are reopening or returning to work. In 2020, $18.3 million of net
reserves were established to address the increased risk of loss and expense that emanated from the economic downturn brought on by
the pandemic.
Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of
these assumptions involved greater uncertainty as of December 31, 2020. We expect there will be impacts to the timing of loss
emergence and ultimate loss ratios for certain coverages. The industry is experiencing new issues, including the postponement of civil
court cases, the extension of various statutes of limitations, changes in settlement trends and a significant reduction in economic
activity and insured exposure in some classes. Our booked reserves include consideration of these factors, but the duration and degree
to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies
and reduce earnings in future periods.
We continue to evaluate opportunities for expense savings and efficiencies and took targeted actions to reduce or defer expenses
in 2020, including certain hiring freezes, position consolidations, travel limitations and executive merit increase suspensions. Bonus
and profit-sharing expense, which is correlated with company performance, also declined.
38
The equity portfolio has more than recovered from the sharp market sell off in the first quarter, with $37.8 million of net after-
tax realized and unrealized gains on equity securities in 2020. Additionally, lower interest rates increased the fair value of the fixed
income portfolio, which resulted in $53.5 million of after-tax other comprehensive earnings. However, with the decline in yields,
reinvestment rates are now lower than in previous years, which will limit the portfolio’s ability to generate higher levels of investment
income, absent a larger invested asset base.
Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime) contributed towards positive net earnings in
2020. While earnings for Prime were higher than in 2019, Maui Jim’s sales were negatively impacted by the shutdown much of the
traditional retail sector experienced during the year. The economic downturn may continue to impact the results of these investees,
particularly if there is any lasting impact on the retail sector as it relates to Maui Jim.
We produced solid operating results in 2020 and our financial position remained strong despite the impact of the COVID-19
pandemic. We generated $263.3 million of net operating cash inflows and believe we have adequate liquidity. Our revolving credit
facility provides for a borrowing capacity of $60.0 million, which can be increased to $120.0 million under certain circumstances.
Additionally, our membership in the Federal Home Loan Bank system provides a secured lending facility with an aggregate
borrowing capacity of approximately $30.0 million. There were no amounts outstanding under any of these facilities as of December
31, 2020. In addition to the $155.9 million of cash and other investments maturing within one year as of December 31, 2020, we
believe that cash generated from operations, the liquidity of our fixed income portfolio and our unused lines of credit provide
sufficient sources of cash to meet our anticipated needs over the next 12 to 24 months.
Ultimately, the extent to which COVID-19 will impact our business will be influenced by how long it takes for the economy to
recover. We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business. Our
diversified portfolio of products and financial strength have allowed us to remain on solid footing. We believe we have a strong and
sustainable underwriting approach that will allow us to weather the economic downturn and uncertainty we are currently experiencing.
RESULTS OF OPERATIONS
This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.
Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be
found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2019, incorporated herein by reference.
Consolidated revenue for 2020 decreased $20.0 million from 2019. Net premiums earned for the Group increased 3 percent,
driven by growth from our property and casualty segments, but performance in the equity portfolio was not able to match the return
generated in 2019. Net investment income decreased by 1 percent in 2020, primarily due to lower reinvestment rates relative to the
prior year. Additionally, we recorded net realized gains on our investment portfolio in 2020 and 2019, due to portfolio rebalancing.
CONSOLIDATED REVENUE
(in thousands)
Net premiums earned
Net investment income
Net realized gains
Net unrealized gains on equity securities
Total consolidated revenue
Year ended December 31,
2019
2020
865,747 $
67,893
17,885
32,101
983,626 $
839,111
68,870
17,520
78,090
1,003,591
$
$
Net earnings for 2020 totaled $157.1 million, down from $191.6 million in 2019. Improved underwriting income was offset by a
decline in unrealized gains on equity securities.
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NET EARNINGS
(in thousands)
Underwriting income
Net investment income
Net realized gains
Net unrealized gains on equity securities
Interest expense on debt
General corporate expenses
Equity in earnings of unconsolidated investees
Earnings before income taxes
Income tax expense
Net earnings
UNDERWRITING RESULTS
Year ended December 31,
2019
2020
$
$
$
69,597 $
67,893
17,885
32,101
(7,603 )
(10,265 )
20,233
189,841 $
(32,750 )
157,091 $
67,568
68,870
17,520
78,090
(7,588 )
(12,686 )
20,960
232,734
(41,092 )
191,642
Gross premiums written increased $71.4 million, or 7 percent, in 2020 when compared to 2019. Excluding the decline in
commercial transportation, which was impacted by the COVID-19 pandemic, written premium increased by 12 percent. Positive rate
movement across most of the casualty and property portfolio and an expansion of distribution channels provided for growth
opportunities in established lines.
Underwriting results for 2020 were impacted by significant catastrophe activity, including $51.5 million of pretax losses and
$1.5 million of reinstatement premium from hurricanes, as well as $6.5 million of other storm and civil unrest losses. Additionally,
$18.3 million of COVID-19 related loss and defense reserves were established in 2020. Comparatively, pretax storm losses were $9.5
million in 2019. Results for each period benefited, however, from favorable development on prior years’ loss reserves, which provided
additional pretax earnings of $101.1 million in 2020, compared to $75.3 million in 2019. Further discussion of reserve development
can be found in note 6 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 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 capital. MVP 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 $14.2 million and $11.1 million for 2020 and 2019,
respectively. These performance-related expenses impact policy acquisition, insurance operating and general corporate expenses line
items in the financial statements. Partially offsetting the 2020 and 2019 increases were $11.2 million and $1.4 million, respectively, in
reductions to incentive and profit-sharing amounts earned due to losses associated with catastrophe activity, as well as the reserves
that were established for COVID-19 in 2020.
In total, underwriting income was $69.6 million on a 92.0 combined ratio in 2020, compared to $67.6 million on a 91.9
combined ratio in 2019. The loss ratio was 51.2 in 2020, compared to 49.3 in 2019. The expense ratio decreased to 40.8 in 2020, from
42.6 in 2019. Travel and entertainment expenses, along with other discretionary costs, decreased in 2020 as we made adjustments to
reduce the impact of COVID-19 on our results. Additionally, stronger growth in book value was experienced in 2019, which led to
larger levels of bonus and profit-sharing expenses.
We achieved our 25th consecutive year of underwriting profit in 2020. 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 the Company from the broader insurance market by ensuring sound risk selection and appropriate pricing.
The following tables and narrative provide a more detailed look at individual segment performance over the last two years.
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GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial excess and personal umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Other casualty
Total casualty
PROPERTY
Marine
Commercial property
Specialty personal
Other property
Total property
SURETY
Commercial
Miscellaneous
Contract
Total surety
Grand total
Casualty
Gross Premiums Written
2019
% Change
2020
Net Premiums Earned
2019
% Change
2020
$ 237,239 $ 183,098
99,345
94,307
91,300
89,347
63,345 105,592
63,925
65,843
96,828
121,653
66,057
75,722
$ 749,409 $ 704,192
30 % $ 178,214 $ 140,483
(5 ) % 91,653 98,880
2 % 85,196 81,329
(40 ) % 64,624 83,213
3 % 63,357 55,701
26 % 26,509 27,088
15 % 59,968 71,764
6 % $ 569,521 $ 558,458
98,027 $
$
91,315
145,371 126,358
21,190
2,562
$ 268,769 $ 241,425
20,962
4,409
$
46,426 $
43,174
28,654
47,436
42,614
29,335
$ 118,254 $ 119,385
7 % $ 81,852 $ 74,887
15 % 79,406 68,310
(1 ) % 19,596 19,316
72 %
1,509
2,866
11 % $ 183,720 $ 164,022
(2 ) % $ 42,872 $ 43,553
1 % 42,292 44,721
(2 ) % 27,342 28,357
(1 ) % $ 112,506 $ 116,631
27 %
(7 ) %
5 %
(22 ) %
14 %
(2 ) %
(16 ) %
2 %
9 %
16 %
1 %
90 %
12 %
(2 ) %
(5 ) %
(4 ) %
(4 ) %
$ 1,136,432 $ 1,065,002
7 % $ 865,747 $ 839,111
3 %
Gross premiums written for the casualty segment were up $45.2 million for 2020. Rate increases were achieved across the
segment, particularly in our executive products group. Small commercial continued to benefit from new production sources and
geographic expansion, while personal umbrella expanded its distribution base. Other casualty increased $9.7 million, as our general
binding authority (GBA) business continued to grow.
Commercial transportation has been significantly affected by the stay-at-home orders associated with COVID-19, particularly
public auto, which focuses on charter, school and transit buses. The reduced utilization led to a $42.2 million decline in gross
premiums written in 2020. General liability premiums also declined as a result of increased competition, as well as decreases in
construction related activity and use-based exposures.
Property
Gross premiums written from our property segment were up $27.3 million in 2020. Our commercial property business was up
$19.0 million, as an improving market allowed our underwriters to find more opportunities with acceptable rate levels. Additionally,
rates on wind-prone and earthquake exposures continued to increase. Rate increases and market disruption, which created new
business opportunities, led to $6.7 million of growth for our marine product. Other property premium increased as a result of property-
exposed GBA business that continued to gain scale.
Surety
Gross premiums written from our surety segment were down $1.1 million in 2020. The economic slowdown reduced demand
for surety bonds. Additionally, we continually monitor our portfolio for higher risk accounts and have selectively eliminated
exposures that no longer met our underwriting standards.
41
UNDERWRITING INCOME
(in thousands)
Casualty
Property
Surety
Total
COMBINED RATIO
Casualty
Property
Surety
Total
Casualty
2020
2019
44,427 $
(3,182 )
28,352
69,597 $
20,601
18,143
28,824
67,568
$
$
2020
2019
92.2
101.7
74.8
92.0
96.3
88.9
75.3
91.9
Underwriting income for the casualty segment was $44.4 million on a 92.2 combined ratio in 2020, compared to $20.6 million
on a 96.3 combined ratio in 2019. The improvement is the result of increased favorable development on prior accident years’ reserves
and improved current accident year performance resulting from a shift in mix of business and lower levels of bonus and profit-sharing
expenses.
Favorable development on prior accident years’ loss reserves contributed to underwriting earnings in each of the past two years.
The total benefit from favorable development on prior years’ reserves was $75.1 million for 2020, with the largest amounts of the
development coming from accident years 2016 through 2019. Products which generated the majority of the favorable development
include transportation, general liability, commercial excess and professional services. No active products experienced significant
adverse development. Comparatively, overall results for the casualty segment in 2019 included favorable development of $62.5
million, with the bulk of the development attributable to transportation, general liability, professional services, commercial excess,
personal umbrella and small commercial across accident years 2016 through 2018. Executive products and medical professional
liability developed adversely in 2019. Favorable development on executive products and medical professional liability in 2020 was
responsible for a significant amount of the increase between the releases in 2020 and 2019. Hurricane losses on casualty-oriented
package policies that include property coverage resulted in $4.4 million of losses in 2020 and $12.9 million of current year reserves
were established for COVID-19 loss and defense costs on financial-related product lines.
The segment’s loss ratio was 56.6 in 2020, compared to 59.1 in 2019. The lower loss ratio in 2020 was due to the higher
amounts of favorable development on prior years’ reserves. The expense ratio for the casualty segment decreased to 35.6 from 37.2 in
2019.
Property
Underwriting loss from the property segment was $3.2 million on a 101.7 combined ratio in 2020, compared to underwriting
income of $18.1 million on an 88.9 combined ratio in 2019. Underwriting results for 2020 included $13.0 million of favorable
development on prior years’ loss and catastrophe reserves, primarily from the marine business, $5.0 million of storm and civil unrest
losses and $2.0 million of reserves related to COVID-19 investigative and defense costs. Hurricane activity resulted in $47.2 million
of losses and $1.5 million of ceded reinstatement premium. Comparatively, results for 2019 included $4.5 million of favorable
development in prior years’ reserves, largely from marine, and $8.8 million of storm losses.
The segment’s loss ratio was 60.6 in 2020, compared to 44.9 in 2019. Catastrophe losses added 30 points to the loss ratio in
2020, compared to 5 points of impact from catastrophe losses in 2019. Partially offsetting this increase was a reduction in current
accident year non-catastrophe losses and larger favorable development on prior years’ reserves. The expense ratio for the property
segment declined to 41.1 in 2020, from 44.0 in 2019, due in part to the larger premium base in 2020.
Surety
Underwriting income for the surety segment totaled $28.4 million on a 74.8 combined ratio in 2020, compared to $28.8 million
on a 75.3 combined ratio in 2019. Underwriting performance for each year reflects a combination of positive current accident year
results and favorable development in prior accident years’ loss reserves. The current accident year combined ratio for each period has
been in the low 80s, with each product line contributing to underwriting profit. Results for 2020 included favorable development on
prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $13.0 million, and offset $3.4 million
in current year reserves established for COVID-19 related losses. Comparatively, 2019 results included favorable development on
prior accident years’ loss reserves, which decreased the segment’s loss and settlement expenses by $8.3 million.
42
The segment’s loss ratio was 8.4 in 2020, compared to 8.3 in 2019. As stated above, a larger amount of favorable development
on prior years’ reserves in 2020 was offset by higher current accident year losses, primarily from reserves established for COVID-19,
all of which was incurred on a lower premium base. The expense ratio for the surety segment was 66.4 in 2020, compared to 67.0 in
2019.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS
During 2020, net investment income decreased by 1 percent. The decrease was primarily due to lower reinvestment rates
relative to the prior year. The average annual yields on our investments were as follows for 2020 and 2019:
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)
2020
2019
3.10 %
2.69 %
2.33 %
2.45 %
2.55 %
2.02 %
3.39 %
2.77 %
2.41 %
2.68 %
2.62 %
2.09 %
The after-tax yield reflects the different tax rates applicable to each category of investment. Our taxable fixed income securities
were subject to a corporate tax rate of 21.0 percent, our tax-exempt municipal securities were subject to a tax rate of 5.3 percent and
our dividend income was generally subject to a tax rate of 13.1 percent. During 2020, the average after-tax yield on the taxable fixed
income portfolio was 2.5 percent, a decrease from 2.7 percent in the prior year. The average after-tax yield on the tax-exempt portfolio
remained at 2.6 percent.
The fixed income portfolio increased by $213.5 million during the year, as the majority of operating cash flows were allocated
to the fixed income portfolio and a decline in interest rates was experienced during the year, increasing the fair value of fixed income
securities. The tax-adjusted total return on a mark-to-market basis was 6.6 percent. Our equity portfolio increased by $63.4 million to
$524.0 million in 2020 as a result of the strong equity market returns during the year. The total return for the year on the equity
portfolio was 12.5 percent.
Our investment results for the last five years are shown in the following table:
Average
Invested
Assets (1)
Net
Investment
Income (2)(3)
Net Realized
Change in
Unrealized
Appreciation
Gains (3)
(3)(4)
Tax
Pre-tax
Annualized
Return on
Equivalent
Annualized
Return on
Avg.
Invested
Assets
Avg.
Invested
Assets
$ 1,986,685 $
2,081,309
2,167,510
2,377,295
2,698,721
$ 2,262,304 $
53,075 $
54,876
62,085
68,870
67,893
61,360 $
34,645 $
4,411
63,407
17,520
17,885
27,574 $
(2,313 )
53,719
(140,513 )
161,848
99,451
34,438
4.3 %
5.4 %
(0.7 ) %
10.4 %
6.9 %
5.3 %
4.6 %
5.8 %
(0.6 ) %
10.5 %
6.9 %
5.4 %
(in thousands)
2016
2017
2018
2019
2020
5-yr Avg.
Investment income, net of investment expenses.
(1) Average amounts at beginning and end of year (inclusive of cash and short-term investments).
(2)
(3) Before income taxes.
(4) Relates to available-for-sale fixed income and equity securities.
In 2020, we recognized $15.8 million in net realized gains in the equity portfolio, $3.9 million in net realized gains in the fixed
income portfolio and $1.8 million in other net realized losses. In 2019, we recognized $14.4 million in net realized gains in the equity
portfolio, $3.2 million in net realized gains in the fixed income portfolio and $0.1 million in other net realized losses.
We regularly evaluate the quality of our investment portfolio. With the adoption of ASU 2016-13 on January 1, 2020, we started
recognizing a reversible allowance for credit losses on available-for-sale fixed income securities. Prior to 2020, when we determined
43
that a fixed income security had suffered an other-than-temporary decline in value, the investment’s value was adjusted by
reclassifying the decline from unrealized to realized losses. In 2020, we realized $0.6 million in losses on fixed income securities for
which we had the intent to sell. We did not recognize any impairment losses in 2019.
