RLI CORP 10-Q

Item 1. Financial Statements ​ RLI Corp. and Subsidiaries Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months ​ For the Nine Months ​ ​ Ended September 30, ​ Ended September 30, (in thousands, except per share data) 2022 2021 2022 2021 Net premiums earned ​ $ 291,468 ​ $ 253,389 ​ $ 843,430 ​ $ 722,984 Net investment income ​ ​ 21,270 ​ ​ 17,844 ​ ​ 57,625 ​ ​ 50,929 Net realized gains ​ ​ 573,170 ​ ​ 1,829 ​ ​ 591,562 ​ ​ 52,442 Net unrealized gains (losses) on equity securities ​ ​ ( 26,414 ) ​ ​ ( 2,592 ) ​ ​ ( 155,218 ) ​ ​ 29,526 Consolidated revenue ​ $ 859,494 ​ $ 270,470 ​ $ 1,337,399 ​ $ 855,881 Losses and settlement expenses ​ ​ 165,089 ​ ​ 143,656 ​ ​ 388,527 ​ ​ 355,574 Policy acquisition costs ​ ​ 96,977 ​ ​ 80,449 ​ ​ 271,879 ​ ​ 232,674 Insurance operating expenses ​ ​ 20,606 ​ ​ 15,560 ​ ​ 58,794 ​ ​ 54,504 Interest expense on debt ​ ​ 2,013 ​ ​ 1,906 ​ ​ 6,034 ​ ​ 5,711 General corporate expenses ​ ​ 2,755 ​ ​ 2,505 ​ ​ 8,553 ​ ​ 9,533 Total expenses ​ $ 287,440 ​ $ 244,076 ​ $ 733,787 ​ $ 657,996 Equity in earnings (loss) of unconsolidated investees ​ ​ ( 17,352 ) ​ ​ 9,043 ​ ​ 3,061 ​ ​ 29,407 Earnings before income taxes ​ $ 554,702 ​ $ 35,437 ​ $ 606,673 ​ $ 227,292 Income tax expense ​ ​ 114,809 ​ ​ 6,194 ​ ​ 121,096 ​ ​ 43,222 Net earnings ​ $ 439,893 ​ $ 29,243 ​ $ 485,577 ​ $ 184,070 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive earnings (loss), net of tax ​ ​ ( 81,248 ) ​ ​ ( 12,240 ) ​ ​ ( 294,392 ) ​ ​ ( 41,810 ) Comprehensive earnings ​ $ 358,645 ​ $ 17,003 ​ $ 191,185 ​ $ 142,260 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net earnings per share ​ $ 9.69 ​ $ 0.65 ​ $ 10.71 ​ $ 4.07 Diluted net earnings per share ​ $ 9.61 ​ $ 0.64 ​ $ 10.61 ​ $ 4.03 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average number of common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 45,379 ​ ​ 45,243 ​ ​ 45,347 ​ ​ 45,216 Diluted ​ ​ 45,775 ​ ​ 45,689 ​ ​ 45,775 ​ ​ 45,714 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ 3 ​ Table of Contents RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands, except share and per share data) 2022 2021 ASSETS ​ ​ ​ ​ ​ ​ Investments and cash: ​ ​ ​ ​ ​ ​ Fixed income: ​ ​ ​ ​ ​ ​ Available-for-sale, at fair value ​ $ 2,452,039 ​ $ 2,409,887 (amortized cost of $ 2,753,631 and allowance for credit losses of $ 327 at 9/30/22) ​ ​ ​ ​ ​ ​ (amortized cost of $ 2,346,267 and allowance for credit losses of $ 441 at 12/31/21) ​ ​ ​ ​ ​ ​ Equity securities, at fair value (cost - $ 327,964 at 9/30/22 and $ 324,501 at 12/31/21) ​ ​ 462,988 ​ ​ 613,776 Other invested assets ​ ​ 48,837 ​ ​ 50,501 Cash ​ ​ 723,511 ​ ​ 88,804 Total investments and cash ​ $ 3,687,375 ​ $ 3,162,968 Accrued investment income ​ ​ 19,355 ​ ​ 17,505 Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $ 18,478 at 9/30/22 and $ 18,067 at 12/31/21 ​ ​ 201,781 ​ ​ 167,279 Ceded unearned premium ​ ​ 137,346 ​ ​ 130,916 Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $ 11,400 at 9/30/22 and $ 11,188 at 12/31/21 ​ ​ 770,858 ​ ​ 608,086 Deferred policy acquisition costs ​ ​ 128,979 ​ ​ 103,553 Property and equipment, at cost, net of accumulated depreciation of $ 67,911 at 9/30/22 and $ 75,236 at 12/31/21 ​ ​ 50,385 ​ ​ 52,161 Investment in unconsolidated investees ​ ​ 58,105 ​ ​ 171,311 Goodwill and intangibles ​ ​ 53,562 ​ ​ 53,562 Income taxes-deferred ​ ​ 51,791 ​ ​ — Other assets ​ ​ 52,128 ​ ​ 40,961 TOTAL ASSETS ​ $ 5,211,665 ​ $ 4,508,302 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ Unpaid losses and settlement expenses ​ $ 2,322,737 ​ $ 2,043,555 Unearned premiums ​ ​ 786,485 ​ ​ 680,444 Reinsurance balances payable ​ ​ 50,349 ​ ​ 42,851 Funds held ​ ​ 100,547 ​ ​ 89,773 Income taxes-current ​ ​ 132,446 ​ ​ 3,092 Income taxes-deferred ​ ​ — ​ ​ 83,509 Current portion of long-term debt ​ ​ 149,816 ​ ​ — Long-term debt ​ ​ 50,000 ​ ​ 199,676 Accrued expenses ​ ​ 81,066 ​ ​ 98,274 Other liabilities ​ ​ 144,226 ​ ​ 37,767 TOTAL LIABILITIES ​ $ 3,817,672 ​ $ 3,278,941 ​ ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ ​ ​ ​ ​ Common stock ($ 0.01 par value) ​ ​ ​ ​ ​ ​ (Shares authorized - 200,000,000 ) ​ ​ ​ ​ ​ ​ ( 68,308,385 shares issued, 45,378,171 shares outstanding at 9/30/22) ​ ​ ​ ​ ​ ​ ( 68,219,551 shares issued, 45,289,337 shares outstanding at 12/31/21) ​ $ 683 ​ $ 682 Paid-in capital ​ ​ 352,129 ​ ​ 343,742 Accumulated other comprehensive earnings (loss) ​ ​ ( 244,566 ) ​ ​ 49,826 Retained earnings ​ ​ 1,678,746 ​ ​ 1,228,110 Deferred compensation ​ ​ 9,047 ​ ​ 9,642 Less: Treasury shares, at cost ( 22,930,214 shares at 9/30/22 and 12/31/21) ​ ​ ( 402,046 ) ​ ​ ( 402,641 ) TOTAL SHAREHOLDERS’ EQUITY ​ $ 1,393,993 ​ $ 1,229,361 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ​ $ 5,211,665 ​ $ 4,508,302 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ 4 ​ Table of Contents RLI Corp. and Subsidiaries Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ Comprehensive ​ ​ ​ ​ ​ ​ ​ Treasury ​ ​ Common ​ Shareholders’ ​ Common ​ Paid-in ​ Earnings ​ Retained ​ Deferred ​ Shares (in thousands, except share and per share data) Shares Equity Stock Capital (Loss) Earnings Compensation at Cost Balance, January 1, 2021 ​ 45,142,580 ​ $ 1,135,978 ​ $ 681 ​ $ 335,365 ​ $ 108,714 ​ $ 1,084,217 ​ $ 8,292 ​ $ ( 401,291 ) Net earnings ​ — ​ ​ 73,012 ​ ​ — ​ ​ — ​ ​ — ​ ​ 73,012 ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ ( 44,747 ) ​ ​ — ​ ​ — ​ ​ ( 44,747 ) ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 366 ) ​ ​ 366 Share-based compensation ​ 60,858 ​ ​ 1,392 ​ ​ — ​ ​ 1,392 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.24 per share) ​ — ​ ​ ( 10,849 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 10,849 ) ​ ​ — ​ ​ — Balance, March 31, 2021 ​ 45,203,438 ​ $ 1,154,786 ​ $ 681 ​ $ 336,757 ​ $ 63,967 ​ $ 1,146,380 ​ $ 7,926 ​ $ ( 400,925 ) Net earnings ​ — ​ ​ 81,815 ​ ​ — ​ ​ — ​ ​ — ​ ​ 81,815 ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ 15,177 ​ ​ — ​ ​ — ​ ​ 15,177 ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 325 ​ ​ ( 325 ) Share-based compensation ​ 19,905 ​ ​ 1,343 ​ ​ 1 ​ ​ 1,342 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.25 per share) ​ — ​ ​ ( 11,318 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 11,318 ) ​ ​ — ​ ​ — Balance, June 30, 2021 ​ 45,223,343 ​ $ 1,241,803 ​ $ 682 ​ $ 338,099 ​ $ 79,144 ​ $ 1,216,877 ​ $ 8,251 ​ $ ( 401,250 ) Net earnings ​ — ​ ​ 29,243 ​ ​ — ​ ​ — ​ ​ — ​ ​ 29,243 ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ ( 12,240 ) ​ ​ — ​ ​ — ​ ​ ( 12,240 ) ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 79 ​ ​ ( 79 ) Share-based compensation ​ 21,162 ​ ​ 2,769 ​ ​ — ​ ​ 2,769 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.25 per share) ​ — ​ ​ ( 11,319 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 11,319 ) ​ ​ — ​ ​ — Balance, September 30, 2021 ​ 45,244,505 ​ $ 1,250,256 ​ $ 682 ​ $ 340,868 ​ $ 66,904 ​ $ 1,234,801 ​ $ 8,330 ​ $ ( 401,329 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ Comprehensive ​ ​ ​ ​ ​ ​ ​ Treasury ​ ​ Common ​ Shareholders’ ​ Common ​ Paid-in ​ Earnings ​ Retained ​ Deferred ​ Shares (in thousands, except share and per share data) ​ Shares ​ Equity ​ Stock ​ Capital ​ (Loss) ​ Earnings ​ Compensation ​ at Cost Balance, January 1, 2022 ​ 45,289,337 ​ $ 1,229,361 ​ $ 682 ​ $ 343,742 ​ $ 49,826 ​ $ 1,228,110 ​ $ 9,642 ​ $ ( 402,641 ) Net earnings ​ — ​ ​ 47,923 ​ ​ — ​ ​ — ​ ​ — ​ ​ 47,923 ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ ( 115,581 ) ​ ​ — ​ ​ — ​ ​ ( 115,581 ) ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 973 ) ​ ​ 973 Share-based compensation ​ 26,605 ​ ​ 3,049 ​ ​ — ​ ​ 3,049 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.25 per share) ​ — ​ ​ ( 11,330 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 11,330 ) ​ ​ — ​ ​ — Balance, March 31, 2022 ​ 45,315,942 ​ $ 1,153,422 ​ $ 682 ​ $ 346,791 ​ $ ( 65,755 ) ​ $ 1,264,703 ​ $ 8,669 ​ $ ( 401,668 ) Net earnings ​ — ​ ​ ( 2,239 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 2,239 ) ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ ( 97,563 ) ​ ​ — ​ ​ — ​ ​ ( 97,563 ) ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 276 ​ ​ ( 276 ) Share-based compensation ​ 52,862 ​ ​ 2,371 ​ ​ 1 ​ ​ 2,370 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.26 per share) ​ — ​ ​ ( 11,803 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 11,803 ) ​ ​ — ​ ​ — Balance, June 30, 2022 ​ 45,368,804 ​ $ 1,044,188 ​ $ 683 ​ $ 349,161 ​ $ ( 163,318 ) ​ $ 1,250,661 ​ $ 8,945 ​ $ ( 401,944 ) Net earnings ​ — ​ ​ 439,893 ​ ​ — ​ ​ — ​ ​ — ​ ​ 439,893 ​ ​ — ​ ​ — Other comprehensive earnings (loss), net of tax ​ — ​ ​ ( 81,248 ) ​ ​ — ​ ​ — ​ ​ ( 81,248 ) ​ ​ — ​ ​ — ​ ​ — Deferred compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 102 ​ ​ ( 102 ) Share-based compensation ​ 9,367 ​ ​ 2,968 ​ ​ — ​ ​ 2,968 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Dividends and dividend equivalents ($ 0.26 per share) ​ — ​ ​ ( 11,808 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 11,808 ) ​ ​ — ​ ​ — Balance, September 30, 2022 ​ 45,378,171 ​ $ 1,393,993 ​ $ 683 ​ $ 352,129 ​ $ ( 244,566 ) ​ $ 1,678,746 ​ $ 9,047 ​ $ ( 402,046 ) ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ 5 ​ Table of Contents RLI Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months ​ ​ Ended September 30, (in thousands) 2022 2021 Net cash provided by operating activities ​ $ 282,886 ​ $ 280,441 Cash Flows from Investing Activities ​ ​ ​ ​ ​ ​ Purchase of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ $ ( 531,894 ) ​ $ ( 587,910 ) Equity securities ​ ​ ( 42,490 ) ​ ​ ( 117,218 ) Property and equipment ​ ​ ( 4,432 ) ​ ​ ( 5,005 ) Other ​ ​ ( 7,940 ) ​ ​ ( 11,938 ) Proceeds from sale of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ ​ 46,448 ​ ​ 42,776 Equity securities ​ ​ 59,264 ​ ​ 157,973 Equity method investments ​ ​ 686,666 ​ ​ — Other ​ ​ 2,298 ​ ​ 4,496 Proceeds from call or maturity of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ ​ 176,616 ​ ​ 296,561 Net cash provided by (used in) investing activities ​ $ 384,536 ​ $ ( 220,265 ) Cash Flows from Financing Activities ​ ​ ​ ​ ​ ​ Cash dividends paid ​ $ ( 34,913 ) ​ $ ( 33,454 ) Proceeds from stock option exercises ​ ​ 2,198 ​ ​ 679 Net cash used in financing activities ​ $ ( 32,715 ) ​ $ ( 32,775 ) Net increase in cash ​ $ 634,707 ​ $ 27,401 Cash at the beginning of the period ​ ​ 88,804 ​ ​ 62,217 Cash at September 30, ​ $ 723,511 ​ $ 89,618 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ 6 ​ Table of Contents NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS ​ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ​ A. BASIS OF PRESENTATION ​ The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2021 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2022 and the results of operations of RLI Corp. (the Company) and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2021 to conform to the classifications used in the current year. ​ The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates. ​ B. ADOPTED ACCOUNTING STANDARDS ​ No new accounting standards applicable in 2022 materially impact our financial statements. ​ C. PROSPECTIVE ACCOUNTING STANDARDS ​ There are no prospective accounting standards which would have a material impact on our financial statements as of September 30, 2022. ​ D. 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 Securities and Exchange Commission 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 Standard & Poor’s (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 each 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 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 overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized. ​ The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $ 16.1 million and $ 11.4 million, respectively, at September 30, 2022. At December 31, 2021, the amounts were $ 16.1 million and $ 11.2 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs 7 ​ Table of Contents were applied to the allowances in the first nine months of 2022 and less than $ 0.1 million was recovered. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts. ​ E. INTANGIBLE ASSETS ​ The composition of goodwill and intangible assets at September 30, 2022 and December 31, 2021 is detailed in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2022 2021 Goodwill ​ ​ ​ ​ ​ ​ Surety ​ $ 40,816 ​ $ 40,816 Casualty ​ ​ 5,246 ​ ​ 5,246 Total goodwill ​ $ 46,062 ​ $ 46,062 Intangibles ​ ​ ​ ​ ​ ​ Indefinite-lived intangibles - state insurance licenses ​ ​ 7,500 ​ ​ 7,500 Total goodwill and intangibles ​ $ 53,562 ​ $ 53,562 ​ Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible asset during the second quarter of 2022. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of September 30, 2022 that would suggest an updated impairment test would be needed for our goodwill and intangible assets. ​ F. 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 unaudited condensed consolidated interim financial statements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months ​ For the Three Months ​ ​ Ended September 30, 2022 ​ Ended September 30, 2021 ​ ​ Income ​ Shares ​ Per Share ​ Income ​ Shares ​ Per Share (in thousands, except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Basic EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders ​ $ 439,893 ​ 45,379 ​ $ 9.69 ​ $ 29,243 ​ 45,243 ​ $ 0.65 Effect of Dilutive Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock options and restricted stock units ​ ​ — ​ 396 ​ ​ ​ ​ ​ — ​ 446 ​ ​ ​ Diluted EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders ​ $ 439,893 ​ 45,775 ​ $ 9.61 ​ $ 29,243 ​ 45,689 ​ $ 0.64 Anti-dilutive securities excluded from diluted EPS ​ ​ ​ ​ ​ 435 ​ ​ ​ ​ ​ ​ ​ ​ 191 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months ​ For the Nine Months ​ ​ Ended September 30, 2022 ​ Ended September 30, 2021 ​ ​ Income ​ Shares ​ Per Share ​ Income ​ Shares ​ Per Share (in thousands, except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Basic EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders ​ $ 485,577 ​ 45,347 ​ $ 10.71 ​ $ 184,070 ​ 45,216 ​ $ 4.07 Effect of Dilutive Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock options and restricted stock units ​ ​ — ​ 428 ​ ​ ​ ​ ​ — ​ 498 ​ ​ ​ Diluted EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders ​ $ 485,577 ​ 45,775 ​ $ 10.61 ​ $ 184,070 ​ 45,714 ​ $ 4.03 Anti-dilutive securities excluded from diluted EPS ​ ​ ​ ​ ​ 459 ​ ​ ​ ​ ​ ​ ​ ​ 191 ​ ​ ​ ​ 8 ​ Table of Contents G. COMPREHENSIVE EARNINGS ​ 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 earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax benefit of $ 21.6 million for the third quarter of 2022, compared to $ 3.2 million for the same period in 2021. For the nine-month period ended September 30, 2022, other comprehensive earnings (loss) is net of tax benefit of $ 78.3 million, compared to $ 11.1 million for the same period in 2021. ​ Unrealized losses, net of tax, recognized in other comprehensive earnings (loss) were $ 294.4 million for the first nine months of 2022, compared to $ 41.8 million during the same period last year. The unrealized losses were attributable to higher interest rates in both periods, which decreased the fair value of securities held in the fixed income portfolio. ​ The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings (loss) for each period presented in the unaudited condensed consolidated interim financial statements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ For the Three Months ​ For the Nine Months ​ ​ Ended September 30, ​ Ended September 30, Unrealized Gains/Losses on Available-for-Sale Securities 2022 2021 2022 2021 Beginning balance ​ $ ( 163,318 ) ​ $ 79,144 ​ $ 49,826 ​ $ 108,714 Other comprehensive earnings (loss) before reclassifications ​ ​ ( 82,785 ) ​ ​ ( 12,114 ) ​ ​ ( 296,422 ) ​ ​ ( 40,307 ) Amounts reclassified from accumulated other comprehensive earnings ​ ​ 1,537 ​ ​ ( 126 ) ​ ​ 2,030 ​ ​ ( 1,503 ) Net current-period other comprehensive earnings (loss) ​ $ ( 81,248 ) ​ $ ( 12,240 ) ​ $ ( 294,392 ) ​ $ ( 41,810 ) Ending balance ​ $ ( 244,566 ) ​ $ 66,904 ​ $ ( 244,566 ) ​ $ 66,904 Balance of securities for which an allowance for credit losses has been recognized in net earnings ​ ​ ​ ​ ​ ​ ​ $ 1,520 ​ $ 426 ​ Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings (loss) to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings (loss) by the respective line items of net earnings are presented in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount Reclassified from Accumulated Other ​ ​ (in thousands) ​ Comprehensive Earnings (Loss) ​ ​ ​ ​ For the Three Months ​ For the Nine Months ​ ​ Component of Accumulated ​ Ended September 30, ​ Ended September 30, ​ Affected line item in the Other Comprehensive Earnings (Loss) 2022 2021 2022 2021 Statement of Earnings Unrealized gains and losses on available-for-sale securities ​ $ ( 1,912 ) ​ $ 182 ​ $ ( 2,684 ) ​ $ 1,731 ​ Net realized gains (losses) ​ ​ ​ ( 34 ) ​ ​ ( 22 ) ​ ​ 115 ​ ​ 171 ​ Credit gains presented within net realized gains ​ ​ $ ( 1,946 ) ​ $ 160 ​ $ ( 2,569 ) ​ $ 1,902 ​ Earnings (loss) before income taxes ​ ​ ​ 409 ​ ​ ( 34 ) ​ ​ 539 ​ ​ ( 399 ) ​ Income tax (expense) benefit ​ ​ $ ( 1,537 ) ​ $ 126 ​ $ ( 2,030 ) ​ $ 1,503 ​ Net earnings (loss) ​ H. FAIR VALUE MEASUREMENTS ​ 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. ​ 9 ​ Table of Contents 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, agency, government and municipal securities are deemed Level 2. ​ Mortgage-backed Securities (MBS)/Commercial 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 (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate 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 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. An increase to the credit spread assumptions would result in a lower fair value. ​ 