What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-04-24 compared with 2025-10-22 · 123 added, 219 removed, 170 unchanged (67% of the section changed)

3 unchanged sentences

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, reinsurance and surety 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.

These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A.

assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A.

Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2025 and Part II within this report.

4 unchanged sentences

is a U.S.-based, specialty insurance company that underwrites select property, casualty and surety products through three major subsidiaries.

Our focus is on niche markets and developing unique products that are tailored to customers’

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.

5 unchanged sentences

We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments:

property, casualty and surety.

casualty, property and surety.

Growth is measured in terms of gross premiums written, and profitability is analyzed through underwriting income and combined ratios.

The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law.

One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred.

12 unchanged sentences

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, energy and renewable energy industries.

We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the home builders, financial, healthcare, energy and renewable energy industries.

We also offer a variety of transactional bonds, including but not limited to license and permit, notary and court bonds.

5 unchanged sentences

However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline.

Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

Our primary focus will continue to be

on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

Key Performance Measures

2 unchanged sentences

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 are not subtotaled.

Each of these components are presented in the statements of earnings but are not subtotaled.

However, this information is available in total and by segment in note 7 to the unaudited condensed consolidated financial statements in this quarterly report on Form 10-Q, and in note 11 to the consolidated financial statements in our 2025 Annual Report on Form 10-K, regarding operating segment information.

2 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

4 unchanged sentences

Interest expense on debt

Net unrealized gains on equity securities

Net realized (gains) losses

Net unrealized (gains) losses on equity securities

Net realized gains

Net investment income

14 unchanged sentences

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2025 Compared to Nine Months Ended September 30, 2024

Net premiums earned increased 7 percent, driven primarily by products in our casualty and surety segments.

Investment income was up 13 percent, due to an increased average asset base and higher reinvestment rates.

Positive market performance resulted in $43 million of unrealized gains on equity securities in the first nine months of 2025, compared to $87 million in 2024.

Realized gains during the first nine months of 2025 were comprised of $45 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $2 million of realized gains on the fixed income portfolio and $1 million of other realized gains.

This compares to $20 million of realized gains on the equity portfolio, $3 million of realized losses on the fixed income portfolio and $6 million of other realized losses during the first nine months of 2024.

For the Nine Months

Ended September 30,

Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025

Net premiums earned increased 3 percent, driven primarily by products in our casualty segment.

Investment income was up 15 percent, reflecting an increased average asset base and higher reinvestment rates.

Market declines resulted in $39 million of unrealized losses on equity securities in the first three months of 2026, compared to $42 million of unrealized losses for the same period in 2025.

Realized gains in 2026 included $10 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and less than $1 million of realized losses on fixed income securities.

This compares to $15 million of realized gains on equity securities and less than $1 million of realized losses on fixed income securities during the first three months of 2025.

For the Three Months

Ended March 31,

Consolidated Revenues (in thousands)

2 unchanged sentences

Net realized gains

Net unrealized gains on equity securities

Net unrealized gains (losses) on equity securities

Total consolidated revenue

Underwriting income was $193 million on an 84.0 combined ratio for the first nine months of 2025, compared to $188 million on an 83.3 combined ratio in the same period of 2024.

Underwriting results for 2025 were impacted by $26 million of pretax losses from catastrophe events, compared to $67 million in 2024.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $74 million in the first nine months of 2025, compared to $85 million in 2024.

The loss ratio was 45.5 for the first nine months of 2025 and 2024.

The benefit of lower catastrophe losses was offset by lower levels of favorable development on prior years’ loss reserves and a shift in the mix of business towards casualty lines, which tend to have higher non-catastrophe loss ratios than our property and surety products.

Underwriting income was $58 million on an 86.0 combined ratio for the first three months of 2026, compared to $71 million on an 82.3 combined ratio in the same period of 2025.

Underwriting results for 2026 were impacted by $16 million of pretax catastrophe losses, compared to $12 million in 2025.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $35 million in the first three months of 2026, compared to $31 million in 2025.

The loss ratio was 47.0 for the first three months of 2026, compared to 44.5 in 2025.

The benefit of higher levels of favorable development on prior years’ loss reserves was offset by higher catastrophe losses and a shift in the mix of business towards casualty lines, which tend to have higher non-catastrophe loss ratios than our property and surety products.