As of December 31, 2020, in addition to the securities included in the allowance for credit losses, the fixed income portfolio
contained 142 positions with an unrealized loss position for which an allowance for credit losses had not been recorded. Of these 142
securities, 31 have been in an unrealized loss position for 12 consecutive months or longer and represent $0.4 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.
INVESTMENTS
We maintain a diversified investment portfolio with a prudent mix of fixed income and risk assets. We continually monitor
economic conditions, our capital position and the insurance market to determine our tactical allocation. As of December 31, 2020, the
portfolio had a fair value of $2.8 billion, an increase of $276.7 million from the end of 2019.
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, 2020, our investment portfolio had the following asset allocation breakdown:
(in thousands)
U. S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS**
Corporate
Municipal
Total fixed income
Equities
Other invested assets
Cash
Total portfolio
Cost or
Unrealized % of Total
Amortized Cost Fair Value Gain/(Loss) Fair Value
$
28,902
10,298
170,110 $ 183,357 $
32,872
10,965
384,015 402,071
213,223 218,373
753,404 816,592
501,515 532,396
13,247
3,970
667
18,056
5,150
63,188
30,881
$ 2,061,467 $ 2,196,626 $ 135,159
293,190 524,006 230,816
2,291
54,232
—
62,217
$ 2,468,815 $ 2,837,081 $ 368,266
51,941
62,217
Quality*
6.4 % AAA
1.1 % AAA
0.4 % BBB
14.2 % AAA
7.7 % AA+
28.8 % BBB+
18.8 %
AA
77.4 % AA-
18.5 %
1.9 %
2.2 %
100.0 %
Quality ratings provided by Moody’s, S&P and Fitch
*
** Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
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 77 percent of our total 2020 portfolio, the same as 2019. As of December 31, 2020, the fair value of
our fixed income portfolio consisted of 44 percent AAA-rated securities, 19 percent AA-rated securities, 21 percent A-rated securities,
10 percent BBB-rated securities and 6 percent non-investment grade or non-rated securities. This compares to 49 percent AAA-rated
securities, 17 percent AA-rated securities, 19 percent A-rated securities, 9 percent BBB-rated securities and 6 percent non-investment
grade or non-rated securities in 2019.
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, 2020, our fixed income
portfolio’s duration was 4.7 years.
Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk
asset classes. Equities comprised 19 percent of our total 2020 portfolio, a slight increase from 18 percent in 2019. Securities within the
equity portfolio are well diversified and are primarily invested in large-cap issues with a preference for dividend income. Our strategy
has a value tilt and security selection takes precedence over market timing. Likewise, low turnover throughout our long investment
horizon minimizes transaction costs and taxes.
44
FIXED INCOME PORTFOLIO
As of December 31, 2020, our fixed income portfolio had the following rating distributions:
FAIR VALUE
(in thousands)
Bonds:
U.S. government & agency (GSE)
Non-U.S. government & agency
Corporate - industrial
Corporate - financial
Corporate - utilities
Corporate industrial - private
placements
Corporate financial - private
placements
Corporate utilities - private
placements
Municipal
Structured:
GSE - RMBS
Non-GSE RMBS
CLO
ABS - credit cards
ABS - auto loans
All other ABS/MBS
GSE - CMBS
CMBS
Total
AAA
AA
A
BBB
Below
Investment
Grade
No Rating Fair Value
—
$ 205,940 $ 10,289 $
—
— $
2,005
18,712 38,471 147,091 136,141 39,908
9,362
3,609
3,271 36,818 179,515 52,163
1,086 34,481 14,296
1,318
— $
2,027
— $
6,933
— $ 216,229
—
10,965
— 380,323
— 281,129
54,790
—
—
—
2,507
8,643 73,247
—
84,397
—
1,000
—
4,457
7,598
—
13,055
—
1,401
142,520 317,607 67,072
—
1,198
2,549
299
—
—
2,898
2,648 532,396
—
5,078
6,009
—
—
—
297,987
—
49,128
—
33,235
—
24,746
—
28,054
—
21,999
—
104,084
25,941
—
$ 956,935 $ 418,618 $ 454,805 $ 227,065 $ 136,028 $
—
868
—
—
—
2,260 19,843
—
—
—
—
—
—
685
—
—
—
—
—
— 297,987
55,074
—
39,244
—
24,746
—
28,739
—
44,629
527
— 104,084
25,941
—
3,175 $ 2,196,626
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
December 31:
(in thousands)
2020
Pass-throughs
Sequential
Planned amortization class
Total
2019
Pass-throughs
Sequential
Planned amortization class
Total
Amortized
Cost
Fair Value
% of Total
$
$
$
$
220,516 $
96,314
67,185
384,015 $
230,610
104,084
67,377
402,071
57.3 %
25.9 %
16.8 %
100.0 %
276,423 $
107,045
28,340
411,808 $
282,594
108,918
28,653
420,165
67.3 %
25.9 %
6.8 %
100.0 %
Agency MBS represented 18 percent of the fixed income portfolio, compared to 21 percent as of December 31, 2019. We
believe agency MBS investments add diversification, liquidity, credit quality and additional yield to our portfolio. Our objective for
the agency MBS portfolio is to provide reasonable cash flow stability where we are compensated for the call risk associated with
residential refinancing. The agency MBS portfolio includes mortgage-backed pass-through securities and collateralized mortgage
obligations (CMO), which include planned amortization classes (PACs) and sequential pay structures. As of December 31, 2020, all of
the securities in our agency 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).
45
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, 2020, the agency MBS portfolio contained 57 percent of pure pass-throughs, compared to 67 percent as of
December 31, 2019. An additional 26 percent of the MBS portfolio was invested in sequential payer, the same as 2019.
The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of
December 31:
(in thousands)
2020
Non-GSE RMBS
CLO
Auto
CMBS
Credit card
Equipment
Other
Total
2019
Non-GSE RMBS
CLO
Auto
CMBS
Credit card
Equipment
Other
Total
Amortized
Cost
Fair Value
% of Total
$
$
$
$
54,271 $
39,315
28,093
23,927
24,218
9,348
34,051
213,223 $
55,074
39,244
28,739
25,941
24,746
9,448
35,181
218,373
26,770 $
32,066
52,488
43,435
32,622
6,974
28,477
222,832 $
26,657
32,020
52,895
44,726
33,116
7,018
28,438
224,870
25.2 %
18.0 %
13.2 %
11.9 %
11.3 %
4.3 %
16.1 %
100.0 %
11.9 %
14.2 %
23.5 %
19.9 %
14.7 %
3.1 %
12.7 %
100.0 %
An asset-backed security (ABS), commercial mortgage-backed security (CMBS) or non-agency residential mortgage-backed
security (RMBS) 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, structured bank loans in the form of collateralized loan obligations (CLOs) and
residential or commercial mortgages. As of December 31, 2020, ABS/CMBS/RMBS investments were 10 percent of the fixed income
portfolio, compared to 11 percent as of December 31, 2019. Eighty-four percent of the securities in the ABS/CMBS/RMBS portfolio
were rated AAA as of December 31, 2020, while 99 percent were rated A or better. 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. We had $1.2 million
in unrealized losses in these asset classes as of December 31, 2020.
Municipal Fixed Income Securities
As of December 31, 2020, municipal bonds composed 24 percent of our fixed income portfolio, compared to 21 percent as of
December 31, 2019. 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,
2020, approximately 43 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining 57
percent were revenue based. The municipal portfolio is diversified amongst 280 issues with the largest single issuer representing less
than 1 percent of invested assets.
Eighty-six percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better.
The municipal portfolio includes 62 percent tax-exempt and 38 percent taxable securities.
46
Corporate Debt Securities
As of December 31, 2020, our corporate debt portfolio comprised 37 percent of the fixed income portfolio, compared to 35
percent as of December 31, 2019. The corporate allocation includes floating rate bank loans 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 $134.0
million at the end of 2020. The corporate debt portfolio has an overall quality rating of BBB+ diversified among 657 issues.
The table below illustrates our corporate debt exposure as of December 31, 2020. Private placements include bank loan and
Regulation D securities.
(in thousands)
Bonds:
Corporate - industrial
Corporate - financial
Corporate - utilities
Corporate industrial - private placements
Corporate financial - private placements
Corporate utilities - private placements
Total
Amortized
Cost
Fair Value
Gains
Losses
Gross
Gross
Unrealized Unrealized
$ 346,760 $ 380,323 $ 33,861 $
24,177
256,978 281,129
4,697
54,790
1,201
84,397
367
13,055
198
2,898
$ 753,404 $ 816,592 $ 64,501 $
50,093
83,826
13,047
2,700
(298 )
(26 )
—
(630 )
(359 )
—
(1,313 )
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.
EQUITY SECURITIES
As of December 31, 2020, our equity portfolio comprised 19 percent of the investment portfolio, an increase of 1 percent from
December 31, 2019. 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, S&P 500 Index and S&P 600 Index. The ETF portfolio is congruent with the actively managed
equity portfolios and solves for exposures that line up with our overall benchmark index, the Russell 3000. In total, the equity
portfolio is comprised of 221 securities with the largest single company exposure representing less than 1 percent of invested assets.
INTEREST AND GENERAL CORPORATE EXPENSE
We incurred $7.6 million of interest expense on outstanding debt during 2020 and 2019. At December 31, 2020 and 2019, 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 2020 and 2019, we exceeded the required return, resulting in the
accrual of executive bonuses. Decreased levels of comprehensive earnings in 2020 resulted in lower variable compensation earned
than in 2019.
INVESTEE EARNINGS
We maintain a 40 percent equity interest in Maui Jim, a manufacturer of high-quality sunglasses. As a private company, the
market for Maui Jim’s stock is limited. Our investment in Maui Jim is carried at the RLI Corp. holding company level, as it is not core
to our insurance operations. While we have certain rights under our shareholder agreement with Maui Jim as a minority shareholder,
we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In 2020, we recorded
$10.4 million in earnings from this investment, compared to $13.6 million in 2019. Sales were negatively impacted by the shutdown
the traditional retail sector experienced during 2020.
As of December 31, 2020, we had a 23 percent interest in the equity and earnings of 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 private company, the market for Prime’s stock is limited. While we
have certain rights under our shareholder agreement, we are subject to the decisions of the controlling shareholder, which may impact
the value of our investment. In 2020, we recorded $10.8 million in investee earnings for Prime, compared to $7.4 million in 2019,
47
reflective of their growth in revenue. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $15.7
million of gross premiums written and $14.3 million of net premiums earned during 2020, compared to $13.1 million of gross
premiums written and $28.7 million of net premiums earned during 2019. The decrease in net premiums earned is reflective of our
decreased quota share participation with Prime.
We received a dividend from Prime in 2020 and Maui Jim in 2019. Dividends from Maui Jim and Prime 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.
INCOME TAXES
Our effective tax rates were 17.3 percent and 17.7 percent for 2020 and 2019, respectively. Effective rates are dependent upon
components of pretax earnings, which is impacted by the volatility of unrealized gains and losses, and the related tax effects. The
effective rate was lower in 2020 due to investment tax credits and lower levels of pretax earnings, which caused tax-favored
adjustments to be larger on a percentage basis.
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 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. We
received a $4.7 million dividend from Prime in 2020 and recognized a $0.5 million tax benefit from applying the lower tax rate
applicable to affiliated dividends paid to an insurance company (10.8 percent in 2020), as compared to the corporate capital gains rate
on which the deferred tax liabilities were based. We received a $13.2 million dividend from Maui Jim in 2019 and recognized a $1.8
million tax benefit from applying the lower tax rate applicable to affiliated dividends paid to a non-insurance company (7.4 percent in
2019), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. Standing alone, the dividends
resulted in a 0.2 percent and 0.8 percent reduction to the 2020 and 2019 effective tax rates, respectively.
Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in
2020 and 2019 resulted in tax benefits of $1.1 million in each year. These tax benefits reduced the effective tax rate for 2020 and 2019
by 0.6 percent and 0.5 percent, 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 the Company. 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 $1.3 billion at December 31, 2020, from $1.2 billion as of December 31, 2019. This reflects incurred losses of
$442.9 million in 2020 offset by paid losses of $325.1 million, compared to incurred losses of $413.4 million offset by $319.9 million
paid in 2019. 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 $1.8 billion at December 31, 2020, from $1.6 billion at December 31, 2019, while ceded loss
and LAE reserves increased to $443.7 million from $384.5 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
48
maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt, issuance of common
stock and dividend payments. The following table summarizes these three cash flows over the last two years:
(in thousands)
Operating cash flows
Investing cash flows (uses)
Financing cash flows (uses)
$
2020
263,259 $
(167,987 )
(79,258 )
2019
276,917
(184,753 )
(76,101 )
We have posted positive operating cash flow in the last two 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 2020, the majority of cash flow uses were 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 the Company to make recurring payments. The following table
summarizes our contractual obligations as of December 31, 2020:
(in thousands)
Loss and settlement expense reserves
Long-term debt
Interest on long-term debt
Operating leases
Other invested assets and equity method investees
Total
Payments due by period
Less than 1
year
1-3 years
3-5 years
More than
5 years
Total
$ 481,137 $ 624,472 $ 344,755 $ 299,685 $ 1,750,049
150,000
19,805
20,030
23,070
$ 516,229 $ 798,260 $ 348,090 $ 300,375 $ 1,962,954
150,000
12,492
10,339
957
—
7,313
5,992
21,787
—
—
3,136
199
—
—
563
127
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 the Company of
our liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $443.7 million at
December 31, 2020, compared to $384.5 million in 2019.
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 total capital 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, 2020, we had cash, short-term investments and other investments maturing within one year of approximately
$155.9 million and an additional $519.9 million of investments maturing between 1 to 5 years. We maintain a revolving line of credit
with Bank of Montreal, Chicago Branch, which permits us to borrow up to an aggregate principal amount of $60.0 million. Under
certain conditions, the line may be increased up to an aggregate principal amount of $120.0 million. The facility has a three-year term
that expires on March 27, 2023. This facility replaced the previous $50.0 million facility with JP Morgan Chase Bank N.A., which
was set to expire on May 24, 2020. As of and during the year ended December 31, 2020, no amounts were outstanding on these
facilities.
49
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 with access to an additional source
of liquidity via a secured lending facility. Based on qualifying assets at year-end, aggregate borrowing capacity is approximately $30.0
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. As of
and during the year ended December 31, 2020, 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 25 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 and 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 sale, call or maturity of bonds
Proceeds from sale of stocks
Proceeds from sale of other invested assets
Uses
Purchase of bonds
Purchase of stocks
Purchase of other invested assets
Acquisitions
Purchase of property and 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, 2020, our portfolio had a carrying value of $2.8 billion. Portfolio
assets at December 31, 2020, increased by $276.7 million, or 11 percent, from December 31, 2019.
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, 2020, 46 percent of our shareholders’ equity was invested in
equities, unchanged from December 31, 2019.
50
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, 2020, our capital structure consisted of
$149.5 million in 10-year maturity senior notes (long-term debt) and $1.1 billion of shareholders’ equity. Debt outstanding comprised
12 percent of total capital as of December 31, 2020.
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, 2020, our holding company had $1.1 billion in equity. This includes amounts related to the
equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of
holding company net assets is comprised primarily of investments and cash, including $64.6 million in liquid investment assets, which
exceeds our normal annual holding company expenditures. Unrestricted funds at the holding company level are available to fund debt
interest, general corporate obligations and regular 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 2020 and 2019, our principal insurance subsidiary paid ordinary dividends totaling $110.0 million and $59.0 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 2020 or 2019. As of December 31, 2020, $25.3 million of the net assets of
our principal insurance subsidiary are not restricted and could be distributed to RLI Corp. as ordinary dividends. Because the
limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to
restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined
by our rating agencies in determining amounts available for distribution.
Our 179th consecutive dividend payment was declared in February 2021 and will be paid on March 19, 2021, in the amount of
$0.24 per share. Since the inception of cash dividends in 1976, we have increased our annual dividend every year.
OUTLOOK FOR 2021
We achieved our 25th consecutive year of underwriting profit in 2020, a notable milestone in the midst of challenging
conditions. Despite the economic slowdown, we were able to grow premium 7 percent for the year and believe there is momentum for
growth to continue in 2021. The support for broad-based rate increases in the industry go well beyond the influences of the pandemic
and continue to be driven by loss cost inflation, elevated catastrophe activity, reinsurance pricing and prolonged low interest rates. We
will benefit when rates exceed the trajectory of projected loss costs and should continue to see business opportunities that meet our
risk appetite.