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 September 30, 2022, 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). Pricing for the equity securities not traded on an exchange is provided by a third-party pricing source using observable inputs are classified as Level 2. Pricing for equity securities not traded on an exchange rely on one or more unobservable inputs and 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. ​ 10 ​ Table of Contents I. RISKS AND UNCERTAINTIES ​ Certain risks and uncertainties are inherent in our day-to-day operations. Adverse changes in the economy, including inflation; rising interest rates; volatile equity markets; and ongoing supply chain disruptions, could lower demand for our insurance products, result in increased levels of loss costs that we could not anticipate at the time we priced our coverages, or negatively impact our investment results, all of which could have an adverse effect on the profitability of our operations. The COVID-19 pandemic may result in significant disruptions in economic activity and financial markets or exacerbate the impact of other economic trends. The cumulative effects of any public health outbreak could reduce demand for our insurance policies; result in increased level of losses, settlement expenses or other operating costs; reduce the market value of invested assets held by the Company or negatively impact the fair value of our goodwill. ​ Catastrophe Exposures ​ Our catastrophe reinsurance treaty renewed on January 1, 2022. We purchased limits of $ 600 million in excess of $ 25 million first-dollar retention for earthquakes in California, $ 625 million in excess of $ 25 million first-dollar retention for earthquakes outside of California and $ 475 million in excess of $ 25 million first-dollar retention for all other perils, including wind. These amounts are subject to certain co-participations by the Company on losses in excess of the $ 25 million retentions. On May 1, 2022, 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 increases the limits to $ 750 million for earthquakes in California, $ 775 million for earthquakes outside of California and $ 625 million for all other perils, including wind, all of which are still subject to $ 25 million first-dollar retentions and certain co-participations in excess of the retentions. ​ 2. INVESTMENTS ​ Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value. ​ Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the nine-month periods ended September 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales ​ Proceeds ​ Gross Realized ​ Net Realized (in thousands) From Sales Gains Losses Gain (Loss) 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed income securities - available-for-sale ​ $ 48,559 ​ $ 286 ​ $ ( 2,481 ) ​ $ ( 2,195 ) Equity securities ​ ​ 59,264 ​ ​ 20,410 ​ ​ ( 609 ) ​ ​ 19,801 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed income securities - available-for-sale ​ $ 43,041 ​ $ 1,476 ​ $ ( 107 ) ​ $ 1,369 Equity securities ​ ​ 157,973 ​ ​ 52,409 ​ ​ ( 1,787 ) ​ ​ 50,622 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Calls/Maturities ​ ​ ​ ​ Gross Realized ​ Net Realized (in thousands) Proceeds Gains Losses Gain (Loss) 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed income securities - available-for-sale ​ $ 176,991 ​ $ 142 ​ $ ( 55 ) ​ $ 87 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed income securities - available-for-sale ​ $ 296,563 ​ $ 471 ​ $ ( 109 ) ​ $ 362 ​ 11 ​ Table of Contents FAIR VALUE MEASUREMENTS ​ Assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 are summarized below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of September 30, 2022 ​ ​ Quoted Prices in ​ Significant Other ​ Significant ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ ​ ​ (in thousands) (Level 1) (Level 2) (Level 3) Total Fixed income securities - available-for-sale ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government ​ $ — ​ $ 340,442 ​ $ — ​ $ 340,442 U.S. agency ​ ​ — ​ ​ 56,935 ​ ​ — ​ ​ 56,935 Non-U.S. government & agency ​ ​ — ​ ​ 5,712 ​ ​ — ​ ​ 5,712 Agency MBS ​ ​ — ​ ​ 317,029 ​ ​ — ​ ​ 317,029 ABS/CMBS/MBS* ​ ​ — ​ ​ 241,512 ​ ​ — ​ ​ 241,512 Corporate ​ ​ — ​ ​ 910,979 ​ ​ 52,890 ​ ​ 963,869 Municipal ​ ​ — ​ ​ 526,540 ​ ​ — ​ ​ 526,540 Total fixed income securities - available-for-sale ​ $ — ​ $ 2,399,149 ​ $ 52,890 ​ $ 2,452,039 Equity securities ​ ​ 461,392 ​ ​ 49 ​ ​ 1,547 ​ ​ 462,988 Total ​ $ 461,392 ​ $ 2,399,198 ​ $ 54,437 ​ $ 2,915,027 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2021 ​ ​ Quoted Prices in ​ Significant Other ​ Significant ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ ​ ​ (in thousands) (Level 1) (Level 2) (Level 3) Total Fixed income securities - available-for-sale ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government ​ $ — ​ $ 134,554 ​ $ — ​ $ 134,554 U.S. agency ​ ​ — ​ ​ 32,760 ​ ​ — ​ ​ 32,760 Non-U.S. government & agency ​ ​ — ​ ​ 8,481 ​ ​ — ​ ​ 8,481 Agency MBS ​ ​ — ​ ​ 367,187 ​ ​ — ​ ​ 367,187 ABS/CMBS/MBS* ​ ​ — ​ ​ 264,054 ​ ​ — ​ ​ 264,054 Corporate ​ ​ — ​ ​ 913,577 ​ ​ 43,518 ​ ​ 957,095 Municipal ​ ​ — ​ ​ 645,756 ​ ​ — ​ ​ 645,756 Total fixed income securities - available-for-sale ​ $ — ​ $ 2,366,369 ​ $ 43,518 ​ $ 2,409,887 Equity securities ​ ​ 613,712 ​ ​ 64 ​ ​ — ​ ​ 613,776 Total ​ $ 613,712 ​ $ 2,366,433 ​ $ 43,518 ​ $ 3,023,663 * Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities 12 ​ Table of Contents The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3). ​ ​ ​ ​ ​ (in thousands) Level 3 Securities Balance as of January 1, 2022 ​ $ 43,518 Net realized and unrealized gains (losses) ​ ​ ​ Included in net earnings as a part of: ​ ​ ​ Net investment income ​ ​ ( 662 ) Net realized gains ​ ​ ( 433 ) Included in other comprehensive earnings (loss) ​ ​ ( 8,350 ) Total net realized and unrealized gains (losses) ​ $ ( 9,445 ) Purchases ​ ​ 21,461 Transfers out of Level 3 ​ ​ ( 1,097 ) Balance as of September 30, 2022 ​ $ 54,437 Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains ​ $ ( 433 ) Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss) ​ $ ( 8,350 ) ​ The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of September 30, 2022 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 (in thousands) Amortized Cost Fair Value Due in one year or less ​ $ 206,921 ​ $ 206,327 Due after one year through five years ​ ​ 867,511 ​ ​ 818,569 Due after five years through 10 years ​ ​ 515,276 ​ ​ 457,011 Due after 10 years ​ ​ 526,093 ​ ​ 411,591 ABS/CMBS/MBS* ​ ​ 637,830 ​ ​ 558,541 Total available-for-sale ​ $ 2,753,631 ​ $ 2,452,039 * Asset-backed, commercial mortgage-backed and mortgage-backed securities ​ 13 ​ Table of Contents The amortized cost and fair value of available-for-sale securities at September 30, 2022 and December 31, 2021 are presented in the tables below. Amortized cost does not include the $ 18.4 million and $ 16.4 million of accrued interest receivable as of September 30, 2022 and December 31, 2021, respectively. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 ​ ​ Cost or ​ Allowance ​ Gross ​ Gross ​ ​ ​ ​ ​ Amortized ​ for Credit ​ Unrealized ​ Unrealized ​ Fair (in thousands) Cost Losses Gains Losses Value U.S. government ​ $ 349,419 ​ $ — ​ $ — ​ $ ( 8,977 ) ​ $ 340,442 U.S. agency ​ ​ 59,048 ​ ​ — ​ ​ 9 ​ ​ ( 2,122 ) ​ ​ 56,935 Non-U.S. government & agency ​ ​ 6,798 ​ ​ — ​ ​ — ​ ​ ( 1,086 ) ​ ​ 5,712 Agency MBS ​ ​ 360,429 ​ ​ — ​ ​ 172 ​ ​ ( 43,572 ) ​ ​ 317,029 ABS/CMBS/MBS* ​ ​ 277,401 ​ ​ ( 9 ) ​ ​ 21 ​ ​ ( 35,901 ) ​ ​ 241,512 Corporate ​ ​ 1,067,473 ​ ​ ( 318 ) ​ ​ 47 ​ ​ ( 103,333 ) ​ ​ 963,869 Municipal ​ ​ 633,063 ​ ​ — ​ ​ 194 ​ ​ ( 106,717 ) ​ ​ 526,540 Total Fixed Income ​ $ 2,753,631 ​ $ ( 327 ) ​ $ 443 ​ $ ( 301,708 ) ​ $ 2,452,039 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ Cost or ​ Allowance ​ Gross ​ Gross ​ ​ ​ ​ ​ Amortized ​ for Credit ​ Unrealized ​ Unrealized ​ Fair (in thousands) Cost Losses Gains Losses Value U.S. government ​ $ 127,752 ​ $ — ​ $ 6,846 ​ $ ( 44 ) ​ $ 134,554 U.S. agency ​ ​ 30,403 ​ ​ — ​ ​ 2,374 ​ ​ ( 17 ) ​ ​ 32,760 Non-U.S. government & agency ​ ​ 8,297 ​ ​ — ​ ​ 338 ​ ​ ( 154 ) ​ ​ 8,481 Agency MBS ​ ​ 362,861 ​ ​ — ​ ​ 9,277 ​ ​ ( 4,951 ) ​ ​ 367,187 ABS/CMBS/MBS* ​ ​ 264,273 ​ ​ — ​ ​ 2,120 ​ ​ ( 2,339 ) ​ ​ 264,054 Corporate ​ ​ 925,394 ​ ​ ( 441 ) ​ ​ 37,247 ​ ​ ( 5,105 ) ​ ​ 957,095 Municipal ​ ​ 627,287 ​ ​ — ​ ​ 22,750 ​ ​ ( 4,281 ) ​ ​ 645,756 Total Fixed Income ​ $ 2,346,267 ​ $ ( 441 ) ​ $ 80,952 ​ $ ( 16,891 ) ​ $ 2,409,887 * Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities ​ Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities ​ A reversable allowance for credit losses is recognized on available-for-sale fixed income securities. Several criteria are reviewed to determine if securities in the fixed income portfolio 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 security’s fair value is below amortized cost. As of September 30, 2022, the discounted cash flow analysis resulted in an allowance for credit losses on 18 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities: 14 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Beginning balance ​ $ 292 ​ $ 204 ​ $ 441 ​ $ 397 Increase to allowance from securities for which credit losses were not previously recorded ​ ​ 168 ​ ​ — ​ ​ 292 ​ ​ — Reduction from securities sold during the period ​ ​ ( 166 ) ​ ​ — ​ ​ ( 619 ) ​ ​ ​ Reductions from intent to sell securities ​ ​ — ​ ​ — ​ ​ ( 17 ) ​ ​ — Net increase (decrease) from securities that had an allowance at the beginning of the period ​ ​ 33 ​ ​ 22 ​ ​ 230 ​ ​ ( 171 ) Balance as of September 30, ​ $ 327 ​ $ 226 ​ $ 327 ​ $ 226 ​ During 2022, net realized gains included $ 0.1 million of losses on fixed income securities for which we no longer had the intent to hold until recovery and the cost basis was written down to fair value. No such losses were recognized during the first nine months of 2021. ​ As of September 30, 2022, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,543 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $ 301.7 million in associated unrealized losses represents 10.8 percent of the fixed income portfolio’s cost basis and 8.2 percent of total invested assets. Isolated to these securities, unrealized losses increased through the first nine months of 2022, as interest rates increased during the period. Of the total 1,543 securities, 302 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 September 30, 2022 and December 31, 2021 after factoring in the allowance for credit losses. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position. 15 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 ​ December 31, 2021 (in thousands) < 12 Mos. 12 Mos. & Greater Total < 12 Mos. 12 Mos. & Greater Total U.S. government ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 285,302 ​ $ 5,315 ​ $ 290,617 ​ $ 2,942 ​ $ — ​ $ 2,942 Amortized cost ​ ​ 293,829 ​ ​ 5,765 ​ ​ 299,594 ​ ​ 2,986 ​ ​ — ​ ​ 2,986 Unrealized loss ​ $ ( 8,527 ) ​ $ ( 450 ) ​ $ ( 8,977 ) ​ $ ( 44 ) ​ $ — ​ $ ( 44 ) U.S. agency ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 30,089 ​ $ — ​ $ 30,089 ​ $ 1,498 ​ $ — ​ $ 1,498 Amortized cost ​ ​ 32,211 ​ ​ — ​ ​ 32,211 ​ ​ 1,515 ​ ​ — ​ ​ 1,515 Unrealized loss ​ $ ( 2,122 ) ​ $ — ​ $ ( 2,122 ) ​ $ ( 17 ) ​ $ — ​ $ ( 17 ) Non-U.S. government ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 3,594 ​ $ 2,118 ​ $ 5,712 ​ $ 4,346 ​ $ — ​ $ 4,346 Amortized cost ​ ​ 3,798 ​ ​ 3,000 ​ ​ 6,798 ​ ​ 4,500 ​ ​ — ​ ​ 4,500 Unrealized Loss ​ $ ( 204 ) ​ $ ( 882 ) ​ $ ( 1,086 ) ​ $ ( 154 ) ​ $ — ​ $ ( 154 ) Agency MBS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 192,947 ​ $ 112,457 ​ $ 305,404 ​ $ 102,145 ​ $ 62,669 ​ $ 164,814 Amortized cost ​ ​ 210,448 ​ ​ 138,528 ​ ​ 348,976 ​ ​ 104,336 ​ ​ 65,429 ​ ​ 169,765 Unrealized loss ​ $ ( 17,501 ) ​ $ ( 26,071 ) ​ $ ( 43,572 ) ​ $ ( 2,191 ) ​ $ ( 2,760 ) ​ $ ( 4,951 ) ABS/CMBS/MBS* ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 148,272 ​ $ 