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R L I C O R P.
A N N U A L
R E P O R T O N
F O R M 1 0 K
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02 FINANCIAL HIGHLIGHTS
03 OUR PURPOSE, VISION,
MISSION & VALUES
04 LETTER TO SHAREHOLDERS
08 OUR LEADERSHIP TEAM
10 SELECTED FINANCIAL DATA
12 INVESTOR INFORMATION
FINANCIAL HIGHLIGHTS
In thousands, except combined ratio, per-share data and return on equity
2023
2022
% Change
Gross premiums written
$ 1,806,660
$ 1,565,486
Net premiums written
Consolidated revenue
Net earnings(1)
Operating earnings(2)
GAAP combined ratio
1,427,747
1,511,994
304,611
227,740
86.6
1,241,536
1,697,992
583,411
214,636
84.4
Total shareholders’ equity
1,413,514
1,177,341
Per-share data:
Net earnings (diluted)(1)
Operating earnings (diluted)(2)
Cash dividends declared:
Regular
Special
Book value(3)
Year-end closing stock price
Return on equity(1)
$ 6.61
4.94
$ 12.74
4.69
1.07
2.00
30.97
133.12
23.3%
1.03
7.00
25.89
131.27
48.6%
15.4%
15.0%
-11.0%
-47.8%
6.1%
2.6%
20.1%
-48.1%
5.3%
3.9%
-71.4%
19.6%
1.4%
-52.1%
(1) The 2022 amounts included $434.4 million ($9.49 per diluted share) related to the sale of Maui Jim, Inc.
(2) See discussion of non-GAAP measures in note 1 of the SELECTED FINANCIAL DATA section on page 11 of the YEAR IN REVIEW wrap.
(3) With the inclusion of dividends paid (regular and special), book value per share growth was 31% year over year.
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OUR PURPOSE
Protect people and organizations from
life’s uncertainties to help them explore,
create, build and thrive.
OUR VISI0N
Be the recognized performance leader
of the U.S. specialty insurance industry.
OUR MISSION
Provide industry-leading specialty risk
management solutions that are convenient,
tailored and fill unmet customer needs.
OUR VALUES
We are talented.
We are innovative.
We are customer focused.
We are driven.
We act with integrity.
We are respectful.
We are owners.
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LETTER TO SHAREHOLDERS
DEAR SHAREHOLDERS,
I’m pleased to share that RLI reported excellent financial
results in 2023. We achieved profitability and strong top line
growth, despite the impact of the Hawaiian wildfires, which
resulted in the largest net catastrophe loss in our company’s
history.
Through our superior service, hallmark underwriting discipline,
diversified product portfolio and prudent fiscal management,
we helped many customers recover from unexpected events
during the year. Our strong capital position also allowed us to
return $140 million to shareholders through regular quarterly
dividends and a special dividend.
These achievements are a testament to the strength and
resilience of RLI’s business model and the commitment of
our talented team.
PEOPLE, CULTURE & RELATIONSHIPS
While our business model and financial track record set
us apart in the industry, what truly differentiates RLI is
our people, culture and focus on building meaningful
relationships.
We hire talented associates who share our values and provide
them with the opportunity to become owners of the company
through shared rewards and our Employee Stock Ownership
Plan. This unique ownership culture enhances our financial
performance and success by fostering shared accountability
and an alignment of employee and shareholder interests.
It also means our associates instill more care and
commitment into the work they do and the personal
connections they cultivate with our customers, distribution
partners and one another.
ABOUT OUR BUSINESS
As a U.S.-based specialty insurance company, RLI provides
risk management solutions that are convenient, tailored
and fill unmet customer needs. To this end, we consciously
manage our business to ensure we can always fulfill our
commitments to customers. We carried out this mission during
the Hawaiian wildfires by providing exceptional support to
policyholders, helping them navigate and recover in the midst
of a terrible tragedy. The quality of service we provide builds
long-term loyalty and goodwill and enhances our reputation.
At its core, RLI is an underwriting company with a highly
diversified portfolio of products. In exchange for a fair
premium, we take on risks that individuals and organizations
are unable or unwilling to bear alone. Our niche property,
casualty and surety products are distributed through a
network of trusted, specialized wholesale and retail brokers
and independent agents.
RLI is financially strong and stable. Our balance sheet is
endorsed by an A+ (Superior) rating from AM Best and an
A (Strong) rating from S&P. In addition, 2023 marked our
33rd year on Ward’s 50 top performing insurance companies
list. RLI is the only insurance company to have earned this
recognition every year since the list’s inception.
MARKET CONDITIONS
In 2023, the insurance industry experienced an active year
of natural catastrophes, a challenging regulatory environment
and persistent economic, social and loss-cost inflation.
Despite these challenges, broader economic conditions and
rate increases supported top line momentum. Our team
leaned into new growth opportunities, leveraging our market
expertise, deep relationships and consistent underwriting
appetite to serve more customers.
UNDERWRITING RESULTS
We posted underwriting income of $173 million on an 86.6
combined ratio, compared to $178 million on an 84.4
combined ratio in 2022. In addition to achieving our 28th
consecutive year of underwriting profitability, we succeeded in
growing our top line, exceeding $1.8 billion in premium. Gross
premiums written grew 15 percent in 2023, fueled by growth
across most of our product portfolio.
RLI’s casualty segment experienced a 4 percent increase in
gross premiums written on a 92.2 combined ratio. Premium
growth was tempered by competitive market conditions
within our executive products business and our exit of the
energy casualty business in 2023. Overall, we are optimistic
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about the future of our casualty business. Investments we’ve made
in technology, talent and producer relationships should support
continued long-term growth for this segment.
The property segment achieved 40 percent growth in gross
premiums written on a 78.5 combined ratio, despite the impact of
the Hawaiian wildfire catastrophe. Our commercial property and
marine products led segment premium growth, which was driven by
rate increases and new business flow. We believe the market will
continue to provide opportunities for growth in this segment in 2024.
Our surety segment achieved 6 percent growth in gross premiums
written and a 79.6 combined ratio. All major surety products
contributed to the growth. We anticipate the surety environment will
remain highly-competitive in the year ahead. Moving forward, we will
continue to closely monitor the economic environment, selectively
pursue growth opportunities and maintain discipline.
Overall, our underwriting performance was strong. We invested in our
people and products — while implementing customer experience,
innovation and technology initiatives — to support continued
profitable growth and make it easy for customers to do business
with RLI.
INVESTMENT RESULTS
In addition to underwriting profit, investment income served as a
significant contributor to operating earnings. Investment income
grew 40 percent for the year, due to sustained higher reinvestment
rates and growth in our invested asset base.
The investment portfolio’s total return for the year was 8.8 percent,
which was driven by strong returns in both the equity and fixed
income portfolios.
We remain committed to investing in a conservative, well-diversified
manner that enables us to fulfill our promise to policyholders, meet
our operational obligations and provide long-term growth in book
value for shareholders.
DELIVERING SHAREHOLDER VALUE
In 2023, we increased regular dividends for the 48th consecutive
year and paid a $2.00 per share special dividend. This marked
the 14th consecutive year that RLI has paid a special dividend
to shareholders. RLI has returned $1.4 billion in dividends to
shareholders over the last 10 years.
Book value growth over time continues to be the primary measure of
how we deliver long-term value for shareholders. In 2023, our book
value per share (inclusive of dividends) grew by 31 percent year over
year. Over the past 10 years, RLI’s book value (inclusive of dividends)
has grown by 225 percent.
LOOKING AHEAD
Our strategy for delivering sustainable long-term growth for
shareholders remains rooted in three core principles — serving our
customers as a financially secure and stable market; cultivating our
community of ownership and underwriting discipline; and leveraging
our deep expertise to continuously improve and adapt to changes in
the markets we serve.
With the help of our exceptional associate-owners, we will advance
this strategy and make prudent decisions to best support our
customers and the long-term viability of our company.
Thank you for your investment and confidence in RLI. In the year
ahead, we look forward to demonstrating, once again, that being
Different Works.
Craig W. Kliethermes
President & Chief Executive Officer
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STATUTORY COMBINED RATIO
Our average statutory combined ratio has outperformed the industry average by 12 points over the last decade.
110
100
90
80
RLI
P&C Industry(1)(2)
2014
84.1
97.2
2015
83.9
97.9
2016
89.0
100.7
2017
96.2
103.9
2018
94.0
99.2
2019
91.1
98.9
2020
91.8
98.8
2021
85.3
99.7
2022
83.2
102.7
2023
84.4
102.2
10-YEAR AVG.
88.3
100.1
(1) AM Best (2023). Aggregate & Averages – Property/Casualty, United States & Canada. 2014 – 2022.
(2) Conning (2023). Property-Casualty Forecast & Analysis: By Line of Business, Fourth Quarter 2023.
Estimated for the year ended December 31, 2023.
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.
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Assumes $100 invested on December 31, 2013, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends.
Comparison of ten-year annualized total return -- RLI: 15.0% | S&P 500: 12.0% | and S&P 500 P&C Index: 13.5%.
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P&C Industry*
RLI
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S&P 500 P&C Index
S&P 500
RLI
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Operations ROE
Operations ROE
Net EPS
Net EPS
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BOOK VALUE GROWTH WITH DIVIDENDS
EARNINGS PER SHARE
Over the past five years, RLI has returned more than $813 million
in dividends to shareholders.
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Each share of our stock has generated $33.15 of diluted earnings
over the five year period ending in 2023.
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The contents of the graph will pop up in a table.
Edit the table and click the check mark to apply.
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To update graph, go to Object > Graph > Data.
To update graph, go to Object > Graph > Data.
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Note: Some minor adjustment to formatting may be
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The contents of the graph will pop up in a table.
The contents of the graph will pop up in a table.
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necessary after updating:
Edit the table and click the check mark to apply.
Edit the table and click the check mark to apply.
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Cumulative Dividends
Cumulative Dividends
Cumulative Dividends
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Reported Book Value
Reported Book Value
Reported Book Value
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(cid:19)(cid:18)(cid:17)(cid:16)(cid:15)(cid:14)(cid:13)(cid:12)(cid:11)(cid:14)(cid:15)(cid:12)(cid:10)(cid:9)(cid:8)(cid:7)(cid:18)(cid:7)(cid:6)(cid:5)(cid:12)(cid:4)(cid:14)(cid:8)(cid:12)(cid:3)(cid:2)(cid:9)(cid:8)(cid:14)
(cid:19)(cid:18)(cid:17)(cid:16)(cid:15)(cid:14)(cid:13)(cid:12)(cid:1)(cid:127)(cid:14)(cid:8)(cid:9)(cid:15)(cid:18)(cid:7)(cid:6)(cid:12)(cid:10)(cid:9)(cid:8)(cid:7)(cid:18)(cid:7)(cid:6)(cid:5)(cid:12)(cid:4)(cid:14)(cid:8)(cid:12)(cid:3)(cid:2)(cid:9)(cid:8)(cid:14)(cid:22)(cid:30)(cid:21)
(cid:19)(cid:18)(cid:17)(cid:16)(cid:15)(cid:14)(cid:13)(cid:12)(cid:1)(cid:127)(cid:14)(cid:8)(cid:9)(cid:15)(cid:18)(cid:7)(cid:6)(cid:12)(cid:10)(cid:9)(cid:8)(cid:7)(cid:18)(cid:7)(cid:6)(cid:5)(cid:12)(cid:4)(cid:14)(cid:8)(cid:12)(cid:3)(cid:2)(cid:9)(cid:8)(cid:14)(cid:22)(cid:30)(cid:21)
(1) The 2022 amounts included $434.4 million ($9.49 per diluted share)
related to the sale of Maui Jim, Inc.
(2) See discussion of non-GAAP measures in note 1 of the SELECTED
FINANCIAL DATA section on page 11 of the YEAR IN REVIEW wrap.
8
OUR
LEADERSHIP
TEAM
9
BOARD OF DIRECTORS
Jonathan Michael, Director since 1997
Chairman, RLI Corp.
Kaj Ahlmann (3, 4), Director since 2009
Retired Global Head of Strategic Services and
Chairman, Advisory Board for Deutsche Bank
Michael Angelina (2, 5), Director since 2013
Executive in Residence, Maguire Academy
of Insurance and Risk Management,
Saint Joseph’s University
David Duclos (1, 5), Director since 2017
Retired CEO, QBE, North America
Susan Fleming (2, 4), Director since 2018
Executive Educator, Speaker and Angel Investor
Jordan Graham (2, 3), Director since 2004
Managing Director, Quotient Partners
Clark Kellogg (1, 4), Director since 2024
College basketball commentator at CBS Sports
Craig Kliethermes (4, 5), Director since 2021
President & CEO, RLI Corp.
Paul Medini (1, 2), Director since 2022
Retired Sr. Vice President and Chief Accounting
Officer of Chubb, Ltd.
Robert Restrepo, Jr. (3, 4), Director since 2016
Retired Chairman, CEO & President, State Auto
Insurance Company
Debbie Roberts (1, 3), Director since 2018
Executive Vice President and COO, Panera
Michael Stone (1, 5), Director since 2012
Former President & COO, RLI Insurance Company
1: Human Capital and Compensation Committee
2: Audit Committee
3: Nominating/Corporate Governance Committee
4: Finance and Investment Committee
5: Strategy and Risk Committee
OUR
TEAM
LEADERSHIP
EXECUTIVE LEADERSHIP
PRODUCT LEADERSHIP
PROPERTY
Phil Brodeur
Vice President, Risk Services
Industry experience - 15 years
Todd Bryant
Chief Financial Officer
Industry experience - 30 years
Seth Davis
Vice President, Controller
Industry experience - 28 years
Aaron Diefenthaler
Chief Investment Officer & Treasurer
Industry experience - 22 years
Patrick Ferrell
Vice President, Internal Audit
Industry experience - 31 years
Jeffrey Fick
Chief Legal Officer & Corporate Secretary
Industry experience - 19 years
Bryan Fowler
Vice President, Chief Information Officer
Industry experience - 26 years
Lisa Gates
Vice President, Marketing & Communications
Industry experience - 13 years
Kevin Horwitz
Vice President, Innovation Management
& Policy Development
Industry experience - 23 years
Kathleen Kappes
Vice President, Human Resources
Industry experience - 21 years
Craig Kliethermes
President & CEO
Industry experience - 39 years
Jennifer Klobnak
Chief Operating Officer
Industry experience - 24 years
Bret Stone
Vice President, Data & Analytics
Industry experience - 23 years
Kathleen Taylor
Vice President, Accounting & Branch
Operations
Industry experience - 27 years
Thomas Ward
Vice President, Risk Services
Industry experience - 40 years
CASUALTY
William Bell, III
Vice President, Environmental E&S
Industry experience - 36 years
Chad Berberich
Vice President, Executive Products Group
Industry experience - 27 years
Paul Dietrich
Vice President, Professional Services Group
Industry experience - 36 years
Justin Doss
Vice President, Distribution
& Strategic Partnerships
Industry experience - 24 years
Robert Hartje
Vice President, Casualty Brokerage
Industry experience - 37 years
Christopher Hughs
Vice President, General Liability
Industry experience - 26 years
Donald Johnson
Vice President, Professional Services Group
Industry experience - 35 years
Jill Johnson
Vice President, Personal Lines
Industry experience - 40 years
Daniel Meyer
President, RLI Transportation
Industry experience - 23 years
Eric Raudins
Senior Vice President, Transactional Products
Industry experience - 33 years
Eric White
Vice President, Commercial Transactional
Insurance Solutions
Industry experience - 23 years
CONTRACTORS BONDING AND
INSURANCE COMPANY
Robert Ogle
Vice President, Contractors Bonding
& Insurance Company
Industry experience - 35 years
Blake Ahrens
Vice President, Inland Marine
Industry experience - 27 years
Robert Schauer
President, RLI Marine
Industry experience - 36 years
Jonathan Ward
Vice President, E&S Property
Industry experience - 21 years
SURETY
Barton Davis
Vice President, Surety Underwriting
Industry experience - 36 years
Christopher Gleason
Vice President, Contract Surety
Industry experience - 21 years
Robert Kirk
Vice President, Commercial Surety
Industry experience - 33 years
Brian Schick
Vice President, Surety
Industry experience - 29 years
CLAIM LEADERSHIP
Matthew Campen
Vice President, Claim
Industry experience - 20 years
Marcos Cancio
Vice President, Claim Counsel
Industry experience - 21 years
Cory Figiel
Vice President, Claim
Industry experience - 17 years
Robert Handzel
Chief Claim Officer
Industry experience - 46 years
William Irish
Vice President, Claim
Industry experience - 37 years
Nicolas Mesco
Vice President, Claim
Industry experience - 16 years
10
SELECTED
FINANCIAL DATA
The following is selected financial data of RLI Corp. and Subsidiaries for the 5 years ended December 31, 2023.
(Amounts in thousands, except per share data and combined ratios)
Operating Results
Gross premiums written
Consolidated revenue
Net earnings
Comprehensive earnings
Operating earnings(1)
Net cash provided from operating activities
Financial Condition
Total investments and cash
Total assets
Unpaid losses and settlement expenses
Total debt
Total shareholders’ equity
Statutory surplus(2)
Share Information
Diluted net earnings per share
Diluted comprehensive earnings per share
Diluted operating earnings per share(1)
Cash dividends declared per share:
Regular
Special
Book value per share
Closing stock price
Diluted weighted average shares outstanding
Common shares outstanding
Other Non-GAAP Financial Information
Net premiums written to statutory surplus(2)
Combined ratio(3)
Statutory combined ratio(3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2023
2022
2021
2020
2019
1,806,660
1,565,486
1,347,354
1,136,432
1,065,002
1,511,994
1,697,992
1,179,245
983,626
1,003,591
304,611
367,384
227,740
464,257
583,411
304,509
214,636
250,448
279,354
220,466
159,063
384,905
157,091
213,310
109,411
263,259
191,642
258,687
105,372
276,917
3,676,318
3,272,301
3,162,968
2,837,081
2,560,360
5,180,221
4,767,068
4,508,302
3,938,485
3,545,721
2,446,025
2,315,637
2,043,555
1,750,049
1,574,352
100,000
199,863
199,676
149,489
1,413,514
1,177,341
1,229,361
1,135,978
149,302
995,388
1,520,135
1,407,925
1,240,649
1,121,592
1,029,671
6.61
7.97
4.94
1.07
2.00
30.97
133.12
46,077
45,640
12.74
6.65
4.69
1.03
7.00
25.89
131.27
45,794
45,470
6.11
4.82
3.48
0.99
2.00
27.14
112.10
45,712
45,289
3.46
4.70
2.41
0.95
1.00
25.16
104.15
45,376
45,143
4.23
5.72
2.33
0.91
1.00
22.18
90.02
45,257
44,869
94%
86.6
84.4
88%
84.4
83.2
85%
86.8
85.3
80%
92.0
91.8
84%
91.9
91.1
11
SELECTED
FINANCIAL DATA
The following is selected financial data of RLI Corp. and Subsidiaries for the 5 years ended December 31, 2023.
(Amounts in thousands, except per share data and combined ratios)
Net earnings
Less:
Net realized gains
Income tax on realized gains
Net unrealized (gains) losses on equity securities
Income tax on unrealized gains (losses) on equity
securities
Equity in earnings of Maui Jim
Income tax on equity in earnings of Maui Jim
Operating earnings(1)
Net earnings per share
Less:
Net realized gains
Income tax on realized gains
Net unrealized (gains) losses on equity securities
Income tax on unrealized gains (losses) on equity
securities
Equity in earnings of Maui Jim
Income tax on equity in earnings of Maui Jim
Operating earnings per share(1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2023
2022
2021
2020
2019
304,611
583,411
279,354
157,091
191,642
(32,518)
(588,515)
(64,222)
(17,885)
(17,520)
6,829
124,415
13,487
3,756
3,679
(64,787)
121,037
(65,258)
(32,101)
(78,090)
13,605
(25,418)
13,703
6,741
16,399
—
—
(372)
(22,786)
(10,368)
(13,592)
78
4,785
2,177
2,854
227,740
214,636
159,063
109,411
105,372
6.61
12.74
6.11
3.46
4.23
(0.71)
0.15
(1.41)
(12.84)
2.72
2.64
(1.40)
0.30
(1.44)
(0.39)
0.08
(0.71)
(0.38)
0.08
(1.72)
0.30
(0.56)
0.30
0.15
0.36
—
—
4.94
(0.01)
(0.49)
(0.23)
(0.30)
—
4.69
0.10
3.48
0.05
2.41
0.06
2.33
(1) Operating earnings and operating earnings per share (EPS) consist of our GAAP net earnings adjusted by net realized gains/
(losses), net unrealized gains/(losses) on equity securities and taxes related thereto. Additionally, equity in earnings of Maui Jim and
the related taxes were excluded from operating earnings and operating EPS due to the sale of RLI’s investment in 2022. Operating
earnings and operating EPS for prior periods have been restated to reflect the equity in earnings of Maui Jim adjustment. Net
earnings and net earnings per share are the GAAP financial measures that are most directly comparable to operating earnings and
operating EPS.