Terms and conditions are an important part of tailoring coverage for the specific needs of an insured. The evolution of policy
language offers the potential for more business to align with our criteria, and we are better equipped to provide bespoke solutions to
our distribution partners.
51
Brokers and agents that drive new business to RLI are demanding ease of use. As consolidation of these producers is likely to
persist, the ability to maintain relationships through transitions is critical. Continued investment in people and technology is designed
to address these trends and sustain our business. Our diversified portfolio of products allows us to respond to market opportunity and
shift away from commoditized business with heavy competition.
Government policy was swift and far reaching in response to the COVID-induced recession of mid-2020. Consumers,
employers, the mortgage market and credit availability were all supported by large amounts of federal stimulus. Measures of
employment have rebounded faster than expected, but the path toward full employment will take time, with affected industries (e.g.
entertainment, travel, hospitality) requiring a prolonged recovery, well into 2022.
The Federal Reserve’s support of the capital markets last year seems to have forestalled a second financial crisis. However, this
accommodation will extend the low interest rate environment for the foreseeable future. While this liquidity will support asset prices
in much of our investment portfolio, longer term performance will require increasing earnings and sound fundamentals. Investment
income will face some headwinds over the next several quarters, but a growing invested asset base may provide an important offset.
Equity prices and credit markets have rebounded significantly from the lows in March 2020, and while there may be some volatility in
2021, we believe markets will continue to respond positively to the ongoing recovery.
The economy was on better footing in the last six months of 2020. However, there are segments of our business that remain
highly sensitive to slowdowns in gross domestic product. A number of products in our casualty and surety segments touch the
construction industry and any slide back into recession may shelve projects more permanently. Our expectation is that most planned
commercial construction activity will continue as intended, although post pandemic preferences for real estate may change the
landscape over time.
CASUALTY
The casualty segment has experienced a number of cross currents on loss trends over the last several years, with volatile damage
awards and changes to frequency adding to uncertainty of outcomes, especially for lines with longer duration. Pricing has responded
with consecutive years of improvement in many lines, especially for products where the most challenging loss outcomes have
impacted participants, and capacity is being removed from the market.
We will remain disciplined and aim to grow premium and underwriting profit, primarily from rate and by providing outstanding
service to our producer partners and insureds.
PROPERTY
Market disruption for property has been ongoing for several years, driven by increased frequency of storm activity. Last year set
a number of records for weather events and business interruption (BI) was a constant headline for the segment. The industry will be
working through BI coverage issues beyond 2021, as cases make their way through the court system.
Capital constraints for other carriers, a reactive reinsurance market and higher loss activity should support continued positive
rate change. Reduced capacity has increased new business opportunities in our excess and surplus commercial coverages. Over time
and through major catastrophe events, we have demonstrated our commitment to serving our insureds through responsive claim
handling, which has strengthened our relationships with producers as well as insureds. We believe growth is achievable in all of our
property businesses in 2021, and underwriting profit will be dependent on the level of catastrophe activity.
SURETY
The surety market appears to be changing as macroeconomic factors and years of competitiveness have increased losses relative
to premium. Capacity is available and relatively stable, but losses are beginning to influence terms, conditions and rate. Bankruptcy
activity may be elevated over the next year, along with general deterioration in financial security, particularly in the energy sector.
Surety premiums have been capped the last few years as we maintained disciplined underwriting, surrounded by higher levels of
competition. Our actions are reflected in the stable underwriting profit the segment has produced. Looking ahead, we are ready to take
advantage of improving market conditions and are cautiously optimistic that measured growth is possible for 2021. We will continue
to take underwriting action where required and are monitoring how our accounts are faring in light of the current economy.
In all, we see some momentum continuing into the new year, with a cautious eye on trends affecting our industry. We will
maintain our disciplined approach and the cultural hallmarks that have enabled RLI to achieve an enviable track record over the past
25 years.
* * *
52
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.
53
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 consolidated statement of earnings due to its impact on interest expense. As of
December 31, 2020 and 2019, 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 two 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, 2020.
Listed on each table is the December 31, 2020 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, 2020, our fixed income portfolio had a fair value of $2.2 billion. The sensitivity analysis uses scenarios of
interest rates increasing 100 and 200 basis points from their December 31, 2020, levels with all other variables held constant. Such
scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $113.6 million and $219.9 million,
respectively.
As of December 31, 2020, our equity portfolio had a fair value of $524.0 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 $46.9 million and $93.8 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.
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.
54
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
12/31/20 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,196,626 $
524,006
$ 2,720,632 $
(113,648 ) $
—
(113,648 ) $
—
(46,878 )
(46,878 )
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
12/31/20 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,196,626 $
524,006
$ 2,720,632 $
(219,874 ) $
—
(219,874 ) $
—
(93,755 )
(93,755 )
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
12/31/20 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,196,626 $
524,006
$ 2,720,632 $
124,089 $
—
124,089 $
—
46,878
46,878
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
12/31/20 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,196,626 $
524,006
$ 2,720,632 $
257,714 $
—
257,714 $
—
93,755
93,755
55
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
Reports of Independent Registered Public Accounting Firms
Page
57
58
59
60
61-92
93
56
RLI Corp.
Consolidated Balance Sheets
December 31,
2020
2019
(in thousands, except per share data)
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value
$
2,196,626 $
1,983,086
(amortized cost of $2,061,467 and allowance for credit losses of $397 in 2020)
(amortized cost of $1,915,278 and allowance for credit losses of $0 in 2019)
Equity securities, at fair value (cost - $293,190 in 2020 and $262,131 in 2019)
Other invested assets
Cash
Total investments and cash
Accrued investment income
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts
of $17,658 in 2020 and $16,682 in 2019
Ceded unearned premiums
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of
allowances for uncollectible amounts of $8,634 in 2020 and $9,402 in 2019
Deferred policy acquisition costs
Property and equipment, at cost, net of accumulated depreciation of $68,682 in 2020 and
$62,703 in 2019
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 ($0.01 par value)
(Shares authorized - 200,000,000 in 2020 and 100,000,000 in 2019)
(68,072,794 shares issued and 45,142,580 shares outstanding in 2020)
(67,799,229 shares issued and 44,869,015 shares outstanding in 2019)
Paid-in capital
Accumulated other comprehensive earnings
Retained earnings
Deferred compensation
Treasury stock, at cost (22,930,214 shares in 2020 and 2019)
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
57
524,006
54,232
62,217
2,837,081 $
16,126
460,630
70,441
46,203
2,560,360
14,587
$
174,628
113,488
443,729
88,425
160,369
93,656
384,517
85,044
51,406
128,382
53,719
31,501
3,938,485 $
53,121
103,836
54,127
36,104
3,545,721
1,750,049 $
586,386
42,265
81,747
80,235
149,489
75,925
36,411
2,802,507 $
1,574,352
540,213
25,691
83,358
56,727
149,302
66,626
54,064
2,550,333
681 $
335,365
108,714
1,084,217
8,292
(401,291 )
1,135,978 $
3,938,485 $
678
321,190
52,473
1,014,046
7,980
(400,979 )
995,388
3,545,721
$
$
$
$
$
$
RLI Corp.
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
Net unrealized gains (losses) on equity securities
Consolidated revenue
Losses and settlement expenses
Policy acquisition costs
Insurance operating expenses
Interest expense on debt
General corporate expenses
Total expenses
Equity in earnings of unconsolidated investees
Earnings before income taxes
Income tax expense (benefit):
Current
Deferred
Income tax expense (benefit)
Net earnings
Other comprehensive earnings (loss), net of tax
Comprehensive earnings
Basic net earnings per share
Diluted net earnings per share
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
$
$
$
$
$
$
$
2020
Years ended December 31,
2019
2018
865,747 $
67,893
17,885
—
32,101
983,626 $
442,884
286,438
66,828
7,603
10,265
814,018 $
20,233
189,841 $
24,174
8,576
32,750 $
157,091 $
839,111 $
68,870
17,520
—
78,090
1,003,591 $
413,416
288,697
69,430
7,588
12,686
791,817 $
20,960
232,734 $
26,426
14,666
41,092 $
191,642 $
791,366
62,085
63,624
(217 )
(98,735 )
818,123
428,193
267,738
53,803
7,437
9,427
766,598
16,056
67,581
23,917
(20,515 )
3,402
64,179
56,219
213,310 $
67,045
258,687 $
(33,997 )
30,182
3.49 $
3.46 $
4.28 $
4.23 $
1.45
1.43
45,000
45,376
44,734
45,257
44,358
44,835
58
RLI Corp.
Consolidated Statements of Shareholders’ Equity
Total
Accumulated
Other
(in thousands, except per share data)
Balance, January 1, 2018
Cumulative-effect adjustment from
ASU 2016-01 and 2018-02
Par value conversion from $1.00 per
share to $0.01 per share
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($1.87 per share)
Balance, December 31, 2018
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($1.91 per share)
Balance, December 31, 2019
Cumulative-effect adjustment from ASU
2016-13
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($1.95 per share)
Balance, December 31, 2020
Common
Shares
44,148,355 $
Shareholders’ Common Paid-in Comprehensive Retained Deferred
Equity
Capital Earnings (Loss) Earnings Compensation
8,640 $
157,919 $ 788,522 $
853,598 $ 67,079 $ 233,077 $
Stock
Treasury Stock
at Cost
—
—
—
86
—
—
(138,494 ) 138,580
— (66,409 ) 66,409
—
—
64,179
—
—
—
64,179
—
—
355,688
(33,997 )
—
6,178
—
—
4
—
—
6,174
(33,997 )
—
—
—
—
—
—
—
—
—
(286 )
—
(401,639 )
—
—
—
—
286
—
—
44,504,043 $
—
(83,202 )
806,842 $
191,642
—
—
674 $ 305,660 $
—
—
—
(83,202 )
(14,572 ) $ 908,079 $
— 191,642
—
8,354 $
—
—
(401,353 )
—
—
—
364,972
67,045
—
15,534
—
—
—
—
4 15,530
67,045
—
—
—
—
—
—
(374 )
—
—
374
—
—
44,869,015 $
(85,675 )
995,388 $
—
—
678 $ 321,190 $
—
(85,675 )
52,473 $ 1,014,046 $
—
7,980 $
—
(400,979 )
—
—
1,095
157,091
—
—
—
—
22
1,073
— 157,091
—
—
273,565
56,219
—
14,178
—
—
—
—
3 14,175
56,219
—
—
—
—
—
—
—
—
312
—
—
—
—
(312 )
—
(87,993 )
45,142,580 $ 1,135,978 $
—
—
—
681 $ 335,365 $
—
(87,993 )
108,714 $ 1,084,217 $
—
8,292 $
—
(401,291 )
See accompanying notes to consolidated financial statements.
59
RLI Corp.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Years ended December 31,
2019
2018
2020
Net earnings
$
Adjustments to reconcile net earnings to net cash provided by operating activities:
157,091 $
191,642 $
64,179
Net realized gains
Net unrealized (gains) losses on equity securities
Depreciation
Deferred income tax expense (benefit)
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 premiums
Reinsurance balances recoverable on unpaid losses and settlement expenses
Deferred policy acquisition costs
Accrued expenses
Unpaid losses and settlement expenses
Unearned premiums
Current income taxes payable
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 securities, available-for-sale
Equity securities
Property and equipment
Investment in equity method investee
Other
Proceeds from sale of:
Fixed income securities, available-for-sale
Equity securities
Property and equipment
Other
Proceeds from call or maturity of:
Fixed income, available-for-sale
Net proceeds from sale (purchase) of short-term investments
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from stock option exercises
Cash dividends paid
Net cash used in financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
See accompanying notes to consolidated financial statements.
60
(17,885 )
(32,101 )
7,432
8,576
10,460
(17,520 )
(78,090 )
8,164
14,666
25,341
(63,407 )
98,735
7,042
(20,515 )
6,171
(1,539 )
(552 )
1,132
(14,259 )
16,574
(1,611 )
(19,832 )
(59,212 )
(3,381 )
9,299
175,697
46,173
(2,665 )
(7,793 )
3,100
11,049
(22,482 )
(19,518 )
(110 )
21,502
113,004
43,708
(1,434 )
(20,233 )
4,675
263,259 $
(20,960 )
13,200
276,917 $
(18,225 )
967
(2,251 )
(13,246 )
(63,008 )
(7,218 )
(7,724 )
189,845
45,056
5,725
(16,056 )
9,900
217,102
(518,362 ) $
(77,863 )
(5,768 )
(4,533 )
(12,851 )
(539,726 ) $
(89,486 )
(6,955 )
—
(22,751 )
84,587
79,368
—
4,328
196,558
62,172
—
2,502
(725,675 )
(115,921 )
(6,087 )
—
(18,754 )
395,019
147,838
167
3,394
283,107
—
(167,987 ) $
201,383
11,550
(184,753 ) $
187,380
(1,570 )
(134,209 )
8,648 $
(87,906 )
(79,258 ) $
9,490 $
(85,591 )
(76,101 ) $
6,076
(83,100 )
(77,024 )
16,014 $
46,203
62,217 $
16,063 $
30,140
46,203 $
5,869
24,271
30,140
$
$
$
$
$
$
$
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
RLI Corp. is an insurance holding company. References to “the Company,” “we,” “our,” “us” or like terms refer to the business
of RLI Corp. and its subsidiaries. We underwrite select property and casualty insurance coverages through major subsidiaries
collectively known as RLI Insurance 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.
On May 4, 2018, RLI Corp. changed its state of incorporation from the State of Illinois to the State of Delaware (the
Reincorporation). The Reincorporation was effected by merging RLI Corp., an Illinois corporation (RLI Illinois), into RLI Corp., a
Delaware corporation (RLI Delaware). The separate corporate existence of RLI Illinois ceased and RLI Delaware continues in
existence as the surviving corporation and possesses all rights, privileges, powers and franchises of RLI Illinois. The Reincorporation
did not result in any change in the name, business, management, fiscal year, location of the principal executive offices, assets or
liabilities of the Company. Each outstanding share of RLI Illinois common stock, which had a par value of $1.00 per share, was
automatically converted into one outstanding share of RLI Delaware common stock, with a par value of $0.01 per share. In order to
reflect the new par value of common stock on the balance sheet, a $66.4 million reclassification from common stock to paid-in-capital
was made.
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. Intercompany
balances and transactions have been eliminated. 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 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments.
Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires a
financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for
credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded
through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost.
We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the
Company’s balance sheet accounts: available-for-sale fixed income securities, premiums receivable and reinsurance balances
recoverable. The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted
towards higher rated bonds (83 percent rated A or better at December 31, 2020 and 85 percent at December 31, 2019), we purchase
reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic
cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances. In total, the cumulative-
effect adjustment made to the balance sheet as of the beginning of the year resulted in a $1.1 million increase to retained earnings and
an increase to accumulated other comprehensive earnings of less than $0.1 million
D. PROSPECTIVE ACCOUNTING STANDARDS
There are no prospective accounting standards which would have a material impact on our financial statements as of December
31, 2020.
E.
INVESTMENTS
Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings. Investments in fixed
income securities are classified into one of three categories: trading, held-to-maturity or available-for-sale. All of our fixed income
61
securities 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.
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. Other invested assets include investments in low income housing tax
credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), investments in private funds and
investments in restricted stock. Our LIHTC investments are carried at amortized cost, and our investment in FHLBC stock is carried at
cost. Due to the nature of cash, the LIHTCs and our membership in the FHLBC, their carrying amounts approximate fair value. The
private funds are carried at fair value, using each investment’s net asset value. Restricted stock is carried at quoted market prices, as
the restrictions expire within one year.
G. REINSURANCE
Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported
separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company 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 AM Best and S&P ratings of our reinsurers. In 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 the Company 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.
H. POLICY ACQUISITION COSTS
We defer incremental direct costs that relate to the successful acquisition of new or renewal insurance contracts, including
commissions and premium taxes. 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 process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs expected to
be incurred, but does not consider investment income. 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.
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.
INVESTMENTS IN UNCONSOLIDATED INVESTEES
Our investments accounted for under the equity method are primarily related to Maui Jim, Inc. (Maui Jim) and Prime Holdings
Insurance Services, Inc. (Prime). We maintain a 40 percent interest in the equity and earnings of Maui Jim, a manufacturer of high-
62
quality sunglasses, and a 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 $90.9 million at December 31, 2020 and $79.6 million at December 31, 2019.