The expense ratio increased to 39.0 from 37.8.

Increased expenses were driven by continued investments in people and technology, as well as higher acquisition-related costs, which can fluctuate between periods.

Increased expenses were primarily related to continued investments in people and technology.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital.

1 unchanged sentence

These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.

Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime Holdings Insurance Services, Inc.

Equity in earnings of unconsolidated investees relates to our investment in Prime Holdings Insurance Services, Inc.

(Prime), a specialty insurance company.

We recognized $7 million of investee earnings from Prime in the first nine months of 2025 and $8 million in 2024.

Net earnings for the first nine months of 2025 totaled $312 million, compared to $305 million for the same period in 2024.

Higher levels of underwriting income, investment income and realized gains all contributed to the improved results.

Comprehensive earnings totaled $389 million for the first nine months of 2025, compared to $365 million for the first nine months of 2024.

Other comprehensive earnings primarily included net after-tax unrealized gains (losses) from the fixed income portfolio.

Other comprehensive earnings of $76 million in the first nine months of 2025 was primarily attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

We recognized $2 million of investee earnings from Prime in the first three months of 2026, compared to $3 million in 2025.

Net earnings for the first three months of 2026 totaled $55 million, compared to $63 million for the same period in 2025.

The decrease was due to lower levels of underwriting income, partially offset by higher investment income.

Comprehensive earnings totaled $30 million for the first three months of 2026, compared to $93 million for the first three months of 2025.

Other comprehensive earnings (loss) primarily included net after-tax unrealized gains (losses) from the fixed income portfolio.

Other comprehensive loss of $25 million in the first three months of 2026 was primarily attributable to rising interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $30 million of other comprehensive earnings was recognized in 2025.

Gross premiums written increased $24 million for the first nine months of 2025, compared to the same period of 2024, primarily from our casualty segment.

Net premiums earned increased $79 million, also driven by our casualty segment.

Gross premiums written increased $13 million for the first three months of 2026, driven by growth within our casualty segment and reflecting favorable rate movement.

Net premiums earned increased $13 million, also driven by our casualty segment and consistent with the growth in gross premiums written.

Gross Premiums Written

Net Premiums Earned

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(in thousands)

1 unchanged sentence

Commercial transportation

General liability

Professional services

General liability

Small commercial

4 unchanged sentences

Transactional

Gross premiums written for the casualty segment increased $76 million in the first nine months of 2025.

We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth within our personal umbrella distribution channels.

Premium growth for commercial excess and general liability was driven by expanded marketing efforts, while some of our competitors pulled back from the construction market, and increased construction spending in targeted markets.

Other casualty premium was down for the first nine months of 2025, as we exited from various captive programs and reduced our participation on the reinsurance agreement with Prime.

Gross premiums written for the property segment decreased $54 million in the first nine months of 2025.

After several consecutive years of rate increases, rates on commercial property exposures declined in 2025, driven by more intense competition.

However, new opportunities, rate increases and strong sections of the construction market led to $5 million of premium growth for our marine product.

Additionally, some competitors have reduced their appetite for select Hawaii homeowner coverages, which, along with rate increases, has allowed our other property premium to grow.

Gross premiums written for the surety segment increased $1 million in the first nine months of 2025.

Transactional and commercial surety grew as result of continued marketing efforts and new regional bonding requirements.

However, a slowdown in construction spending resulted in a decline in contract surety premium.

Gross premiums written for the casualty segment increased $29 million in the first three months of 2026.

We continued to benefit from positive rate movement across a large portion of our casualty segment.

Personal umbrella continued expansion of its distribution base, while our commercial transportation business benefited from some other carriers reducing their appetite.

The decline in general liability premium was the result of slower construction activity within our targeted market for the year, which created a challenging environment to write business on new projects.

Other casualty premium declined due to increased competition in our binding authority group and our decision to no longer participate in the reinsurance agreement with Prime.

Gross premiums written for the property segment decreased $15 million in the first three months of 2026.

Commercial property declined $18 million as more intense competition drove down rates.

However, new product adjacencies led to $2 million of premium growth for our marine product.

Additionally, growth in other property premiums was driven by rate increases and ongoing efforts to enhance client experience to attract and retain business for our Hawaii homeowners coverages.

Gross premiums written for the surety segment decreased by less than $1 million in the first three months of 2026.