(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) See page 27 for information regarding key performance measures.
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: 2023 annual
report on form 10-K; 2024 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.
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, Chief Investment Officer and Treasurer, at
309-693-5846 or at aaron.diefenthaler@rlicorp.com.
RLI Corp.
Phone:
9025 N. Lindbergh Drive
Peoria, Illinois 61615-1431
309-692-1000 or
800-331-4929
Comprehensive investor information is available at rlicorp.com.
13
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, 2023
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-09463
RLI CORP.
(Exact name of registrant as specified in its charter)
Delaware
(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 ☒
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. ☐
Non-accelerated filer ☐
Accelerated filer ☐
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, based upon the closing sale price of the
Common Stock on June 30, 2023, was $5,668,979,903. Shares of Common Stock held 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.
The number of shares outstanding of the registrant’s common stock, $0.01 par value, on February 14, 2024 was 45,659,290.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2024 annual meeting of shareholders are incorporated herein by reference into Part III of this document.
RLI Corp.
Index to Annual Report on Form 10-K
Part I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Part IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
3
15
24
24
25
25
25
25
26
27
50
52
92
92
92
92
92
93
93
93
93
93
95
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, casualty and surety products through major subsidiaries collectively known
as RLI Insurance Group. We conduct operations 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, casualty and surety products through locations across the country that market to
wholesale and retail brokers, independent agents and carrier partners. We offer limited coverages on a direct basis to select insureds,
as well as various reinsurance coverages. From time to time, we also write a limited amount of business under agreements with
managing general agents under the direction of our product leadership.
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
(http://www.rlicorp.com). 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.
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 superior 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.
SPECIALTY ADMITTED INSURANCE MARKET
We write business in the specialty admitted market. Many of these risks are unique and harder to place than 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 2023, our specialty admitted operations produced gross
premiums written of $992 million, representing approximately 55 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, in many cases, more expensive than in the standard admitted market. The excess and surplus lines environment and
production model effectively filter submission flow and match market opportunities to our expertise and appetite. The excess and
surplus market represented less than 10 percent of the entire domestic property and casualty industry as of December 31, 2022,
according to AM Best and as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of $794
million, or 44 percent, of our total gross premiums written in 2023.
3
SPECIALTY REINSURANCE MARKET
The business we write in the specialty reinsurance market is generally written on a portfolio 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
2023, our specialty reinsurance operations wrote gross premiums of $21 million, representing approximately 1 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. The table below summarizes the
composition of net premiums earned by major product.
(in thousands)
CASUALTY
2023
Year ended December 31,
2022
2021
Commercial excess and personal umbrella
Commercial transportation
General liability
Professional services
Small commercial
Executive products
Other casualty
Total
$ 286,178
103,719
103,066
99,596
72,920
24,687
68,180
$ 758,346
22 % $
8 %
8 %
8 %
6 %
2 %
5 %
59 %
$
253,921
96,992
100,374
95,187
67,673
26,606
71,079
711,832
22 % $ 219,437
83,352
8 %
90,853
9 %
88,855
9 %
64,660
6 %
21,873
2 %
64,609
6 %
$ 633,639
62 %
PROPERTY
Commercial property
Marine
Other property
Total
SURETY
Commercial
Transactional
Contract
Total
Grand total
CASUALTY SEGMENT
Commercial Excess and Personal Umbrella
$ 244,798
129,428
27,304
$ 401,530
19 %
10 %
2 %
31 %
$
$
163,078
113,208
31,600
307,886
14 %
10 %
3 %
27 %
$ 107,941
97,745
26,151
$ 231,837
$
49,707
47,983
36,740
$ 134,430
$ 1,294,306
4 %
3 %
3 %
10 %
100 %
$
47,652
45,826
31,240
124,718
$
$ 1,144,436
4 %
4 %
3 %
11 %
100 %
$ 43,738
43,982
27,707
$ 115,427
$ 980,903
4 %
5 %
3 %
12 %
100 %
Our commercial excess coverage is written in excess of primary liability insurance provided by other carriers and, in some
cases, 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.
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.
4
22 %
8 %
9 %
9 %
7 %
2 %
8 %
65 %
11 %
10 %
2 %
23 %
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 environmental liability for
underground storage tanks, contractors and asbestos and environmental remediation specialists.
Professional Services
We offer professional liability coverages focused on providing errors and omission coverage for small to medium-sized design,
technical, computer and other 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.
Small Commercial
Our small commercial business offers property and casualty insurance coverages for small to mid-sized contractors. The
coverages included in these packages are predominantly general liability, but also have some inland marine coverages, as well as
commercial automobile, property and excess coverage. These products are primarily marketed through retail agents.
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.
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). Through our reinsurance agreement with 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. Separately, we assume mortgage reinsurance, which provides credit risk transfer on pools of
mortgages. We also offer general liability and package coverages through a general binding authority (GBA) group, a program in
which select surplus lines producers are granted limited underwriting authority through our on-line system to bind business on behalf
of the Company.
PROPERTY SEGMENT
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.
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.
Other Property
We offer specialized homeowners’ and dwelling fire insurance through retail agents in Hawaii, as well as property coverages
through our general binding authority group.
5
SURETY SEGMENT
Commercial
We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries,
including the financial, healthcare, as well as onshore 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.
Transactional
Our transactional 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. The
underwriting and delivery of these bonds is highly automated.
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 that guarantee commercial contractors’ contractual obligations for a specific
construction project. 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.
MARKETING AND DISTRIBUTION
We distribute our coverages across the country, primarily through wholesale and retail brokers, independent agents and carrier
partners.
BROKERS
The largest volume of broker-generated premium is in our commercial property, general liability, commercial surety, executive
products, 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.
CARRIER PARTNERS
We partner with other insurance carriers for home business and personal umbrella. The carriers place the business with us
through their associated agencies when the underlying risk does not meet their underwriting appetite.
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 regular audits.
DIGITAL AND DIRECT
We utilize digital efforts to produce and efficiently process and service business including home business, general binding
authority, small commercial and personal umbrella risks and surety bonding. On a direct basis, we also assume premium on various
reinsurance treaties.
6
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 AIG, Arch, Aspen, Beazley, Berkley, Chubb, CNA, Great
American, Great West, Hartford, Hudson, James River, Kinsale, Lancer, Liberty, Markel, Protective, RSUI, Sompo, Travelers, USLI
and Zurich. Primary competitors in the property segment include AmRisc, Arch, Arrowhead, CNA, Golden Bear, Lexington, Liberty
Mutual, Markel, Palomar, RSUI, Special Risk Underwriters, Travelers, Velocity and Westchester. Primary competitors in the surety
segment are AIG, Arch, Beazley, Berkley, Chubb, CNA, Great American, Hartford, Intact, Liberty Mutual, Markel, Merchants,
Philadelphia, Sompo, Swiss Re, Travelers and Zurich. 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, quality and consistent
service to the agents and policyholders, and fair pricing. 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 all segments, we have experienced underwriting and claim specialists. 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 risk
transfer with exceptional service on a profitable basis.
FINANCIAL STRENGTH RATINGS
Financial strength ratings are an important factor in establishing the relative competitive position of insurance companies. 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. 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.
At December 31, 2023, the following ratings were assigned to our insurance companies and represent affirmations of previously
assigned ratings:
AM Best
RLI Ins., Mt. Hawley and CBIC* (group-rated)
Standard & Poor’s
RLI Ins. and Mt. Hawley
Moody’s
RLI Ins. and Mt. Hawley
* CBIC is only rated by AM Best
REINSURANCE
A+, Superior
A, Strong
A2
In the ordinary course of business, we rely on other insurance companies to share risks through reinsurance, paying or ceding to
the reinsurer a portion of the premiums received on such policies. These arrangements allow the Company to pursue greater
diversification of business and serve to limit the maximum net loss on catastrophes and large risks. 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. 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.
7
(in thousands)
PREMIUMS WRITTEN
Direct and Assumed
Reinsurance ceded
Net
PREMIUMS EARNED
Direct and Assumed
Reinsurance ceded
Net
Year Ended December 31,
2022
2021
2023
$ 1,806,660 $ 1,565,486 $ 1,347,354
(289,821)
$ 1,427,747 $ 1,241,536 $ 1,057,533
(323,950)
(378,913)
$ 1,699,419 $ 1,460,845 $ 1,253,296
(272,393)
980,903
$ 1,294,306 $ 1,144,436 $
(316,409)
(405,113)
Reinsurance is subject to certain risks, specifically market risk, which affects the cost and ability to secure reinsurance contracts,
and credit risk, which is the risk that our reinsurers may not pay on losses in a timely fashion or at all. 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 93 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. Lastly, we may be required to pay additional
premium to reinstate the reinsurance limits for potential future recoveries during the same contract year.
Excluding catastrophe reinsurance, the table below summarizes the reinsurance treaty coverage currently in effect. We may
purchase facultative coverage in addition to the treaty coverages shown below.
(in millions)
Product Line(s) Covered
General liability
Commercial excess
Personal umbrella
Commercial transportation
Package - liability and workers' compensation
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
Date
Attachment
Point
Per Risk
Limit
Purchased
1/1 $
1/1
1/1
1/1
1/1
1/1
4/1
7/1
1/1
6/1
4/1
1.0 $
1.0
1.0
1.0
1.0
11.0
1.0
N/A
2.0
2.5
2.0
Maximum
Retention *
2.8
2.8
2.8
2.8
4.2
— **
3.3
6.3
5.4
2.5
9.7 ***
9.0 $
9.0
9.0
9.0
10.0
14.0
9.0
25.0
23.0
27.5
73.0
* 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 million limit. These accounts are subject to
additional levels of review and are monitored on a monthly basis.
8
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. In the last renewal
cycle, we increased co-participations within the ceded layers of the property reinsurance structure.
PROPERTY REINSURANCE — CATASTROPHE COVERAGE
Our property catastrophe reinsurance reduces the financial impact of a catastrophe event involving multiple claims and
policyholders, including earthquakes, hurricanes, floods, wildfires, convective storms and certain 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 catastrophe 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 2022 through 2024 are shown in the table below. Amounts for 2023 and 2022 reflect additional catastrophe reinsurance
protection that was purchased mid-year to support growth in our catastrophe-exposed business.
Catastrophe Coverages
(in millions)
California earthquake
Non-California earthquake
Other perils, including hurricane
2024
2023
2022
First-Dollar
Retention
Limit
First-Dollar
Retention
Limit
First-Dollar
Retention
$
25 $
50
50
850 $
850
750
25 $
50
50
850 $
850
750
25 $
25
25
Limit
750
775
625
Our property catastrophe program continues to be applied on an excess of loss basis. Although covered in one program, limits
and attachment points differ for California earthquakes and all other perils. These catastrophe limits are in addition to the per-
occurrence coverage provided by facultative and other treaty coverages. We have participated in the catastrophe layers purchased by
retaining a percentage of certain layers throughout this period. Our participation has varied over time based on price and the amount of
risk transferred by each layer. All layers of the treaty include one reinstatement, which for certain layers requires the payment of
additional premium.
The following table shows the likelihood that a loss from a single event would be less than the amount shown. For example, the
1-in-100 return period for hurricane means that the largest modeled hurricane occurrence had losses less than the amount shown in 99
out of 100 modeled years, while the largest modeled hurricane occurrence exceeded the amount shown in one out of 100 modeled
years. Losses were modeled based on our exposure as of December 31, 2023, utilizing the reinsurance treaty structure in place as of
January 1, 2024. The loss amounts are pre-tax and include the impact of reinsurance reinstatement premium.
(Losses in millions)
Hurricane
California Earthquake
Non-California Earthquake
Probability
90.0%
96.0%
98.0%
99.0%
99.6%
Return Period
10 Year
25 Year
50 Year
100 Year
250 Year
Gross Loss
$
93 $
208
322
457
688
Net Loss
Gross Loss
Net Loss
Gross Loss
Net Loss
50 $
69
86
99
112
15 $
88
209
375
647
11 $
28
46
72
97
1 $
13
50
128
265
1
8
30
44
63
Actual results could vary significantly from these modeled losses as the actual nature or severity of a particular event cannot be
accurately predicted. 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 catastrophe
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 catastrophe exposure models and an internally developed
analysis to assess each risk to ensure we include an appropriate charge for assumed catastrophe risks.
9
Catastrophe exposure modeling is inherently uncertain due to the model’s reliance on an infrequent observation of actual events,
increasing the importance of capturing accurate policy coverage data. The modeled results are used both in the underwriting analysis
of individual risks and at a corporate level for the aggregate book of catastrophe-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 catastrophe models, rating agency capital constraints, underwriting guidelines and coverages and internal
preferences. Our risk tolerances for each type of catastrophe, 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 catastrophe 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 catastrophe reinsurance treaty purchased on January 1, 2024, there is a 99.6 percent likelihood that
the net loss will be less than 8.0 percent of policyholders’ statutory surplus as of December 31, 2023. Comparatively, based on the
catastrophe reinsurance treaty purchased on January 1, 2023, there was a 99.6 percent likelihood that the net loss would have been less
than 10.8 percent of policyholders’ statutory surplus as of December 31, 2022. The comparable metric over the past five years, as
measured at the beginning of each of those treaty years, has ranged from 4.6 percent of surplus to 15.1 percent of surplus. The
exposure levels are within our tolerances for this risk.
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
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
2023
$ 1,427,747
1,520,135
0.9 to 1
COMBINED RATIO AND STATUTORY COMBINED RATIO
2022
$ 1,241,536
1,407,925
0.9 to 1
Year Ended December 31,
2021
$ 1,057,533
1,240,649
0.9 to 1
$
2020
892,088
1,121,592
0.8 to 1
$
2019
860,337
1,029,671
0.8 to 1
Our underwriting experience is best indicated by our combined ratio, which is the sum of (a) the ratio of incurred loss and
settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and insurance 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
2023
46.7
39.9
86.6
2022
Year Ended December 31,
2021
2020
44.9
39.5
84.4
46.5
40.3
86.8
51.2
40.8
92.0
2019
49.3
42.6
91.9
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, but is a standardized industry measure. The statutory combined ratio is
the sum of (a) the ratio of statutory loss and loss adjustment expenses incurred to statutory net premiums earned (loss ratio), (b) the
ratio of statutory other underwriting expenses incurred to statutory net premiums written (expense ratio) and (c) the ratio of
policyholder dividends to statutory net premiums earned (policyholder dividend ratio).
10
Statutory
Statutory loss ratio
Statutory expense ratio
Statutory combined ratio
2023
46.7
37.7
84.4
Year Ended December 31,
2021
2020
2022
44.9
38.3
83.2
46.5
38.8
85.3
51.0
40.8
91.8
2019
49.3
41.8
91.1
P&C industry combined ratio
102.2 *
102.7 **
99.7 **
98.8 **
98.9 **
* Source: Conning (2023). Property-Casualty Forecast & Analysis: By Line of Business, Fourth Quarter 2023. Estimated for
the year ended December 31, 2023.
** Source: AM Best (2023). Aggregate & Averages – Property/Casualty, United States & Canada. 2019 – 2022.
INVESTMENTS
Our investment portfolio serves as a resource for loss payments and secondarily 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 an investment 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 over time. 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 78 percent of the total portfolio, down 4 percent from
the prior year, while the equity allocation was 16 percent of the overall portfolio, up 1 percent from the previous year. Other invested
assets represented 1 percent of the total portfolio and include investments in low-income housing tax credit and historic tax credit
partnerships, membership stock in the Federal Home Loan Bank of Chicago and investments in private funds. The remaining
5 percent was made up of cash and short-term investments. As of December 31, 2023, 81 percent of the fixed income portfolio was
rated A or better and 58 percent was rated AA or better.
We classify all of the securities in our fixed income portfolio as available-for-sale, which are carried at fair value. Beyond
available operating cash flow, the 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, 2023, were 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
Fair Value
Amortized Cost
$
157,831 $
904,769
674,761
548,021
769,009
156,463
874,375
654,068
464,476
706,467
$ 3,054,391 $ 2,855,849
*
Asset-backed, commercial mortgage-backed and mortgage-backed securities
We had cash and fixed income securities maturing within one year of $328 million at year-end 2023. This total represented
9 percent of cash and investments, compared to 12 percent at year-end 2022.
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
11
to its outstanding liabilities and adequate for its needs. Notice to and, in some cases, consent from regulators is required prior to the
completion 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
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 are domiciled in Illinois,
with the Illinois Department of Insurance (IDOI) as its principal insurance regulator. Changes to the state insurance regulatory
requirements are frequent, including changes caused by state legislation, regulations by the state insurance departments and court
rulings.
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 provide that extraordinary dividends may not
be paid without such regulator’s prior approval (or the absence of disapproval). 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.
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, and 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, 2023, 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 $273 million compared to actual statutory
capital and surplus of $1.5 billion as of December 31, 2023, 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 those 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.
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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 December 29, 2023, for the five-year period ending December 31, 2022. The examination report is available
to the public.
Each of our insurance company subsidiaries is subject to Illinois laws and regulations that impose restrictions on the amount and
type of investments our insurance company subsidiaries may have. Such laws and regulations generally require diversification of the
insurer’s investment portfolio and limit the amounts of investments in certain asset categories, such as below investment grade fixed
income securities, real estate-related equity, other equity investments and derivatives. Failure to comply with these laws and
regulations would generally cause investments that exceed regulatory limitations to be treated as non-admitted assets for measuring
statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.
Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example,
states may limit an insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing
one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state
insurance department may disapprove a withdrawal plan that may lead to marketplace disruption. Laws and regulations that limit
cancellation and non-renewal, and that subject program withdrawals to prior approval requirements, may restrict our ability to exit
unprofitable marketplaces in a timely manner.
Virtually all states require licensed insurers to participate in various forms of guaranty associations in order to bear a portion of
the loss suffered by qualified policyholders of insurance companies that become insolvent. Depending upon state law, licensed
insurers can be assessed 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 U.S. company data breaches, a number of 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. For example, the New York State Department of Financial Services (NYDFS) enacted a comprehensive
cybersecurity regulation in 2017, and revised the regulation in 2023. 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.” Other states have enacted similar
regulations. We are in compliance with the requirements of these regulations.
The NAIC adopted the Insurer Climate Risk Disclosure Data Survey to provide regulators with information about the
assessment of risks posed by climate change to insurers and the actions insurers are taking in response to their understanding of
climate change risks. A number of states require the Company to provide annual responses to the survey, all of which accept the filing
of the Company’s response with the California Department of Insurance. The Company’s 2023 survey response, for calendar year
2022, can be accessed on the California Department of Insurance website.
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
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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, accredited, certified or identified as a
reciprocal jurisdiction reinsurer 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 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 related to the business of insurance and
instead is regulated principally at the state level. The Company is subject to a number of federal regulatory requirements related to
securities, employment practices, qualified employee benefits plans and financial disclosures, among others.
Other federal laws and regulations apply to many aspects of our company and its business operations. These federal regulations
include laws such as the Gramm-Leach-Bliley Act, which establishes privacy and security requirements for insurance companies, and
enables state departments of insurance to enforce these requirements; and the Fair Credit Reporting Act as amended by the Fair and
Accurate Credit Transactions Act, which establishes rules regarding access to and use of information (including but not limited to
credit information and motor vehicle reports) from consumer reporting agencies.
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, ownership culture. We strive
to hire top underwriting and claim talent, who work closely with our customers throughout the United States. 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. Underwriters have the resources and authority to operate within established underwriting
guidelines and share in the rewards when they succeed. We solicit employee feedback to help ensure employees are engaged, feel
valued and are contributing to our success.
The Company employed 1,099 associates throughout the United States as of December 31, 2023, compared to 1,001 as of
December 31, 2022, and the average employee tenure was 8.8 years. 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 their industry knowledge and
technical expertise through education and training, as well as through memberships in 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.
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
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President & 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 our 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 RLI Corp. 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, 2023, 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 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. Forward looking statements reflect the Company’s expectations, plans
or forecasts of future events and views as of the date of this report. While the Company may elect to update these forward looking
statements at some point in the future, the Company specifically disclaims any obligation to do so. 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 significantly affected, and has been affected to varying degrees, 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, including inflation in the cost of
materials, delays that cause increased business interruption losses and social inflation, as influenced by higher jury
verdicts,
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• Volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes, terrorist
attacks or geopolitical events,
• Significant price changes of the commodities we insure,
• Changes in the availability and 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.
A significant percentage of our premium revenues are sold through a few brokers and carrier partners and a loss of business
provided by any of them could adversely affect us.