In 2020, we recorded $10.4 million in investee earnings for Maui Jim, compared to $13.6 million in 2019 and $12.5 million in 2018.
As of December 31, 2020, we had a 23 percent interest in the equity and earnings of 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. Our investment in Prime was $32.7 million at December 31, 2020 and $24.2
million at December 31, 2019. In 2020, we recorded $10.8 million in investee earnings for Prime, compared to $7.4 million in 2019
and $3.6 million in 2018. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $15.7 million of
gross premiums written and $14.3 million of net premiums earned during 2020, compared to $13.1 million of gross premiums written
and $28.7 million of net premiums earned during 2019 and $41.1 million of gross premiums written and $34.2 million of net
premiums earned during 2018. The decrease in premium is reflective of our decreased quota share participation with Prime.
Our equity method investments recorded net income of $70.4 million in 2020, $77.3 million in 2019 and $50.2 million in 2018.
Additional summarized financial information for our equity method investments as of 2020 and 2019 is outlined in the following
table:
(in millions)
Total assets
Total liabilities
Total equity
$
2020
2019
837.2 $
473.2
364.0
718.5
420.8
297.7
Approximately $106.0 million of undistributed earnings from our equity method investees are included in our retained earnings
as of December 31, 2020. We received dividends of $4.7 million, $13.2 million and $9.9 million from our equity method investees in
2020, 2019 and 2018, respectively.
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
The composition of goodwill and intangibles at December 31, 2020 and 2019, is detailed in the following table:
(in thousands)
Goodwill
Surety
Casualty
Total goodwill
Intangibles
State insurance licenses
Definite-lived intangibles, net of accumulated amortization of
$3,878 at 12/31/20 and $3,470 at 12/31/19
Total intangibles
Total goodwill and intangibles
2020
2019
$
$
$
$
$
40,816 $
5,246
46,062 $
40,816
5,246
46,062
7,500 $
7,500
157
7,657 $
53,719 $
565
8,065
54,127
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 2020. Based upon these reviews, our goodwill
and state insurance license indefinite-lived intangible asset were not impaired. In addition, as of December 31, 2020, there were no
triggering events on goodwill and intangible assets that would suggest an updated review was necessary.
During the first quarter of 2018, adverse loss experience triggered the need to test the medical professional liability reporting
unit. The testing resulted in a $4.4 million non-cash impairment charge on goodwill and intangible assets in 2018. The fair value for
the medical professional liability reporting unit’s agency relationships, carried as a definite-lived intangible asset, was determined by
using a discounted cash flow valuation. The carrying value exceeded the fair value, resulting in a $0.8 million non-cash impairment
charge. The 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 in each year, resulting in a $3.6
million non-cash impairment charge in 2018. Subsequent to the 2018 impairment, the medical professional liability reporting unit had
63
no remaining goodwill or intangible assets. All impairment charges were recorded as net realized losses in the respective period’s
reporting unit.
The definite-lived intangible assets are amortized against future operating results based on their estimated useful lives.
Amortization of intangible assets was $0.4 million for 2020, 2019 and 2018. We anticipate we will recognize amortization expense of
$0.1 million in 2021 and less than $0.1 million in 2022.
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
64
diluted net earnings or net loss per share is computed excluding these items. 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, 2020
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
Anti-dilutive options excluded from diluted EPS
For the year ended December 31, 2019
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
Anti-dilutive options excluded from diluted EPS
For the year ended December 31, 2018
Basic EPS
Income available to common shareholders
Stock options
Diluted EPS
Income available to common shareholders and assumed conversions
Anti-dilutive options excluded from diluted EPS
P. COMPREHENSIVE EARNINGS
Income
(Numerator)
Weighted Average
Shares
(Denominator)
Per Share
Amount
$
157,091
—
45,000 $
376
$
157,091
45,376 $
384
$
191,642
—
44,734 $
523
$
191,642
45,257 $
65
$
64,179
—
44,358 $
477
$
64,179
44,835 $
65
3.49
3.46
4.28
4.23
1.45
1.43
Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed
income portfolio. In reporting the components of comprehensive earnings, we used the federal statutory tax rate of 21 percent. Other
comprehensive income (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense
(benefit) of $14.9 million, $17.8 million and $(9.0) million for 2020, 2019 and 2018, respectively.
The table below illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each
period presented in the consolidated financial statements. The changes in accumulated other comprehensive earnings also reflect
adjustments from the adoption of accounting standards. ASU 2016-01, Financial Instruments – Overall (subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, necessitated a cumulative-effect adjustment in the
beginning of 2018, which moved $142.2 million of net unrealized gains and losses on equity securities from accumulated other
comprehensive earnings to retained earnings.
ASU 2018-02 addressed issues arising from the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). Deferred tax items are
required to be revalued based on new tax laws with changes included in earnings. Since other comprehensive earnings was not
affected by the revaluation of deferred tax items, the accumulated other comprehensive earnings balance was reflective of the historic
tax rate instead of the newly enacted rate, which created a stranded tax effect. ASU 2018-02 allowed for the reclassification of our
$3.7 million stranded tax effect out of accumulated other comprehensive earnings into retained earnings.
65
Unrealized Gains/Losses on Available-for-Sale Securities
(in thousands)
Beginning balance
Cumulative-effect adjustment of ASU 2016-13 (see note 1.C)
Cumulative-effect adjustment of ASU 2016-01
Adjusted beginning balance
Other comprehensive earnings before reclassifications
Amounts reclassified from accumulated other comprehensive earnings
Net current period other comprehensive earnings (loss)
Reclassification of stranded tax effect from implementation of TCJA
Ending balance
Balance of securities for which an allowance for credit losses has not been
recognized in net earnings
$
$
$
$
$
For the Year Ended December 31,
2019
2018
2020
52,473 $
22
—
52,495 $
58,986
(2,767 )
56,219 $
—
108,714 $
(14,572 ) $
—
—
(14,572 ) $
69,560
(2,515 )
67,045 $
—
52,473 $
157,919
—
(142,219 )
15,700
(35,763 )
1,766
(33,997 )
3,725
(14,572 )
470 $
— $
—
In 2020, credit losses or the sale of an available-for-sale security resulted in amounts being reclassified from accumulated other
comprehensive earnings to current period net earnings. In 2019 and 2018, the sale or other-than-temporary impairment of an available-
for-sale security resulted in amounts being reclassified from accumulated other comprehensive earnings to 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
Unrealized gains and losses on available-for-sale
securities
3,872 $
2020
$
For the Year Ended December 31,
2019
2018
Affected line item in the
Consolidated Statement of Earnings
3,184 $
(2,018 ) Net realized gains (losses)
(369 )
—
—
—
—
(217 )
Credit losses presented within net
realized gains
Other-than-temporary impairment
losses on investments
Earnings (losses) before income
taxes
$
$
3,503 $
(736 )
2,767 $
3,184 $
(669 )
2,515 $
(2,235 )
469 Income tax (expense) benefit
(1,766 ) Net earnings (loss)
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. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.
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.
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.
66
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
(nonvolatile, 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 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.
Regulation D Private Placement Securities: The pricing vendor evaluation methodology for these securities includes a
combination of observable and unobservable inputs. Observable inputs include public corporate spread matrices classified by sector,
rating and average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable
inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. All
Regulation D privately-placed bonds are classified as corporate securities and deemed Level 3.
For all of our fixed income securities, 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 fixed income securities provided by our pricing services are
reasonable.
Common Stock: As of December 31, 2020, all but one of our common stock holdings were traded on an exchange. Exchange
traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). Pricing for
the equity security not traded on an exchange is provided by a third-party pricing source and is classified as Level 2.
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 private funds, 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 are made through net earnings. See
note 8 for further discussion and related disclosures regarding stock options.
S. RISKS AND UNCERTAINTIES
Certain risks and uncertainties are inherent in our day-to-day operations and in 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 often highly competitive, which can make it difficult to grow or maintain premium volume
without sacrificing underwriting discipline and income. Our profitability can be significantly affected by the ability of our
67
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, 2020, we had $1.8 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 the Company 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 environments. If the actual
amount of insured losses is greater than the amount we have reserved for these losses, our profitability would 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 2020, we had reinsurance protection of $500 million in
excess of $25 million first-dollar retention for earthquakes in California and $525 million in excess of a $25 million first-dollar
retention for earthquakes outside of California. These amounts are subject to certain co-participations by the Company 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 2020, these coverages were supported by
$375 million in excess of a $25 million first-dollar retention in traditional catastrophe reinsurance protection, subject to certain co-
participations by the Company in the excess layers. In addition, we have incidental exposure to international catastrophic events.
Our catastrophe reinsurance treaty renewed on January 1, 2021. 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 excess, 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 the Company 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.
68
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-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 the Company, 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,
the allowance for credit losses on fixed income securities, 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, 2020, 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 AM 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.
69
2.
INVESTMENTS
Our investments are primarily composed of fixed income debt securities and common stock equity securities. All of our debt
securities are classified as available-for-sale, which are carried at fair value. Our equity portfolio consists of common stocks and
exchange traded funds (ETF), which are carried at fair value.
A summary of net investment income is as follows:
(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
2020
2019
2018
$
$
$
59,755 $
9,728
3,379
72,862 $
(4,969 )
67,893 $
60,364 $
9,950
3,674
73,988 $
(5,118 )
68,870 $
54,491
9,814
2,309
66,614
(4,529 )
62,085
Pretax net realized gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31
are summarized below.
(in thousands)
Net realized gains (losses):
Fixed income:
Available-for-sale
Equity securities
Other
Total net realized gains (losses)
Other-than-temporary-impairment losses on investments
Net changes in unrealized gains (losses) on investments:
Equity securities
Other invested assets
2020
2019
2018
$
$
$
$
3,872 $
15,796
(1,783 )
17,885 $
3,184 $
14,445
(109 )
17,520 $
(2,018 )
69,868
(4,226 )
63,624
— $
— $
(217 )
32,317 $
(216 )
78,389 $
(299 )
(98,380 )
(355 )
Total unrealized gains (losses) on equity securities recognized in net
earnings
$
32,101 $
78,090 $
(98,735 )
Fixed income:
Available-for-sale
Investment in unconsolidated investees
Other
Total unrealized gains (losses) recognized in other comprehensive
earnings
Net realized gains (losses) and changes in unrealized gains (losses) on
investments
$
$
$
67,350 $
3,444
369
83,758 $
1,109
—
(41,778 )
(1,257 )
—
71,163 $
84,867 $
(43,035 )
121,149 $
180,477 $
(78,363 )
The change in unrealized gain (loss) position was due to declining interest rates, increasing the fair value of fixed income
securities, as well as strong equity market returns.
70
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)
2020
Available-for-sale
Equities
2019
Available-for-sale
Equities
2018
Available-for-sale
Equities
CALLS/MATURITIES
(in thousands)
2020
Available-for-sale
2019
Available-for-sale
2018
Available-for-sale
Proceeds
Gains
Losses
Gross Realized
Net Realized
Gain (Loss)
$
$
$
84,697 $
79,368
5,454 $
25,338
(1,777 ) $
(9,542 )
3,677
15,796
196,799 $
62,172
4,368 $
16,938
(2,167 ) $
(2,493 )
2,201
14,445
394,318 $
147,838
3,131 $
71,065
(5,349 ) $
(1,197 )
(2,218 )
69,868
Proceeds
Gains
Losses
Gross Realized
Net Realized
Gain (Loss)
$
283,107 $
821 $
(27 ) $
$
201,698 $
1,004 $
(21 ) $
794
983
$
187,380 $
311 $
(111 ) $
200
FAIR VALUE MEASUREMENTS
Assets measured at fair value on a recurring basis as of December 31, 2020 and 2019, are summarized below:
(in thousands)
Fixed income securities - available-for-sale
U.S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS*
Corporate
Municipal
Total fixed income securities - available-for-sale
Equity securities
Other invested assets
Total
Quoted in
Active
Significant
Other
Observable
Markets for
Identical Assets
(Level 1)
Inputs
(Level 2)
2020
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
183,357 $
— $
32,872
—
10,965
—
402,071
—
218,373
—
798,794
—
532,396
—
— $ 2,178,828 $
83
—
529,991 $ 2,178,911 $
523,923
6,068
— $
—
—
—
—
17,798
—
183,357
32,872
10,965
402,071
218,373
816,592
532,396
17,798 $ 2,196,626
524,006
6,068
17,798 $ 2,726,700
—
—
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
71
(in thousands)
Fixed income securities - available-for-sale
U.S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS*
Corporate
Municipal
Total fixed income securities - available-for-sale
Equity securities
Other invested assets
Total
Quoted in
Active
Significant
Other
Observable
Markets for
Identical Assets
(Level 1)
Inputs
(Level 2)
2019
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
193,661 $
— $
38,855
—
7,628
—
420,165
—
224,870
—
690,297
—
—
405,840
— $ 1,981,316 $
—
—
460,630 $ 1,981,316 $
460,630
—
— $
—
—
—
—
1,770
—
193,661
38,855
7,628
420,165
224,870
692,067
405,840
1,770 $ 1,983,086
460,630
—
1,770 $ 2,443,716
—
—
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
The following table summarizes changes in the balance of Regulation D private placement fixed income securities whose fair
value was measured using significant unobservable inputs (Level 3).
(in thousands)
Balance as of January 1, 2020
Net realized and unrealized gains (losses)
Included in net earnings as a part of:
Net investment income
Net realized gains
Included in other comprehensive earnings
Total net realized and unrealized gains (losses)
Purchases
Balance as of December 31, 2020
Change in unrealized gains (losses) during the period for Level 3 assets held at
period-end - included in net realized gains
Change in unrealized gains (losses) during the period for Level 3 assets held at
period-end - included in other comprehensive earnings
$
$
$
$
Level 3 Securities
$
1,770
(20 )
(90 )
566
456
15,572
17,798
(90 )
566
The amortized cost and estimated fair value of fixed income securities at December 31, 2020, by contractual maturity, are
shown as follows:
(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
ABS/CMBS/MBS*
Total available-for-sale
Amortized
Cost
Fair Value
$
92,561 $
489,451
525,083
357,134
597,238
93,689
519,920
575,940
386,633
620,444
$ 2,061,467 $ 2,196,626
*
Asset-backed, commercial mortgage-backed and mortgage-backed securities
Expected maturities may differ from contractual maturities due to call provisions on some existing securities.
72
The amortized cost and fair value of available-for-sale securities at December 31, 2020 and 2019 are presented in the tables
below. Amortized cost does not include the $14.9 million and $13.5 million of accrued interest receivable as of December 31, 2020
and 2019, respectively.
(in thousands)
U.S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS*
Corporate
Municipal
Total fixed income
(in thousands)
U.S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS*
Corporate
Municipal
Total fixed income
Allowance
for Credit
Losses
2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
—
—
—
—
(17 )
(380 )
—
13,504 $
3,970
667
18,789
5,580
64,501
31,099
(397 ) $ 138,110 $
Fair Value
(257 ) $ 183,357
32,872
10,965
402,071
218,373
816,592
532,396
(2,554 ) $ 2,196,626
—
—
(733 )
(413 )
(933 )
(218 )
Amortized
Cost
$ 170,110
28,902
10,298
384,015
213,223
753,404
501,515
$ 2,061,467
2019
Gross
Gross
Unrealized Unrealized
Allowance
for Credit
Losses
$
$
—
—
—
—
—
—
—
—
$
$
Gains
6,994
2,362
295
8,920
2,514
33,245
16,131
70,461
$
$
Losses
Fair Value
(32 ) $ 193,661
38,855
(42 )
7,628
—
420,165
(563 )
224,870
(476 )
692,067
(818 )
405,840
(722 )
(2,653 ) $ 1,983,086
Amortized
Cost
$ 186,699
36,535
7,333
411,808
222,832
659,640
390,431
$ 1,915,278
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Asset-Backed, Commercial Mortgage-Backed and Mortgage-Backed Securities
Ninety-four percent 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, 2020, 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.
Municipal Bonds
As of December 31, 2020, 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-six percent of our
municipal fixed income securities were rated AA or better while 99 percent were rated A or better.
Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities
We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required the recognition of a reversible
allowance for credit losses on available-for-sale fixed income securities. See note 1. C. for more information on the adoption of the ASU.
Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included
in the allowance for expected credit loss evaluation, including:
• Changes in technology that may impair the earnings potential of the investment,
• The discontinuance of a segment of business that may affect future earnings potential,
• Reduction of or non-payment of interest and/or principal,
73
• Specific concerns related to the issuer’s industry or geographic area of operation,
• Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and
• Downgrades in credit quality by a major rating agency.