Transactional and contract surety grew as a result of continued marketing efforts.

However, slowdowns in various sectors led to declines in commercial surety.

Underwriting Income

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $15 million in the first nine months of 2025, compared to $27 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $28 million in 2025, primarily on accident years 2019 through 2022 and 2024.

Larger drivers of the favorable development were commercial excess, general liability and subsegments within professional liability, while auto liability exposures developed adversely for some products, most notably in commercial transportation.

In comparison, $42 million of prior accident years’ reserves were released in the first nine months of 2024.

Commercial excess, general liability, professional services, executive products and personal umbrella drove the favorable development in 2024.

Storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2025 and $3 million in 2024.

The casualty segment recorded underwriting income of $7 million in the first three months of 2026, compared to $2 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $14 million in 2026, primarily related to accident years 2018, 2019, 2021, 2022 and 2025.

Larger drivers of the favorable development were executive products, professional services and commercial transportation, while personal umbrella experienced some adverse development.

In comparison, $5 million of prior accident years’ reserves were released in the first three months of 2025.

Commercial excess, general liability and subsegments within professional liability drove the favorable development, while commercial transportation and personal umbrella had adverse development related to auto exposures in 2025.

Storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2026 and less than $1 million in 2025.

The combined ratio for the casualty segment was 97.1 in 2026, compared to 99.1 in 2025.

The segment’s loss ratio was 61.9 in 2025, up from 58.9 in 2024.

Lower levels of reserve releases on prior accident years and higher current year loss reserves, primarily in auto exposed lines, resulted in the higher loss ratio in 2025.

The expense ratio for the casualty segment was 36.0, down from 36.9 for the same period last year, as the growth in the earned premium base exceeded the growth in expense.

The property segment recorded underwriting income of $157 million for the first nine months of 2025, compared to $141 million for the same period last year.

Underwriting results for 2025 included $32 million of favorable development on prior years’ loss and catastrophe reserves, offset by $24 million of storm and other catastrophe losses.

Comparatively, the 2024 underwriting results included $33 million of favorable development on prior years’ loss and catastrophe reserves, $35 million of losses from Hurricanes Beryl and Helene, as well as $28 million of other storm losses.

Underwriting results for the first nine months of 2025 translated into a combined ratio of 59.8, compared to 64.4 for the same period last year.

The segment’s loss ratio was 26.7 in 2025, down from 34.0 in 2024, as a result of lower current accident year catastrophe losses.

The segment’s expense ratio increased to 33.1 in 2025 from 30.4 in the prior year, as a result of continued investments in people and technology, as well as higher acquisition-related expenses, which can fluctuate between periods.

The surety segment recorded underwriting income of $22 million for the first nine months of 2025, compared to $21 million for the same period last year.

Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves.

Results for 2025 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $13 million.

Results for 2024 included $11 million of favorable development on prior accident years’ reserves.

Additionally, $2 million of reinsurance reinstatement premium was recorded in 2024 on a prior year loss, which reduced net premiums earned and underwriting income.

The combined ratio for the surety segment totaled 80.5 for the first nine months of 2025 and 2024.

The segment’s loss ratio was 7.0 in 2025, down from 9.0 in 2024, due to higher levels of favorable prior accident years’ reserve development.

The expense ratio was 73.5, up from 71.5 in the prior year, due to continued investments in people and technology, higher acquisition expenses, as well as differences in our reinsurance costs.

The segment’s loss ratio was 61.5 in 2026, down from 63.7 in 2025, primarily due to higher levels of favorable prior accident years’ reserve development.

The expense ratio for the casualty segment was 35.6, up from 35.4 for the same period last year.

The property segment recorded underwriting income of $48 million for the first three months of 2026, compared to $57 million for the same period last year.

Underwriting results for 2026 included $21 million of favorable development on prior years’ loss and catastrophe reserves, offset by $14 million of storm losses.

Comparatively, results for 2025 included $18 million of favorable development on prior years’ loss and catastrophe reserves and $12 million of storm and other catastrophe losses.

Underwriting results for the first three months of 2026 resulted in a combined ratio of 61.9, compared to 57.1 for the same period last year.

The segment’s loss ratio was 26.8 in 2026, up from 24.7 in 2025, as larger catastrophe losses and slightly higher attritional, non-catastrophe losses on a lower earned premium base were partially offset by increased favorable development on prior accident years.