We market our insurance products through brokers, agents and carrier partners. In 2023, 42 percent of our gross premiums
written were produced through six producer entities, while no other entity’s production exceeded 2 percent of our gross premiums
written. Accordingly, our business is dependent on the willingness of these agents, brokers and carrier partners to recommend our
products to their customers, who may also promote and distribute the products of our competitors. Loss of all or a substantial portion
of the business written through these parties could have a material adverse effect on our business.
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, 57 percent of our direct premiums earned were generated in four states in 2023: Florida –
20 percent; California – 17 percent; Texas – 11 percent; and New York – 9 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 and their actions could ultimately impact our overall
results.
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 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 in expanding our operations
into new markets, the amount of premium we write may decline, pressuring 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,
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• 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 catastrophe-prone areas or other alternative
market types of coverage,
• Changing practices, which may lead to greater competition in the insurance business and
• The emergence of Insurtech companies and the development of new technologies, which may lead to disruption of
current business models and the insurance value chain.
New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which
could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.
A downgrade in our ratings from 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 we will
continue to maintain of our current ratings.
All of our ratings were reviewed during 2023. 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 rating for the group of RLI Ins. and Mt. Hawley. 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 significant 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,
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• 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
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.
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 claim 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,
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• State reviver statutes that permit claims after a statute of limitation has expired,
• Court closures or increased time-to-trial,
•
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 Losses and Settlement Expenses
section of our Critical Accounting Policies contained within Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations. However, there is no precise method for evaluating the impact of any specific factor on the adequacy of
reserves and actual results are likely to differ from original estimates. If the actual amount of insured losses is greater than the amount
we have reserved for these losses, our profitability could suffer.
Catastrophic losses are unpredictable and could cause the Company to suffer material financial losses.
Our insurance coverages include exposure to catastrophic events, particularly earthquakes on the West Coast and hurricanes and
tropical storms affecting coastal regions of the United States. Weather-related catastrophes may include meteorological events such as
hurricanes, severe convective storms and winter weather; and climatological events such as drought, wildfires and heatwaves. In
addition, catastrophe losses can occur from events such as lava flows in Hawaii and terrorist events in the United States.
The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe 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 catastrophes are restricted
to fairly specific geographic areas. However, hurricanes and earthquakes may produce significant damage in large, heavily populated
areas. It is possible that a catastrophic event or multiple catastrophic events could cause the Company to suffer material financial
losses. In addition, catastrophe claim costs may be higher than we originally estimate and could cause substantial volatility in our
financial results for any fiscal quarter or year.
We use models to help assess exposure to catastrophic events against established thresholds. Models include underlying
assumptions based on a limited set of actual events and cannot contemplate all possible catastrophe scenarios. In addition, models are
revised periodically, which could change modeled losses. 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 catastrophe models, we also monitor against thresholds using
non-modeled scenarios.
Changing climate and weather conditions may adversely affect our financial condition or profitability.
Climate change is a complex and evolving issue and we cannot predict the cumulative impact it may have on our results of
operations or financial condition at this time. The effects on the Company could include:
• Changes in the frequency, severity and location of weather-related catastrophes, which may result in higher levels of
losses,
• Additional uncertainty in third party catastrophe models, which could impair our ability to assess exposure and
adequately price the catastrophe risks we insure,
• Flooding of coastal property, resulting from rising sea levels, making certain geographic areas uninhabitable, reducing
demand for insurance products we offer in those areas,
•
Increased losses from weather-related catastrophes may make it more difficult to obtain reinsurance at desired levels, or
more expensive to acquire reinsurance coverage, which may reduce the amount of business we write and the revenues
we generate,
• A transition from carbon-based energy to other sources of energy may decrease demand for insurance coverage we
provide to the industries that produce or use carbon-based energy, decrease the availability of reinsurance available for
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coverages we provide for those industries, or increase claims and losses related to those industries, any of which could
affect our profitability,
• Changes in legislation, regulation and court decisions could increase our compliance costs, impose liability on
policyholders that we did not contemplate when we underwrote policies, or limit our ability to sell insurance coverage to
certain policyholders and
• Losses on our invested assets that could have a material adverse impact on our results of operations and financial
condition.
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 material 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 obtain new reinsurance facilities on
terms we deem acceptable, either our net loss exposures would increase, which could increase the volatility of our results, or we would
have to reduce the level of our underwriting commitments when possible, which would reduce our revenues. Many of the bonds we
issue, particularly in the energy sector, are non-cancelable and may expose the Company to greater losses, should the surety
reinsurance coverage we are able to secure be reduced or become unavailable.
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, payroll, 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.
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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 have paid annual special dividends since 2010. The payment of
either type of dividend to our shareholders in the future is not guaranteed, is 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
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 Own Risk and
Solvency Assessment (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
21
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 system 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
reputational 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, cyber attacks, utility outages or complications encountered as existing systems are replaced or upgraded.
Any such issues could materially impact our company, including the impairment of information availability, compromise of
system integrity/accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of
our general business. Although we believe our computer systems are 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.
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 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, as well as our business partners and service providers, employ measures to prevent, detect, address,
mitigate and recover from these threats (including employee training, access controls, data encryption, vulnerability assessments,
continuous monitoring of information technology networks and systems and maintenance of backup and protective systems).
22
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 Company or third-party
confidential 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.
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. Furthermore, 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.
Epidemics, pandemics and public health outbreaks 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, such as the COVID-19 pandemic, 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
• Changes 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 remains uncertain at this time.
23
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, it could have 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 affect 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 shareholder 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 1C. Cybersecurity
Risks from cybersecurity threats or incidents (cybersecurity risks) are assessed, identified and managed by the Company in a
manner that is consistent with leading cybersecurity frameworks, including the National Institute of Standards and Technology
Cybersecurity Framework (NIST Framework). The Company’s approach to cybersecurity risk management is generally based on the
five core functions contained within the NIST Framework organizing structure: identify, protect, detect, respond and recover.
As of the date of this report, risks from cybersecurity threats or incidents have not materially affected, nor are they reasonably
likely to materially affect, the Company’s business strategy, results of operations or financial condition. However, in light of emerging
and changing cybersecurity threats and vulnerabilities, the Company cannot guarantee that it will not be a victim of a cybersecurity
attack in the future that could materially affect the Company. See Item 1A, Risk Factors for more information.
The RLI Corp. Board of Directors provides oversight for cybersecurity risks primarily through its audit committee. The
Company’s chief information officer (CIO), who also serves as the Company’s chief information security officer (CISO), along with
the head of the Company’s IT security department, present quarterly to the audit committee on cybersecurity risks and the Company’s
strategies and actions to assess and manage those risks. Additionally, the board receives periodic updates on emerging cybersecurity
issues and developments through director education provided by the Company and third-party experts, detailed reviews provided by
the CIO/CISO and the Company’s head of IT security on select cyber security topics, and “table top” simulations of a cybersecurity
event.
Management oversight of cybersecurity risks is provided through the Company’s risk committee, which is chaired by the chief
executive officer and comprised of members of senior management. Among its responsibilities, the risk committee identifies the
Company’s material risks and reviews the strategies, processes and controls in place to facilitate the understanding, identification,
prevention, measurement, reporting and mitigation of those risks. The risk committee meets quarterly and reviews the Company’s
24
current assessment of cybersecurity risks conducted by the Company’s CIO/CISO and IT security department based on leading
cybersecurity frameworks. The risk committee also periodically conducts a detailed review of cybersecurity risks.
The Company’s IT security department, which operates under general oversight of the Company’s CIO/CISO, is responsible for
day-to-day assessment and management of cybersecurity risks, including efforts to prevent and, if necessary, mitigate the effects of a
cybersecurity incident. The Company’s CIO/CISO has 25 years of technology and technology leadership experience, including 13
years serving as a CISO in the insurance industry.
The Company maintains a Cybersecurity Incident Response Plan (CIRP) providing a framework for identifying, evaluating and
escalating potential or actual cybersecurity events. The CIRP assigns responsibilities and provides a workflow between the
Company’s IT security department; members of an Executive Cybersecurity Committee comprised of the chief executive officer and
senior management; and the board of directors regarding the detection, assessment and response to a cybersecurity event.
The Company’s internal audit department routinely engages third-party cybersecurity consultants to conduct network security
audits. The Company also engages other third-party consultants in a number of areas to support the assessment, identification and
management of cybersecurity risks, including risk assessments, log monitoring, threat intelligence, system penetration testing, training
and incident response, among others. The Company performs cybersecurity due diligence and monitoring of third-party vendors,
which may include the review of System and Organization Control (SOC) reports or the results of a security questionnaire to identify
the cybersecurity controls and protections maintained by a third party.
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.
RLI’s Peoria, Illinois campus includes a 1.8-megawatt solar field that is capable of producing annual electrical power equal to or
exceeding the yearly electrical needs for all of our office buildings in Peoria.
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.
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
190 consecutive quarters and increased quarterly dividends in each of the last 48 years. In December 2023 and 2022, RLI Corp. paid
special cash dividends of $2.00 and $7.00 per share to shareholders, respectively. As of February 14, 2024, there were 1,071 registered
holders of the Company’s common stock.
The payment of dividends to our shareholders is at the discretion of our board of directors and will depend on our results of
operations, our financial condition, regulatory restrictions of our insurance subsidiaries and other factors deemed relevant by our board
of directors. Although the Company currently intends to continue paying quarterly cash dividends to our shareholders, there can be no
assurance as to the amount of such dividends or whether the Company will continue to pay such dividends.
25
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
133 $
131
126
157 $
156
134
174 $
200
157
217 $
164
187
225
207
207
2018
2019
2020
2021
2022
2023
Assumes $100 invested on December 31, 2018, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends.
Comparison of five-year annualized total return — RLI: 17.7%, S&P 500: 15.7% and S&P 500 P&C Index: 15.7%.
Securities Authorized for Issuance under Equity Compensation Plans
Information on securities authorized for issuance under our equity compensation plan is incorporated by reference to the “Share
Ownership of Certain Beneficial Owners and Management” section of the Proxy Statement.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities - Not applicable.
Issuer Purchases of Equity Securities
In 2010, our board of directors implemented a $100 million share repurchase program. In 2023, our board of directors
terminated the share repurchase program. We did not repurchase any shares during 2023.
Item 6. [Reserved] - Not applicable.
26
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, casualty and surety products 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
2023, we achieved our 28th consecutive year of underwriting profitability. Over the 28-year period, we averaged an 88.2 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.
KEY PERFORMANCE MEASURES
Following is a list of key performance 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 components are 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) losses on equity securities
Net realized gains
Net investment income
Underwriting income
Combined Ratio
$
$
$
$
$
Year ended December 31,
2022
2023
583,411
304,611
137,267
72,654
720,678
377,265
(9,853)
(9,610)
12,900
15,917
8,047
7,301
121,037
(64,787)
(588,515)
(32,518)
(86,078)
(120,383)
178,216
173,185
$
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 loss 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.
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
27
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 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 claim
frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In
establishing reserves, we also consider estimated recoveries from reinsurance as well as salvage and subrogation.
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.
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. 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.
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.
28
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 catastrophe business (included below in other
property) has significant variance in year over year results; however, its reserving estimation risk is relatively moderate.
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
Commercial transportation
Medium
Internal
Small commercial
Medium
Internal
Executive products
Long
Internal & 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
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 change/mix
Unforeseen tort potential
Small volume
Low frequency
High severity
Loss trend volatility
Economic volatility
Unforeseen tort potential
Exposure growth/mix
Heavily reinsured
Medium
Internal & external
Small volume
Medium
Medium
Other casualty
Marine
Other property
Medium
Internal & external
Short
Internal
Surety
Medium
Internal
Exposure growth/mix
Aggregation exposure
Aggregation exposure
Low frequency
High severity
Economic volatility
Unique exposures
High
Medium
High
Medium
Medium
Medium
Runoff including asbestos & environmental
Long
Internal & external
Loss trend volatility
Mass tort/latent exposure
High
High
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. 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.
29
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.
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,
• 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.
30
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 grouping 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 businesses 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 and workers’ compensation, we utilize external
data extensively.
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.
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.
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.
31
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 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.
32
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,
• 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
Our best estimate of ultimate loss and LAE reserves are proposed by our lead reserving actuary and then discussed 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. As part of the discussion with the LRC, 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. Our actuaries make a recommendation to management in regard 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 among the LRC, our actuaries determine whether the reserve balances require further
adjustment.
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
33
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 when coverage is initiated. 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 observed 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.
We do not use discounting (recognition of the time value of money) in reporting our estimated reserves for losses and settlement
expenses.
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,
2023.
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 17 percent to 20 percent
favorable and our small commercial emergence has ranged from 27 percent adverse to 9 percent favorable over the last three years,
while our overall emergence for all products combined has ranged from 16 percent to 27 percent favorable. The numbers below are
the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2023, resulting from the change in the
parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance of $215 million, in addition
to associated ULAE and latent liability reserves, at December 31, 2023.
(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
Result from unfavorable
change in parameter
(18.7)
(6.5)
(10.0)
(32.8)
$
$
$
$
16.9
4.4
8.2
31.8
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
34
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.
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 determine 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 and unrealized losses on our fixed income
35
portfolio. We also have a significant amount of deferred tax liabilities from unrealized gains on the equity portfolio and deferred
acquisition costs.
Periodically, management reviews our deferred tax positions to determine if it is more likely than not that the assets will be
realized. These reviews include, among other things, the nature and amount of the taxable income and expense items, the expected
timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical profitability of
businesses expected to provide future earnings. Furthermore, management considers tax planning strategies it can use to increase the
likelihood that the tax assets will be realized. After conducting the periodic review, if management determines that the realization of
the tax asset does not meet the more likely than not criteria, an offsetting valuation allowance is recorded, thereby reducing net
earnings and the deferred tax asset in that period. In addition, management must make estimates of the tax rates expected to apply in
the periods in which future taxable items are realized. Such estimates include determinations and judgments as to the expected manner
in which certain temporary differences, including deferred amounts related to our equity method investment, will be recovered. These
estimates enter into the determination of the applicable tax rates and are subject to change based on the circumstances.
We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to
uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered material to the
consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to
unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they
occur, would be included in income tax expense in the period in which they are incurred.
Additional discussion of other significant accounting policies may be found in note 1 to the consolidated financial statements
within Item 8, Financial Statements and Supplementary Data.
RESULTS OF OPERATIONS
This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022, incorporated herein by reference.
Consolidated revenue for 2023 totaled $1.5 billion, down $186 million from 2022 as the sale of our equity method investment in
Maui Jim, Inc. (Maui Jim) resulted in $571 million of realized gains in the prior year. Net premiums earned for the Group increased
13 percent, driven by growth from our property and casualty segments. A rally in equity markets during 2023 resulted in $65 million
of unrealized gains on equity securities, while market declines in 2022 resulted in $121 million of unrealized losses in our equity
portfolio. Net investment income increased by 40 percent in 2023, primarily due to higher reinvestment rates and a larger average
asset base relative to the prior year.
CONSOLIDATED REVENUE
(in thousands)
Net premiums earned
Net investment income
Net realized gains
Net unrealized gains (losses) on equity securities
Total consolidated revenue
Year ended December 31,
2022
2023
$ 1,294,306 $ 1,144,436
86,078
588,515
(121,037)
$ 1,511,994 $ 1,697,992
120,383
32,518
64,787
Net earnings for 2023 totaled $305 million, down from $583 million in 2022, as the comparable period was elevated by the gain
recognized on the sale of our interest in Maui Jim in 2022.
36
NET EARNINGS
(in thousands)
Underwriting income
Net investment income
Net realized gains
Net unrealized gains (losses) 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,
2022
2023
178,216
173,185 $
86,078
120,383
588,515
32,518
(121,037)
64,787
(8,047)
(7,301)
(12,900)
(15,917)
9,853
9,610
720,678
377,265 $
(137,267)
(72,654)
583,411
304,611 $
$
$
$
We achieved our 28th consecutive year of underwriting profitability in 2023. Our track record is built on our diversified product
portfolio and underwriting discipline in all markets.
Gross premiums written increased $241 million, or 15 percent, in 2023 when compared to 2022, with all three segments
contributing. Positive rate momentum continued in 2023 for much of the property and casualty portfolio and our investments in
technology and underwriting staff should put us in a position to take advantage of opportunities in 2024. Net premiums earned were
up 13 percent in 2023, when compared to 2022, reflecting the broadly positive environment over the last twelve months. We anticipate
healthy market conditions should support profitable growth across much of our diverse product portfolio in 2024.
In total, underwriting income was $173 million on an 86.6 combined ratio in 2023, compared to $178 million on an 84.4
combined ratio in 2022. Underwriting results for 2023 included $49 million of pretax losses and $12 million of reinsurance
reinstatement premium from the Hawaiian wildfires, as well as $31 million of other storm losses. Comparatively, 2022 included $38
million of pretax losses from Hurricane Ian and $13 million of other storm losses. Results for each period benefited from favorable
development on prior years’ loss reserves, which provided additional pretax earnings of $109 million in 2023, compared to $123
million in 2022. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within
Item 8, Financial Statements and Supplementary Data.
The loss ratio was 46.7 in 2023, compared to 44.9 in 2022. Higher net retained catastrophe losses in 2023 were partially offset
by modest improvements in the current accident year’s attritional, non-catastrophe loss ratio. The expense ratio increased to 39.9 in
2023, from 39.5 in 2022, as operating performance and a larger growth in book value led to higher levels of bonus and profit-sharing
expenses in 2023. Additionally, we continue to invest in our people and technology to support growth, improve customer experiences
and drive efficiencies, which impacted all segments.
Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate
performance including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in
book value would increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased
investment portfolio returns would lead to expense reductions. These performance-related expenses impact policy acquisition,
insurance operating and general corporate expenses.
We remain optimistic about the potential underlying profitability of our portfolio. The January 1, 2024 reinsurance renewals
were more orderly than in the 2023 renewal cycle. For our casualty treaties, the risk-adjusted rate change will be up mid-to high single
digits, with similar structures and retentions. For our property treaties, the risk-adjusted rate change will be flat to slightly down and
we increased our co-participations on our non-catastrophe cover, for which the combined effect should be an increased level of
property premium retention in 2024 as compared to 2023.
The following tables and narrative provide a more detailed look at individual segment performance over the last two years.
37
GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial excess and personal umbrella
Commercial transportation
General liability
Professional services
Small commercial
Executive products
Other casualty
Total casualty
PROPERTY
Commercial property
Marine
Other property
Total property
SURETY
Commercial
Transactional
Contract
Total surety
Grand total
Casualty
Gross Premiums Written
Net Premiums Earned
2023
2022
% Change
2023
2022
% Change
$
$
370,571 $
125,434
106,032
108,503
76,644
95,356
79,125
961,665 $
325,218
123,099
110,659
103,922
72,347
103,742
87,244
926,231
$
$
505,413 $
148,829
43,130
697,372 $
326,609
133,539
39,313
499,461
$
$
57,704 $
49,624
40,295
147,623 $
55,026
48,926
35,842
139,794
14 %
2 %
(4) %
4 %
6 %
(8) %
(9) %
4 %
55 %
11 %
10 %
40 %
5 %
1 %
12 %
6 %
$
$
$
$
$
$
286,178 $
103,719
103,066
99,596
72,920
24,687
68,180
758,346 $
253,921
96,992
100,374
95,187
67,673
26,606
71,079
711,832
244,798 $
129,428
27,304
401,530 $
163,078
113,208
31,600
307,886
49,707 $
47,983
36,740
134,430 $
47,652
45,826
31,240
124,718
13 %
7 %
3 %
5 %
8 %
(7) %
(4) %
7 %
50 %
14 %
(14) %
30 %
4 %
5 %
18 %
8 %
$ 1,806,660 $ 1,565,486
15 %
$ 1,294,306 $ 1,144,436
13 %
Gross premiums written for casualty were up $35 million in 2023. Continued new business growth of our personal umbrella and
small commercial distribution channels, as well as positive rate movement across a large portion of our casualty segment, offset
headwinds in several lines. We slowed writing business in our loss-challenged energy liability business in late 2022 and suspended
this line in late 2023, which resulted in a $22 million decrease within the commercial excess and general liability products.
Additionally, executive products premium decreased as a result of a more competitive market, particularly with public directors and
officers coverages.
Commercial transportation premium experienced limited growth during the year and remains a highly competitive line despite
some loss severity for the industry. We continue to apply for rate increases to cover loss costs, will bring our underwriting discipline
to bear where necessary and look to avoid binding business that we believe is underpriced.
The casualty segment remains highly diversified, allowing select products to work through challenges, while the success of
other products allows us to achieve positive overall results. Product level market conditions will influence opportunities for near-term
growth. Rate adequacy is dependent on regulatory approval in the admitted markets and our personal umbrella product has received
authorizations that we expect will accelerate rate increases in 2024. As with all our segments, our investments in underwriting talent,
as well as strong relationships with producers, should provide continued growth opportunities.