89,792 ​ $ 238,064 ​ $ 150,997 ​ $ 3,935 ​ $ 154,932 Amortized cost ​ ​ 165,163 ​ ​ 108,802 ​ ​ 273,965 ​ ​ 153,235 ​ ​ 4,036 ​ ​ 157,271 Unrealized loss ​ $ ( 16,891 ) ​ $ ( 19,010 ) ​ $ ( 35,901 ) ​ $ ( 2,238 ) ​ $ ( 101 ) ​ $ ( 2,339 ) Corporate ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 773,433 ​ $ 184,317 ​ $ 957,750 ​ $ 217,791 ​ $ 53,818 ​ $ 271,609 Amortized cost ​ ​ 844,169 ​ ​ 216,914 ​ ​ 1,061,083 ​ ​ 221,010 ​ ​ 55,704 ​ ​ 276,714 Unrealized loss ​ $ ( 70,736 ) ​ $ ( 32,597 ) ​ $ ( 103,333 ) ​ $ ( 3,219 ) ​ $ ( 1,886 ) ​ $ ( 5,105 ) Municipal ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 418,864 ​ $ 76,783 ​ $ 495,647 ​ $ 162,998 ​ $ 15,037 ​ $ 178,035 Amortized cost ​ ​ 493,485 ​ ​ 108,879 ​ ​ 602,364 ​ ​ 166,602 ​ ​ 15,714 ​ ​ 182,316 Unrealized loss ​ $ ( 74,621 ) ​ $ ( 32,096 ) ​ $ ( 106,717 ) ​ $ ( 3,604 ) ​ $ ( 677 ) ​ $ ( 4,281 ) Total fixed income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 1,852,501 ​ $ 470,782 ​ $ 2,323,283 ​ $ 642,717 ​ $ 135,459 ​ $ 778,176 Amortized cost ​ ​ 2,043,103 ​ ​ 581,888 ​ ​ 2,624,991 ​ ​ 654,184 ​ ​ 140,883 ​ ​ 795,067 Unrealized loss ​ $ ( 190,602 ) ​ $ ( 111,106 ) ​ $ ( 301,708 ) ​ $ ( 11,467 ) ​ $ ( 5,424 ) ​ $ ( 16,891 ) * Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities ​ The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at September 30, 2022 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equivalent ​ Equivalent ​ (dollars in thousands) ​ ​ ​ NAIC S&P Moody’s ​ Amortized ​ ​ ​ ​ Unrealized ​ Percent ​ Rating Rating Rating Cost Fair Value Loss to Total ​ 1 ​ AAA/AA/A ​ Aaa/Aa/A ​ $ 2,084,118 ​ $ 1,840,726 ​ $ ( 243,392 ) ​ 80.7 % 2 ​ BBB ​ Baa ​ ​ 399,832 ​ ​ 353,124 ​ ​ ( 46,708 ) ​ 15.5 % 3 ​ BB ​ Ba ​ ​ 75,146 ​ ​ 67,738 ​ ​ ( 7,408 ) ​ 2.5 % 4 ​ B ​ B ​ ​ 65,238 ​ ​ 61,152 ​ ​ ( 4,086 ) ​ 1.3 % 5 ​ CCC ​ Caa ​ ​ 657 ​ ​ 543 ​ ​ ( 114 ) ​ 0.0 % 6 ​ CC or lower ​ Ca or lower ​ ​ — ​ ​ — ​ ​ — ​ 0.0 % ​ ​ ​ ​ Total ​ $ 2,624,991 ​ $ 2,323,283 ​ $ ( 301,708 ) ​ 100.0 % ​ Other Invested Assets ​ We had $ 48.8 million of other invested assets at September 30, 2022, compared to $ 50.5 million at December 31, 2021. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC investments are carried at amortized 16 ​ Table of Contents cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value. ​ Our LIHTC interests had a balance of $ 14.2 million at September 30, 2022, compared to $ 16.6 million at December 31, 2021, and recognized a total tax benefit of $ 0.9 million during the third quarters of 2022 and 2021. For the nine-months ended September 30, 2022, our LIHTC interests recognized a total benefit of $ 2.6 million, compared to $ 2.7 million for the same period in 2021. Our unfunded commitment for our LIHTC investments totaled $ 1.3 million at September 30, 2022 and will be paid out in installments through 2035. ​ As of September 30, 2022, $ 60.2 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of September 30, 2022, $ 50.0 million of borrowings were outstanding with the FHLBC. ​ Our investments in private funds totaled $ 28.9 million at September 30, 2022, compared to $ 28.6 million at December 31, 2021, and we had $ 5.7 million of associated unfunded commitments at September 30, 2022. 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. ​ Investments in Unconsolidated Investees ​ We had $ 58.1 million of investments in unconsolidated investees at September 30, 2022, compared to $ 171.3 million at December 31, 2021. Our investments accounted for under the equity method are primarily related to Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime). On September 30, 2022, we completed the sale of our investment in Maui Jim. See note 8 for more information on the sale. At September 30, 2022, our investment in Prime was $ 46.9 million. Other investments in unconsolidated investees totaled $ 11.2 million at September 30, 2022 and had unfunded commitments of $ 7.7 million. ​ Cash ​ Cash consists of uninvested balances in bank accounts. We had a cash balance of $ 723.5 million at September 30, 2022, compared to $ 88.8 million at December 31, 2021. Cash balances increased due to the sale of our investment in Maui Jim which was completed on September 30, 2022. ​ 17 ​ Table of Contents 3. HISTORICAL LOSS AND LAE DEVELOPMENT ​ The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first nine months of 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Nine Months ​ ​ Ended September 30, (in thousands) 2022 2021 Unpaid losses and LAE at beginning of year ​ ​ ​ ​ ​ ​ Gross ​ $ 2,043,555 ​ $ 1,750,049 Ceded ​ ​ ( 608,086 ) ​ ​ ( 443,729 ) Net ​ $ 1,435,469 ​ $ 1,306,320 ​ ​ ​ ​ ​ ​ ​ Increase (decrease) in incurred losses and LAE ​ ​ ​ ​ ​ ​ Current accident year ​ $ 491,559 ​ $ 452,542 Prior accident years ​ ​ ( 103,032 ) ​ ​ ( 96,968 ) Total incurred ​ $ 388,527 ​ $ 355,574 ​ ​ ​ ​ ​ ​ ​ Loss and LAE payments for claims incurred ​ ​ ​ ​ ​ ​ Current accident year ​ $ ( 52,435 ) ​ $ ( 58,411 ) Prior accident years ​ ​ ( 219,682 ) ​ ​ ( 172,120 ) Total paid ​ $ ( 272,117 ) ​ $ ( 230,531 ) ​ ​ ​ ​ ​ ​ ​ Net unpaid losses and LAE at September 30, ​ $ 1,551,879 ​ $ 1,431,363 ​ ​ ​ ​ ​ ​ ​ Unpaid losses and LAE at September 30, ​ ​ ​ ​ ​ ​ Gross ​ $ 2,322,737 ​ $ 2,033,517 Ceded ​ ​ ( 770,858 ) ​ ​ ( 602,154 ) Net ​ $ 1,551,879 ​ $ 1,431,363 ​ For the first nine months of 2022, incurred losses and LAE included $ 103.0 million of favorable development on prior years’ loss reserves. General liability, professional services, transportation, executive products, commercial excess, marine and surety were drivers of the favorable development. No products experienced significant adverse development. ​ For the first nine months of 2021, incurred losses and LAE included $ 97.0 million of favorable development on prior years’ loss reserves. General liability, transportation, professional services, small commercial, commercial excess, personal umbrella and marine were drivers of the favorable development. No products experienced significant adverse development. ​ Actuarial models base future loss emergence on historical experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of September 30, 2022. We expect the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite will be affected as a result of COVID-19 and the related economic impact. The industry is experiencing new issues, including the postponement of civil court cases, the extension of various statutes of limitations and changes in settlement trends. Our recorded reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods. ​ 4. INCOME TAXES ​ Our effective tax rate for the three and nine months ended September 30, 2022 was 20.7 percent and 20.0 percent, respectively, compared to 17.5 percent and 19.0 percent, respectively, for the same period in 2021. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective tax rate was higher for the three and nine-month periods in 2022, as higher pretax income, resulting from the gain on our sale of Maui Jim, decreased the percentage impact of tax-favored adjustments. The sale of Maui Jim also resulted in a larger current income taxes payable balance as of September 30, 2022. ​ Income tax expense attributable to income from operations for the three and nine-month periods ended September 30, 2022 and 2021 differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income by the 18 ​ Table of Contents items detailed in the below table. In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended September 30, 2022 ​ For the Nine Months Ended September 30, 2022 ​ ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 ​ (in thousands) Amount % Amount % Amount % Amount % ​ Provision for income taxes at the statutory rate of 21% ​ $ 116,487 ​ 21.0 % $ 7,442 ​ 21.0 % $ 127,401 ​ 21.0 % $ 47,731 ​ 21.0 % Increase (reduction) in taxes resulting from: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Excess tax benefit on share-based compensation ​ ​ ( 95 ) ​ ( 0.0 ) % ​ ( 225 ) ​ ( 0.6 ) % ​ ( 2,270 ) ​ ( 0.4 ) % ​ ( 2,419 ) ​ ( 1.1 ) % Tax exempt interest income ​ ​ ( 280 ) ​ ( 0.1 ) % ​ ( 298 ) ​ ( 0.8 ) % ​ ( 850 ) ​ ( 0.1 ) % ​ ( 927 ) ​ ( 0.4 ) % Dividends received deduction ​ ​ ( 240 ) ​ ( 0.0 ) % ​ ( 223 ) ​ ( 0.6 ) % ​ ( 673 ) ​ ( 0.1 ) % ​ ( 707 ) ​ ( 0.3 ) % Investment tax credit ​ ​ ( 1,181 ) ​ ( 0.2 ) % ​ ( 801 ) ​ ( 2.3 ) % ​ ( 3,545 ) ​ ( 0.6 ) % ​ ( 2,404 ) ​ ( 1.0 ) % ESOP dividends paid deduction ​ ​ ( 136 ) ​ ( 0.0 ) % ​ ( 132 ) ​ ( 0.4 ) % ​ ( 404 ) ​ ( 0.0 ) % ​ ( 399 ) ​ ( 0.2 ) % Nondeductible expenses ​ ​ 34 ​ 0.0 % ​ 642 ​ 1.8 % ​ 608 ​ 0.1 % ​ 1,879 ​ 0.8 % Other items, net ​ ​ 220 ​ 0.0 % ​ ( 211 ) ​ ( 0.6 ) % ​ 829 ​ 0.1 % ​ 468 ​ 0.2 % Total tax expense ​ $ 114,809 ​ 20.7 % $ 6,194 ​ 17.5 % $ 121,096 ​ 20.0 % $ 43,222 ​ 19.0 % ​ 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 result of future operations, which will generate sufficient taxable income to realize the deferred tax asset. Unrealized losses on the investment portfolio during 2022 have moved us from a net deferred tax liability position as of December 31, 2021 to a net deferred tax asset position as of September 30, 2022. ​ ​ 5. STOCK BASED COMPENSATION ​ Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015. ​ In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have granted 3,237,225 awards under the 2015 LTIP, including 336,805 thus far in 2022. ​ Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $ 2.4 million and $ 6.2 million in the three and nine-month periods ended September 30, 2022, respectively, compared to $ 1.6 million and $ 4.8 million, respectively, for the same period in 2021. The total income tax benefit was $ 0.4 million and $ 1.0 million for the three and nine-month periods ended September 30, 2022, compared to $ 0.2 million and $ 0.7 million, respectively, for the same period in 2021. Total unrecognized compensation expense relating to outstanding and unvested awards was $ 8.2 million, which will be recognized over the weighted average vesting period of 2.23 years. ​ Stock Options ​ Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable over a five-year period and expire eight years after grant. ​ 19 ​ Table of Contents For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 , the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares. ​ The following tables summarize option activity for the nine-month period ended September 30, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Aggregate ​ ​ ​ ​ Weighted ​ Average ​ Intrinsic ​ ​ ​ ​ Average ​ Remaining ​ Value ​ Options Exercise Price Contractual Life (in 000’s) Outstanding options at January 1, 2022 ​ 1,669,325 ​ $ 78.63 ​ ​ ​ ​ ​ Options granted ​ 320,100 ​ ​ 115.27 ​ ​ ​ ​ ​ Options exercised ​ ( 98,967 ) ​ ​ 59.98 ​ ​ ​ ​ ​ Options canceled/forfeited ​ ( 9,485 ) ​ ​ 93.40 ​ ​ ​ ​ ​ Outstanding options at September 30, 2022 ​ 1,880,973 ​ $ 85.78 ​ 4.86 ​ $ 37,402 Exercisable options at September 30, 2022 ​ 960,605 ​ $ 71.37 ​ 3.48 ​ $ 30,181 ​ The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $ 5.5 million and $ 8.4 million during the first nine months of 2022 and 2021, respectively. ​ The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of September 30: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ Weighted-average fair value of grants ​ $ 20.99 ​ $ 17.01 ​ Risk-free interest rates ​ ​ 2.86 % ​ 0.70 % Dividend yield ​ ​ 2.50 % ​ 2.06 % Expected volatility ​ ​ 22.89 % ​ 22.73 % Expected option life ​ ​ 5.06 years ​ 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 behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant. ​ Restricted Stock Units ​ In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 . For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period. The total fair value of restricted stock units that vested was $ 2.5 million and $ 2.2 million during the first nine months of 2022 and 2021, respectively. ​ 20 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ ​ ​ Grant Date ​ RSUs Fair Value Nonvested at January 1, 2022 ​ 45,068 ​ $ 97.67 Granted ​ 16,705 ​ ​ 116.60 Reinvested ​ 291 ​ ​ 108.78 Vested ​ ( 21,380 ) ​ ​ 93.07 Forfeited ​ ( 1,291 ) ​ ​ 76.82 Nonvested at September 30, 2022 ​ 39,393 ​ $ 108.25 ​ ​ 6. OPERATING SEGMENT INFORMATION Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months ​ For the Nine Months Revenues ​ Ended September 30, ​ Ended September 30, (in thousands) 2022 2021 2022 2021 Casualty ​ $ 179,615 ​ $ 162,852 ​ $ 528,494 ​ $ 467,817 Property ​ ​ 80,844 ​ ​ 60,886 ​ ​ 222,974 ​ ​ 168,393 Surety ​ ​ 31,009 ​ ​ 29,651 ​ ​ 91,962 ​ ​ 86,774 Net premiums earned ​ $ 291,468 ​ $ 253,389 ​ $ 843,430 ​ $ 722,984 Net investment income ​ ​ 21,270 ​ ​ 17,844 ​ ​ 57,625 ​ ​ 50,929 Net realized gains ​ ​ 573,170 ​ ​ 1,829 ​ ​ 591,562 ​ ​ 52,442 Net unrealized gains (losses) on equity securities ​ ​ ( 26,414 ) ​ ​ ( 2,592 ) ​ ​ ( 155,218 ) ​ ​ 29,526 Total consolidated revenue ​ $ 859,494 ​ $ 270,470 ​ $ 1,337,399 ​ $ 855,881 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Earnings ​ ​ ​ ​ ​ ​ (in thousands) 2022 2021 2022 2021 Casualty ​ $ 11,329 ​ $ 22,949 ​ $ 60,418 ​ $ 74,254 Property ​ ​ ( 8,308 ) ​ ​ ( 16,558 ) ​ ​ 40,273 ​ ​ ( 8,684 ) Surety ​ ​ 5,775 ​ ​ 7,333 ​ ​ 23,539 ​ ​ 14,662 Net underwriting income ​ $ 8,796 ​ $ 13,724 ​ $ 124,230 ​ $ 80,232 Net investment income ​ ​ 21,270 ​ ​ 17,844 ​ ​ 57,625 ​ ​ 50,929 Net realized gains ​ ​ 573,170 ​ ​ 1,829 ​ ​ 591,562 ​ ​ 52,442 Net unrealized gains (losses) on equity securities ​ ​ ( 26,414 ) ​ ​ ( 2,592 ) ​ ​ ( 155,218 ) ​ ​ 29,526 General corporate expense and interest on debt ​ ​ ( 4,768 ) ​ ​ ( 4,411 ) ​ ​ ( 14,587 ) ​ ​ ( 15,244 ) Equity in earnings (loss) of unconsolidated investees ​ ​ ( 17,352 ) ​ ​ 9,043 ​ ​ 3,061 ​ ​ 29,407 Earnings before income taxes ​ $ 554,702 ​ $ 35,437 ​ $ 606,673 ​ $ 227,292 Income tax expense ​ ​ 114,809 ​ ​ 6,194 ​ ​ 121,096 ​ ​ 43,222 Net earnings ​ $ 439,893 ​ $ 29,243 ​ $ 485,577 ​ $ 184,070 ​ 21 ​ Table of Contents The following table further summarizes revenues by major product type within each operating segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months ​ For the Nine Months Net Premiums Earned ​ Ended September 30, ​ Ended September 30, (in thousands) 2022 2021 2022 2021 Casualty ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial excess and personal umbrella ​ $ 65,131 ​ $ 56,285 ​ $ 187,666 ​ $ 161,287 General liability ​ ​ 25,284 ​ ​ 23,156 ​ ​ 74,130 ​ ​ 67,616 Commercial transportation ​ ​ 24,205 ​ ​ 22,571 ​ ​ 71,774 ​ ​ 60,926 Professional services ​ ​ 24,174 ​ ​ 22,401 ​ ​ 71,590 ​ ​ 66,095 Small commercial ​ ​ 17,005 ​ ​ 16,301 ​ ​ 50,463 ​ ​ 48,302 Executive products ​ ​ 6,556 ​ ​ 5,461 ​ ​ 20,208 ​ ​ 15,785 Other casualty ​ ​ 17,260 ​ ​ 16,677 ​ ​ 52,663 ​ ​ 47,806 Total ​ $ 179,615 ​ $ 162,852 ​ $ 528,494 ​ $ 467,817 Property ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial property ​ $ 43,201 ​ $ 28,683 ​ $ 115,419 ​ $ 76,488 Marine ​ ​ 29,592 ​ ​ 25,416 ​ ​ 84,499 ​ ​ 72,737 Specialty personal ​ ​ 6,409 ​ ​ 5,462 ​ ​ 18,405 ​ ​ 15,761 Other property ​ ​ 1,642 ​ ​ 1,325 ​ ​ 4,651 ​ ​ 3,407 Total ​ $ 80,844 ​ $ 60,886 ​ $ 222,974 ​ $ 168,393 Surety ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 12,057 ​ $ 11,541 ​ $ 35,423 ​ $ 33,594 Miscellaneous ​ ​ 10,751 ​ ​ 11,124 ​ ​ 33,691 ​ ​ 32,604 Contract ​ ​ 8,201 ​ ​ 6,986 ​ ​ 22,848 ​ ​ 20,576 Total ​ $ 31,009 ​ $ 29,651 ​ $ 91,962 ​ $ 86,774 Grand Total ​ $ 291,468 ​ $ 253,389 ​ $ 843,430 ​ $ 722,984 ​ ​ 7. LEASES ​ Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease term. ​ 22 ​ Table of Contents The Company’s operating lease obligations are for branch office facilities. The components of lease expense and other lease information as of and during the three and nine-month periods ended September 30, 2022 and 2021 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months ​ For the Nine Months ​ ​ Ended September 30, ​ Ended September 30, (in thousands) 2022 2021 2022 2021 Operating lease cost ​ $ 1,272 ​ $ 1,326 ​ $ 3,686 ​ $ 4,005 Variable lease cost ​ ​ 339 ​ ​ 348 ​ ​ 1,073 ​ ​ 1,090 Sublease income ​ ​ ( 139 ) ​ ​ ( 123 ) ​ ​ ( 416 ) ​ ​ ( 369 ) Total lease cost ​ $ 1,472 ​ $ 1,551 ​ $ 4,343 ​ $ 4,726 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash outflows from operating leases ​ $ 1,387 ​ $ 1,490 ​ $ 3,987 ​ $ 4,455 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ROU assets obtained in exchange for new operating lease liabilities ​ $ 54 ​ $ 4,434 ​ $ 2,485 ​ $ 4,699 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Reduction to ROU assets resulting from reduction to lease liabilities ​ $ — ​ $ — ​ $ — ​ $ 1,250 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other non-cash reductions to ROU assets ​ $ — ​ $ 48 ​ $ 73 ​ $ 48 ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) September 30, 2022 December 31, 2021 ​ Operating lease ROU assets ​ $ 13,749 ​ $ 14,765 ​ Operating lease liabilities ​ $ 15,658 ​ $ 16,905 ​ Weighted-average remaining lease term - operating leases ​ ​ 4.31 years ​ 4.52 years Weighted-average discount rate - operating leases ​ ​ 2.07 % ​ 2.02 % ​ Future minimum lease payments under non-cancellable leases as of September 30, 2022 were as follows: ​ ​ ​ ​ ​ (in thousands) September 30, 2022 2022 ​ $ 1,448 2023 ​ ​ 5,529 2024 ​ ​ 3,552 2025 ​ ​ 2,138 2026 ​ ​ 1,285 2027 ​ ​ 826 Thereafter ​ ​ 1,589 Total future minimum lease payments ​ $ 16,367 Less imputed interest ​ ​ ( 709 ) Total operating lease liability ​ $ 15,658 ​ ​ 8. ACQUISITONS AND DISPOSTIONS ​ On September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim to Kering Eyewear for cash proceeds of $ 686.6 million. We recognized a net realized gain of $ 574.5 million as a result of the sale, which was recorded in the net realized gain line item of the statement of earnings. In addition, we have the right to receive additional consideration based on customary post-closing working capital and other adjustments. Any gain related to the additional consideration will be recognized when received. ​ ​ ​ 23 ​ Table of Contents