The segment’s expense ratio increased to 35.1 in 2026 from 32.4 in the prior year, as a result of continued investments in people and technology on a lower earned premium base.

The surety segment recorded underwriting income of $2 million for the first three months of 2026, compared to $12 million for the same period last year.

Results for 2026 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by less than $1 million, compared to $8 million in 2025.

The combined ratio for the surety segment totaled 93.7 for the first three months of 2026, compared to 68.5 for the same period last year.

The segment’s loss ratio was 18.0 in 2026, up from (3.6) in 2025, due to lower levels of favorable prior accident years’ reserve development.

The expense ratio was 75.7, up from 72.1 in the prior year, due to continued investments in people and technology, as well as higher acquisition expenses, which can fluctuate between periods.

Investment Income

Our investment portfolio generated net investment income of $117 million during the first nine months of 2025, an increase of 13 percent from the same period in 2024.

Our investment portfolio generated net investment income of $42 million during the first three months of 2026, an increase of 15 percent from the same period in 2025.

The increase in investment income was due to higher reinvestment rates, as well as an increased average asset base relative to the prior year.

Yields on our fixed income investments for the first nine months of 2025 and 2024 were as follows:

Yields on our fixed income investments for the first three months of 2026 and 2025 were as follows:

After-Tax Yield

The following table depicts the composition of our investment portfolio at September 30, 2025 as compared to December 31, 2024:

The following table depicts the composition of our investment portfolio at March 31, 2026 as compared to December 31, 2025:

(in thousands)

September 30, 2025

March 31, 2026

December 31, 2025

4 unchanged sentences

We believe our overall asset allocation supports our strategy to preserve capital for policyholders, provide sufficient income to support our insurance operations and effectively grow book value over a long-term investment horizon.

The fixed income portfolio increased by $361 million in the first nine months of 2025, as bonds rallied and cash flows were largely allocated to the fixed income portfolio.

Average fixed income duration was 4.8 years at September 30, 2025, reflecting our liability structure and sound capital position.

The equity portfolio increased by $143 million during the first nine months of 2025, primarily due to strength in the equity markets.

Short-term investments increased by $91 million, as yields on AAA-rated government money market funds remained relatively attractive.

Our effective tax rate for the first nine months of 2025 was 20.4 percent, compared to 19.8 percent for the same period in 2024.

Effective rates are dependent upon components of pretax earnings or losses and the related tax effects.

The effective tax rate was higher for the nine-month period in 2025 due to lower levels of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation, and higher levels of pretax income, which decreased the percentage impact of the tax-favored adjustments.

Three Months Ended September 30, 2025 Compared to Three Months Ended September 30, 2024

Net premiums earned increased 5 percent, driven primarily by products in our casualty and surety segments.

Investment income was up 12 percent, due to an increased average asset base and higher reinvestment rates.

Positive market performance resulted in $42 million of unrealized gains on equity securities in the third quarter of 2025, compared to $38 million in 2024.

Realized gains during the third quarter of 2025 were comprised of $16 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $3 million of realized gains on the fixed income portfolio and $1 million of

other realized losses.

This compares to $7 million of realized gains on the equity portfolio, $1 million of realized losses on the fixed income portfolio and less than $1 million of other realized losses during the third quarter of 2024.

For the Three Months

Ended September 30,

Consolidated Revenues (in thousands)

Net premiums earned

Net investment income

Net realized gains

Net unrealized gains on equity securities

Total consolidated revenue

Underwriting income was $61 million on an 85.1 combined ratio for the third quarter of 2025, compared to $41 million on an 89.6 combined ratio in the same period of 2024.

Underwriting results for 2024 were impacted by $37 million of pretax losses from Hurricanes Beryl and Helene, as well as $2 million of pretax storm losses, while minimal catastrophe losses were incurred in the third quarter of 2025.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $15 million in the third quarter of 2025, compared to $21 million in 2024.

The loss ratio decreased to 46.1 from 51.9 due to lower catastrophe losses.

The expense ratio increased to 39.0 from 37.7.

Improved equity market returns resulted in more book value growth in 2025 and a corresponding increase in bonus expense accruals when compared to 2024.