Property
Gross premiums written for the property segment were up $198 million in 2023, principally driven by wind-exposed
commercial property business, which is written on an excess and surplus basis. This business has experienced favorable market
conditions over several consecutive years due to market disruption and a lack of capacity. As competition in the market has recently
increased, we have moderated the growth in our hurricane exposure while we assess near-term market conditions. Our underwriters
are empowered with the flexibility to navigate the market and achieve profitable growth. We expect rates to increase at a slower pace
in 2024, but to maintain a level of adequacy sought by our underwriters.
38
Rate increases and new opportunities led to $15 million of premium growth for our marine product. Additionally, other property
premium grew as a result of underwriting efforts within our Hawaii homeowners product, which continues to benefit from our strong
relationships with local producers and competitors reducing their appetite for condominium coverages.
Surety
Gross premiums written for the surety segment were up $8 million in 2023. Contract surety benefited from new agency
relationships and construction projects. The expansion of existing accounts and new business resulted in increased premium for
commercial surety. We continue to invest in people and technology to support long-term growth in the surety segment, but believe that
actively moderating the trajectory of growth may be prudent in the current economic and competitive environment.
UNDERWRITING INCOME
Underwriting Income
(in thousands)
Casualty
Property
Surety
Total
Combined Ratio
Casualty
Property
Surety
Total
Casualty
$
2023
59,479 $
86,316
27,390
$
173,185 $
2022
73,789
72,522
31,905
178,216
2023
2022
92.2
78.5
79.6
86.6
89.6
76.4
74.4
84.4
Underwriting income for the casualty segment was $59 million on a 92.2 combined ratio in 2023, compared to $74 million on
an 89.6 combined ratio in 2022. The decline was the result of decreased favorable development on prior accident years’ reserves and a
slight increase in current accident year losses and 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 $78 million for 2023, which was broadly attributable to
accident years 2015 through 2022. Favorable development was widespread, with notable amounts from commercial excess, general
liability, personal umbrella, executive products, professional services, and transportation. Comparatively, results for the casualty
segment in 2022 included favorable development of $87 million, with the bulk of the development attributable to general liability,
professional services, commercial excess, transportation, small commercial and executive products across accident years 2016 and
2018 through 2021. Storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses
in 2023, compared to $8 million of hurricane and storm losses in 2022.
The segment’s loss ratio was 55.1 in 2023, compared to 53.6 in 2022. The higher loss ratio in 2023 was due to lower amounts of
favorable development on prior years’ reserves and strengthening our current accident year reserves for our personal umbrella and
transportation products. The expense ratio for the casualty segment was 37.1 in 2023, compared to 36.0 in 2022.
Property
Underwriting income from the property segment was $86 million on a 78.5 combined ratio in 2023, compared to $73 million on
a 76.4 combined ratio in 2022. Underwriting results for 2023 included $21 million of favorable development on prior years’ loss and
catastrophe reserves, largely from the commercial property business, $49 million of losses and $12 million of reinstatement premium
from Hawaiian wildfires, as well as $29 million of other storm losses. Results for 2022 included $25 million of favorable development
on prior years’ loss and catastrophe reserves, primarily from the marine business, $31 million of hurricane losses and $12 million of
other storm losses.
A larger earned premium base resulted in higher levels of underwriting income as well as a lower expense ratio. The segment’s
loss ratio was 42.9 in 2023, compared to 39.2 in 2022. Catastrophe losses added 20 points to the loss ratio in 2023, compared to 14
points of impact in 2022. However, the current accident year attritional loss ratio improved in 2023, which partially offset the increase
in net retained catastrophe activity. The expense ratio for the property segment declined to 35.6 in 2023, from 37.2 in 2022.
39
Surety
Underwriting income for the surety segment totaled $27 million on a 79.6 combined ratio in 2023, compared to $32 million on a
74.4 combined ratio in 2022. Underwriting performance for each year reflects a combination of positive current accident year results
and favorable development in prior accident years’ loss reserves. Results for 2023 included favorable development on prior
accident years’ reserves, which decreased loss and settlement expenses for the segment by $9 million. Comparatively, 2022 results
included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by
$10 million.
The segment’s loss ratio was 10.7 in 2023, compared to 9.8 in 2022. A decreased amount of favorable development on
prior years’ reserves in 2023 led to a higher loss ratio. The expense ratio for the surety segment was 68.9 in 2023, up from 64.6 in
2022, as we increased investments in our people and technology to support long-term growth and improve customer experiences. We
also recorded $2 million of non-recurring expense during 2023.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS
During 2023, net investment income increased by 40 percent. The increase was primarily due to higher interest rates and an
increased asset base relative to the prior year. The average annual yields on our investments were as follows for 2023 and 2022:
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)
2023
2022
3.51 %
2.80 %
2.27 %
2.77 %
2.65 %
1.97 %
2.94 %
2.71 %
2.20 %
2.32 %
2.57 %
1.91 %
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 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 2023, the average after-tax yield on the taxable fixed
income portfolio was 2.8 percent, an increase from 2.3 percent in the prior year. The average after-tax yield on the tax-exempt
portfolio increased slightly to 2.7 percent.
The fixed income portfolio increased by $189 million during the year, as we allocated the majority of available cash flow to
investment grade bonds and experienced strong market performance throughout the year. The tax-adjusted total return on a mark-to-
market basis was 6.7 percent. Our equity portfolio increased by $92 million to $590 million in 2023 as a result of strong equity market
returns during the year. The total return for the year on the equity portfolio was 19.3 percent.
Our investment results for the last five years are shown in the following table:
40
Tax
Equivalent
Pre-tax
Annualized Annualized
Change in Return on Return on
Unrealized
Investment Net Realized Appreciation
Avg.
Invested
Avg.
Invested
Assets
(3)(5)
Assets
Net
Income (2)(3) Gains (3)(4)
Average
Invested
Assets (1)
$ 2,377,295 $
2,698,721
3,000,025
3,217,635
3,474,310 120,383
$ 2,953,597 $
68,870 $ 17,520 $ 161,848
99,451
17,885
67,893
68,862
(6,280)
64,222
86,078 588,515 (462,981)
32,518 144,569
82,417 $ 144,132 $ (12,679)
10.4 %
6.9 %
4.2 %
6.6 %
8.6 %
7.3 %
10.5 %
6.9 %
4.3 %
6.6 %
8.6 %
7.4 %
(in thousands)
2019
2020
2021
2022
2023
5-yr Avg.
Investment income, net of investment expenses.
(1) Average market values at beginning and end of year (inclusive of cash and short-term investments).
(2)
(3) Before income taxes.
(4) Net realized gains for 2022 include $571 million of gains from the sale of our equity method investment in Maui Jim.
(5) Relates to available-for-sale fixed income and equity securities.
In 2023, we recognized $22 million of net realized gains in the equity portfolio, $3 million of net realized losses in the fixed
income portfolio and $14 million of other net realized gains, primarily from the payout of the working capital escrow associated with
our sale of Maui Jim. In 2022, we recognized $20 million of net realized gains in the equity portfolio, $3 million of net realized gains
in the fixed income portfolio and $571 million of other net realized gains, primarily from our sale of Maui Jim.
Investment income was aided by higher interest rates in 2023, as the Federal Reserve raised the Fed Funds target to fight
inflation. Entering 2024, consensus is the Federal Reserve has made enough progress in tightening policy and there remains a low
probability for further rate increases. A stable interest rate environment and a larger invested asset base should offer continued
investment income growth. However, if yields decline dramatically from current levels, investment income growth may be limited.
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, the insurance market and relative value in the capital markets to determine our tactical
allocation. As of December 31, 2023, the portfolio had a fair value of $3.7 billion, an increase of $404 million from the end of 2022.
Excluding U.S. government and agency issues, no single issuer in either the fixed income or equity portfolio represented more than
1 percent of invested assets.
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.
41
As of December 31, 2023, our investment portfolio had the following asset allocation breakdown:
Unrealized
Gain/(Loss)
% of Total
Fair Value
(in thousands)
U.S. government
U.S. agency
Non-U.S. government & agency
Agency MBS
ABS/CMBS/MBS**
Corporate
Municipal
Total fixed income
Equities
Short-term investments
Other invested assets
Cash
Total portfolio
Cost or
$
Amortized Cost Fair Value
308,031
$
59,826
3,882
425,285
281,182
1,225,019
552,624
$ 2,855,849
590,041
134,923
59,081
36,424
$ 3,676,318
312,632
60,763
4,800
460,551
308,458
1,273,187
634,000
$ 3,054,391
354,022
134,923
56,009
36,424
$ 3,635,769
$
(4,601)
(937)
(918)
(35,266)
(27,276)
(48,168)
(81,376)
$ (198,542)
236,019
—
3,072
—
40,549
$
Quality*
8.4 % AA+
1.6 % AA+
0.1 % BBB+
11.6 % AA+
7.7 % AA+
33.3 % A-
15.0 % AA
77.7 % AA-
16.0 %
3.7 %
1.6 %
1.0 %
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.
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, 2023, our fixed income
portfolio’s duration was 4.6 years.
Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk
asset classes. Equities comprised 16 percent of our total 2023 portfolio, up from 15 percent at the end of 2022, as equity markets rose
over the course of the year. Securities within the equity portfolio are well diversified and are primarily invested in broad index
exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value-oriented security
selection with low turnover, which minimizes transaction costs and taxes throughout our extended investment horizon.
42
FIXED INCOME PORTFOLIO
As of December 31, 2023, 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 - auto loans
ABS - railcars
All other ABS/MBS
GSE - CMBS
CMBS
Total
AAA
AA
A
BBB
Below
Investment
Grade
No Rating Fair Value
$
— $
— $
—
— $ 367,857 $
—
20,228
9,820
1,082
—
—
—
145,011
2,184
1,698
77,638 246,974 210,245
82,881
42,103 227,822
30,561
56,840
1,191
1,681
—
—
—
—
—
53,369
5,524
—
—
—
353,902
— $
—
35,358
12,480
3,850
— $ 367,857
3,882
—
595,600
5,157
377,368
2,262
97,857
—
108,935
81,616 24,447
44,773
10,430 34,343
—
486
552,624
342
486
—
—
93,897
24,044
10,408
—
18,001
—
33,946
369,301
104,887
30,469
10,408
12,997
67,732
55,984
54,689
$ 356,437 $ 1,295,819 $ 647,148 $ 327,062 $ 144,220 $ 85,163 $ 2,855,849
—
—
—
—
2,441
—
—
—
—
—
— 16,171
—
—
—
—
369,301
10,990
3,984
—
—
1,991
55,984
6,545
—
—
—
—
12,997
31,569
—
14,198
—
—
—
—
—
—
—
—
Percent of total fair value
12.5%
45.4%
22.7%
11.4%
5.0%
3.0%
100.0%
Mortgage-Backed, Asset-Backed and Commercial Mortgage-Backed Securities
We believe mortgage-backed securities (MBS), asset-backed securities (ABS) and commercial mortgage-backed securities
(CMBS) add diversification, liquidity, credit quality and additional yield to our portfolio. The following table summarizes the
distribution of our mortgage-backed securities (MBS) portfolio by investment type, as of December 31:
(in thousands)
2023
Pass-throughs
Planned amortization class
Sequential
Total
2022
Pass-throughs
Planned amortization class
Sequential
Total
Amortized Cost
Fair Value
% of Total
$
$
295,060
102,726
62,765
460,551
$
$
238,259
71,051
64,377
373,687
$
$
$
$
275,113
94,188
55,984
425,285
214,226
59,806
57,774
331,806
64.7 %
22.1 %
13.2 %
100.0 %
64.6 %
18.0 %
17.4 %
100.0 %
Agency MBS represented 15 percent of the fixed income portfolio, compared to 12 percent as of December 31, 2022. 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 mortgage refinancing. The agency MBS portfolio includes mortgage-backed pass-through securities and
collateralized mortgage obligations (CMO), which include planned amortization classes and sequential pay structures. As of
December 31, 2023, all of the securities in our agency MBS portfolio were rated AA and issued by Government Sponsored
Enterprises (GSEs) such as the Governmental National Mortgage Association, Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation.
43
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, 2023, the agency MBS portfolio contained 65 percent of pure pass-throughs, the same as of December 31,
2022. An additional 13 percent of the MBS portfolio was invested in sequential payer, down from 17 percent in 2022.
The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of
December 31:
(in thousands)
2023
Non-GSE RMBS
CMBS
CLO
Railcars
Auto
Marine
Consumers
Other
Total
2022
Non-GSE RMBS
CMBS
CLO
Railcars
Auto
Marine
Consumers
Other
Total
Amortized
Cost
Fair Value
% of Total
$
$
$
$
119,374 $
61,878
30,620
14,415
10,748
11,657
11,067
48,699
308,458 $
104,887
54,689
30,469
12,997
10,408
10,338
10,268
47,126
281,182
109,852 $
49,333
31,393
16,072
17,194
8,554
12,241
31,487
276,126 $
92,321
41,593
30,407
13,923
16,198
7,319
10,904
28,071
240,736
37.3 %
19.4 %
10.8 %
4.6 %
3.7 %
3.7 %
3.7 %
16.8 %
100.0 %
38.4 %
17.3 %
12.6 %
5.8 %
6.7 %
3.0 %
4.5 %
11.7 %
100.0 %
An ABS, 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, 2023,
ABS/CMBS/RMBS investments were 10 percent of the fixed income portfolio, compared to 9 percent as of December 31, 2022.
Sixty-four percent of the securities in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2023, while 93 percent
were rated A or better. We believe that ABS/CMBS investments often add 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 $63 million
in unrealized losses in these asset classes as of December 31, 2023.
Municipal Fixed Income Securities
As of December 31, 2023, municipal bonds composed 19 percent of our fixed income portfolio, compared to 20 percent as of
December 31, 2022. 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,
2023, approximately 46 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining
54 percent were revenue based. The municipal portfolio is diversified amongst 326 issues.
44
Ninety percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better. The
municipal portfolio includes 58 percent taxable and 42 percent tax-exempt securities.
Corporate Debt Securities
As of December 31, 2023, our corporate debt portfolio comprised 43 percent of the fixed income portfolio, compared to 39
percent as of December 31, 2022. 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 $144
million while non-rated Regulation D securities totaled $60 million at the end of 2023. While these Regulation D securities are not
rated by a traditional nationally recognized statistical rating organization, they all carry an equivalent investment-grade rating from the
Securities Valuation Office of the NAIC. The corporate debt portfolio has an overall quality rating of A- diversified among 904 issues.
The table below illustrates our corporate debt exposure as of December 31, 2023. 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
% of Total
$
617,745
395,745
100,561
111,121
47,531
484
$ 1,273,187
$
595,600
377,368
97,857
108,935
44,773
486
$ 1,225,019
48.6 %
30.8 %
8.0 %
8.9 %
3.7 %
- %
100.0 %
We believe corporate debt investments add diversification and additional yield to our portfolio.
EQUITY SECURITIES
As of December 31, 2023, our equity portfolio comprised 16 percent of the investment portfolio, up from 15 percent at the end
of the previous year. The securities within the equity portfolio are well diversified and are primarily invested in broad index ETFs that
represent market indexes similar to the Russell 3000 Index, 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 88 securities.
INTEREST AND GENERAL CORPORATE EXPENSE
We incurred $7 million of interest expense on outstanding debt during 2023 and $8 million in 2022. At December 31, 2023, our
debt consisted of $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time
and carries a floating interest rate of 7.07 percent, which will reset during the first quarter of 2024. Additionally, we borrowed $50
million from the Federal Home Loan Bank of Chicago (FHLBC) that matures on November 12, 2024 and pays interest monthly at an
annualized rate of 5.44 percent. Comparatively, at December 31, 2022, our debt consisted of $150 million in senior notes that matured
on September 15, 2023 and paid interest semi-annually at a rate of 4.875 percent, as well as $50 million of borrowings from the
FHLBC that matured on November 10, 2023 and paid interest monthly at an annualized rate of 0.84 percent.
We incurred $16 million of general corporate expense during 2023 and $13 million in 2022. 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 2023 and 2022, we exceeded the required return, resulting in the accrual of executive bonuses. Positive market
returns and book value growth in 2023 resulted in higher variable compensation earned than in 2022.
INVESTEE EARNINGS
As of December 31, 2023, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services, Inc.
(Prime). Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and surplus
lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. As a 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
45
controlling shareholder, which may impact the value of our investment. In 2023, we recorded $10 million in investee earnings for
Prime, compared to $13 million in 2022. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $7
million of gross premiums written and $13 million of net premiums earned during 2023, compared to $21 million of gross premiums
written and $23 million of net premiums earned during 2022. The decrease in premiums is attributable to a reduction of our
participation in the quota share reinsurance treaty in 2023, as well as the competitive market in which Prime operates.
We owned a 40 percent equity interest in Maui Jim, a manufacturer of high-quality sunglasses, but sold our interest in 2022. For
more information on the sale, see note 13 to the consolidated financial statements within Item 8, Financial Statements and
Supplementary Data. Our investment in Maui Jim was carried at the RLI Corp. holding company level, as it was not core to our
insurance operations. We did not recognize investee earnings from Maui Jim in 2023 and recorded less than $1 million in 2022.
We did not receive a dividend from our equity method investments in 2023 or 2022. Dividends from our equity method
investees 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.
INCOME TAXES
Our effective tax rates were 19.3 percent and 19.0 percent for 2023 and 2022, respectively. Effective rates are dependent upon
components of pretax earnings, which is impacted by the volatility of unrealized gains and losses in equity securities, and the related
tax effects. The effective rate was higher in 2023 due to lower levels of tax-favored adjustments, such as dividends paid to our
Employee Stock Ownership Plan (ESOP), tax credits and excess tax benefits on share-based compensation.
Dividends paid to our ESOP result in a tax deduction. Dividends paid to the ESOP in 2023 and 2022 resulted in tax benefits of
$1.6 million and $4.2 million, respectively. These tax benefits reduced the effective tax rate for 2023 and 2022 by 0.4 percent and
0.6 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 $1.7 billion at December 31, 2023, from $1.6 billion as of December 31, 2022. This reflects incurred losses of
$604 million in 2023 offset by paid losses of $491 million, compared to incurred losses of $514 million offset by $374 million paid in
2022. 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 $2.4 billion at December 31, 2023, from $2.3 billion at December 31, 2022, while ceded loss
and LAE reserves increased to $757 million from $740 million over the same period.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our
underwriting operations and income earned on our investment portfolio, (2) investing cash flows related to the purchase, sale and
maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt, issuance of common
stock and dividend payments. The following table summarizes these three cash flows over the last two years:
46
(in thousands)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
$
2023
464,257
(211,803)
(238,848)
$
2022
250,448
48,879
(365,313)
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 2022, we received $687 million of cash proceeds from the sale of our equity
method investment in Maui Jim, which were classified as investing cash flows. However, tax payments associated with Maui Jim were
classified as operating activities and totaled $142 million. During 2023, the majority of cash outflows were associated with the net
purchase of fixed income securities, classified as investing activities, and the payment of our regular quarterly dividends and $2.00 per
share special dividend, classified as financing activities. During 2022, we used a portion of the proceeds from the sale of Maui Jim to
pay a $7.00 special dividend.
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, 2023:
(in thousands)
Loss and settlement expense reserves
Debt
Interest on debt
Operating leases
Other invested assets
Total
Payments due by period
3-5 years
1-3 years
More than 5 years
Total
Less than 1 year
$
720,303 $ 861,838 $ 458,414 $
100,000
2,388
4,090
2,136
—
—
5,515
2,395
828,917 $ 869,748 $ 461,262 $
—
—
2,810
38
405,470 $ 2,446,025
100,000
2,388
16,918
4,634
410,038 $ 2,569,965
—
—
4,503
65
$
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
its liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $757 million at
December 31, 2023, compared to $740 million in 2022.
The next largest contractual obligation relates to debt outstanding. On September 15, 2023, we accessed $50 million from our
revolving line of credit with PNC Bank, N.A. (PNC). As the borrowing may be repaid at any time and carries a floating interest rate of
7.07 percent, which will reset during the first quarter of 2024, interest on this $50 million borrowing is excluded from the table above.
Additionally, on November 10, 2023 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2024 and
monthly interest is paid at an annualized rate of 5.44 percent. 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 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.
At December 31, 2023, we had cash, short-term investments and other investments maturing within one year of approximately
$328 million and an additional $911 million of investments maturing between 1 to 5 years. Our revolving line of credit with PNC
permits us to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount
of $130 million under certain conditions. The facility has a three-year term that expires on May 29, 2026. As of December 31, 2023,
$50 million was outstanding on this facility. Additionally, based on qualifying assets and the $50 million borrowing outstanding with
the FHLBC as of year-end, additional aggregate borrowing capacity from the FHBLC is approximately $15 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.