If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security, or if
any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the
discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on
credit rating. The allowance for any security is limited to the amount that the fair value is below amortized cost. As of December 31,
2020, the discounted cash flow analysis resulted in an allowance for credit losses on 21 securities. The following table presents
changes in the allowance for expected credit losses on available-for-sale securities:
(in thousands)
Beginning balance
Adoption impact of ASU 2016-13
Increase to allowance from securities for which credit losses were not previously
recorded
Ending balance
$
$
2020
—
28
369
397
Net realized gains included $0.6 million of losses on fixed income securities for which we no longer had the intent to hold until
recovery and the cost basis was written down to fair value. All fixed income securities continue to pay the expected coupon payments.
We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.
Prior to the adoption of ASU 2016-13, we conducted reviews of fixed income securities with unrealized losses to evaluate whether an
impairment was other-than-temporary. Any credit-related impairment on fixed income securities we did not plan to sell and we were not
more likely than not to be required to sell were recognized in net earnings, with the non-credit related impairment recognized in
comprehensive earnings. We did not recognize any other-than-temporary impairment losses in earnings on the fixed income portfolio
in 2019.
As of December 31, 2020, in addition to the securities included in the allowance for credit losses, the fixed income portfolio
contained 142 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $2.6
million in associated unrealized losses represents 0.1 percent of the fixed income portfolio’s cost basis and 0.1 percent of total invested
assets. Isolated to these securities, unrealized losses at the end of 2020 were flat compared to the previous year. Of the total 142 securities,
31 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed
income securities that were in an unrealized loss position as of December 31, 2020, after factoring in the allowance for credit losses, and
December 31, 2019.
74
(in thousands)
U.S. government
Fair value
Amortized cost
Unrealized loss
U.S. agency
Fair value
Amortized cost
Unrealized loss
Agency MBS
Fair value
Amortized cost
Unrealized loss
ABS/CMBS/MBS*
Fair value
Amortized cost
Unrealized loss
Corporate
Fair value
Amortized cost
Unrealized loss
Municipal
Fair value
Amortized cost
Unrealized loss
Total fixed income
Fair value
Amortized cost
Unrealized loss
December 31, 2020
12 Mos.
December 31, 2019
12 Mos.
< 12 Mos. & Greater
Total
< 12 Mos. & Greater
Total
$
$
$
$
5,680 $
5,937
(257 ) $
— $
—
— $
5,680 $
5,937
(257 ) $
2,505 $
2,506
(1 ) $
8,463 $ 10,968
11,000
8,494
(32 )
(31 ) $
— $
—
— $
— $
—
— $
— $
—
— $
6,794 $
6,836
(42 ) $
— $
—
— $
6,794
6,836
(42 )
$ 43,999 $
44,732
(733 ) $
$
— $ 43,999 $ 21,548 $ 41,718 $ 63,266
63,829
21,664
—
(563 )
(116 ) $
— $
42,165
(447 ) $
44,732
(733 ) $
$ 32,771 $ 16,161 $ 48,932 $ 74,968 $ 18,036 $ 93,004
93,480
(476 )
18,148
(112 ) $
16,251
(90 ) $
75,332
(364 ) $
49,345
(413 ) $
33,094
(323 ) $
$
$ 52,655 $
53,440
(785 ) $
$
6,235 $ 58,890 $ 16,478 $
16,950
59,823
6,383
(472 ) $
(933 ) $
(148 ) $
9,348 $ 25,826
26,644
9,694
(818 )
(346 ) $
$ 25,676 $
25,894
(218 ) $
$
— $ 25,676 $ 47,018 $
47,740
—
(722 ) $
— $
25,894
(218 ) $
— $ 47,018
47,740
—
(722 )
— $
$ 160,781 $ 22,396 $ 183,177 $ 169,311 $ 77,565 $ 246,876
78,501 249,529
163,097
(2,653 )
(2,316 ) $
$
22,634 185,731 171,028
(1,717 ) $
(2,554 ) $
(936 ) $
(238 ) $
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Unrealized Gains and Losses on Equity Securities
Net unrealized gains recognized during 2020 on equity securities still held as of December 31, 2020 were $47.9 million. Net
unrealized gains recognized during 2019 on equity securities still held as of December 31, 2019 were $92.8 million. Net unrealized
losses recognized during 2018 on equity securities still held as of December 31, 2018 were $28.7 million.
Other Invested Assets
We had $54.2 million of other invested assets at December 31, 2020, compared to $70.4 million at the end of 2019. Other
invested assets include investments in low income housing tax credit (LIHTC) partnerships, membership stock in the Federal Home
Loan Bank of Chicago (FHLBC), investments in private funds and investments in restricted stock. Our LIHTC investments are carried
at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the
FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investments’ net asset
value. Restricted stock is carried at quoted market prices, as the restrictions expire within one year.
Our LIHTC interests had a balance of $20.3 million at December 31, 2020, compared to $23.3 million at December 31, 2019,
and recognized a total tax benefit of $3.5 million during 2020, compared to $2.5 million during 2019 and $2.2 million during 2018.
Our unfunded commitment for our LIHTC investments totaled $3.8 million at December 31, 2020 and will be paid out in installments
through 2035.
Our investments in private funds totaled $32.1 million at December 31, 2020, compared to $46.0 million at December 31, 2019,
and we had $8.3 million of associated unfunded commitments at December 31, 2020. Our interest in these investments is generally
restricted from being transferred or otherwise redeemed without prior consent by the respective entities. During 2020, one of the
private funds transitioned into a publicly traded common stock. Short-term restrictions on the stock, limiting our ability to sell without
75
prior approval, were established and remain in place until the first quarter of 2021. Our remaining investment in restricted stock was
$6.1 million as of December 31, 2020. For our remaining investments in private funds, the timed dissolution of the partnerships would
trigger redemption.
Restricted Assets
As of December 31, 2020, $12.3 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. As of and during the year ended December 31, 2020, there
were no outstanding borrowings with the FHLBC.
As of December 31, 2020, fixed income securities with a carrying value of $77.7 million were on deposit with regulatory
authorities as required by law.
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:
2020
2019
2018
$
85,044 $
84,934 $
77,716
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
$
$
$
200,917 $
14,783
(42,115 )
173,585 $
170,204
88,425 $
185,164 $
14,395
(31,140 )
168,419 $
168,309
85,044 $
175,697
12,654
(22,190 )
166,161
158,943
84,934
$
170,204 $
168,309 $
158,943
(4,053 )
120,287
286,438 $
(3,034 )
123,422
288,697 $
(2,241 )
111,036
267,738
$
As of December 31, 2020, outstanding debt balances totaled $149.5 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. The estimated fair value for the senior note was $165.4 million as of December 31, 2020. 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 paid $7.3 million of interest on our senior notes in each of the last three years. The average rate on debt was 4.91 percent in
2020, 2019 and 2018.
We maintain a revolving line of credit with Bank of Montreal, Chicago Branch, which permits the Company to borrow up to an
aggregate principal amount of $60.0 million. This facility was entered into during 2020 and replaced the previous $50.0 million
facility with JP Morgan Chase Bank N.A. Under certain conditions, the line may be increased up to an aggregate principal amount of
$120.0 million. This facility has a three-year term that expires on March 27, 2023. As of and during the years ended December 31,
2020, 2019 and 2018, 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
76
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 the Company 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.
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
2020
2019
2018
$ 1,107,303 $ 1,039,955 $
25,047
(204,665 )
860,337 $
29,129
(244,344 )
892,088 $
$
934,913
48,303
(160,041 )
823,175
$ 1,062,608 $
27,651
(224,512 )
865,747 $
$
981,121 $
40,173
(182,183 )
839,111 $
896,234
41,926
(146,794 )
791,366
LOSSES AND SETTLEMENT EXPENSES INCURRED
Direct
$
Reinsurance assumed
Reinsurance ceded
Net
$
608,638 $
18,783
(184,537 )
442,884 $
521,055 $
21,951
(129,590 )
413,416 $
560,421
20,376
(152,604 )
428,193
More than 88 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better
by AM Best and S&P rating services. The following table displays net reinsurance balances recoverable, after consideration of
collateral, from our top reinsurers as of December 31, 2020. These reinsurers all have financial strength ratings of A or better by AM
Best and S&P’s ratings services. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year
2020.
(dollars in thousands)
Munich Re / HSB
Renaissance Re
Endurance Re
Berkley Insurance Co.
Aspen UK Ltd.
Scor Re
Hannover Ruckversicherung
Swiss Re / Westport Ins. Corp.
Toa Re
Liberty Mutual
All other reinsurers*
Total ceded exposure
AM Best
Rating
A+, Superior
A+, Superior
A+, Superior
A+, Superior
A, Excellent
A+, Superior
A+, Superior
A+, Superior
A, Excellent
A, Excellent
S&P
Rating
Net Reinsurer
Exposure as of Percent of
12/31/2020
Total
Ceded
Premiums
Written
Percent of
Total
AA-, Very Strong
A+, Strong
A+, Strong
A+, Strong
A-, Strong
AA-, Very Strong
AA-, Very Strong
AA-, Very Strong
A+, Strong
A, Strong
$
$
73,414
41,385
39,673
32,050
31,768
28,855
28,504
26,679
22,231
21,142
195,100
540,801
13.6 % $
7.7 %
7.3 %
5.9 %
5.9 %
5.3 %
5.3 %
4.9 %
4.1 %
3.9 %
36.1 %
100.0 % $
27,133
20,314
13,941
10,628
7,590
14,516
8,288
1,556
3,907
7,288
129,183
244,344
11.1 %
8.3 %
5.7 %
4.3 %
3.1 %
5.9 %
3.4 %
0.6 %
1.6 %
3.0 %
53.0 %
100.0 %
* All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of shareholders’ equity.
The allowances for uncollectible amounts on paid and unpaid recoverables were $15.9 million and $8.6 million, respectively, at
December 31, 2020. At December 31, 2019, the amounts were $15.7 million and $9.4 million, respectively. Adoption of ASU 2016-
13 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other
changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from
whom the balances were recoverable and their associated S&P default ratings. No write-offs were applied to the allowances in 2020
77
and less than $0.1 million was recovered. 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 2020, 2019 and 2018:
(in thousands)
Unpaid losses and LAE at beginning of year:
Gross
Ceded
Net
Adoption impact of ASU 2016-13 on reinsurance balances recoverable
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
2020
2019
2018
1,574,352 $
(384,517 )
1,189,835 $
1,461,348 $
(364,999 )
1,096,349 $
1,271,503
(301,991 )
969,512
(1,345 ) $
— $
—
543,937 $
(101,053 )
442,884 $
488,700 $
(75,284 )
413,416 $
478,143
(49,950 )
428,193
(93,077 ) $
(231,977 )
(325,054 ) $
(80,055 ) $
(239,875 )
(319,930 ) $
(76,050 )
(225,306 )
(301,356 )
$
$
$
$
$
$
$
Net unpaid losses and LAE at end of year
$
1,306,320 $
1,189,835 $
1,096,349
Unpaid losses and LAE at end of year:
Gross
Ceded
Net
$
$
1,750,049 $
(443,729 )
1,306,320 $
1,574,352 $
(384,517 )
1,189,835 $
1,461,348
(364,999 )
1,096,349
We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including
reinsurance balances recoverable, to be presented at the net amount expected to be collected. We previously maintained an allowance for
uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we
released $1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the
cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes
have and ongoing modifications will continue to be recorded. See note 1. C. for more information on the adoption of the ASU.
Loss development occurs when our current estimate of ultimate losses, established through our reserve analysis processes, differs
from the initial reserve estimate. 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 claim experience directly available to the Company 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, 2020, 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, 2020. 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 services product along with general
liability, small commercial and other casualty products. Excess occurrence encompasses commercial excess and personal umbrella, while
claims made includes select lines within the professional services product, executive products and other casualty. 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, 2011 to 2019 is
presented as unaudited required supplementary information.
78
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
1,806
2,078
3,350
5,871
9,699
16,214
29,201
56,310
90,220
115,016
5,869
5,187
4,315
4,284
4,386
4,284
4,441
4,707
4,953
3,662
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
514
826
1,693
3,318
8,724
13,570
22,078
37,085
63,384
86,608
582
866
947
902
692
640
617
541
512
272
Casualty - Primary Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2017*
2018*
2011* 2012* 2013* 2014* 2015* 2016*
$ 91,139 $ 98,428 $ 94,145 $ 89,622 $ 86,342 $ 83,181 $ 82,193 $ 82,248 $ 81,579 $ 80,905 $
91,807 78,406 65,893 61,072 59,028 59,488 60,328 60,465 60,591
80,823 67,297 62,882 60,329 60,162 59,556 59,116 57,106
88,092 79,497 71,592 67,237 66,389 66,702 65,636
94,835 84,975 83,579 78,675 76,398 75,470
101,950 96,753 90,611 85,449 83,374
119,741 111,391 102,583 95,513
141,513 130,281 125,731
146,011 135,209
145,171
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total $ 924,706
2013*
2019*
2018*
2017*
2016*
2012*
2014* 2015*
2011*
$ 5,924 $ 17,124 $ 32,978 $ 48,822 $ 60,769 $ 67,358 $ 71,413 $ 74,814 $ 76,318 $ 76,561
5,897 14,539 23,889 33,822 43,276 47,970 51,611 54,391 55,679
6,334 13,021 22,366 34,786 40,609 45,753 47,783 49,411
11,436 18,771 29,545 40,270 47,343 52,387 55,965
10,157 19,902 33,020 45,056 54,270 58,866
10,142 24,186 35,764 48,042 56,152
13,154 25,933 38,783 52,823
15,066 32,365 48,424
15,698 30,673
17,096
Total $ 501,650
9,767
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 432,823
* Presented as unaudited required supplementary information.
2020
Years
1
12.0 %
2
13.2 %
3
15.7 %
4
17.1 %
5
12.2 %
6
7
8
9
10
7.7 %
5.0 %
3.9 %
2.0 %
0.3 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Casualty - Excess Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2013*
2018*
2017*
2016*
2015*
2012*
2014*
2011*
$ 26,272 $ 17,148 $ 17,443 $ 18,641 $ 19,160 $ 20,959 $ 21,295 $ 22,032 $ 21,825 $ 21,657 $
29,042 21,558 21,021 21,885 21,231 22,433 23,020 25,286 26,129
39,984 34,824 26,857 25,425 25,599 24,922 25,496 25,073
50,889 39,095 35,119 32,274 33,372 33,458 35,128
53,672 50,857 47,392 42,840 43,328 42,446
56,341 49,385 37,676 33,125 30,251
62,863 55,868 48,363 44,737
69,362 62,646 54,626
88,078 89,691
107,579
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total $ 477,317
1,315
2013*
2019*
2018*
2017*
2016*
2012*
3,573
1,060
2014* 2015*
2011*
$ 2,169 $ 5,145 $ 6,981 $ 8,793 $ 10,772 $ 16,494 $ 17,769 $ 20,214 $ 21,036 $ 21,040
8,843 15,380 16,879 17,747 19,310 21,993 22,202
5,701 10,967 14,545 16,967 17,956 18,524 21,229
4,006 11,002 18,852 22,541 23,376 26,068
1,899
2,048 10,127 19,571 23,184 28,756 31,352
7,441 10,054 12,703
9,275 15,441
5,679
5,823 10,801
2,506
4,213 19,044
2,901
Total $ 182,781
All outstanding liabilities before 2011, net of reinsurance 18,291
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 312,827
* Presented as unaudited required supplementary information.