Increased expenses were also driven by continued investments in people and technology, as well as higher acquisition-related costs, which can fluctuate between periods.

Favorable development and other drivers of growth in book value will 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 affect policy acquisition, insurance operating and general corporate expenses.

Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime.

We recognized $2 million of investee earnings from Prime in the third quarter of 2025 and $1 million in 2024.

Net earnings for the third quarter of 2025 totaled $125 million, compared to $95 million for the same period in 2024.

Higher levels of underwriting income, investment income, realized gains and unrealized gains on equity securities all contributed to the improved results.

Comprehensive earnings totaled $152 million for the third quarter of 2025, compared to $175 million for the third quarter of 2024.

Other comprehensive earnings primarily included net after-tax unrealized gains (losses) from the fixed income portfolio.

Other comprehensive earnings of $28 million in the third quarter of 2025 was primarily attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

Comparatively, $80 million of other comprehensive earnings was recognized in 2024.

Gross premiums written increased $2 million for the third quarter of 2025, compared to the same period of 2024.

Growth in our casualty segment offset declines in the property and surety segments.

Net premiums earned increased $18 million, driven by the casualty segment.

Gross Premiums Written

Net Premiums Earned

For the Three Months

Ended September 30,

(in thousands)

Commercial excess and personal umbrella

Commercial transportation

General liability

Professional services

Small commercial

Executive products

Other casualty

Commercial property

Other property

Transactional

Gross premiums written for the casualty segment increased $23 million in the third quarter of 2025.

We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth within our personal umbrella distribution channels.

Other casualty premium was down for the quarter as we exited from various captive programs and reduced our participation on the reinsurance agreement with Prime.

Gross premiums written for the property segment decreased $19 million in the third quarter of 2025.

After several consecutive years of rate increases, rates on commercial property exposures declined in the third quarter of 2025, driven by more intense competition.

However, some competitors have reduced their appetite for select Hawaii homeowner coverages, which, along with rate increases, has allowed our other property premium to grow.

Gross premiums written for the surety segment decreased $1 million for the third quarter of 2025.

A decrease in construction spending and soft market conditions drove the decline.

Underwriting Income

For the Three Months

Ended September 30,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $4 million in the third quarter of 2025, compared to $3 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $8 million in 2025, primarily on accident years 2020 through 2022 and 2024.

Larger drivers of the favorable development were commercial excess, general liability, executive products and personal umbrella.

In comparison, $10 million of prior accident years’ reserves were released in the third quarter of 2024.

Commercial excess, professional services, general liability, personal umbrella and executive products were drivers of the favorable development in 2024.

In addition, underwriting results for 2024 included $2 million of hurricane and storm losses on casualty-oriented package policies that include property coverage.

The combined ratio for the casualty segment was 98.2 in 2025, compared to 98.8 in 2024.

The segment’s loss ratio was 62.0 in 2025, down from 62.8 in 2024, due to improved current accident year losses.

The expense ratio for the casualty segment was 36.2, up from 36.0 for the same period last year.

The property segment recorded underwriting income of $50 million for the third quarter of 2025, compared to $30 million for the same period last year.

Underwriting results for 2025 included $5 million of favorable development on prior years’ loss reserves.

Comparatively, the 2024 underwriting results included $8 million of favorable development on prior years’ loss and catastrophe reserves, $35 million of losses from Hurricanes Beryl and Helen, as well as $2 million of storm losses.

Underwriting results for the third quarter of 2025 translated into a combined ratio of 60.2, compared to 77.2 for the same period last year.

The segment’s loss ratio was 25.9 in 2025, down from 45.8 in 2024, as a result of lower catastrophe losses.

The segment’s expense ratio increased to 34.3 in 2025, up from 31.4 in the prior year, driven by continued investments in people and technology, along with higher acquisition-related expenses, which can fluctuate between periods.

The surety segment recorded underwriting income of $6 million for the third quarter of 2025, compared to $8 million for the same period last year.

Results for 2025 and 2024 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $3 million in each period.

The combined ratio for the surety segment totaled 85.0 for the third quarter of 2025, compared to 78.8 for the same period in 2024.

The segment’s loss ratio was 11.4 in 2025, up from 8.7 in 2024, due to slightly lower favorable development on prior accident years and a higher earned premium base.