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
47
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. 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 28
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)
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 claim 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, 2023, our portfolio had a carrying value of $3.7 billion. Portfolio
assets at December 31, 2023, increased by $404 million, or 12 percent, from December 31, 2022.
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, 2023 and 2022, 42 percent of our shareholders’ equity was
invested in equities.
48
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
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, 2023, our capital structure consisted of
$100 million in debt and $1.4 billion of shareholders’ equity. Debt outstanding comprised 7 percent of total capital as of December 31,
2023.
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, 2023, our holding company had $1.4 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 $145 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 2023 and 2022, our principal insurance subsidiary paid ordinary dividends totaling $145 million and $13 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 2023 or 2022. As of December 31, 2023, $7 million of the net assets of our
principal insurance subsidiary were 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 191st consecutive dividend payment was declared in February 2024 and will be paid on March 20, 2024, in the amount of
$0.27 per share. Since the inception of cash dividends in 1976, we have increased our annual dividend every year.
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.
49
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 at the time of debt refinancing can also affect our consolidated statement of earnings due to its impact on
interest expense. We monitor the interest rate environment and evaluate refinancing opportunities as debt maturity dates approach.
Changes in interest rates do affect the fair value of our debt. However, our debt is reported at amortized cost on the consolidated
balance sheet and is not adjusted for changes in fair value.
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, 2023.
Listed on each table is the December 31, 2023 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, 2023, our fixed income portfolio had a fair value of $2.9 billion. The sensitivity analysis uses scenarios of
interest rates increasing 100 and 200 basis points from their December 31, 2023, levels with all other variables held constant. Such
scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $132 million and $255 million,
respectively. Comparatively, our fixed income portfolio had a fair value of $2.7 billion as of December 31, 2022 and scenarios of
interest rates increasing 100 and 200 basis points would have resulted in modeled decreases of $111 million and $215 million,
respectively.
As of December 31, 2023, our equity portfolio had a fair value of $590 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 $55 million and $110 million, respectively. Comparatively, our equity portfolio had a fair value of $498
million as of December 31, 2022 and scenarios of the S&P 500 Index declining by 10 percent and 20 percent would have resulted in
approximate decreases of $46 million and $93 million, respectively.
50
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.
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
12/31/23 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,855,849 $ (131,647) $
—
(54,927)
$ 3,445,890 $ (131,647) $ (54,927)
590,041
—
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
12/31/23 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,855,849 $ (254,624) $
—
(109,854)
$ 3,445,890 $ (254,624) $ (109,854)
590,041
—
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
12/31/23 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,855,849 $ 141,076 $
590,041
—
$ 3,445,890 $ 141,076 $
—
54,927
54,927
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
12/31/23 Fair
Value
Interest
Rate Risk
Equity
Risk
$ 2,855,849 $ 291,715 $
—
109,854
$ 3,445,890 $ 291,715 $ 109,854
590,041
—
51
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
53
54
55
56
57
90
52
RLI Corp.
Consolidated Balance Sheets
(in thousands, except per share data)
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value
(amortized cost of $3,054,391 and allowance for credit losses of $306 in 2023)
(amortized cost of $2,945,273 and allowance for credit losses of $339 in 2022)
Equity securities, at fair value (cost - $354,022 in 2023 and $328,019 in 2022)
Short-term investments, at cost which approximates fair value
Other invested assets
Cash
Total investments and cash
Accrued investment income
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $21,438 in
2023 and $18,696 in 2022
Ceded unearned premiums
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for
uncollectible amounts of $10,608 in 2023 and $11,250 in 2022
Deferred policy acquisition costs
Property and equipment, at cost, net of accumulated depreciation of $74,279 in 2023 and $68,633 in 2022
Investment in unconsolidated investees
Goodwill and intangibles
Income taxes - deferred
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and settlement expenses
Unearned premiums
Reinsurance balances payable
Funds held
Income taxes - current
Debt
Accrued expenses
Other liabilities
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 200,000,000)
(68,570,261 shares issued and 45,640,047 shares outstanding in 2023)
(68,399,966 shares issued and 45,469,752 shares outstanding in 2022)
Paid-in capital
Accumulated other comprehensive earnings
Retained earnings
Deferred compensation
Treasury stock, at cost (22,930,214 shares in 2023 and 2022)
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
53
December 31,
2023
2022
$
2,855,849
$
2,666,950
590,041
134,923
59,081
36,424
3,676,318
24,062
221,206
112,257
757,349
146,566
46,715
56,966
53,562
15,872
69,348
5,180,221
2,446,025
892,326
71,507
101,446
3,757
100,000
108,880
42,766
3,766,707
686
362,345
(166,303)
1,609,785
13,539
(406,538)
1,413,514
5,180,221
498,382
36,229
47,922
22,818
3,272,301
21,259
189,501
138,457
740,089
127,859
49,573
58,275
53,562
40,269
75,923
4,767,068
2,315,637
785,085
61,100
101,144
—
199,863
94,869
32,029
3,589,727
684
352,391
(229,076)
1,446,341
12,015
(405,014)
1,177,341
4,767,068
$
$
$
$
$
$
$
$
$
$
$
$
$
$
RLI Corp.
Consolidated Statements of Earnings and Comprehensive Earnings
Years ended December 31,
2023
2022
120,383
32,518
64,787
86,078
588,515
(121,037)
$ 1,294,306 $ 1,144,436 $
2021
980,903
68,862
64,222
65,258
$ 1,511,994 $ 1,697,992 $ 1,179,245
456,602
317,468
76,907
7,677
13,330
871,984
37,060
344,321
604,413
418,325
98,383
7,301
15,917
514,376
369,632
82,212
8,047
12,900
987,167 $
9,853
720,678 $
9,610
377,265 $
$ 1,144,339 $
$
64,944
7,710
$
$
72,654 $
304,611 $
186,906
(49,639)
137,267 $
583,411 $
46,040
18,927
64,967
279,354
62,773
$
367,384 $
(278,902)
304,509 $
(58,888)
220,466
$
$
6.68 $
6.61 $
12.86 $
12.74 $
6.18
6.11
45,596
46,077
45,368
45,794
45,230
45,712
(in thousands, except per share data)
Net premiums earned
Net investment income
Net realized gains
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
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.
54
RLI Corp.
Consolidated Statements of Shareholders’ Equity
Total
Common
45,142,580 $
—
Shareholders’ Common Paid-in
Capital
681 $ 335,365 $
—
Equity
1,135,978 $
279,354
Stock
—
Retained
Earnings Compensation
Deferred
Treasury Stock
at Cost
108,714 $ 1,084,217 $
279,354
—
8,292 $
—
(401,291)
—
Accumulated Other
Comprehensive
Earnings (Loss)
—
—
146,757
(in thousands, except per share data) Shares
Balance, January 1, 2021
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($2.99 per share)
Balance, December 31, 2021
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($8.03 per share)
Balance, December 31, 2022
Cumulative-effect adjustment from
ASU 2023-02
Net earnings
Other comprehensive earnings (loss),
net of tax
Deferred compensation
Share-based compensation
Dividends and dividend equivalents
($3.07 per share)
Balance, December 31, 2023
—
45,289,337 $
—
—
—
180,415
—
45,469,752 $
—
—
—
170,295
—
45,640,047 $
(58,888)
—
8,378
—
—
1
—
—
8,377
(58,888)
—
—
—
—
—
—
1,350
—
—
(1,350)
—
(135,461)
1,229,361 $
583,411
—
—
682 $ 343,742 $
—
—
—
(135,461)
49,826 $ 1,228,110 $
583,411
—
—
9,642 $
—
—
(402,641)
—
(278,902)
—
8,651
—
—
2
—
—
8,649
(278,902)
—
—
—
—
—
—
2,373
—
—
(2,373)
—
(365,180)
1,177,341 $
—
—
684 $ 352,391 $
—
(365,180)
(229,076) $ 1,446,341 $
—
12,015 $
—
(405,014)
(951)
304,611
62,773
—
9,956
—
—
—
—
2
—
—
9,954
—
(951)
304,611
—
—
62,773
—
—
—
—
—
—
1,524
—
—
(1,524)
—
(140,216)
1,413,514 $
—
—
686 $ 362,345 $
—
(140,216)
(166,303) $ 1,609,785 $
—
13,539 $
—
(406,538)
See accompanying notes to consolidated financial statements.
55
RLI Corp.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Years ended December 31,
2022
2021
2023
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
304,611
$
583,411
$
279,354
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
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of:
Fixed income securities, available-for-sale
Equity securities
Property and equipment
Equity method investee
Other
Proceeds from sale of:
Fixed income securities, available-for-sale
Equity securities
Equity method investee
Property and equipment
Other
Proceeds from call or maturity of:
Fixed income, available-for-sale
Net purchase of short-term investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Repayment of debt
Proceeds from stock option exercises
Cash dividends paid
Net cash used in financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
See accompanying notes to consolidated financial statements.
56
(32,518)
(64,787)
8,545
7,710
24,947
(588,515)
121,037
7,981
(49,639)
(20,467)
(64,222)
(65,258)
7,394
18,927
14,141
(2,803)
(3,754)
(1,379)
(31,705)
10,407
302
26,200
(17,260)
(18,707)
14,011
130,388
107,241
7,285
(22,222)
18,249
11,371
(7,541)
(132,003)
(24,306)
(3,405)
272,082
104,641
(6,619)
7,349
586
8,026
(17,428)
(164,357)
(15,128)
22,349
293,506
94,058
4,047
(9,610)
464,257
$
(9,853)
250,448
$
(37,060)
384,905
$
(662,070)
(55,652)
(5,913)
—
(10,786)
$ (2,053,359)
(45,007)
(5,889)
(3,819)
(5,704)
(733,811)
(140,721)
(8,310)
(8,978)
(11,428)
50,135
51,881
14,284
27
817
504,168
(98,694)
(211,803)
100,000
(200,000)
1,245
(140,093)
(238,848)
13,606
22,818
36,424
53,300
62,212
686,666
375
2,659
1,393,674
(36,229)
48,879
—
—
(465)
(364,848)
(365,313)
(65,986)
88,804
22,818
$
$
$
$
$
$
$
$
$
$
63,811
180,256
—
—
7,605
376,750
—
(274,826)
50,000
—
1,838
(135,330)
(83,492)
26,587
62,217
88,804
$
$
$
$
$
$
$
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.
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. Certain reclassifications were made to 2022 and 2021 to conform to the classifications
used in the current year. The Company has evaluated subsequent events through the date these consolidated financial statements were
issued. There were no subsequent events requiring adjustment to the financial statements or disclosure.
C. ADOPTED ACCOUNTING STANDARDS
2023-02—Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using
the Proportional Method
The amendments in this Accounting Standards Update (ASU) permit the use of the proportional amortization method for
investments in tax credits if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is
amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits presented as
a component of income tax expense. Under previous guidance, equity investments in tax credit structures, other than qualified
affordable housing projects, were accounted for using the equity method of accounting, which required the presentation of income,
gains and losses, and tax credits in their respective line items of the statement of earnings. This ASU allows entities to make an
accounting policy election on an individual tax credit program basis for all equity investments whose primary purpose is receiving
income tax credits or other income tax benefits.
We adopted ASU 2023-02 on January 1, 2023 using a modified-retrospective approach. Through 2022, our investment in
historic tax credit partnerships was presented in the balance sheet as an investment in unconsolidated investee. On January 1, 2023, the
$11 million investment was moved to the other invested assets line item, and the asset and retained earnings were reduced by $1
million to reflect the difference between applying the equity method and the proportional method since the investment was entered
into. While the amortization of the investment will be presented in income tax expense going forward, rather than in equity in earnings
of unconsolidated investees, the impact to net earnings will not have a material impact on our financial statements.
D. PROSPECTIVE ACCOUNTING STANDARDS
2023-07—Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
The guidance in ASU 2023-07 was designed to improve reportable segment disclosure requirements, primarily through
enhanced disclosures about significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023,
and interim periods within fiscal years beginning after December 15, 2024. Although the Company continues to evaluate the impact of
adopting this new accounting standard, the amendments are disclosure-related and should not have a material impact on our financial
statements.
57
2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures
The guidance in ASU 2023-09 was designed to increase transparency about income tax information through improvements to
the rate reconciliation and disclosure of income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024.
Although the Company continues to evaluate the impact of adopting this new accounting standard, the amendments are disclosure-
related and should not have a material impact on our financial statements.
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
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 the specific identification of the investments sold
on the settlement date.
F. CASH, SHORT-TERM INVESTMENTS AND OTHER INVESTED ASSETS
Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original maturities of
90 days or less, primarily AAA-rated government money market funds. Short-term investments are carried at cost. Other invested
assets include investments in low-income housing tax credit (LIHTC) and historic tax credit (HTC) partnerships, membership in the
Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC and HTC investments are carried at
amortized cost, and our investment in FHLBC stock is carried at cost. Due to the nature of cash, the LIHTC and HTC partnerships,
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.
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 reinsurers’ annual financial statements and SEC filings for those 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 its 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 and, if needed, an additional
allowance is recognized.
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.
58
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 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 Prime Holdings Insurance Services, Inc. (Prime)
and Maui Jim, Inc. (Maui Jim). As of December 31, 2023, 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 $56 million at
December 31, 2023 and $47 million at December 31, 2022. In 2023, we recorded $10 million in investee earnings for Prime,
compared to $13 million in 2022 and $17 million in 2021. The decrease in investee earnings is reflective of the competitive market in
which Prime writes business. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $7 million of
gross premiums written and $13 million of net premiums earned during 2023, compared to $21 million of gross premiums written and
$23 million of net premiums earned during 2022, and $22 million of gross premiums written and $19 million of net premiums earned
during 2021. The decrease in gross premiums written and net premiums earned is attributable to a reduction of our participation in the
quota share reinsurance treaty in 2023, as well as the competitive market in which Prime operates.
We owned a 40 percent interest in the equity and earnings of Maui Jim, a manufacturer of high-quality sunglasses, but sold our
interest in 2022. See note 13 for more information on the sale. We carried this investment at the holding company level as it was not
core to our insurance operations. We did not recognize investee earnings from Maui Jim in 2023, but recorded less than $1 million in
2022 and $23 million in 2021.
Our equity method investments recorded net income of $45 million in 2023, $59 million in 2022 and $125 million in 2021.
Additional summarized financial information for our equity method investments as of 2023 and 2022 is outlined in the following
table:
(in millions)
Total assets
Total liabilities
Total equity
$
2023
2022
944 $
691
253
906
690
216
Approximately $62 million of undistributed earnings from our equity method investees were included in our retained earnings
as of December 31, 2023. Undistributed earnings exceeded our investment in unconsolidated investees as rising interest rates on
Prime’s fixed income portfolio resulted in the recognition of other comprehensive losses. We did not receive any dividends from our
equity method investees during 2023, 2022 or 2021.
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. GOODWILL AND INTANGIBLE ASSETS
The composition of goodwill and intangibles at December 31, 2023 and 2022, is detailed in the following table:
(in thousands)
Goodwill
Surety
Casualty
Total goodwill
Indefinite-lived intangibles
Total goodwill and intangibles
2023
2022
$
40,816 $
5,246
46,062 $
7,500 $
53,562 $
$
$
$
40,816
5,246
46,062
7,500
53,562
59
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 2023. Based upon these reviews, our goodwill
and state insurance license indefinite-lived intangible assets were not impaired. In addition, as of December 31, 2023, there were no
triggering events on goodwill and intangible assets that would suggest an updated review was necessary.
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. Our policies are short-term
in nature and premium is generally earned over a one-year period. 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. Since the majority of our income on a state
basis 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.
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O. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts
to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of these items
increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the
diluted net earnings or net loss per share is computed excluding these items. 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, 2023
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, 2022
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, 2021
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
Weighted Average
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
$
304,611
—
$
304,611
$
583,411
—
$
583,411
$
279,354
—
$
279,354
45,596 $
481
46,077 $
173
45,368 $
426
45,794 $
295
45,230 $
482
45,712 $
214
6.68
6.61
12.86
12.74
6.18
6.11
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 $17 million, $(74) million and $(16) million for 2023, 2022 and 2021, 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.
Unrealized Gains/Losses on Available-for-Sale Securities
(in thousands)
Beginning balance
Other comprehensive earnings before reclassifications
Amounts reclassified from accumulated other comprehensive
earnings
Net current period other comprehensive earnings (loss)
Ending balance
Balance of securities for which an allowance for credit losses has not
been recognized in net earnings
$
$
$
$
61
For the Year Ended December 31,
2022
2023
(229,076) $
59,922
2,851
62,773 $
(166,303) $
49,826 $
(281,189)
2,287
(278,902) $
(229,076) $
2021
108,714
(57,454)
(1,434)
(58,888)
49,826
1,224 $
1,693 $
124
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. 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
(3,641) $
$
2023
For the Year Ended December 31,
2022
2021
(2,997) $
1,859
Affected line item in the
Consolidated Statement of Earnings
Net realized gains (losses)
32
(3,609) $
758
(2,851) $
102
(2,895) $
608
(2,287) $
$
$
Credit gains (losses) presented within net
realized gains
(44)
1,815 Earnings (loss) before income taxes
(381) Income tax (expense) benefit
1,434 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.
Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.
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.
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.
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-backed Securities (CMBS) 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 MBS and CMBS 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/CMBS and ABS with corroborated, observable inputs are classified as Level
2. All of our MBS/CMBS and ABS are deemed Level 2.
Regulation D Private Placement Securities: All Regulation D privately placed bonds are classified as corporate securities and
deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of observable and
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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. The quantitative detail of the liquidity
spread premium is neither provided nor reasonably available to the Company.
For all of our fixed income securities classified as Level 2, 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. If discrepancies are found in our comparisons, we compare our prices to actual reported
trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews.
Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing
services are reasonable.
Equity Securities: As of December 31, 2023, nearly all of our equity 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). Equity securities
not traded on an exchange, for which pricing is provided by a third-party pricing source using observable inputs, are classified as
Level 2. Equity securities not traded on an exchange and that rely on one or more unobservable inputs in pricing are classified as
Level 3.
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 debt is
discussed further in note 4.
R. SHARE-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
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, 2023, we had $2.4 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.
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Catastrophe Exposures
Our insurance coverages include exposure to catastrophic events. We monitor 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
by 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, and windstorms affecting commercial properties in coastal regions of the United
States. We are also exposed to convective storms, winter weather, wildfires, lava flows in Hawaii as well as terrorist events in the
United States.
For our catastrophe reinsurance treaty, which renewed on January 1, 2023, we purchased limits of $700 million in excess of $25
million first-dollar retention for earthquakes in California, $700 million in excess of a $50 million first-dollar retention for earthquakes
outside of California and $600 million in excess of a $50 million first-dollar retention for all other perils, including wind. These
amounts were subject to certain co-participations by the Company on losses in excess of the first-dollar retentions. On June 1, 2023,
we purchased $150 million of additional catastrophe reinsurance protection on top of the previously described coverage, to support
growth in our catastrophe-exposed business. This increased the limits to $850 million in excess of $25 million first-dollar retention for
earthquakes in California, $850 million in excess of $50 million first-dollar retention for earthquakes outside of California and $750
million in excess of $50 million first-dollar retention for all other perils, including wind, all of which were still subject to certain co-
participations in excess of the retentions.
The majority of our catastrophe reinsurance treaty renewed on January 1, 2024 and the remaining portions of certain layers of
coverage will renew on June 1, 2024. 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. Our policies include pollution
exclusions that have been continually updated to further strengthen them and our policies primarily cover moderate hazard risks.
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.
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
64
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 and forms 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 and 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, 2023, 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.
65
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
$
2023
103,446 $
12,238
10,940
126,624
(6,241)
120,383
$
$
$
$
2022
2021
77,164 $
11,912
2,467
91,543
(5,465)
86,078
$
$
60,624
11,787
2,639
75,050
(6,188)
68,862
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
Investment in unconsolidated investees
Other
Total net realized gains (losses)
Net changes in unrealized gains (losses) on investments:
Equity securities
Other invested assets
Total unrealized gains (losses) on equity securities recognized in net
earnings
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
2023
2022
2021
$
$
$
$
$
$
$
(3,641)
22,232
14,084
(157)
32,518
65,655
(868)
$
$
$
(2,997)
20,287
570,952
273
588,515
(118,912)
(2,125)
$
$
$
1,859
62,512
(61)
(88)
64,222
58,459
6,799
64,787
$
(121,037)
$
65,258
79,782
(290)
(33)
79,459
176,764
$
$
$
(341,944)
(10,994)
(102)
(353,040)
114,438
$
$
$
(71,538)
(3,047)
44
(74,541)
54,939
The change in the portfolio’s unrealized gain (loss) position was due to a rally in fixed income securities, as well as strong
equity market returns during the year.