3,396
17
1,068
2020
Years
1
4.5 %
2
12.1 %
3
15.3 %
4
14.4 %
5
6
7
9.5 %
8.4 %
5.4 %
8
10.8 %
9
10
2.3 %
0.0 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
79
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
160
303
1,448
2,542
4,699
9,996
8,836
26,325
39,891
50,149
682
803
1,042
1,305
1,337
1,507
1,645
1,391
1,502
1,174
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
34
114
219
475
979
2,589
3,788
9,200
23,100
20,704
2,469
2,286
2,853
3,099
3,186
3,941
3,636
3,396
3,296
1,533
Casualty - Claims Made
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2013*
2018*
2017*
2016*
2015*
2012*
2014*
2011*
$ 17,416 $ 17,454 $ 12,260 $ 10,619 $ 8,510 $ 7,720 $ 7,852 $ 11,506 $ 14,031 $ 13,646 $
27,576 26,144 20,727 19,590 18,022 17,612 17,569 20,785 22,325
40,095 41,488 44,054 40,288 38,473 37,959 38,352 37,974
53,929 55,386 58,152 55,350 51,554 53,841 53,783
55,006 47,831 42,206 39,906 39,653 39,619
59,992 67,760 69,493 67,728 64,730
60,572 62,450 62,714 57,450
66,128 62,416 56,468
62,918 61,712
60,278
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2012*
2013*
2014* 2015*
2016*
2017*
2018*
2019*
2020
Total $ 467,985
433
4,086
792
330 $ 1,949 $ 4,508 $ 5,947 $ 5,637 $ 6,209 $ 6,835 $ 7,132 $ 7,239 $ 10,869
6,898
9,218 10,968 14,378 15,621 16,450 16,892
7,073 18,425 26,121 29,678 32,789 34,535 35,476
9,775 27,923 35,755 40,080 44,127 46,122
1,705
2,215 10,738 16,774 20,920 28,795 32,241
2,060 14,558 27,465 39,370 47,999
2,455 11,350 22,728 36,522
1,964 11,965 18,840
8,123
1,839
1,488
Total $ 254,572
All outstanding liabilities before 2011, net of reinsurance
690
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 214,103
* Presented as unaudited required supplementary information.
2011*
$
Years
1
3.2 %
2
16.0 %
3
20.3 %
4
15.5 %
5
6
7
8
9
10
9.4 %
8.8 %
4.6 %
2.8 %
1.4 %
26.6 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Casualty - Transportation
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2013*
2018*
2017*
2016*
2015*
2012*
2014*
2011*
$ 22,957 $ 23,479 $ 25,747 $ 25,272 $ 25,431 $ 25,376 $ 25,167 $ 25,614 $ 25,827 $ 26,081 $
21,452 22,203 22,924 23,511 23,689 23,620 23,305 23,731 23,845
32,742 32,853 32,989 37,673 38,811 39,974 39,309 39,183
38,361 33,015 36,452 38,590 40,202 40,508 41,156
38,561 46,258 47,021 46,395 45,162 45,525
50,430 53,519 54,105 52,277 52,818
55,640 53,641 45,017 43,764
57,597 54,592 38,719
58,297 56,129
43,573
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total $ 410,793
4,466
2013*
2019*
2018*
2017*
2016*
2012*
2014* 2015*
2011*
$ 5,295 $ 9,485 $ 14,477 $ 19,443 $ 22,375 $ 23,537 $ 23,941 $ 24,377 $ 25,052 $ 25,791
8,533 12,394 17,318 20,931 22,566 22,730 23,180 23,181
5,306 11,978 19,761 28,220 33,480 35,923 37,327 37,915
7,125 13,933 19,676 27,457 33,190 38,282 40,006
6,984 20,709 29,554 37,222 39,339 41,345
8,923 18,354 30,354 38,001 43,564
7,979 17,070 24,090 30,260
6,980 12,827 19,216
7,148 15,852
3,986
Total $ 281,116
All outstanding liabilities before 2011, net of reinsurance
175
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 129,852
* Presented as unaudited required supplementary information.
2020
Years
1
16.0 %
2
18.5 %
3
18.0 %
4
17.9 %
5
11.5 %
6
7
8
9
10
6.9 %
2.5 %
1.7 %
1.3 %
2.8 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
80
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
17
26
111
101
164
505
2,022
6,172
8,218
40,590
3,028
2,640
2,995
4,561
4,075
3,377
2,892
2,333
2,428
2,492
As of December 31, 2020
Cumulative
Number of
Reported
Claims
Total IBNR
16
18
33
48
243
389
673
1,489
4,663
16,483
1,681
1,479
1,407
1,351
1,231
1,367
1,724
1,265
953
405
Property
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
AY
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2013*
2018*
2017*
2016*
2015*
2012*
2014*
2011*
$ 70,246 $ 66,924 $ 64,976 $ 63,724 $ 62,770 $ 62,570 $ 62,456 $ 62,875 $ 62,799 $ 62,754 $
85,485 80,155 79,181 77,569 79,175 78,125 78,161 78,002 77,924
63,864 62,090 62,173 62,114 61,914 61,834 61,776 61,623
56,587 49,441 48,801 48,761 49,217 49,444 49,479
59,863 56,103 53,958 52,720 53,111 52,781
62,900 55,594 55,384 55,930 55,424
90,803 83,273 84,961 82,671
89,091 83,457 79,961
71,232 65,189
118,247
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total $ 706,053
2013*
2019*
2018*
2017*
2016*
2012*
2014* 2015*
2011*
$ 27,676 $ 48,756 $ 55,778 $ 59,099 $ 60,272 $ 61,428 $ 61,834 $ 62,729 $ 62,730 $ 62,733
39,074 66,509 72,057 73,705 75,640 76,152 77,159 77,323 77,347
32,208 50,840 57,407 59,259 60,520 61,195 61,325 61,335
30,550 43,380 46,148 46,528 47,799 49,027 49,259
32,184 49,348 50,197 51,290 52,078 52,342
33,134 46,921 51,371 53,006 54,328
41,314 66,818 74,415 78,360
37,048 68,264 72,357
30,703 51,740
43,192
Total $ 602,993
323
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 103,383
* Presented as unaudited required supplementary information.
2020
Years
1
50.9 %
2
31.6 %
3
4
5
6
7
8
9
10
7.3 %
3.0 %
2.1 %
1.3 %
0.7 %
0.6 %
0.0 %
0.0 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Surety
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2018*
2014*
2017*
2015*
2012*
2016*
2013*
17,114 11,452
16,080
2011*
$ 13,842 $ 17,832 $ 17,792 $ 17,321 $ 16,766 $ 16,695 $ 16,480 $ 18,281 $ 18,293 $ 18,252 $
6,985
5,107
4,266
9,521
8,391
8,116
4,564
7,205
19,241
7,099
5,231
4,267
16,958 12,957 11,113 10,456
9,351
18,928 11,062
8,641
16,127
16,765
7,082
5,209
4,319
9,792
8,895
8,798
7,227
14,785
8,667
7,516
16,450
7,471
5,271
4,427
7,867
5,399
5,225
8,180
6,170
8,106
2019*
2020
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total $ 91,648
1,883
2019*
2018*
2017*
2013*
2012*
2014*
2016*
2015*
6,680
1,116
6,726
2,856
722
2011*
$ 8,160 $ 16,932 $ 17,151 $ 17,403 $ 17,212 $ 17,086 $ 17,086 $ 17,013 $ 18,251 $ 18,234
6,941
5,061
4,214
9,186
8,086
7,221
2,368
2,433
835
Total $ 64,579
(60 )
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 27,009
6,996
5,128
4,234
9,183
7,640
7,062
2,588
336
7,065
5,150
4,131
9,436
6,299
2,862
1,835
7,406
5,098
4,059
7,695
5,817
979
7,536
4,911
4,166
6,719
3,087
* Presented as unaudited required supplementary information.
7,416
4,701
4,283
3,192
2020
Years
1
24.2 %
2
41.4 %
3
12.3 %
4
5
6
7
8
9
10
7.0 %
1.4 %
0.2 %
-1.4 %
-0.9 %
3.0 %
-0.1 %
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
81
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:
(in thousands)
Net outstanding liabilities:
December 31, 2020
December 31, 2019
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
$
432,823 $
312,827
214,103
129,852
103,383
27,009
54,954
403,910
256,153
217,954
139,951
71,965
24,988
52,275
8,634
22,735
1,306,320 $
9,402
13,237
1,189,835
35,202 $
88,528
223,020
53,251
40,257
4,017
(8,634 )
8,088
443,729 $
31,122
98,518
176,936
53,724
21,438
11,199
(9,402 )
982
384,517
Total gross liability for unpaid loss and settlement expenses
$
1,750,049 $
1,574,352
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.
Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of
these assumptions involved more uncertainty as of December 31, 2020. We expect there will be impacts to the timing of loss
emergence and ultimate loss ratios for certain coverages we underwrite as a result of the spread of COVID-19 and the related
82
economic shutdown. The industry is experiencing new issues, including the postponement of civil court cases, the extension of various
statutes of limitations, changes in settlement trends and a significant reduction in economic activity and insured exposure in some
classes. Our recorded reserves include consideration of these factors, but the duration and degree to which these issues persist, along
with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods.
DEVELOPMENT OF IBNR RESERVES
The following table summarizes our prior accident years’ loss reserve development by segment for 2020, 2019 and 2018:
(in thousands)
Casualty
Property
Surety
Total
$
2020
(75,075 ) $
(13,019 )
(12,959 )
$ (101,053 ) $
2019
(62,497 ) $
(4,461 )
(8,326 )
(75,284 ) $
2018
(33,252 )
(10,813 )
(5,885 )
(49,950 )
A discussion of significant components of reserve development for the three most recent calendar years follows:
2020. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2020. The
casualty segment contributed $75.1 million in favorable development, inclusive of ULAE. Accident years 2017 through 2019 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’ ability to select risk as well as
an increasing rate environment within many of our casualty sublines. Nearly all of our casualty products contributed to the favorable
development. Transportation contributed $19.1 million for the year. Within the primary occurrence grouping, the general liability product
contributed $17.9 million to our favorable development. Within the excess occurrence grouping, commercial excess developed favorably
by $12.5 million. Within the claims made grouping, professional services coverages developed favorably by $7.8 million and medical
professional liability had $6.1 million of favorable development.
The marine product was the primary driver of the favorable development in the property segment. Marine contributed $6.5 million
of the $13.0 million total favorable property development, inclusive of ULAE, primarily in accident years 2017 and 2018. Commercial
property was favorable by $5.2 million.
The surety segment experienced favorable development of $13.0 million, inclusive of ULAE. The majority of the favorable
development was from accident year 2019. Contract and commercial surety products were the main contributors with favorable
development of $5.9 million and $3.8 million, respectively.
2019. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2019. The
casualty segment contributed $62.5 million in favorable development, inclusive of unallocated loss and adjustment expenses (ULAE),
which is excluded from the incurred loss and loss adjustment expense tables above. Accident years 2017 and 2018 contributed the majority
of the favorable development, with earlier years developing favorably in aggregate to a lesser extent. 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 $11.8 million to our favorable development. Small commercial products were favorable by $6.3 million. Within the
excess occurrence grouping, commercial excess was favorable by $6.8 million and our personal umbrella product developed favorably by
$7.8 million. Within the claims made grouping, professional services coverages developed favorably by $10.2 million, which was offset
by adverse development of $7.3 million on executive products and $2.3 million on medical professional liability coverages.
Transportation experienced favorable development of $16.6 million, primarily on accident years 2016 through 2018.
Marine contributed $2.4 million of the $4.5 million total favorable property development, inclusive of ULAE. Accident years 2017
and 2018 contributed to the marine products’ favorable development. Homeowners’ contributed $1.1 million of favorable development
with other commercial property insurance and assumed reinsurance products contributing the balance.
The surety segment experienced favorable development of $8.3 million, inclusive of ULAE. The majority of the favorable
development was from accident year 2018, while earlier accident years developed slightly adversely. The commercial surety product was
the main contributor with favorable development of $5.8 million. Contract surety had favorable development of $4.2 million, which offset
$1.7 million of adverse development on miscellaneous surety.
2018. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2018.
Development from the casualty segment totaled $33.3 million, inclusive of ULAE. The largest amounts of favorable development came
from accident years 2015 through 2017. We continued to experience emergence that was generally better than previously estimated. We
attribute the favorable emergence to loss trends in most lines outperforming our long-term expectations. Further, we believe our
underwriters’ risk selection contributed to the Company experiencing less loss cost inflation than originally anticipated. The primary
occurrence grouping had favorable development of $15.6 million, driven by our general liability product with $6.7 million of favorable
83
development. The excess occurrence grouping had favorable development of $21.4 million, with commercial insureds contributing $10.8
million and personal insureds contributing the remainder. Claims made exposures had adverse development of $3.9 million driven by
medical errors and omissions coverages. Transportation had $0.5 million of favorable development.
Our marine product was the predominant driver of the favorable development in the property segment, accounting for $5.0 million
of the $10.8 million total favorable development for the segment, inclusive of ULAE. Accident years 2015 through 2017 made the largest
contribution. Our excess and surplus lines commercial property product and assumed reinsurance products also contributed $2.0 million
and $2.8 million of favorable development, respectively.
The surety segment experienced $5.9 million of favorable development, inclusive of ULAE. The majority of the favorable
development came from the 2017 accident year, which served to offset the unfavorable development from accident years 2011 and 2016.
Commercial surety contributed favorable development of $6.3 million. Miscellaneous surety experienced adverse development totaling
$0.8 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 excess,
general liability and discontinued assumed casualty reinsurance lines of business. The majority of the exposure is in the excess layers of
our commercial excess 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, 2020, 2019 and 2018:
(in thousands)
Loss and LAE Payments (Cumulative):
2020
2019
2018
Gross
Ceded
Net
$ 139,804 $ 137,485 $ 136,043
(68,638 )
67,405
(69,219 )
70,585 $
(68,849 )
68,636 $
$
Unpaid Losses and LAE at End of Year:
Gross
Ceded
Net
$
$
22,485 $
(4,619 )
17,866 $
22,616 $
(5,149 )
17,467 $
24,262
(5,373 )
18,889
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.
During 2020, RLI experienced modest emergence of asbestos, environmental and mass tort losses and we increased our IBNR
reserves for these exposures.
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.
84
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 below.
(in thousands)
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses
Unearned premium offset
Deferred compensation
Stock option expense
Lease liability
Other
Deferred tax assets before allowance
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Net unrealized appreciation of securities
Deferred policy acquisition costs
Lease asset
Discounting of unpaid losses and settlement expenses - Tax Cuts
and Jobs Act (TCJA) implementation offset
Fixed assets
Intangible assets
Undistributed earnings of unconsolidated investees
Other
Total deferred tax liabilities
Net deferred tax liability
2020
2019
21,096 $
19,862
2,829
2,749
3,971
389
50,896 $
—
50,896 $
77,639 $
18,569
3,402
3,181
3,439
1,558
21,813
1,530
131,131 $
(80,235 ) $
19,143
18,755
2,981
2,728
5,140
275
49,022
—
49,022
56,532
17,859
4,690
3,817
3,008
1,634
17,673
536
105,749
(56,727 )
$
$
$
$
$
$
Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2020, 2019 and 2018,
differed from the amounts computed by applying the U.S. federal tax rate of 21 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 TCJA
Excess tax benefit on share-based compensation
Tax-exempt interest income
Dividends received deduction
Investment tax credit
ESOP dividends paid deduction
Unconsolidated investee dividends
Nondeductible expenses
Other items, net
Total
2020
2019
2018
$ 39,867 21.0 % $ 48,874 21.0 % $ 14,192 21.0 %
(3,958 )
(1,238 )
(823 )
— — %
(1.8 ) %
(0.7 ) %
(0.5 ) %
(1.3 ) %
(0.6 ) %
(0.2 ) %
1.0 %
0.4 %
— — %
(1.7 ) %
(0.5 ) %
(0.4 ) %
— — %
(0.5 ) %
(0.8 ) %
0.7 %
(0.1 ) %
$ 32,750 17.3 % $ 41,092 17.7 % $
(3,537 )
(1,293 )
(883 )
(2,435 )
(1,083 )
(479 )
1,878
715
(1,122 )
(1,802 )
1,649
(488 )
(2,268 )
(4,533 )
(1,795 )
(775 )
(3.4 ) %
(6.7 ) %
(2.7 ) %
(1.1 ) %
— — %
(1.8 ) %
— — %
0.6 %
(0.9 ) %
5.0 %
389
(624 )
3,402
(1,184 )
Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was lower in
2020 due to investment tax credits recognized using the flow-through method of accounting, whereby income taxes payable and
income tax expense were reduced. Additionally, lower levels of pretax earnings caused tax-favored adjustments to be larger on a
percentage basis in 2020 compared to 2019. The effective rate was significantly lower in 2018 as a result of the impact of tax reform
and lower pretax income.
Except for two aspects, the accounting for the tax effects of the enactment of the TCJA were completed as of December 31,
2017. The first provisional item recorded in 2017 was related to an expected disallowance of deductions for certain performance-based
compensation, including bonuses and stock options. At the time of enactment, there was a lack of clarity on whether some amounts
could be grandfathered in as deductible. The Internal Revenue Service (IRS) and Treasury Department provided additional guidance
85
and we were able to finalize the accounting in 2018 by recording a $2.3 million deferred tax benefit to restore the deferred tax assets
related to those performance-based compensation amounts. The second provisional item related to discount factors on loss reserves
that the IRS had not yet published. The IRS published the factors in the fourth quarter of 2018 and we were able to complete the
accounting for the effects of the enactment of the TCJA. While there was no net impact to the deferred tax amount that was recorded
at December 31, 2017, we implemented the new discounting methodology and will recognize the adjustment ratably over the allowed
eight-year period beginning in 2018.