The expense ratio was 73.6, up from 70.1 in the prior year, due to continued investments in people and technology, as well as higher acquisition expenses.

Investment Income

Our investment portfolio generated net investment income of $41 million during the third quarter of 2025, an increase of 12 percent from the same period in 2024.

The increase in investment income was due to higher reinvestment rates, as well as an increased average asset base relative to the prior year.

Yields on our fixed income investments for the third quarter of 2025 and 2024 were as follows:

After-Tax Yield

Our effective tax rate for the third quarter of 2025 was 20.8 percent, compared to 18.7 percent for the same period in 2024.

The fixed income portfolio decreased by $5 million in the first three months of 2026, as interest rates increased causing the fair value of bonds to decline.

Average fixed income duration was 4.7 years at March 31, 2026, reflecting our liability structure and sound capital position.

The equity portfolio decreased by $34 million during the first three months of 2026, due to negative performance in the equity markets.

Proceeds from debt issuance were invested into short-term securities, increasing the short-term investment portfolio by $266 million.

Our effective tax rate for the first three months of 2026 was 18.5 percent, compared to 19.6 percent for the same period in 2025.

Effective rates are dependent upon components of pretax earnings or losses and the related tax effects.

The effective tax rate was higher for the third quarter of 2025 due to lower levels of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation, and higher levels of pretax income, which decreased the percentage impact of the tax-favored adjustments.

The decrease in the effective tax rate for the three-month period in 2026 was primarily due to higher levels of tax credit utilization.

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

(1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the nine-month periods ended September 30, 2025 and 2024:

The following table summarizes cash flows provided by (used in) our activities for the three-month periods ended March 31, 2026 and 2025:

(in thousands)

2 unchanged sentences

Financing cash flows

Premiums received from customers are our largest source of cash and claim payments on insured losses represent our largest use of cash.

Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received.

Operating cash flows in the first nine months of 2025 benefited from increased premium and investment income receipts relative to the first nine months of 2024.

As of September 30, 2025, we had $100 million in debt outstanding.

On September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A.

The borrowing may be repaid at any time and carries an adjustable interest rate of 5.76 percent, which will reset during the fourth quarter of 2025.

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.

Further, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 12, 2024.

The borrowing matures on November 12, 2025.

Premiums received from customers are our largest source of cash, while claim payments on insured losses represent our largest use of cash.

Cash flows from operating activities may vary between periods due to the timing of these receipts and payments.

Operating cash flows decreased in the first three months of 2026 compared to the same period in 2025, primarily due to higher loss and settlement expense payments, the purchase of tax credits applied against federal income taxes incurred in 2025, and higher bonus and profit-sharing contributions paid in the current period.

The increase in incentive compensation reflects improved financial performance in 2025.

These decreases were partially offset by higher gross premium and investment income receipts, as well as lower reinsurance costs.

Outstanding debt totaled $347 million as of March 31, 2026, consisting of $297 million of long-term debt, net of unamortized discount and debt issuance costs, and $50 million of short-term debt.

On March 3, 2026, we completed a public debt offering, issuing $300 million of senior notes maturing June 1, 2036, with interest payable semi-annually at a rate of 5.375 percent.

The notes were issued at a discount, resulting in net proceeds of $297 million after deducting the discount and issuance costs.

We repaid $50 million that was outstanding under our revolving credit facility with PNC Bank, N.A.

(PNC) on February 20, 2026, which had been drawn in 2023.

The credit facility with PNC, which was entered into during the first quarter of 2023, provided borrowing capacity of $100 million and was scheduled to expire on May 29, 2026.

On February 26, 2026, we entered into an amended and restated credit agreement with PNC to extend the maturity date to February 26, 2031.

The amended agreement provides borrowing capacity of $150 million and may be increased to $200 million under certain conditions.

RLI Insurance Company also borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 12, 2025, which replaced the $50 million borrowed in 2024.

The borrowing matures on November 12, 2026, but may be repaid early at set quarterly dates.

Interest is paid monthly at an annualized rate of 4.21 percent.

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Hawley Insurance Company, are members of the FHLBC.

Membership in the Federal Home Loan Bank system provides both companies access to an additional source of

liquidity via a secured lending facility.

Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility.

Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing.

As of September 30, 2025, $55 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of September 30, 2025, we had cash and other investments maturing within one year of approximately $485 million and an additional $765 million maturing between one to five years.