66
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)
2023
Available-for-sale
Equities
2022
Available-for-sale
Equities
2021
Available-for-sale
Equities
CALLS/MATURITIES
(in thousands)
2023
Available-for-sale
2022
Available-for-sale
2021
Available-for-sale
Proceeds
Gains
Losses
Gross Realized
Net Realized
Gain (Loss)
$
$
49,960 $
51,881
451 $
23,482
(2,174) $
(1,250)
51,355 $
62,212
287 $
21,623
(2,849) $
(1,336)
(1,723)
22,232
(2,562)
20,287
$
65,262 $
180,256
2,161 $
64,298
(815) $
(1,786)
1,346
62,512
Proceeds
Gains
Losses
Gross Realized
Net Realized
Gain (Loss)
$
506,910 $
39 $
(162) $
(123)
$
1,393,704 $
196 $
(55) $
$
376,751 $
638 $
(125) $
141
513
FAIR VALUE MEASUREMENTS
Assets measured at fair value on a recurring basis as of December 31, 2023 and 2022, 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
Total
2023
Quoted in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
— $
—
—
—
—
—
—
— $
588,416
588,416 $
308,031 $
59,826
3,882
425,285
281,182
1,164,548
552,624
2,795,378 $
—
— $
—
—
—
—
60,471
—
60,471 $
1,625
2,795,378 $
62,096 $
Total
308,031
59,826
3,882
425,285
281,182
1,225,019
552,624
2,855,849
590,041
3,445,890
* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
67
(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
Total
2022
Quoted in Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
— $
—
—
—
—
—
—
— $
496,731
496,731 $
454,021 $
73,063
5,847
331,806
240,736
980,676
527,147
2,613,296 $
39
— $
—
—
—
—
53,654
—
53,654 $
1,612
2,613,335 $
55,266 $
Total
454,021
73,063
5,847
331,806
240,736
1,034,330
527,147
2,666,950
498,382
3,165,332
* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
The following table summarizes changes in the balance of securities whose fair value was measured using significant
unobservable inputs (Level 3).
(in thousands)
Balance as of January 1, 2023
Net realized and unrealized gains
Included in other comprehensive earnings
Purchases
Sales
Balance as of December 31, 2023
Change in unrealized gains during the period for Level 3 assets held at period-end
- included in other comprehensive earnings
Level 3 Securities
55,266
2,461
7,921
(3,552)
62,096
2,461
$
$
$
The amortized cost and estimated fair value of fixed income securities at December 31, 2023, 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
Fair Value
Amortized Cost
$
157,831 $
904,769
674,761
548,021
769,009
156,463
874,375
654,068
464,476
706,467
$ 3,054,391 $ 2,855,849
* Asset-backed, commercial mortgage-backed and mortgage-backed securities
Expected maturities may differ from contractual maturities due to call provisions on some existing securities.
The amortized cost and fair value of available-for-sale securities at December 31, 2023 and 2022 are presented in the tables
below. Amortized cost does not include the $23 million and $20 million of accrued interest receivable as of December 31, 2023 and
2022, respectively.
68
(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
2023
Gross
Unrealized
Gains
$
Amortized
Cost
312,632
60,763
4,800
460,551
308,458
1,273,187
634,000
$ 3,054,391
$
$
—
—
—
—
(3)
(303)
—
(306)
$
$
Gross
Unrealized
Fair Value
Losses
308,031
(5,858) $
59,826
(1,589)
3,882
(918)
425,285
(37,902)
281,182
(27,884)
1,225,019
(56,631)
552,624
(83,614)
16,160 $ (214,396) $ 2,855,849
1,257 $
652
—
2,636
611
8,766
2,238
$
Amortized
Cost
462,884
75,074
6,798
373,687
276,126
1,122,097
628,607
$ 2,945,273
Allowance
for Credit
Losses
2022
Gross
Unrealized
Gains
$
$
—
—
—
—
(8)
(331)
—
(339)
$
$
8
26
—
336
62
541
1,265
2,238
$
Gross
Unrealized
Fair Value
Losses
454,021
(8,871) $
73,063
(2,037)
5,847
(951)
331,806
(42,217)
240,736
(35,444)
1,034,330
(87,977)
(102,725)
527,147
$ (280,222) $ 2,666,950
* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
ALLOWANCE FOR CREDIT LOSSES AND UNREALIZED LOSSES ON FIXED INCOME SECURITIES
A reversible allowance for credit losses is required to be recognized on available-for-sale fixed income securities. 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,
• 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,
2023, the discounted cash flow analysis resulted in an allowance for credit losses on 14 securities. The following table presents
changes in the allowance for expected credit losses on available-for-sale securities:
69
(in thousands)
Beginning balance
Increase to allowance from securities for which credit losses were not
previously recorded
Reduction from securities sold during the period
Net increase (decrease) from securities that had an allowance at the
beginning of the period
Ending balance
2023
2022
$
339 $
441
71
(154)
50
$
306 $
337
(671)
232
339
Net realized gains included $2 million of losses on fixed income securities for which the cost basis was written down to fair
value due to a credit event, restructurings and losses on securities for which we no longer had the intent to hold until recovery. In
2022, less than $1 million in such losses were recognized. We believe we will recover the amortized cost basis of available-for-sale
securities that remain in an unrealized loss position.
As of December 31, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio
contained 1,267 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $214
million in associated unrealized losses represents 7 percent of the fixed income portfolio’s cost basis and 6 percent of total invested
assets. Isolated to these securities, unrealized losses at the end of 2023 decreased compared to the previous year due to positive price
movements as markets rallied in the later part of 2023. Of the total 1,267 securities, 1,138 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, 2023 and 2022. We believe we will recover the amortized cost basis of available-for-sale securities
that remain in an unrealized loss position.
70
(in thousands)
U.S. government
Fair value
Amortized cost
Unrealized loss
U.S. agency
Fair value
Amortized cost
Unrealized loss
Non-U.S. government & 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, 2023
12 Mos.
& Greater
< 12 Mos.
Total
< 12 Mos.
December 31, 2022
12 Mos.
& Greater
Total
$
37,718 $
37,950
204,556 $
210,182
242,274 $
248,132
399,361 $
407,340
$
(232) $
(5,626) $
(5,858) $
(7,979) $
8,828 $
9,720
(892) $
408,189
417,060
(8,871)
8,736 $
8,790
(54) $
29,632 $
31,167
(1,535) $
38,368 $
39,957
(1,589) $
32,987 $
34,627
(1,640) $
2,170 $
2,567
(397) $
35,157
37,194
(2,037)
— $
—
— $
3,882 $
4,800
(918) $
3,882 $
4,800
(918) $
3,626 $
3,798
(172) $
2,221 $
3,000
(779) $
5,847
6,798
(951)
61,196 $
61,714
(518) $
275,707 $
313,091
(37,384) $
336,903 $
374,805
(37,902) $
197,252 $
212,776
(15,524) $
117,851 $
144,544
(26,693) $
315,103
357,320
(42,217)
12,240 $
12,367
(127) $
211,436 $
239,193
(27,757) $
223,676 $
251,560
(27,884) $
96,754 $
104,724
(7,970) $
136,149 $
163,623
(27,474) $
232,903
268,347
(35,444)
67,402 $
68,345
(943) $
822,731 $
878,419
(55,688) $
890,133 $
946,764
(56,631) $
660,830 $
697,437
(36,607) $
323,337 $
374,707
(51,370) $
984,167
1,072,144
(87,977)
61,218 $
61,697
(479) $
391,361 $
474,496
(83,135) $
452,579 $
536,193
(83,614) $
228,827 $
255,240
(26,413) $
433,151
204,324 $
280,636
535,876
(76,312) $ (102,725)
$
$
$
$
$
$
$
$
$
$
$
$
$
248,510 $ 1,939,305 $ 2,187,815 $ 1,619,637 $
250,863
1,715,942
2,151,348
2,402,211
794,880 $ 2,414,517
2,694,739
978,797
(96,305) $ (183,917) $ (280,222)
$
(2,353) $ (212,043) $ (214,396) $
* Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
OTHER INVESTED ASSETS
We had $59 million of other invested assets at December 31, 2023, compared to $48 million at the end of 2022. Other invested
assets include investments in low-income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC),
membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC and HTC
investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC, HTC
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.
Our LIHTC interests had a balance of $10 million at December 31, 2023, compared to $13 million at December 31, 2022. Our
LIHTC interests recognized amortization of $3 million as a component of income tax expense in 2023, compared to $3 million in
2022 and $3 million in 2021. Additionally, our LIHTC recognized a total tax benefit of $3 million during 2023, compared to $3
million during 2022 and $4 million during 2021. Our unfunded commitment for our LIHTC investments was less than $1 million at
December 31, 2023 and will be paid out in installments through 2035.
Our HTC investment had a balance of $13 million at December 31, 2023, compared to $11 million at December 31, 2022.
Through 2022, the investment was accounted for as an investment in unconsolidated investee. Due to the adoption of ASU 2023-02,
Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, the investment was reclassified as
an other invested asset during 2023. A total tax benefit of $6 million was recognized from our HTC investment during 2023,
71
compared to $5 million during 2022 and $4 million during 2021. Our HTC recognized $4 million of amortization as a component of
income tax expense during 2023.
Our investments in private funds totaled $28 million at December 31, 2023 and 2022, and we had $4 million of associated
unfunded commitments at December 31, 2023. Our interest in private funds is generally restricted from being transferred or otherwise
redeemed without prior consent by the respective entities and the timed dissolution of the partnerships would trigger redemption.
Restricted Assets
As of December 31, 2023, $59 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. On November 10, 2023, RLI Insurance Company borrowed $50
million from the FHLBC, which was outstanding as of December 31, 2023.
As of December 31, 2023, fixed income securities with a carrying value of $93 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:
2023
2022
$ 127,859 $ 103,553 $
2021
88,425
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
19,736
(38,809)
$ 313,675 $ 277,553 $ 236,145
17,012
(47,592)
$ 294,602 $ 256,711 $ 205,565
190,437
$ 146,566 $ 127,859 $ 103,553
18,616
(39,458)
275,895
232,405
$ 275,895 $ 232,405 $ 190,437
(11,857)
154,287
(4,303)
131,334
$ 418,325 $ 369,632 $ 317,468
(5,882)
143,109
As of December 31, 2023, outstanding debt balances totaled $100 million.
On September 15, 2023, we retired $150 million in senior notes that were originally issued in 2013 and paid interest semi-
annually at the rate of 4.875 percent. Additionally, on September 15, 2023, we accessed $50 million from our revolving line of credit
with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent, which will
reset during the first quarter of 2024. The credit facility with PNC was entered into during the first quarter of 2023 and replaced the
previous $60 million facility with Bank of Montreal, Chicago Branch, which expired on March 27, 2023. The line of credit permits us
to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount of $130
million under certain conditions. The facility has a three-year term that expires on May 29, 2026.
On November 10, 2023, we repaid $50 million that was borrowed from the Federal Home Loan Bank of Chicago (FHLBC) in
2021 and paid interest monthly at an annualized rate of 0.84 percent. Additionally, on November 10, 2023 we borrowed $50 million
from the FHLBC. The borrowing matures on November 12, 2024 and monthly interest is paid at an annualized rate of 5.44 percent.
Due to the lack of marketability and short tenor of our borrowings, the fair value of our debt approximates the carrying value.
We paid $9 million of interest on our debt in 2023, compared to $8 million in 2022 and $7 million in 2021. The average rate on debt
was 4.07 percent in 2023, 3.89 percent in 2022 and 4.77 percent in 2021. The weighted average interest rate on debt outstanding was
6.26 percent as of December 31, 2023.
72
5. REINSURANCE
In the ordinary course of business, our insurance subsidiaries assume and cede premiums and selected insured risks with other
insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and,
in some instances, by negotiation on each individual risk known as facultative reinsurance. In addition, there are several types of
treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts
arising from any one occurrence or event. The arrangements allow 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 limit our net loss on any individual risk to a maximum of $10 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
LOSSES AND SETTLEMENT EXPENSES INCURRED
Direct
Reinsurance assumed
Reinsurance ceded
Net
2023
2022
2021
$ 1,783,862 $ 1,531,656 $ 1,313,093
34,261
(289,821)
$ 1,427,747 $ 1,241,536 $ 1,057,533
33,830
(323,950)
22,798
(378,913)
$ 1,671,044 $ 1,425,165 $ 1,222,346
30,950
(272,393)
$ 1,294,306 $ 1,144,436 $ 980,903
35,680
(316,409)
28,375
(405,113)
$ 840,255 $ 776,448 $ 703,903
18,087
(265,388)
$ 604,413 $ 514,376 $ 456,602
22,813
(284,885)
10,228
(246,070)
More than 93 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, 2023. 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
2023.
73
(dollars in thousands)
Munich Re / HSB
Renaissance Re
Nationwide Mutual
Partner Re
Safety National
Lloyds of London
Berkley Insurance Co.
Aspen UK Ltd.
Endurance Re
Hannover Ruckversicherung
Toa Re
All other reinsurers*
Total ceded exposure
AM Best
Rating
S&P
Rating
Net Reinsurer
Exposure as of
12/31/2023
Percent of
Total
Ceded
Premiums
Written
Percent of
Total
A+, Superior AA-, Very Strong
A+, Superior A+, Strong
A, Excellent
A+, Strong
A+, Superior A+, Strong
A++, Superior A+, Strong
A, Excellent
A+, Superior A+, Strong
A, Excellent
A-, Strong
A+, Superior A+, Strong
A+, Superior AA-, Very Strong
A, Excellent
AA-, Very Strong
A, Strong
$
$
105,823
77,488
50,172
43,389
38,897
33,622
33,575
33,327
33,220
30,340
29,585
298,579
808,017
13.1 % $
9.6 %
6.2 %
5.4 %
4.8 %
4.2 %
4.2 %
4.1 %
4.1 %
3.7 %
3.7 %
36.9 %
100.0 % $
35,989
21,868
20,412
27,746
6,734
37,927
7,610
350
4,142
17,856
11,232
187,047
378,913
9.5 %
5.8 %
5.4 %
7.3 %
1.8 %
10.0 %
2.0 %
0.1 %
1.1 %
4.7 %
3.0 %
49.3 %
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 $16 million and $11 million, respectively, at
December 31, 2023 and 2022. Changes in the allowances during 2023 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 2023 and less than $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 2023, 2022 and 2021:
(in thousands)
Unpaid losses and LAE at beginning of year:
Gross
Ceded
Net
Increase (decrease) in incurred losses and LAE:
Current accident year
Prior accident years
Total incurred
Loss and LAE payments for claims incurred:
Current accident year
Prior accident year
Total paid
2023
2022
2021
$
$
$
$
$
$
2,315,637
(740,089)
1,575,548
712,960
(108,547)
604,413
(165,364)
(325,921)
(491,285)
$
$
$
$
$
$
2,043,555
(608,086)
1,435,469
636,955
(122,579)
514,376
(97,525)
(276,772)
(374,297)
$
$
$
$
$
$
1,750,049
(443,729)
1,306,320
582,065
(125,463)
456,602
(101,590)
(225,863)
(327,453)
Net unpaid losses and LAE at end of year
$
1,688,676
$
1,575,548
$
1,435,469
Unpaid losses and LAE at end of year:
Gross
Ceded
Net
$
$
2,446,025
(757,349)
1,688,676
$
$
2,315,637
(740,089)
1,575,548
$
$
2,043,555
(608,086)
1,435,469
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 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 changes in the loss
74
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, 2023, 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, 2023. 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, 2014 to 2022 is presented as unaudited required supplementary information.
Casualty - Primary Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
Claims
4,303
4,416
4,349
4,550
4,902
5,334
4,697
4,581
4,557
3,770
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014*
88,092 $
$
2015*
79,497 $
94,835
2016*
71,592 $
84,975
101,950
2017*
67,237 $
83,579
96,753
119,741
2018*
66,389 $
78,675
90,611
111,391
141,513
2019*
66,702 $
76,398
85,449
102,583
130,281
146,011
2020*
65,636 $
75,470
83,374
95,513
125,731
135,209
145,171
2021*
63,727 $
75,438
79,440
90,759
115,076
120,570
137,439
142,797
2022*
64,449 $
77,110
77,729
90,344
114,414
109,051
122,785
128,483
155,203
2023
64,160 $
75,958
78,358
90,744
115,793
111,156
117,962
125,672
144,861
152,443
Total $ 1,077,107
Total IBNR
1,844
3,048
5,321
8,014
13,981
24,277
42,852
59,412
88,355
115,076
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2014*
11,436 $
$
2015*
18,771 $
10,157
2016*
29,545 $
19,902
10,142
2017*
40,270 $
33,020
24,186
13,154
* Presented as unaudited required supplementary information.
2018*
47,343 $
45,056
35,764
25,933
15,066
2019*
52,387 $
54,270
48,042
38,783
32,365
15,698
2020*
55,965 $
58,866
56,152
52,823
48,424
30,673
17,096
2023
59,783
69,635
69,968
76,283
93,504
74,380
60,764
43,951
38,712
17,707
Total $ 604,687
10,149
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 482,569
2022*
58,361 $
68,650
65,517
71,419
78,103
57,750
45,267
29,633
17,714
2021*
56,784 $
62,997
60,349
62,236
63,980
41,911
30,596
14,428
Years
1
13.6%
2
13.6%
3
13.9%
4
14.9%
5
11.8%
6
8.5%
7
5.7%
8
4.8%
9
1.9%
10
2.2%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
75
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Casualty - Excess Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
2014*
50,889 $
$
2015*
39,095 $
53,672
2016*
35,119 $
50,857
56,341
2017*
32,274 $
47,392
49,385
62,863
2018*
33,372 $
42,840
37,676
55,868
69,362
2019*
33,458 $
43,328
33,125
48,363
62,646
88,078
2020*
35,128 $
42,446
30,251
44,737
54,626
89,691
107,579
2021*
35,683 $
41,690
29,671
43,249
51,023
79,083
98,409
136,433
2022*
35,918 $
41,471
29,940
41,620
49,861
80,147
90,274
136,354
153,895
2023
37,804 $
40,580
27,733
39,600
47,949
77,185
81,284
125,028
156,822
178,887
$ 812,872
Total IBNR
1,811
2,287
3,281
9,045
17,886
29,498
48,145
64,648
90,640
120,637
Total
Claims
932
707
656
656
622
694
635
820
866
540
2014*
2015*
$
1,899 $
4,006 $
2,048
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2016*
11,002 $
10,127
1,068
2017*
18,852 $
19,571
3,396
17
2018*
22,541 $
23,184
7,441
5,679
2,506
2019*
23,376 $
28,756
10,054
9,275
5,823
4,213
2020*
26,068 $
31,352
12,703
15,441
10,801
19,044
2,901
2021*
28,963 $
32,752
14,400
18,470
17,294
25,389
13,856
5,317
* Presented as unaudited required supplementary information.
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
2022*
30,484 $
35,958
17,807
22,835
22,016
33,375
20,988
23,841
7,479
2023
33,423
36,559
20,603
25,328
23,958
38,291
24,657
38,977
28,764
7,091
$ 277,651
21,757
$ 556,978
Years
1
4.1%
2
12.9%
3
13.1%
4
11.9%
5
9.5%
6
6.0%
7
7.3%
8
8.5%
9
2.8%
10
7.8%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Casualty - Claims Made
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
2014*
53,929 $
$
2015*
55,386 $
55,006
2016*
58,152 $
47,831
59,992
2017*
55,350 $
42,206
67,760
60,572
2018*
51,554 $
39,906
69,493
62,450
66,128
2019*
53,841 $
39,653
67,728
62,714
62,416
62,918
2020*
53,783 $
39,619
64,730
57,450
56,468
61,712
60,278
2021*
52,619 $
38,609
65,078
59,907
48,457
52,224
56,785
51,219
2022*
52,796 $
37,578
61,876
61,546
47,692
46,500
46,853
45,854
58,289
2023
52,557 $
37,332
61,881
60,340
43,912
43,969
40,878
38,946
55,316
54,679
$ 489,810
Total IBNR
1,335
935
1,452
3,053
4,611
10,846
18,725
22,443
34,438
40,398
Total
Claims
1,306
1,338
1,507
1,648
1,394
1,513
1,297
1,224
1,139
1,077
2014*
2015*
$
1,705 $
9,775 $
2,215
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2016*
27,923 $
10,738
2,060
2017*
35,755 $
16,774
14,558
2,455
2018*
40,080 $
20,920
27,465
11,350
1,964
2019*
44,127 $
28,795
39,370
22,728
11,965
1,839
2020*
46,122 $
32,241
47,999
36,522
18,840
8,123
1,488
2021*
50,714 $
33,529
52,846
42,918
24,918
14,117
5,687
999
2022*
51,063 $
34,671
53,737
47,087
27,351
19,930
10,412
5,615
2,088
2023
51,078
35,408
56,342
50,623
31,002
27,133
16,537
8,661
8,836
1,421
$ 287,041
4,795
$ 207,564
* Presented as unaudited required supplementary information.
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Years
1
3.8%
2
16.1%
3
17.4%
4
15.7%
5
12.6%
6
8.0%
7
3.6%
8
5.3%
9
1.3%
10
0.0%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
76
Casualty - Transportation
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
2014*
38,361 $
$
2015*
33,015 $
38,561
2016*
36,452 $
46,258
50,430
2017*
38,590 $
47,021
53,519
55,640
2018*
40,202 $
46,395
54,105
53,641
57,597
2019*
40,508 $
45,162
52,277
45,017
54,592
58,297
2020*
41,156 $
45,525
52,818
43,764
38,719
56,129
43,573
2021*
41,974 $
45,807
53,915
45,351
36,468
43,976
35,524
51,322
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
2022*
42,067 $
46,685
55,718
46,742
35,442
41,925
27,665
51,581
60,862
2023
41,940 $
47,466
56,515
47,619
35,776
44,236
28,856
47,913
53,680
66,863
Total $ 470,864
Total IBNR
274
570
959
1,075
1,538
2,996
4,251
6,990
14,840
16,584
Claims
3,099
3,188
3,944
3,640
3,405
3,318
1,647
2,318
2,708
2,488
2014*
$
7,125 $
2015*
13,933 $
6,984
2016*
19,676 $
20,709
8,923
2017*
27,457 $
29,554
18,354
7,979
* Presented as unaudited required supplementary information.
2018*
33,190 $
37,222
30,354
17,070
6,980
2019*
38,282 $
39,339
38,001
24,090
12,827
7,148
2020*
40,006 $
41,345
43,564
30,260
19,216
15,852
3,986
2023
41,564
46,159
54,245
43,891
30,916
35,546
20,749
25,886
18,296
7,407
Total $ 324,659
2,021
Liabilities for losses and loss adjustment expenses, net of reinsurance $ 148,226
2022*
41,528 $
45,002
52,555
41,064
28,844
26,422
12,035
15,345
6,442
2021*
40,427 $
42,626
47,488
36,141
24,503
21,120
7,876
5,341
All outstanding liabilities before 2014, net of reinsurance
Years
1
14.8%
2
19.3%
3
16.8%
4
16.9%
5
12.2%
6
7.9%
7
5.4%
8
3.0%
9
2.5%
10
0.1%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Property
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
2014*
56,587 $
$
2015*
49,441 $
59,863
2016*
48,801 $
56,103
62,900
2017*
48,761 $
53,958
55,594
90,803
2018*
49,217 $
52,720
55,384
83,273
89,091
2019*
49,444 $
53,111
55,930
84,961
83,457
71,232
2020*
49,479 $
52,781
55,424
82,671
79,961
65,189
118,247
2021*
49,520 $
52,878
55,383
82,319
80,470
61,116
110,466
135,447
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total
2014*
30,550 $
$
2015*
43,380 $
32,184
2016*
46,148 $
49,348
33,134
2017*
46,528 $
50,197
46,921
41,314
2018*
47,799 $
51,290
51,371
66,818
37,048
2019*
49,027 $
52,078
53,006
74,415
68,264
30,703
2020*
49,259 $
52,342
54,328
78,360
72,357
51,740
43,192
2021*
49,317 $
52,400
54,747
80,581
75,253
55,092
79,660
57,272
2022*
49,468 $
53,359
55,536
81,912
79,093
59,901
108,546
116,424
138,756
2023
49,413 $
54,065
55,385
81,677
79,234
61,185
108,363
115,587
119,877
184,252
$ 909,038
Total IBNR
2
6
34
517
1,177
975
6,190
7,512
18,613
51,040
Claims
4,564
4,077
3,379
2,893
2,339
2,458
2,861
3,103
2,940
2,881
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2022*
49,339 $
53,208
55,215
80,958
76,378
57,038
88,401
89,174
44,667
2023
49,400
53,369
55,247
80,965
77,696
59,015
96,350
99,671
84,235
111,137
$ 767,085
923
$ 142,876
* Presented as unaudited required supplementary information.
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Years
1
51.6%
2
31.3%
3
6.5%
4
3.5%
5
2.3%
6
1.2%
7
0.4%
8
0.6%
9
0.2%
10
0.1%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
77
Surety
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2023
Cumulative
Number of
Reported
2015*
2016*
2017*
2018*
2019*
2020*
2021*
2022*
2023
2014*
16,450 $
$
8,106 $
5,225 $
4,427 $
4,267 $
16,958
12,957
18,928
11,113
11,062
16,127
10,456
9,351
8,641
16,765
4,319 $
9,792
8,895
8,798
7,227
14,785
4,266 $
9,521
8,391
8,116
4,564
7,205
19,241
4,227 $
9,275
7,948
8,034
3,947
5,053
14,840
18,540
4,230 $
8,580
8,134
7,769
3,996
4,062
12,378
11,724
20,185
Total
$
Total IBNR
2
27
53
67
85
390
3,158
7,411
6,192
19,993
4,219 $
8,586
7,963
7,644
3,760
3,453
11,516
12,127
11,490
21,242
92,000
Claims
1,364
1,253
1,392
1,869
1,373
1,205
954
907
951
468
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
AY
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014*
2015*
2016*
2017*
2018*
2019*
2020*
2021*
2022*
2023
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
$
722 $
4,283 $
3,192
4,166 $
6,719
3,087
4,059 $
7,695
5,817
979
4,131 $
9,436
6,299
2,862
1,835
4,234 $
9,183
7,640
7,062
2,588
336
4,214 $
9,186
8,086
7,221
2,368
2,433
835
4,197 $
9,168
7,673
7,362
2,536
2,765
2,719
1,197
4,218 $
8,462
7,946
7,372
3,020
3,039
3,828
3,229
(241)
* Presented as unaudited required supplementary information.
Total
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
$
4,213
8,575
7,795
7,342
2,079
3,093
3,907
3,075
4,161
841
45,081
(106)
46,813
Years
1
18.3%
2
37.4%
3
10.2%
4
7.1%
5
3.4%
6
(5.5)%
7
0.6%
8
(3.5)%
9
0.9%
10
(0.1)%
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
78
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:
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
Total gross liability for unpaid loss and settlement expenses
DETERMINATION OF IBNR
$
$
$
$
$
December 31, 2023
December 31, 2022
482,569
556,978
207,564
148,226
142,876
46,813
66,111
10,608
26,931
1,688,676
53,177
149,502
292,803
68,126
152,714
51,526
(10,608)
109
757,349
2,446,025
$
$
$
$
$
461,527
467,592
211,296
141,737
149,901
40,116
61,752
11,250
30,377
1,575,548
46,674
138,822
298,930
78,456
137,613
50,737
(11,250)
107
740,089
2,315,637
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 estimate
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.
79
DEVELOPMENT OF IBNR RESERVES
The following table summarizes our prior accident years’ loss reserve development by segment for 2023, 2022 and 2021:
(in thousands)
Casualty
Property
Surety
Total
2023
2022
$ (78,498) $ (87,225) $ (108,632)
(10,981)
(5,850)
$ (108,547) $ (122,579) $ (125,463)
(21,196)
(8,853)
(24,927)
(10,427)
2021
A discussion of significant components of reserve development for the three most recent calendar years follows:
2023. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2023. The
casualty segment contributed $78 million in favorable development. Accident years 2015 through 2022 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 a favorable rate
environment within many of our casualty sublines. Nearly all of our casualty products contributed to the favorable development.
Within the primary occurrence grouping, the general liability product contributed $13 million to our favorable development. Within
the excess occurrence grouping, commercial excess developed favorably by $15 million and our personal umbrella product developed
favorably by $11 million. Within the claims made grouping, professional services coverages developed favorably by $10 million and
executive products developed favorably by $12 million. Transportation contributed $4 million for the year.
Marine contributed $4 million of the $21 million total favorable property development, primarily in accident years 2020 through
2022. Commercial property was favorable by $11 million.
The surety segment experienced favorable development of $9 million. The majority of the favorable development was from
accident year 2022. Commercial and contract surety products were the main contributors with favorable development of $6 million
and $3 million, respectively.
2022. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2022. The
casualty segment contributed $87 million in favorable development. Accident years 2016 and 2018 through 2021 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 $28 million to our favorable development. Small commercial products were favorable by $5
million. Within the excess occurrence grouping, commercial excess was favorable by $6 million and our personal umbrella product
developed favorably by $4 million. Within the claims made grouping, professional services coverages developed favorably by $19
million and executive products developed favorably by $4 million. Transportation experienced favorable development of $6 million.
Marine contributed $17 million of the $25 million total favorable property development. Accident years 2019 through 2021
contributed to the marine products’ favorable development. Hawaii homeowners contributed $2 million of favorable development.
The surety segment experienced favorable development of $10 million. The majority of the favorable development was from
accident years 2019 through 2021. Contract surety had favorable development of $5 million and commercial surety had favorable
development of $4 million.
2021. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2021.
Development from the casualty segment totaled $109 million. Favorable development was experienced across accident years 2014
through 2020, with the largest amounts attributable to accident years 2018 through 2020. 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, our underwriters’ ability to select risk and an increasing rate environment. Within the primary occurrence
grouping, the general liability product contributed $25 million to our favorable development and small commercial was favorable by
$8 million. Within the excess occurrence grouping, commercial excess was favorable by $11 million and personal umbrella developed
favorably by $10 million. Within the claims made grouping, professional services coverages developed favorably by $14 million and
executive products developed favorably by $6 million. Transportation had $20 million of favorable development.
Our marine product was the predominant driver of the favorable development in the property segment, accounting for $7 million
of the $11 million total favorable development for the segment. Accident years 2019 and 2020 made the largest contribution.
Commercial property was favorable by $2 million.
80
The surety segment experienced $6 million of favorable development. The majority of the favorable development came from the
2019 and 2020 accident years. Contract surety was the main contributor with favorable development of $5 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, 2023, 2022 and 2021:
(in thousands)
Loss and LAE Payments (Cumulative):
2023
2022
2021
Gross
Ceded
Net
$ 144,882 $ 142,377 $ 141,768
(69,576)
72,192
(70,130)
74,752 $
(69,696)
72,681 $
$
Unpaid Losses and LAE at End of Year:
Gross
Ceded
Net
$
$
25,180 $
(5,490)
19,690 $
26,871 $
(5,786)
21,085 $
25,747
(5,718)
20,029
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 2023, our reserves for asbestos, environmental and mass tort exposures decreased slightly.
While our environmental exposure is limited, the ultimate liability for this exposure is difficult to assess because of the
extensive and complicated litigation involved in the settlement of claims and evolving legislation on issues such as joint and several
liability, retroactive liability and standards of cleanup. Additionally, we participate primarily in the excess layers of coverage, where
accurate estimates of ultimate loss are more difficult to derive than for primary coverage.
7.
INCOME TAXES
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
are summarized below.
81
(in thousands)
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses
Unearned premium offset
Net unrealized depreciation of securities
Deferred compensation
Share-based compensation expense
Capitalized research and development costs
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 asset
2023
2022
25,491 $
32,763
—
4,170
3,556
4,970
3,113
2,949
77,012 $
—
77,012 $
10,981 $
30,779
2,870
1,272
2,745
1,552
10,351
590
61,140 $
15,872 $
23,788
27,158
19,839
4,058
3,202
2,544
3,026
938
84,553
—
84,553
—
26,850
2,681
1,909
3,083
1,543
7,399
819
44,284
40,269
$
$
$
$
$
$
Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2023, 2022 and 2021,
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:
Excess tax benefit on share-based compensation
Tax-exempt interest income
Dividends received deduction
Tax credit
ESOP dividends paid deduction
Nondeductible expenses
Other items, net
Total
$
2023
2022
2021
$
79,226
21.0 % $ 151,342
21.0 % $
72,307
21.0 %
(3,774)
(1,092)
(938)
(3,644)
(1,591)
3,351
1,116
72,654
(1.0) %
(0.3) %
(0.2) %
(1.0) %
(0.4) %
0.9 %
0.3 %
(4,491)
(1,143)
(912)
(6,204)
(4,171)
1,263
1,583
19.3 % $ 137,267
(0.6) %
(0.2) %
(0.1) %
(0.9) %
(0.6) %
0.2 %
0.2 %
(3,090)
(1,219)
(891)
(4,657)
(1,566)
3,834
249
64,967
(0.9) %
(0.3) %
(0.3) %
(1.3) %
(0.5) %
1.1 %
0.1 %
18.9 %
19.0 % $
Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in
2023 due to lower levels of tax-favored adjustments.
Our net earnings include equity in earnings of unconsolidated investees. 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. No dividends were declared
from unconsolidated investees in 2023, 2022 or 2021, therefore having no impact to their respective effective tax rates.
Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in
2023, 2022 and 2021 resulted in tax benefits of $2 million, $4 million and $2 million, respectively. These tax benefits reduced the
effective tax rate for 2023, 2022 and 2021 by 0.4 percent, 0.6 percent and 0.5 percent, respectively.
82
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 projected 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 2023, 2022 and 2021 amounted to $50 million, $190 million and $39 million,
respectively. The larger amount paid in 2022 was the result of taxes paid on the sale of our investment in Maui Jim. See note 13 for
more information on the sale.
Although we are not currently under audit by the IRS, tax years 2020 through 2023 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 $23 million, $18 million and $18 million for 2023, 2022 and 2021, respectively.
During 2023, the ESOP purchased 65,773 shares of RLI Corp. stock on the open market at an average price of $136.42 ($9
million) relating to the contribution for plan year 2022. Shares held by the ESOP as of December 31, 2023, totaled 2,447,357 and are
treated as outstanding in computing our earnings per share. During 2022, the ESOP purchased 87,367 shares of RLI Corp. stock on the
open market at an average price of $103.01 ($9 million) relating to the contribution for plan year 2021. During 2021, the ESOP
purchased 65,815 shares of RLI Corp. stock on the open market at an average price of $107.95 ($7 million) relating to the contribution
for plan year 2020. The above-mentioned ESOP purchases relate only to our annual contributions to the plan and do not include
amounts or shares resulting from the reinvestment of dividends.
Annual awards are provided to executives, managers and associates through our incentive plans, provided certain strategic and
financial goals are met. Annual expenses for these incentive plans totaled $38 million, $24 million and $39 million for 2023, 2022 and
2021, 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, 2023, the trusts’ assets were
valued at $61 million.
STOCK PLANS
Our RLI Corp. Long-Term Incentive Plan (2015 LTIP) was in place from 2015 to 2023. The 2015 LTIP provided for equity-
based compensation, including stock options and restricted stock units, up to a maximum of 4,000,000 shares of common stock
(subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 3,291,388 stock
options under the 2015 LTIP. The 2015 LTIP was replaced in 2023.
83
In 2023, our shareholders approved the 2023 RLI Corp. Long-Term Incentive Plan (2023 LTIP), which provides for equity-
based compensation. In conjunction with the adoption of the 2023 LTIP, effective May 4, 2023, awards were no longer granted under
the 2015 LTIP. Awards under the 2023 LTIP may be in the form of restricted stock, restricted stock units, stock options (incentive or
non-qualified), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2023 LTIP is
limited to employees, directors, consultants and independent contractors of the Company or any affiliate. The granting of awards
under the 2023 LTIP is solely at the discretion of the Human Capital and Compensation Committee of the board of directors or its
delegate. The maximum number of shares of common stock available for distribution under the 2023 LTIP is 4,004,891 shares
(subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted 195,538
awards under the 2023 LTIP.
Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to
equity awards was $9 million, $9 million and $6 million for 2023, 2022 and 2021, respectively. The total income tax benefit was $1
million for 2023, 2022 and 2021. Total unrecognized compensation expense relating to outstanding and unvested awards was $6
million, which will be recognized over the weighted average vesting period of 2.69 years.
Stock Options
Under the 2023 LTIP, as under the 2015 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 or more, 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 2023:
Outstanding as of January 1, 2023
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2023
Exercisable at December 31, 2023
Weighted
Average
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value
(in 000’s)
Options
1,695,660 $
201,125
(246,490)
(8,585)
1,641,710 $
872,462 $
Exercise Price
82.42
135.46
57.27
96.99
92.62
78.24
4.62 $
3.46 $
66,995
47,884
The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $19 million,
$22 million and $12 million during 2023, 2022 and 2021, respectively.
The fair values 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
2023
$ 27.24
2022
$ 21.43
2021
$ 17.11
3.59 %
2.28 %
22.97 %
4.96 years
2.95 %
2.50 %
22.89 %
5.05 years
0.75 %
2.06 %
22.73 %
4.97 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
84
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 or more. 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 $3 million, $2 million and $2
million during 2023, 2022 and 2021, respectively.
Nonvested at January 1, 2023
Granted
Reinvested
Vested
Forfeited
Nonvested at December 31, 2023
Weighted
Average
Grant Date
Fair Value
109.51
136.04
131.11
103.61
118.00
125.16
RSUs
44,208 $
22,013
1,058
(19,957)
(2,229)
45,093 $
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, 2023, 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 $273 million, $250 million and $225 million as of December 31, 2023, 2022 and
2021, respectively, compared to actual statutory capital and surplus of $1.5 billion, $1.4 billion and $1.2 billion, respectively, for these
same periods.
Year-end statutory surplus for 2023 presented in the table below includes $294 million of RLI Corp. stock (cost basis of $65
million) held by Mt. Hawley Insurance Company, compared to $327 million and $271 million in 2022 and 2021, respectively. The
Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our GAAP consolidated
financial statements.
The following table includes selected information for our insurance subsidiaries for the year ended and as of December 31:
(in thousands)
Consolidated net income, statutory basis
Consolidated surplus, statutory basis
2023
2022
2021
$ 231,321 $ 229,111 $ 207,550
$ 1,520,135 $ 1,407,925 $ 1,240,649
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, 2023, our holding company had $1.4 billion in equity. This includes
85
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 $145 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 2023, 2022 and 2021, our principal insurance subsidiary paid ordinary dividends totaling $145 million, $13 million and $70
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 2021, our principal insurance subsidiary sought and received regulatory approval prior to the
payment of extraordinary dividends totaling $110 million. No extraordinary dividends were paid in 2023 or 2022. As of December 31,
2023, $7 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
COMMITMENTS
As of December 31, 2023, we had $5 million of unfunded commitments related to our investments in private funds and low-
income housing tax credit investments. See note 2 for more information on our investments in private funds and low-income housing
tax credits.
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.
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 costs for future minimum lease payments are recognized on a straight-line basis over the lease terms. Variable lease
costs are expensed in the period in which the obligations are incurred. Sublease income is recognized on a straight-line basis over the
sublease term.
The components of lease expense and other lease information as of and during the years ended December 31, 2023, 2022 and
2021 were as follows:
86
(in thousands)
Operating lease cost
Variable lease cost
Sublease income
Total lease cost
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases
ROU assets obtained in exchange for new operating lease liabilities
Reduction to ROU assets resulting from reduction to lease liabilities
Other non-cash reductions to ROU assets
2023
2022
2021
4,935
1,469
(469)
5,935
$
$
4,957
1,423
(555)
5,825
$
$
5,131
1,433
(508)
6,056
5,407
$
5,435
$
5,738
5,805
300
—
$
$
$
2,694
2
73
$
$
$
4,828
1,042
48
$
$
$
$
$
$
(in thousands)
Operating lease ROU assets
Operating lease liabilities
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
2023
13,666
14,880
$
$
2022
12,766
14,499
$
$
6.08 years
3.21 %
4.21 years
2.11 %
Future minimum lease payments under non-cancellable leases as of December 31, 2023 were as follows:
(in thousands)
2024
2025
2026
2027
2028
Thereafter
Total future minimum lease payments
Less imputed interest
Total operating lease liability
12. OPERATING SEGMENT INFORMATION
2023
4,090
3,202
2,313
1,544
1,266
4,503
16,918
(2,038)
14,880
$
$
$
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 management liability 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. 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, hurricane, earthquake, difference in conditions and marine
coverages. We also offer homeowners’ coverages in Hawaii. Property insurance results are subject to the variability introduced by
perils such as earthquakes, fires, hurricanes and other storms. Our major catastrophe exposure is to losses caused by earthquakes,
primarily on the West Coast, and windstorms affecting commercial properties in coastal regions of the United States. We limit our net
aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance
and maintaining policy terms and conditions throughout insurance 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 medium-sized contract surety coverages, including payment and performance
bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries,
including the financial, healthcare, as well as onshore and offshore energy, petrochemical and refining industries. We also offer a
variety of transactional bonds including, but not limited to 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
87
adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees commercial
contractors’ contractual obligations for a specific construction 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 23 percent share in earnings of Prime Holdings Insurance Services, Inc., a privately held
insurance company which specializes in hard-to-place risks. Additionally, we owned 40 percent of Maui Jim, a privately held
company which operates in the sunglass and optical goods industries, which we sold in 2022. See note 13 for more information on the
sale. Our investment in Maui Jim was carried at the holding company, as it was 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 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
2023
2022
2021
401,530
134,430
307,886
124,718
$ 758,346 $ 711,832 $ 633,639
231,837
115,427
$ 1,294,306 $ 1,144,436 $ 980,903
68,862
64,222
65,258
$ 1,511,994 $ 1,697,992 $ 1,179,245
86,078
588,515
(121,037)
120,383
32,518
64,787
2023
2022
2021
418,032
172,062
14,319
604,413
$ 381,436
120,745
12,195
$ 514,376
$ 311,627
129,924
15,051
$ 456,602
221,589
116,344
80,392
418,325
$ 204,397
95,203
70,032
$ 369,632
$ 179,354
72,008
66,106
$ 317,468
$
$
$
$
$
59,246
26,808
12,329
$
98,383
$ 1,121,121
$
52,210
19,416
10,586
$
82,212
$ 966,220
$
47,139
18,605
11,163
$
76,907
$ 850,977
88
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
$
2023
59,479 $
86,316
27,390
2022
73,789 $
72,522
31,905
2021
95,519
11,300
23,107
$ 173,185 $ 178,216 $ 129,926
68,862
64,222
65,258
(7,677)
(13,330)
37,060
$ 377,265 $ 720,678 $ 344,321
64,967
$ 304,611 $ 583,411 $ 279,354
86,078
588,515
(121,037)
(8,047)
(12,900)
9,853
120,383
32,518
64,787
(7,301)
(15,917)
9,610
137,267
72,654
The following table further summarizes revenues by major product type within each segment:
NET PREMIUMS EARNED
(in thousands)
CASUALTY
Commercial excess and personal umbrella
Commercial transportation
General liability
Professional services
Small commercial
Executive products
Other casualty
Total
PROPERTY
Commercial property
Marine
Other property
Total
SURETY
Commercial
Transactional
Contract
Total
Grand total
Year ended December 31,
2022
2023
2021
$
$
286,178 $
103,719
103,066
99,596
72,920
24,687
68,180
758,346 $
96,992
100,374
95,187
67,673
26,606
71,079
253,921 $ 219,437
83,352
90,853
88,855
64,660
21,873
64,609
711,832 $ 633,639
$
$
244,798 $
129,428
27,304
401,530 $
163,078 $ 107,941
97,745
113,208
26,151
31,600
307,886 $ 231,837
$
49,707 $
47,983
36,740
134,430 $
43,738
43,982
27,707
$
124,718 $ 115,427
$ 1,294,306 $ 1,144,436 $ 980,903
47,652 $
45,826
31,240
13. ACQUISITONS AND DISPOSITIONS
On September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim to Kering Eyewear for cash
proceeds of $687 million. A net realized gain of $571 million was recognized during 2022, and the payout of the working capital
escrow during 2023 resulted in the recognition of an additional $14 million realized gain. The gains were recorded in the net realized
gain line item of the statement of earnings.
89
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 sheets of RLI Corp. and subsidiaries (the "Company") as of December 31,
2023 and 2022, the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows, for
each of the three years in the period ended December 31, 2023, 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, 2023, 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, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2023, 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, 2023,
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 Controls 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the 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 audits 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 audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
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.
90
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) relate 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 We compared our 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 23, 2024
We have served as the Company’s auditor since 2020.
91
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in accountants or disagreements with accountants on any matters of accounting principles or practices or
financial statement disclosure.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation,
our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective
as of December 31, 2023.
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, 2023.
Our internal control over financial reporting as of December 31, 2023 has been audited by Deloitte & Touche LLP (PCAOB ID
No. 34), an independent registered public accounting firm, as stated in their report on page 90 of this report.
There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2023
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Securities Trading Plans of Executive Officers and Directors
Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables prearranged transactions in Company
securities in a manner that avoids concerns about initiating transactions at a future date while possibly in possession of material
nonpublic information. Our Insider Trading Policy permits our executive officers and directors to enter into trading plans designed to
comply with Rule 10b5-1.
During the year ended December 31, 2023, no director or officer of the Company adopted or terminated a Rule 10b5-1 trading
arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Items 10. Directors, Executive Officers and Corporate Governance
PART III
Information required for Item 10 is incorporated by reference to the sections of the proxy statement entitled: “Executive
Management,” “Proposal One: Election of Directors,” “Corporate Governance and Board Matters” and “Committees of the Board of
Directors.”
92
Items 11. Executive Compensation
Information required for Item 11 is incorporated by reference to the sections of the proxy statement entitled: “Board Meetings
and Compensation,” “Human Capital and Compensation Committee Report,” “Compensation Discussion & Analysis,” “How the
HCC Operates,” “Overview of RLI Executive Compensation,” “Annual Compensation,” “Long-Term Compensation,” “Executive
Compensation,” “Ratio of CEO to Median Employee Total Compensation,” “Pay for Performance” and “Safeguards Against
Unnecessary or Excessive Compensation Risk.”
Items 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required for Item 12 is incorporated by reference to the sections of the proxy statement entitled: “Share Ownership
of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Items 13. Certain Relationships and Related Transactions and Director Independence
Information required for Item 13 is incorporated by reference to the section of the proxy statement entitled: “Corporate
Governance and Board Matters.”
Items 14. Principal Accountant Fees and Services
Information required for Item 14 is incorporated by reference to the section of the proxy statement entitled: “Fees Paid to the
Independent Registered Public Accounting Firm.”
Item 15. Exhibits and Financial Statement Schedules
Item 15. (a)(1) Financial Statements
PART IV
The following consolidated financial statements, notes thereto and related information of RLI Corp. are included in Item 8.
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
Item 15. (a)(2) Financial Statement Schedules
I. Summary of Investments - Other than Investments in Related Parties at December 31, 2023.
II. Condensed Financial Information of Registrant, as of and for the three years ended December 31, 2023.
III. Supplementary Insurance Information, as of and for the three years ended December 31, 2023.
IV. Reinsurance for the three years ended December 31, 2023.
V. Valuation and Qualifying Accounts for the three years ended December 31, 2023.
VI. Supplementary Information Concerning Property-Casualty Insurance Operations for the three years ended
December 31, 2023.
Page
53
54
55
56
57
90
Page
96
97-99
100-101
102
103
104
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.
93
Item 15. (a) (3) Exhibits
The following is a list of the exhibits filed as part of this Form 10-K. The exhibit numbers followed by an asterisk (*) indicate
exhibits that are management contracts or compensatory plans or arrangements.
Description of Document
Form
Filing Date
Herewith
Incorporated by Reference
Filed or Furnished
Exhibit
Number
3.1
3.2
4.1
Amended and Restated Certificate of Incorporation
By-Laws
Description of Securities
10.1
RLI Corp. Nonqualified Agreement*
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
RLI Corp. Nonemployee Directors’ Deferred Compensation
Plan, as amended*
RLI Corp. Executive Deferred Compensation Plan, as
amended*
RLI Corp. 2015 Long-Term Incentive Plan, as amended*
RLI Corp. 2023 Long-Term Incentive Plan, as amended*
RLI Corp. Annual Incentive Compensation Plan, as
amended*
Management Incentive Program Guideline*
RLI Underwriting Profit Program Guideline*
Market Value Potential (MVP), Executive Incentive Program
Guideline*
10-Q
8-K
July 26, 2023
May 8, 2018
10-K
February 21, 2020
10-Q
July 26, 2023
10-Q
July 26, 2023
10-Q
10-Q
10-Q
July 24, 2020
July 26, 2023
July 24, 2020
10-K
February 24, 2023
10-K
February 24, 2023
10-K
February 24, 2023
10.10
RLI Corp. Director and Officer Indemnification Agreement
10-Q
October 24, 2018
10.11
Advances, Collateral Pledge, and Security Agreement
(Federal Home Loan Bank of Chicago)
8-K
September 26, 2014
10.12
Credit Agreement (PNC Bank, National Association)
8-K
March 30, 2023
21.1
Subsidiaries of the Registrant
23.1
Consent of Deloitte & Touche LLP
31.1
31.2
32.1
32.2
97.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
RLI Corp. Policy on Recoupment of Incentive
Compensation (Clawback Policy)
94
X
X
X
X
X
X
X
X
Description of Document
Form
Filing Date
Herewith
Incorporated by Reference
Filed or Furnished
X
X
X
X
X
X
X
Exhibit
Number
101.INS
Inline XBRL Instance Document – the instance document
does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted as Inline XBRL
and contained in Exhibit 101)
Item 15. (b)
The exhibits are listed in Item 15. (a)(3) above.
Item 15. (c)
The financial statement schedules are listed in Item 15. (a)(2) above.
Item 16. Form 10-K Summary
None.
95
RLI CORP. AND SUBSIDIARIES
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2023
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
$
$
$
312,632
60,763
4,800
460,551
308,458
1,273,187
634,000
3,054,391
3,054,391
$
$
$
117,448
236,574
354,022
171,347
56,009
3,635,769
$
$
$
$
$
$
308,031
59,826
3,882
425,285
281,182
1,225,019
552,624
2,855,849
2,855,849
196,202
393,839
590,041
171,347
59,081
3,676,318
$
$
$
$
$
$
308,031
59,826
3,882
425,285
281,182
1,225,019
552,624
2,855,849
2,855,849
196,202
393,839
590,041
171,347
59,081
3,676,318
* 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 90 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.
96
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
(in thousands, except share data)
ASSETS
Cash
Short-term investments, at cost which approximates fair value
Accounts receivable, affiliates
Investments in subsidiaries
Fixed income:
Available-for-sale, at fair value
(amortized cost of $78,431 and allowance for credit losses of $0 in 2023)
(amortized cost of $250,904 and allowance for credit losses of $0 in 2022)
Property and equipment, at cost, net of accumulated depreciation of $1,375 in 2023 and
$1,340 in 2022
Income taxes - deferred
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Income taxes payable - current
Debt
Interest payable on debt
Other liabilities
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 200,000,000)
(68,570,261 shares issued and 45,640,047 shares outstanding in 2023)
(68,399,966 shares issued and 45,469,752 shares outstanding in 2022)
Paid-in capital
Accumulated other comprehensive earnings
Retained earnings
Deferred compensation
Treasury stock, at cost (22,930,214 shares in 2023 and 2022)
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
2023
2022
$
$
1,048
76,926
2,393
1,312,323
1,051
2,229
1,572
1,084,055
67,029
237,282
1,375
3,101
6,170
1,470,365
778
50,000
157
5,916
56,851
$
$
$
$
$
$
686
362,345
(166,303)
1,609,785
13,539
(406,538)
1,413,514
1,470,365
1,410
3,204
3,840
1,334,643
1,823
149,863
2,153
3,463
157,302
684
352,391
(229,076)
1,446,341
12,015
(405,014)
1,177,341
1,334,643
$
$
$
$
$
$
See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms
starting on page 90 of this report.
97
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
Earnings before income taxes
Income tax expense (benefit)
Net earnings 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:
2023
10,351
14,134
—
(15,917)
(6,543)
2,025
(1,802)
3,827
300,784
304,611
$
$
$
$
2022
6,245
570,888
372
(12,900)
(7,622)
556,983
108,699
448,284
135,127
583,411
$
$
$
$
2021
2,102
(625)
22,786
(13,330)
(7,616)
3,317
(1,585)
4,902
274,452
279,354
$
$
$
$
Unrealized holding gains (losses) arising during the period
Less: reclassification adjustment for (gains) losses included in net
earnings
Other comprehensive earnings (loss) - parent only
Equity in other comprehensive earnings (loss) of subsidiaries/investees
Other comprehensive earnings (loss)
Comprehensive earnings
$
1,754
$
(12,188)
$
(1,996)
—
1,754
61,019
62,773
367,384
115
(12,073)
(266,829)
(278,902)
304,509
$
$
$
$
$
$
500
(1,496)
(57,392)
(58,888)
220,466
$
$
$
See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms
starting on page 90 of this report.
98
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands)
Cash flows from operating activities
Earnings before equity in net earnings of subsidiaries
Adjustments to reconcile net losses to net cash provided by (used in)
operating activities:
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
Net cash used in operating activities
Cash flows from investing activities
Purchase of:
Fixed income, available-for-sale
Other
Sale of:
Fixed income, available-for-sale
Equity method investee
Other
Property and equipment
Call or maturity of:
Fixed income, available-for-sale
Net 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
Proceeds from issuance of debt
Repayment of debt
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
2023
2022
2021
$
3,827
$
448,284
$
4,902
(14,134)
35
1,350
(821)
(1,409)
(570,888)
64
1,403
(724)
(19,484)
—
(11,152)
$
(372)
(141,717)
(89,501)
(1,832)
$ (1,356,177)
(1,420)
—
14,134
54
—
263,939
(74,696)
145,000
257,098
1,245
50,000
(150,000)
(152,508)
5,314
(245,949)
(3)
1,051
1,048
1,373
686,566
221
298
1,192,050
(2,229)
13,000
533,682
(465)
—
—
(397,323)
5,441
(392,347)
(382)
1,433
1,051
$
$
$
$
$
$
$
$
$
$
$
$
625
68
3,966
(3,404)
5,901
(22,786)
(10,728)
(33,373)
(2,904)
5,306
—
1,245
—
2,878
—
180,000
153,152
1,838
—
—
(147,422)
4,212
(141,372)
1,052
381
1,433
$
$
$
$
$
$
$
Interest paid on outstanding debt amounted to $8 million, $7 million and $7 million for 2023, 2022 and 2021, respectively. See
Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms
starting on page 90 of this report.
99
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 2023, 2022 and 2021
(in thousands)
Year ended December 31, 2023
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2022
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2021
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Deferred policy Unpaid losses Unearned
premiums,
gross
and settlement
expenses, gross
acquisition
costs
Net
premiums
earned
Incurred losses
and settlement
expenses
current year
$
73,334 $ 2,043,556 $ 491,479 $ 758,346 $
46,366
26,866
314,945
85,902
401,530
134,430
301,907
100,562
$
146,566 $ 2,446,025 $ 892,326 $ 1,294,306 $
$
66,285 $ 1,929,091 $ 466,178 $ 711,832 $
36,767
24,807
237,369
81,538
307,886
124,718
293,737
92,809
$
127,859 $ 2,315,637 $ 785,085 $ 1,144,436 $
$
55,760 $ 1,760,469 $ 438,248 $ 633,639 $
25,764
22,029
168,209
73,987
231,837
115,427
196,369
86,717
$
103,553 $ 2,043,555 $ 680,444 $ 980,903 $
496,530
193,258
23,172
712,960
468,661
145,672
22,622
636,955
420,259
140,905
20,901
582,065
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 90 of this report.
100
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(continued)
As of and for the years ended December 31, 2023, 2022 and 2021
(in thousands)
Year ended December 31, 2023
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2022
Casualty segment
Property segment
Surety segment
RLI Insurance Group
Year ended December 31, 2021
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
$
(78,498) $
(21,196)
(8,853)
221,589 $
116,344
80,392
$ (108,547) $
418,325 $
788,982
59,246 $
500,057
26,808
12,329
138,708
98,383 $ 1,427,747
$
(87,225) $
(24,927)
(10,427)
204,397 $
95,203
70,032
$ (122,579) $
369,632 $
744,607
52,210 $
364,644
19,416
132,285
10,586
82,212 $ 1,241,536
$ (108,632) $
179,354 $
(10,981)
(5,850)
72,008
66,106
$ (125,463) $
317,468 $
674,709
47,139 $
262,816
18,605
11,163
120,008
76,907 $ 1,057,533
See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.
101
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV—REINSURANCE
Years ended December 31, 2023, 2022 and 2021
(in thousands)
2023
Casualty segment
Property segment
Surety segment
RLI Insurance Group premiums earned
2022
Casualty segment
Property segment
Surety segment
RLI Insurance Group premiums earned
2021
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
$
909,081 $ 178,018 $
619,250
142,713
218,265
8,830
$ 1,671,044 $ 405,113 $
27,283 $
545
547
758,346
401,530
134,430
28,375 $ 1,294,306
$
863,530 $ 186,469 $
430,010
131,625
122,415
7,525
$ 1,425,165 $ 316,409 $
34,771 $
291
618
711,832
307,886
124,718
35,680 $ 1,144,436
$
788,741 $ 185,433 $
310,630
122,975
79,094
7,866
$ 1,222,346 $ 272,393 $
30,331 $
301
318
30,950 $
633,639
231,837
115,427
980,903
3.6 %
0.1 %
0.4 %
2.2 %
4.9 %
0.1 %
0.5 %
3.1 %
4.8 %
0.1 %
0.3 %
3.2 %
See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.
102
RLI CORP. AND SUBSIDIARIES
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2023, 2022 and 2021
(in thousands)
2023 Allowance for uncollectible reinsurance
Balance
at beginning
of period
Amounts
charged
to expense
Amounts
recovered
(written off)
$
27,323 $
(50) $
(299) $
Balance
at end of
period
26,974
2022 Allowance for uncollectible reinsurance
$
27,243 $
130 $
(50) $
27,323
2021 Allowance for uncollectible reinsurance
$
24,539 $
2,863 $
(159) $
27,243
See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.
103
RLI CORP. AND SUBSIDIARIES
SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Years ended December 31, 2023, 2022 and 2021
(in thousands)
Affiliation with Registrant (1)
2023
2022
2021
2023
2022
2021
Deferred policy
Claims and
claim adjustment
expense reserves
Unearned
premiums,
gross
Net
premiums
earned
Net
investment
income
2,446,025 $ 892,326 $ 1,294,306 $ 120,383
2,315,637 $ 785,085 $ 1,144,436 $ 86,078
2,043,555 $ 680,444 $ 980,903 $ 68,862
acquisition
costs
146,566 $
127,859 $
103,553 $
$
$
$
Claims and claim adjustment
expenses incurred related to: Amortization
of deferred
Prior
acquisition costs
year
418,325
$ (108,547) $
369,632
$ (122,579) $
317,468
$ (125,463) $
Current
year
$ 712,960
$ 636,955
$ 582,065
Paid claims and
claim adjustment
expenses
$
$
$
491,285
374,297
327,453
Net
premiums
written
$ 1,427,747
$ 1,241,536
$ 1,057,533
(1) Consolidated property-casualty insurance operations.
(2) See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.
104
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, Chief Financial Officer
Date: February 23, 2024
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/ Craig W. Kliethermes
By:
/s/ Todd W. Bryant
Craig W. Kliethermes, President & CEO
(Principal Executive Officer)
Todd W. Bryant, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ Kaj Ahlmann
Kaj Ahlmann, Director
By:
/s/ Craig W. Kliethermes
Craig W. Kliethermes, Director
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ Michael E. Angelina
By:
/s/ Paul B. Medini
Michael E. Angelina, Director
Paul B. Medini, Director
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ David B. Duclos
By:
/s/ Jonathan E. Michael
David B. Duclos, Director
Jonathan E. Michael, Director
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ Susan S. Fleming
By:
/s/ Robert P. Restrepo, Jr.
Susan S. Fleming, Director
Robert P. Restrepo, Jr., Director
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ Jordan W. Graham
By:
/s/ Debbie S. Roberts
Jordan W. Graham, Director
Debbie S. Roberts, Director
Date:
February 23, 2024
Date:
February 23, 2024
By:
/s/ Clark C. Kellogg
By:
/s/ Michael J. Stone
Clark C. Kellogg, Director
Michael J. Stone, Director
Date:
February 23, 2024
Date:
February 23, 2024
105
Subsidiaries of the Registrant
The following companies are subsidiaries of the registrant as of December 31, 2023.
Exhibit 21.1
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
Jurisdiction of Percentage
Ownership
Incorporation
Illinois
100 %
Illinois
100 %
Illinois
100 %
California
100 %
Washington
100 %
Illinois
100 %
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-203957 and 333-272204) on Form S-8 of our report
dated February 23, 2024 relating to the financial statements of RLI Corp and the effectiveness of the RLI Corp’s internal control over
financial reporting, appearing in this Annual Report on Form 10-K for the year ended December 31, 2023.
Exhibit 23.1
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 23, 2024
Exhibit 31.1
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION
I, Craig W. Kliethermes, certify that:
I have reviewed this annual report on Form 10-K of RLI Corp.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2024
/s/ Craig W. Kliethermes
Craig W. Kliethermes
President & CEO
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 23, 2024
/s/ Todd W. Bryant
Todd. W Bryant
Chief Financial Officer
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, 2023 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig W. Kliethermes, 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/ Craig W. Kliethermes
Craig W. Kliethermes
President & CEO
February 23, 2024
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, 2023 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
Chief Financial Officer
February 23, 2024