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 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. We received a
$4.7 million dividend from Prime in 2020 and recognized a $0.5 million tax benefit from applying the lower tax rate applicable to
affiliated dividends paid to insurance companies (10.8 percent in 2020), as compared to the corporate capital gains rate on which the
deferred tax liabilities were based. In 2019, we received a $13.2 million dividend from Maui Jim and recognized a $1.8 million tax benefit
from applying the lower tax rate applicable to affiliated dividends paid to non-insurance companies (7.4 percent in 2019), as compared to
the corporate capital gains rate on which the deferred tax liabilities were based. Standing alone, the dividends resulted in a 0.2 percent and
0.8 percent reduction to the 2020 and 2019 effective tax rates, respectively. As no dividends were declared from unconsolidated investees
in 2018, there was no impact to the 2018 effective tax rate.
Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 2020,
2019 and 2018 resulted in tax benefits of $1.1 million, $1.1 million and $1.2 million, respectively. These tax benefits reduced the
effective tax rate for 2020, 2019 and 2018 by 0.6 percent, 0.5 percent and 1.8 percent and, 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 2020, 2019 and 2018 amounted to $23.7 million, $25.6 million and $16.4 million,
respectively.
Although we are not currently under audit by the IRS, tax years 2016 through 2020 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 align with those of our shareholders.
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
approved annually by our board of directors and are expensed in the year earned. ESOP and 401(k)-related expenses (basic and profit-
sharing) were $14.4 million, $15.7 million and $8.8 million for 2020, 2019 and 2018, respectively.
During 2020, the ESOP purchased 94,194 shares of RLI Corp. stock on the open market at an average price of $82.67 ($7.8
million) relating to the contribution for plan year 2019. Shares held by the ESOP as of December 31, 2020, totaled 2,612,357 and are
treated as outstanding in computing our earnings per share. During 2019, the ESOP purchased 60,768 shares of RLI Corp. stock on the
open market at an average price of $69.99 ($4.3 million) relating to the contribution for plan year 2018. During 2018, the ESOP
purchased 98,717 shares of RLI Corp. stock on the open market at an average price of $62.80 ($6.2 million) relating to the contribution
for plan year 2017. 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.
86
Annual awards are provided to executives, managers and associates through our incentive plans, provided certain strategic and
financial goals are met. Annual expenses for these incentive plans totaled $26.6 million, $30.1 million and $11.9 million for 2020,
2019 and 2018, respectively.
DEFERRED COMPENSATION
We maintain rabbi trusts for deferred compensation plans for directors, key employees and executive officers through which
contributions can be invested in RLI Corp. stock or mutual funds. The employer stock in the plan cannot be diversified and is
accounted for as equity, in a manner consistent with the accounting for treasury stock. At December 31, 2020, the trusts’ assets were
valued at $49.3 million.
STOCK PLANS
Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. 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, restricted stock units, 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 2,623,369 awards under the 2015 LTIP, including 340,909 in 2020.
Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to
equity awards was $5.4 million, $6.0 million and $5.5 million for 2020, 2019 and 2018, respectively, and the total income tax benefit was
$0.9 million for each year. Total unrecognized compensation expense relating to outstanding and unvested awards was $6.4 million,
which will be recognized over the weighted average vesting period of 2.65 years.
Stock Options
Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market
value of the shares at the date of grant (subject to adjustments for changes in our capitalization, 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.
The following table summarize option activity in 2020:
Weighted
Average
Weighted
Average
Remaining
Options
Exercise Price
Contractual Life
Aggregate
Intrinsic
Value
(in 000’s)
Outstanding as of January 1, 2020
Granted
Exercised
Cancelled or forfeited
Outstanding as of December 31, 2020
Exercisable at December 31, 2020
1,667,290 $
322,479
(351,025 )
(6,410 )
1,632,334 $
658,290 $
62.52
92.86
52.34
73.42
70.67
60.35
5.16 $
3.74 $
54,657
28,834
The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $15.5 million,
$20.0 million and $24.3 million during 2020, 2019 and 2018, respectively.
87
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
2020
2019
2018
$
13.24
$
13.49
$
0.39 %
2.30 %
22.67 %
2.26 %
2.69 %
22.71 %
10.58
2.72 %
2.98 %
22.87 %
4.96 years
4.96 years
5.07 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 was determined based on the average annualized quarterly dividends paid during the most recent five-year period and
incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median
of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise
behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining
contractual term, adjusted for the demographics of the current year’s grant.
Restricted Stock Units
In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the
Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an
accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of
service equals 75. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting.
In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of
the vesting period. The total fair value of restricted stock units that vested was $1.5 million and $0.7 million during 2020 and 2019,
respectively.
Nonvested at January 1, 2020
Granted
Reinvested
Vested
Forfeited
Nonvested at December 31, 2020
Weighted
Average
Grant Date
Fair Value
70.07
93.24
96.14
65.24
79.54
81.53
RSUs
49,733 $
18,430
920
(20,837 )
(588 )
47,658 $
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’s statutory accounting principles (SAP). We
do not use any permitted SAP that differ from NAIC prescribed SAP. In converting from SAP 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 income securities.
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, 2020, 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 $203.9 million, $191.0 million and $170.9 million as of December 31, 2020, 2019
and 2018, respectively, compared to actual statutory capital and surplus of $1.1 billion, $1.0 billion and $829.8 million, respectively,
for these same periods.
Year-end statutory surplus for 2020 presented in the table below includes $238.0 million of RLI Corp. stock (cost basis of $64.6
million) held by Mt. Hawley Insurance Company, compared to $190.9 million and $132.8 million in 2019 and 2018, respectively. The
Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our GAAP consolidated
financial statements.
88
The following table includes selected information for our insurance subsidiaries for the year ended and as of December 31:
(in thousands)
Consolidated net income, statutory basis
Consolidated surplus, statutory basis
2020
120,329 $
2019
129,625 $
$
$ 1,121,592 $ 1,029,671 $
2018
135,791
829,775
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, 2020, our holding company had $1.1 billion in equity. This includes amounts related to the equity of our
insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net
assets is comprised primarily of investments and cash, including $64.6 million in liquid assets, which exceeds our normal annual holding
company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and
regular 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 2020, 2019 and 2018, our principal insurance subsidiary paid ordinary dividends totaling $110.0 million, $59.0 million and $13.0
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. In 2018, our principal insurance subsidiary sought and received regulatory approval prior to the
payment of extraordinary dividends totaling $110.0 million. No extraordinary dividends were paid in 2020 or 2019. As of December
31, 2020, $25.3 million of the net assets of our principal insurance subsidiary are not restricted and could be distributed to RLI Corp.
as ordinary dividends. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions
vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and
how capital adequacy is defined by our rating agencies in determining amounts available for distribution.
10. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
We are party to numerous claims, loss and litigation matters that arise in the normal course of our business. Many of such claims,
loss or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the resolution of these claims and
losses is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. From time
to time, 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 is not reasonably
likely to have a material adverse effect on our financial condition, results of operations or cash flows.
COMMITMENTS
As of December 31, 2020, we had $23.1 million of unfunded commitments related to our investments in private funds, low
income housing tax credit investments and equity method investees. See note 2 for more information on our investments in private
funds and low income housing tax credits.
11. LEASES
Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line
item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ROU
assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As
our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the
commencement date in determining the present value of future payments. Lease agreements may include options to extend or
terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option
will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component.
Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost
89
is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease
term.
The Company’s operating lease obligations are for branch office facilities. Expenses associated with leases totaled $6.9 million
in 2018. The components of lease expense and other lease information as of and during the years ended December 31, 2020 and 2019
are as follows:
(in thousands)
Operating lease cost
Variable lease cost
Sublease income
Total lease cost
$
$
2020
2019
5,504 $
1,346
(262 )
6,588 $
5,772
1,850
—
7,622
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases
$
5,963
$
5,711
ROU assets obtained in exchange for new operating lease liabilities
$
81 $
1,388
Reduction to ROU assets resulting from reduction to lease liabilities
$
18 $
1,279
Other non-cash reductions to ROU assets
$
1,192 $
—
(in thousands)
Operating lease ROU assets
Operating lease liabilities
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
2020
2019
$
$
16,200
19,072
$
$
22,335
24,475
3.87 years
2.32 %
4.69 years
2.33 %
Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less imputed interest
Total operating lease liability
12. OPERATING SEGMENT INFORMATION
$
$
$
2020
5,992
5,915
4,424
2,334
802
563
20,030
(958 )
19,072
The segments of our insurance operations include casualty, property and surety. The casualty portion of our business consists
largely of commercial excess, 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 assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. We provided medical and healthcare
professional liability coverage in the excess and surplus market, but exited these businesses on a runoff basis in 2019. 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. 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
90
conditions throughout market cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company
carefully manage the concentration of risks exposed to catastrophic events.
The surety segment specializes in writing small to large-sized commercial and contract surety coverages, including payment and
performance bonds. 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. 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. Assets are not managed
at the segment level and therefore are not allocated to segments.
REVENUES
(in thousands)
Casualty
Property
Surety
Net premiums earned
Net investment income
Net realized gains
Net unrealized gains (losses) on equity securities
Total
INSURANCE EXPENSES
(in thousands)
Loss and settlement expenses:
Casualty
Property
Surety
Total 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
2020
569,521 $
183,720
112,506
865,747 $
67,893
17,885
32,101
2019
558,458 $
164,022
116,631
839,111 $
68,870
17,520
78,090
983,626 $ 1,003,591 $
2018
523,472
149,261
118,633
791,366
62,085
63,407
(98,735 )
818,123
2020
2019
2018
322,099 $
111,356
9,429
442,884 $
330,156 $
73,614
9,646
413,416 $
329,763
83,822
14,608
428,193
162,058 $
59,926
64,454
286,438 $
166,499 $
55,986
66,212
288,697 $
151,007
51,830
64,901
267,738
40,937 $
15,620
10,271
66,828 $
796,150 $
41,202 $
16,279
11,949
69,430 $
771,543 $
31,562
12,725
9,516
53,803
749,734
$
$
$
$
$
$
$
$
$
$
91
NET EARNINGS
(in thousands)
Casualty
Property
Surety
Net underwriting income
Net investment income
Net realized gains
Net unrealized gains (losses) on equity securities
Interest on debt
General corporate expense
Equity in earnings of unconsolidated investees
Total earnings before incomes taxes
Income tax expense
Net earnings
2020
2019
2018
$
$
$
$
44,427 $
(3,182 )
28,352
69,597 $
67,893
17,885
32,101
(7,603 )
(10,265 )
20,233
189,841 $
32,750
157,091 $
20,601 $
18,143
28,824
67,568 $
68,870
17,520
78,090
(7,588 )
(12,686 )
20,960
232,734 $
41,092
191,642 $
11,140
884
29,608
41,632
62,085
63,407
(98,735 )
(7,437 )
(9,427 )
16,056
67,581
3,402
64,179
The following table further summarizes revenues by major product type within each segment:
NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial excess and personal umbrella
General liability
Professional services
Commercial transportation
Small commercial
Executive products
Other casualty
Total
PROPERTY
Marine
Commercial property
Specialty personal
Other property
Total
SURETY
Commercial
Miscellaneous
Contract
Total
Grand total
Year ended December 31,
2019
2018
2020
178,214 $
91,653
85,196
64,624
63,357
26,509
59,968
569,521 $
140,483 $
98,880
81,329
83,213
55,701
27,088
71,764
558,458 $
124,350
93,928
79,951
81,053
51,519
21,326
71,345
523,472
81,852 $
79,406
19,596
2,866
183,720 $
74,887 $
68,310
19,316
1,509
164,022 $
59,795
71,501
16,901
1,064
149,261
42,872 $
42,292
27,342
112,506 $
865,747 $
43,553 $
44,721
28,357
116,631 $
839,111 $
43,469
46,968
28,196
118,633
791,366
$
$
$
$
$
$
$
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of RLI Corp
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of RLI Corp and subsidiaries (the "Company") as of December 31,
2020, the related consolidated statement of earnings, comprehensive earnings, shareholders' equity, and cash flows, for the year ended
December 31, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial
statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2020, and the results of its operations and its cash flow for the year ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these 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
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these 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 audit 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 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 audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
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 audit 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.
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.
93
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Unpaid losses and settlement expenses — Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
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.
We identified the assessment of the Company’s estimate of unpaid losses and settlement expenses as a critical audit matter.
Specialized actuarial skills and knowledge were required to assess the methodologies and assumptions used to estimate unpaid losses
and settlement expenses. The assumptions used by the Company to estimate unpaid losses and settlement expenses included expected
loss ratios, loss development patterns, qualitative factors, and the weighting of actuarial methodologies. These assumptions included a
range of potential inputs and changes to these assumptions could affect the estimate of unpaid losses and settlement expenses recorded
by the Company.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to unpaid losses and settlement expenses included the following, among others:
• We tested the effectiveness of controls related to unpaid losses and settlement expenses, including those controls over the
inputs, methods, and assumptions used in the Company’s estimation processes.
• We tested the underlying data, including historical claims, that served as the basis for the actuarial analyses, to test that the
inputs to the actuarial estimates were accurate and complete.
• With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by the Company to estimate
the unpaid losses and settlement expenses by:
o Developing a range of independent estimates of unpaid losses and settlement expenses for certain lines of business
and comparing our estimates to the recorded reserves.
o Comparing the Company’s prior year estimates of expected incurred losses to actual experience during the current
year to identify potential management bias in the determination of the unpaid losses and settlement expenses.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 19, 2021
We have served as the Company's auditor since 2020.
94
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of RLI Corp.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of RLI Corp. and subsidiaries (the Company) as of December 31,
2019, the related consolidated statements of earnings and comprehensive earnings, shareholders’ equity, and cash flows for each of the
years in the two-year period ended December 31, 2019, and the related notes and financial statement schedules I to VI (collectively,
the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements 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 audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits 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. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 1983 to 2020.
Chicago, Illinois
February 21, 2020
95
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On August 21, 2019, Deloitte & Touche LLP (Deloitte) was engaged as the new independent registered public accounting firm
of RLI Corp. (the Company) to perform independent audit services for the Company for the fiscal year ending December 31, 2020.
Deloitte’s engagement was approved by the Audit Committee of the Company’s Board of Directors. The appointment of Deloitte was
the result of a competitive request for proposal process undertaken by the Audit Committee.
KPMG’s audit reports on the Company’s consolidated financial statements for the fiscal years ended December 31, 2019 and
December 31, 2018 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. KPMG LLP's report on the Company’s consolidated financial statements for the fiscal years
ended December 31, 2019 and 2018 contained a separate paragraph stating that "As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for equity investments with the adoption of ASU 2016-01, Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1,
2018.”
During the fiscal years ended December 31, 2019 and December 31, 2018, there were (i) no disagreements (as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of KPMG would have caused KPMG to make reference thereto in its reports on the consolidated financial statements of
the Company for such years, and (ii) no reportable events (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
During the fiscal years ended December 31, 2019 and December 31, 2018, neither the Company, nor any party on behalf of the
Company, consulted with Deloitte with respect to either (i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of the audit opinion that might be rendered with respect to the Company’s consolidated financial
statements, and no written report or oral advice was provided to the Company by Deloitte that was an important factor considered by
the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was subject to
any disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as
that term is defined in Item 304(a)(1)(v) of Regulation S-K).
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, 2020.
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, 2020.
Our internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report on page 93 of this report.
There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2020
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information – None.
96
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.
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 108-109.
(b) Exhibits. See Exhibit Index on pages 108-109.
(c) Financial Statement Schedules. See Index to Financial Statement Schedules on page 98.
97
INDEX TO FINANCIAL STATEMENT SCHEDULES
Data Submitted Herewith:
Schedules:
I. Summary of Investments - Other than Investments in Related Parties at December 31, 2020.
II. Condensed Financial Information of Registrant, as of and for the three years ended December 31, 2020.
III. Supplementary Insurance Information, as of and for the three years ended December 31, 2020.
IV. Reinsurance for the three years ended December 31, 2020.
V. Valuation and Qualifying Accounts for the three years ended December 31, 2020.
VI. Supplementary Information Concerning Property-Casualty Insurance Operations for the three years ended
December 31, 2020.
Reference (Page)
99
100-102
103-104
105
106
107
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.
98
RLI CORP. AND SUBSIDIARIES
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2020
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/MBS*
Corporate
Municipal
Total available-for-sale
Total fixed maturities
Equity securities:
Common stock:
Ind Misc and all other
ETFs (Ind/misc)
Total equity securities
Cash and 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
$
$
$
$
$
$
170,110 $
28,902
10,298
384,015
213,223
753,404
501,515
2,061,467 $
2,061,467 $
183,357 $
32,872
10,965
402,071
218,373
816,592
532,396
2,196,626 $
2,196,626 $
183,357
32,872
10,965
402,071
218,373
816,592
532,396
2,196,626
2,196,626
156,941 $
136,249
293,190 $
62,217
51,941
2,468,815 $
257,154 $
266,852
524,006 $
62,217
54,232
2,837,081 $
257,154
266,852
524,006
62,217
54,232
2,837,081
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Note: See notes 1E and 2 of Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered
public accounting firms starting on page 93 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.
99
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
Investments in subsidiaries
Investments in unconsolidated investee
Fixed income:
Available-for-sale, at fair value
(amortized cost of $60,657 and allowance for credit losses of $0 in 2020)
(amortized cost of $42,747 and allowance for credit losses of $0 in 2019)
Property and equipment, at cost, net of accumulated depreciation of $1,629 in 2020
and $1,562 in 2019
Income taxes receivable - current
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Accounts payable, affiliates
Income taxes - deferred
Bonds payable, long-term debt
Interest payable, long-term debt
Other liabilities
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 200,000,000 in 2020 and 100,000,000 in 2019)
(68,072,794 shares issued and 45,142,580 shares outstanding in 2020)
(67,799,229 shares issued and 44,869,015 shares outstanding in 2019)
Paid-in capital
Accumulated other comprehensive earnings
Retained earnings
Deferred compensation
Treasury stock, at cost (22,930,214 shares in 2020 and 2019)
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
2020
2019
$
381 $
1,148,342
90,893
350
1,034,679
79,597
64,211
45,538
1,779
1,500
895
1,308,001 $
1,846
842
400
1,163,252
2,556 $
16,988
149,489
2,153
837
172,023 $
1,310
14,578
149,302
2,153
521
167,864
681 $
335,365
108,714
1,084,217
8,292
(401,291 )
1,135,978 $
1,308,001 $
678
321,190
52,473
1,014,046
7,980
(400,979 )
995,388
1,163,252
$
$
$
$
$
$
See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms
starting on page 93 of this report.
100
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 earnings (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains arising during the period
Less: reclassification adjustment for (gains) losses included in net
earnings
Other comprehensive earnings - parent only
Equity in other comprehensive earnings (loss) of subsidiaries/investees
Other comprehensive earnings (loss)
Comprehensive earnings
2020
2019
2018
1,412 $
501
10,368
(10,265 )
(7,603 )
(5,587 ) $
(2,885 )
(2,702 ) $
159,793
157,091 $
1,656 $
463
13,592
(12,686 )
(7,588 )
(4,563 ) $
(4,989 )
426 $
191,216
191,642 $
648
(142 )
12,471
(9,427 )
(7,437 )
(3,887 )
(2,359 )
(1,528 )
65,707
64,179
994 $
1,727 $
710
(390 )
604 $
55,615
56,219 $
213,310 $
(365 )
1,362 $
65,683
67,045 $
258,687 $
112
822
(34,819 )
(33,997 )
30,182
$
$
$
$
$
$
$
$
See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms
starting on page 93 of this report.
101
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 (loss) before equity in net earnings of subsidiaries
Adjustments to reconcile net losses to net cash provided by (used in)
operating activities:
2020
2019
2018
$
(2,702 ) $
426 $
(1,528 )
Net realized (gains) losses
Depreciation
Other items, net
Change in:
Affiliate balances receivable/payable
Federal income taxes
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
Other
Sale of:
Fixed income, available-for-sale
Call or maturity of:
Fixed income, available-for-sale
Net proceeds from sale (purchase) of short-term investments
Cash dividends received-subsidiaries
Net cash provided by investing activities
Cash flows from financing activities
Proceeds from stock option exercises
Cash dividends paid
Other
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
(501 )
67
2,270
1,246
1,399
(463 )
68
2,487
1,180
(1,673 )
142
68
(471 )
1,187
3,430
(10,368 )
—
(8,589 ) $
(13,592 )
13,200
1,633 $
(12,471 )
9,900
257
(24,950 ) $
(346 )
(2,507 ) $
—
(73,812 )
—
3,767
14,273
12,056
3,492
—
110,000
91,963 $
29,501
—
34,003
75,270 $
8,648 $
(95,793 )
3,802
(83,343 ) $
31 $
350
381 $
9,490 $
(93,315 )
4,058
(79,767 ) $
(2,864 ) $
3,214
350 $
75,662
70
73,363
87,339
6,076
(90,662 )
—
(84,586 )
3,010
204
3,214
$
$
$
$
$
$
$
Interest paid on outstanding debt amounted to $7.3 million for 2020, 2019 and 2018, respectively. See Notes to Consolidated Financial
Statements. See also the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
102
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 2020, 2019 and 2018
(in thousands)
Year ended December 31, 2020
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2019
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2018
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Deferred policy Unpaid losses Unearned
acquisition
and settlement premiums, premiums
expenses, gross
earned
gross
costs
Net
Incurred losses
and settlement
expenses
current year
$
$
$
$
$
$
48,255 $ 1,567,544 $ 385,736 $ 569,521 $
150,008 131,274 183,720
19,655
20,515
69,376 112,506
88,425 $ 1,750,049 $ 586,386 $ 865,747 $
32,497
397,174
124,375
22,388
543,937
47,805 $ 1,435,619 $ 354,118 $ 558,458 $
100,000 116,624 164,022
17,057
20,182
69,471 116,631
85,044 $ 1,574,352 $ 540,213 $ 839,111 $
38,733
392,653
78,075
17,972
488,700
50,040 $ 1,283,204 $ 330,836 $ 523,472 $
93,032 149,261
14,090
20,804
72,637 118,633
84,934 $ 1,461,348 $ 496,505 $ 791,366 $
134,822
43,322
363,015
94,635
20,493
478,143
NOTE 1: Investment income is not allocated to the segments, therefore, net investment income has not been provided.
See the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
103
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(continued)
As of and for the years ended December 31, 2020, 2019 and 2018
(in thousands)
Year ended December 31, 2020
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2019
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2018
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
(75,075 ) $
(13,019 )
(12,959 )
(101,053 ) $
162,058 $
59,926
64,454
286,438 $
40,937 $
15,620
10,271
66,828 $
583,244
196,603
112,241
892,088
(62,497 ) $
(4,461 )
(8,326 )
(75,284 ) $
166,499 $
55,986
66,212
288,697 $
41,202 $
16,279
11,949
69,430 $
564,979
181,974
113,384
860,337
(33,252 ) $
(10,813 )
(5,885 )
(49,950 ) $
151,007 $
51,830
64,901
267,738 $
31,562 $
12,725
9,516
53,803 $
547,177
155,601
120,397
823,175
$
$
$
$
$
$
See the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
104
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV—REINSURANCE
Years ended December 31, 2020, 2019 and 2018
(in thousands)
2020
Casualty segment
Property segment
Surety segment
RLI Insurance Group premiums earned
2019
Casualty segment
Property segment
Surety segment
RLI Insurance Group premiums earned
2018
Casualty segment
Property segment
Surety segment
RLI Insurance Group premiums earned
Direct
amount
Ceded to
other
companies
Assumed
from other
companies
Net
amount
Percentage
of amount
assumed
to net
$ 690,718 $ 148,271 $
70,398
253,781
118,109
5,843
$ 1,062,608 $ 224,512 $
27,074 $ 569,521
337 183,720
240 112,506
27,651 $ 865,747
$ 641,159 $ 122,452 $
53,810
217,657
122,305
5,921
$ 981,121 $ 182,183 $
39,751 $ 558,458
175 164,022
247 116,631
40,173 $ 839,111
96,639 $
$ 578,643 $
44,634
193,855
123,736
5,521
$ 896,234 $ 146,794 $
41,468 $ 523,472
40 149,261
418 118,633
41,926 $ 791,366
4.8 %
0.2 %
0.2 %
3.2 %
7.1 %
0.1 %
0.2 %
4.8 %
7.9 %
0.0 %
0.4 %
5.3 %
See the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
105
RLI CORP. AND SUBSIDIARIES
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2020, 2019 and 2018
(in thousands)
2020 Allowance for uncollectible reinsurance
Balance
at beginning
of period
Amounts
charged
to expense
Amounts
recovered
(written off)
Balance
at end of
period
$
25,066 $
(522 ) $
(5 ) $
24,539
2019 Allowance for uncollectible reinsurance
$
25,911 $
(647 ) $
(198 ) $
25,066
2018 Allowance for uncollectible reinsurance
$
25,911 $
— $
— $
25,911
See the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
106
RLI CORP. AND SUBSIDIARIES
SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years ended December 31, 2020, 2019 and 2018
Deferred policy Claims and
acquisition
costs
claim adjustment premiums, premiums
expense reserves
earned
gross
Unearned
Net
Net
investment
income
$
$
$
88,425 $
85,044 $
84,934 $
1,750,049 $ 586,386 $ 865,747 $
1,574,352 $ 540,213 $ 839,111 $
1,461,348 $ 496,505 $ 791,366 $
67,893
68,870
62,085
Claims and claim adjustment
expenses incurred related to: Amortization Paid claims and
Current
claim adjustment premiums
Net
year
Prior
year
of deferred
acquisition costs
expenses
written
$ 543,937 $ (101,053 ) $
(75,284 ) $
$ 488,700 $
(49,950 ) $
$ 478,143 $
286,438 $
288,697 $
267,738 $
325,054 $ 892,088
319,930 $ 860,337
301,356 $ 823,175
(in thousands)
Affiliation with
Registrant (1)
2020
2019
2018
2020
2019
2018
(1) Consolidated property-casualty insurance operations.
See the accompanying reports of independent registered public accounting firms starting on page 93 of this report.
107
Exhibit
No.
Description of Document
Reference (page)
EXHIBIT INDEX
3.1
Amended and Restated Certificate of Incorporation
3.2
By-Laws
4.1
Senior Indenture
4.2
Supplemental Indenture
Incorporated by reference to the Company’s Form 8-K filed
May 8, 2020.
Incorporated by reference to the Company’s Form 8-K filed
May 8, 2018.
Incorporated by reference to the Company’s Form 8-K filed
October 2, 2013.
Incorporated by reference to the Company’s Form 8-K filed
May 8, 2018.
4.3
Description of Securities
Attached as Exhibit 4.3.
10.1
RLI Corp. Nonqualified Agreement*
Incorporated by reference to the Company’s Form 10-K filed on
February 21, 2020.
10.2
10.3
RLI Corp. Nonemployee Directors’ Deferred
Compensation Plan, as amended*
Incorporated by reference to the Company’s Form 10-K filed on
February 21, 2020.
RLI Corp. Executive Deferred Compensation Plan, as
amended*
Incorporated by reference to the Company’s Form 10-K filed on
February 21, 2020.
10.4
Key Employee Excess Benefit Plan, as amended*
10.5
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.
10.6
10.7
10.8
RLI Corp. Annual Incentive Compensation Plan, as
amended*
Incorporated by reference to the Company’s Form 10-Q filed July
24, 2020.
Market Value Potential (MVP), Executive Incentive
Program Guideline*
Attached as Exhibit 10.7.
RLI Corp. 2015 Long-Term Incentive Plan, as
amended*
Incorporated by reference to the Company’s Form 10-Q filed on
July 24, 2020.
10.9
Management Incentive Program Guideline*
Attached as Exhibit 10.9.
10.10
RLI Underwriting Profit Program Guideline*
Attached as Exhibit 10.10.
10.11
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.
10.12
Credit Agreement (Bank of Montreal, Chicago Branch.)
Incorporated by reference to the Company’s Form 8-K filed
March 31, 2020.
10.13
10.14
RLI Corp. Director and Officer Indemnification
Agreement
Incorporated by reference to the Company’s Form 10-Q filed
October 24, 2018.
Shareholders Agreement by and among RLI Corp.,
Walter F. Hester III, and the Walter F. Hester III
Revocable Trust
Incorporated by reference to the Company’s Form 8-K filed on
August 21, 2018.
11.0
Statement re: computation of per share earnings
Refer to Note 1.O., “Earnings per share,” on page 65.
16.1
Letter from KPMG LLP to the Securities and Exchange
Commission, dated August 21, 2019
Incorporated by reference to the Company’s Form 8-K filed
August 21, 2019.
* Management contract or compensatory plan.
108
Exhibit
No.
Description of Document
Reference Page
EXHIBIT INDEX
21.1
Subsidiaries of the Registrant
23.1
Consent of Deloitte & Touche LLP
23.2
Consent of KPMG LLP
Page 111
Page 112
Page 113
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Page 114
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Page 115
32.1
32.2
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 116
Page 117
101
iXBRL-Related Documents
104
Cover Page Interactive Data File
Attached as Exhibit 101
Embedded in Inline XBRL and
contained in Exhibit 101.
109
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.
SIGNATURES
RLI Corp.
(Registrant)
By:
/s/ Todd W. Bryant
Todd W. Bryant
Vice President, Chief Financial Officer
Date:
February 19, 2021
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/ Todd W. Bryant
Jonathan E. Michael, Chairman & CEO
(Principal Executive Officer)
Todd W. Bryant, Vice President,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ Kaj Ahlmann
Kaj Ahlmann, Director
By:
/s/ Jordan W. Graham
Jordan W. Graham, Director
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ Michael E. Angelina
Michael E. Angelina, Director
By:
/s/ Craig W. Kliethermes
Craig W. Kliethermes, Director
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ John T. Baily
John T. Baily, Director
By:
/s/ Jonathan E. Michael
Jonathan E. Michael, Director
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ Calvin G. Butler, Jr.
Calvin G. Butler, Jr., Director
By:
/s/ Robert P. Restrepo, Jr.
Robert P. Restrepo, Jr., Director
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ David B. Duclos
David B. Duclos, Director
By:
/s/ Debbie S. Roberts
Debbie S. Roberts, Director
Date:
February 19, 2021
Date:
February 19, 2021
By:
/s/ Susan S. Fleming
Susan S. Fleming, Director
By:
/s/ Michael J. Stone
Michael J. Stone, Director
Date:
February 19, 2021
Date:
February 19, 2021
110
Subsidiaries of the Registrant
The following companies are subsidiaries of the Registrant as of December 31, 2020.
Exhibit 21.1
Jurisdiction of Percentage
Ownership
Incorporation
Illinois
100 %
Illinois
100 %
Illinois
100 %
California
100 %
Washington
100 %
Illinois
100 %
Name
RLI Insurance Company
Mt. Hawley Insurance Company
RLI Underwriting Services, Inc.
Safe Fleet Insurance Services, Inc.
Data & Staff Service Co.
Contractors Bonding and Insurance Company
111
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No. 333-166614 and 333-203957) on Form S-8 of our report
dated February 19, 2021, relating to the financial statements of RLI Corp and the effectiveness of the Company's internal control over
financial reporting, appearing in this Annual Report on Form 10-K for the year ended December 31, 2020.
Exhibit 23.1
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 19, 2021
112
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
RLI Corp.:
We consent to the incorporation by reference in the registration statements (Nos. 333-166614 and 333-203957) on Form S-8 of RLI
Corp. of our report dated February 21, 2020, with respect to the consolidated balance sheet of RLI Corp. as of December 31, 2019, the
related consolidated statements of earnings and comprehensive earnings, shareholders’ equity, and cash flows for each of the years in
the two-year period ended December 31, 2019, and the related notes and financial statement schedules I to VI as of December 31,
2019, which report appears in the December 31, 2020 annual report on Form 10-K of RLI Corp.
/s/ KPMG LLP
Chicago, Illinois
February 19, 2021
113
Exhibit 31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION
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 19, 2021
/s/ Jonathan E. Michael
Jonathan E. Michael
Chairman & CEO
114
Exhibit 31.2
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION
I, Todd W. Bryant, 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 19, 2021
/s/ Todd W. Bryant
Todd. W Bryant
Vice President, Chief Financial Officer
115
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, 2020 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 19, 2021
116
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, 2020 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd W. Bryant, 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/ Todd W. Bryant
Todd W. Bryant
Vice President, Chief Financial Officer
February 19, 2021
117