As of March 31, 2026, $52 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of March 31, 2026, we had cash and other investments maturing within one year of approximately $635 million and an additional $786 million maturing between one to five years.

Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

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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.

Invested assets at September 30, 2025 have increased $606 million from December 31, 2024.

As of September 30, 2025, our investment portfolio had the following asset allocation breakdown:

Invested assets at March 31, 2026 have increased $226 million from December 31, 2025.

As of March 31, 2026, our investment portfolio had the following asset allocation breakdown:

(in thousands)

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Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio.

As of September 30, 2025, our fixed income portfolio had the following rating distribution:

As of March 31, 2026, our fixed income portfolio had the following rating distribution:

government & agency

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Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

As of September 30, 2025, our fixed income portfolio remained well diversified, with 1,929 individual issues.

As of March 31, 2026, our fixed income portfolio remained well diversified, with 1,931 individual issues.

Our investment portfolio has limited exposure to structured asset-backed securities.

As of September 30, 2025, we had $304 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of September 30, 2025, we had $258 million in commercial and non-agency MBS and $604 million in MBS backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae).

As of March 31, 2026, we had $388 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of March 31, 2026, we had $322 million in commercial and non-agency MBS and $601 million in MBS backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae).

Excluding the GSE-backed MBS, our exposure to ABS and CMBS was 14.5 percent of our investment portfolio at quarter end.

We had $1,490 million in corporate fixed income securities as of September 30, 2025, which includes $140 million invested in a high-yield credit strategy.

We had $1.5 billion in corporate fixed income securities as of March 31, 2026, which includes $140 million invested in a high-yield credit strategy.

This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

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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 long investment horizon.

As of September 30, 2025, our equity portfolio had a dividend yield of 1.5 percent, compared to 1.2 percent for the S&P 500 index.

As of March 31, 2026, our equity portfolio had a dividend yield of 1.4 percent, compared to 1.1 percent for the S&P 500 index.

Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income.

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Other invested assets include investments in low-income housing tax credit and historic tax credit partnerships, membership in the FHLBC and investments in private funds.

We had $64 million of investments in unconsolidated investees at September 30, 2025, compared to $56 million at December 31, 2024.

We had $56 million of investments in unconsolidated investees at March 31, 2026, compared to $54 million at December 31, 2025.

Our investment portfolio does not have any exposure to derivatives.

As of September 30, 2025, our capital structure consisted of $100 million in debt and $1.9 billion of shareholders’ equity.

Debt outstanding comprised 5 percent of total capital as of September 30, 2025.

Interest and fees on debt obligations totaled $4 million for the first nine months of 2025 and $5 million during the same period in 2024.

We incurred interest expense on debt at an average annual interest rate of 5.18 percent during the first nine months of 2025, compared to 6.20 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.16 per share on September 19, 2025, the same amount as the prior quarter.

As of March 31, 2026, our capital structure consisted of $347 million in debt and $1.8 billion of shareholders’ equity.

Debt outstanding comprised 16 percent of total capital as of March 31, 2026.

Interest and fees on debt obligations totaled $2 million for the first three months of 2026 and $1 million during the same period in 2025.

We incurred interest expense on debt at an average annual interest rate of 5.03 percent during the first three months of 2026, compared to 5.18 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.16 per share on March 16, 2026, the same amount as the prior quarter.

We have increased dividends in each of the last 50 years.

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shareholders.

On a GAAP basis, as of September 30, 2025, our holding company had $1.9 billion in equity.

On a GAAP basis, as of March 31, 2026, our holding company had $1.8 billion in equity.

This includes amounts related to the equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws.

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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 from the Illinois Department of Insurance (IDOI).

In the first nine months of 2025, RLI Ins.

In the first three months of 2026, RLI Ins.

paid $80 million in ordinary dividends to RLI Corp.

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paid ordinary dividends totaling $139 million.

As of September 30, 2025, $1 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp.

as ordinary dividends without prior approval from the IDOI.

Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time.

Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI).

In 2025, our principal insurance subsidiary sought and received regulatory approval prior to the payment of extraordinary dividends totaling $151 million.

As of March 31, 2026, $19 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp.

as ordinary dividends.

A total of $229 million in ordinary dividend capacity will be available over the remainder of 2026.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis