What changed in this filing

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Item 1. Financial Statements

2023-04-21 compared with 2022-10-21 · 115 added, 179 removed, 485 unchanged (38% of the section changed)

3 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands, except per share data)

10 unchanged sentences

Total expenses

Equity in earnings (loss) of unconsolidated investees

Equity in earnings of unconsolidated investees

Earnings before income taxes

8 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(in thousands, except share and per share data)

5 unchanged sentences

Equity securities, at fair value (cost - $ 333,229 at 3/31/23 and $ 328,019 at 12/31/22)

Short-term investments, at cost which approximates fair value

Other invested assets

14 unchanged sentences

Income taxes-current

Income taxes-deferred

Current portion of long-term debt

Long-term debt

Accrued expenses

25 unchanged sentences

Balance, March 31, 2022

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.25 per share)

Balance, June 30, 2021

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.25 per share)

Balance, September 30, 2021

Comprehensive

2 unchanged sentences

Balance, January 1, 2023

Cumulative-effect adjustment from ASU 2023-02

Other comprehensive earnings (loss), net of tax

3 unchanged sentences

Balance, March 31, 2023

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.26 per share)

Balance, June 30, 2022

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.26 per share)

Balance, September 30, 2022

See accompanying notes to the unaudited condensed consolidated interim financial statements.

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(in thousands)

10 unchanged sentences

Fixed income securities, available-for-sale

Net proceeds from sale (purchase) of short-term investments

Net cash provided by (used in) investing activities

5 unchanged sentences

Cash at the beginning of the period

Cash at September 30,

Cash at March 31,

See accompanying notes to the unaudited condensed consolidated interim financial statements.

5 unchanged sentences

As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2022 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.

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 March 31, 2023 and the results of operations of RLI Corp.

(the Company) and subsidiaries for all periods presented have been made.

4 unchanged sentences

ADOPTED ACCOUNTING STANDARDS

No new accounting standards applicable in 2022 materially impact our financial statements.

2023-02—Investments – Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Method

The amendments in this ASU permit the use of the proportional amortization method for investments in tax credits if certain conditions are met.

Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits presented as a component of income tax expense.

Under previous guidance, equity investments in tax credit structures, other than qualified affordable housing projects, were accounted for using the equity method of accounting, which required the presentation of income, gains and losses, and tax credits in their respective line items of the statement of earnings.

This ASU allows entities to make an accounting policy election on an individual tax credit program basis for all equity investments whose primary purpose is receiving income tax credits or other income tax benefits.

When the proportional amortization method is selected, this amendment also requires a liability be recognized for delayed equity contributions that are unconditional or for contingent contributions when the contingent event becomes probable.

We adopted ASU 2023-02 on January 1, 2023 using a modified-retrospective approach.

Through 2022, our investment in historic tax credit partnerships was presented in the balance sheet as an investment in unconsolidated investee.

On January 1, 2023, the $ 11 million investment was moved to the other invested assets line item, an unfunded commitment for the investment was recognized by establishing a $ 7 million liability and increasing other invested assets, and the asset and retained earnings were reduced by $ 1 million to reflect the difference between applying the equity method and the proportional method since the investment was entered into.

While the amortization of the investment will be presented in income tax expense going forward, rather than in equity in earnings of unconsolidated investees, the impact to net earnings will not have a material impact on our financial statements.

PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would have a material impact on our financial statements as of September 30, 2022.

There are no prospective accounting standards which would have a material impact on our financial statements as of March 31, 2023.

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.

1 unchanged sentence

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.

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.

7 unchanged sentences

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.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $ 16.1 million and $ 10.9 million, respectively, at March 31, 2023.

At December 31, 2022, the amounts were $ 16.1 million and $ 11.3 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

were applied to the allowances in the first nine months of 2022 and less than $ 0.1 million was recovered.

No write-offs or recoveries were applied to the allowances in the first three months of 2023.

We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

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,

The composition of goodwill and intangible assets at March 31, 2023 and December 31, 2022 is detailed in the following table:

(in thousands)

Total goodwill

Indefinite-lived intangibles - state insurance licenses

Indefinite-lived intangibles

Total goodwill and intangibles

1 unchanged sentence

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.

In addition, there were no triggering events as of March 31, 2023 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

EARNINGS PER SHARE

6 unchanged sentences

For the Three Months

Ended September 30, 2022

Ended September 30, 2021

(in thousands, except per share data)

(Denominator)

Earnings available to common shareholders

Effect of Dilutive Securities

Stock options and restricted stock units

Earnings available to common shareholders

Anti-dilutive securities excluded from diluted EPS

For the Nine Months

Ended September 30, 2022

Ended September 30, 2021

Ended March 31, 2023

Ended March 31, 2022

(in thousands, except per share data)

9 unchanged sentences

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.

Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $ 10 million for the first quarter of 2023, compared to $ 31 million of tax benefit for the same period in 2022.

Unrealized gains, net of tax, recognized in other comprehensive earnings (loss) were $ 38 million for the first three months of 2023, compared to $ 116 million of unrealized losses, net of tax, during the same period last year.

The unrealized gains in the first quarter of 2023 were attributable to a decline in interest rates, which increased the fair value of securities held in the fixed income portfolio, compared to rising interest rates during the first quarter of 2022, which decreased the fair value of fixed income securities.

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:

1 unchanged sentence

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

Unrealized Gains/Losses on Available-for-Sale Securities

11 unchanged sentences

For the Three Months

For the Nine Months

Component of Accumulated

Ended September 30,

Ended March 31,

Affected line item in the

49 unchanged sentences

Equity Securities:

As of September 30, 2022, nearly all of our equity holdings were traded on an exchange.

As of March 31, 2023, nearly all of our equity holdings were traded on an exchange.

Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices).

9 unchanged sentences

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

1 unchanged sentence

We purchased limits of $ 700 million in excess of $ 25 million first-dollar retention for earthquakes in California, $ 700 million in excess of $ 50 million first-dollar retention for earthquakes outside of California and $ 600 million in excess of $ 50 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.

These amounts are subject to certain co-participations by the Company on losses in excess of the first-dollar retentions.

Our investments are primarily composed of fixed income debt securities and common stock equity securities.

1 unchanged sentence

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:

The following is a summary of the disposition of fixed income and equity securities for the three-month periods ended March 31, 2023 and 2022:

Gross Realized

10 unchanged sentences

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

Assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 are summarized below:

As of March 31, 2023

Quoted Prices in

25 unchanged sentences

Net realized and unrealized gains (losses)

Included in net earnings as a part of:

Net investment income

Net realized gains

Included in other comprehensive earnings (loss)

Total net realized and unrealized gains (losses)

Transfers out of Level 3

Balance as of September 30, 2022

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains

Sales / Calls / Maturities

Balance as of March 31, 2023

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)

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

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of March 31, 2023 were as follows:

March 31, 2023

(in thousands)

7 unchanged sentences

Asset-backed, commercial mortgage-backed and mortgage-backed securities

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

The amortized cost and fair value of available-for-sale securities at March 31, 2023 and December 31, 2022 are presented in the tables below.

Amortized cost does not include the $ 20 million of accrued interest receivable as of both March 31, 2023 and December 31, 2022.

March 31, 2023

(in thousands)

20 unchanged sentences

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.

As of March 31, 2023, 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:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

1 unchanged sentence

Increase to allowance from securities for which credit losses were not previously recorded

Reduction from securities sold during the period

Reductions from intent to sell securities

Net increase (decrease) from securities that had an allowance at the beginning of the period

Balance as of September 30,

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.

Balance as of March 31,

During the first three months of 2023, net realized gains included $ 1.7 million of losses on fixed income securities for which the cost basis was written down to fair value due to a credit event and restructuring.

We recognized $ 0.1 million of losses on securities for which we no longer had the intent to hold until recovery during the first quarter of 2022.

As of March 31, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,388 securities with an unrealized loss position for which an allowance for credit losses had not been recorded.

The $ 236 million in associated unrealized losses represents 8 percent of the fixed income portfolio’s cost basis and 7 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.

Isolated to these securities, unrealized losses decreased through the first three months of 2023, as interest rates declined during the period.

Of the total 1,388 securities, 954 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.

The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of March 31, 2023 and December 31, 2022 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.

September 30, 2022

March 31, 2023

December 31, 2022

19 unchanged sentences

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 following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at March 31, 2023 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.

1 unchanged sentence

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

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.

We had $ 64 million of other invested assets at March 31, 2023, compared to $ 48 million at December 31, 2022.

Other invested assets include investments in low income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds.

Our LIHTC and

HTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost.

Due to the nature of the LIHTC, HTC and our membership in the FHLBC, their carrying amounts approximate fair value.

The private funds are carried at fair value, using each 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 LIHTC interests had a balance of $ 13 million at both March 31, 2023 and December 31, 2022, and recognized a total tax benefit of $ 0.8 million during the first quarter of 2023, compared to a total tax benefit of $ 0.9 million during the same period in 2022.

Our unfunded commitment for our LIHTC investments totaled $ 1 million at March 31, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $ 16 million at March 31, 2023, compared to $ 11 million at December 31, 2022.

Through 2022, the investment was accounted for as an investment in unconsolidated investee.

Due to the adoption of ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method , the investment was reclassified as an other invested asset during 2023.

A total tax benefit of $ 1.4 million was recognized from our HTC investment during the first quarter of 2023, compared to $ 1.3 million in the first quarter of 2022.

Our unfunded commitment for our HTC investment totaled $ 7 million at March 31, 2023 and is expected be paid entirely during 2023.

As of March 31, 2023, $ 59 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides.

As of March 31, 2023, $ 50 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $ 28 million as of March 31, 2023 and December 31, 2022, and had $ 5 million of associated unfunded commitments at March 31, 2023.

Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities, and the timed dissolution of the partnerships would trigger redemption.

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.

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.

We had $ 52 million of investments in unconsolidated investees at March 31, 2023, compared to $ 58 million at December 31, 2022.

At March 31, 2023, our investment in Prime Holdings Insurance Services, Inc.

(Prime) was $ 52 million and other investments in unconsolidated investees totaled less than $ 1 million.

Through December 31, 2022, our $ 11 million HTC investment was accounted for as an unconsolidated investee, but was reclassified as an other invested asset during 2023 due to the adoption of ASU 2023-02.

Cash and Short-Term Investments

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.

Short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated government money market funds.

Short-term investments are carried at cost.

We had a cash and short-term investment balance of $ 23 million and $ 116 million, respectively, at March 31, 2023, compared to $ 23 million and $ 36 million, respectively, at December 31, 2022.

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,

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first three months of 2023 and 2022:

For the Three Months

Ended March 31,

(in thousands)

7 unchanged sentences

Prior accident years

Net unpaid losses and LAE at September 30,

Unpaid losses and LAE at September 30,

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.

Net unpaid losses and LAE at March 31,

Unpaid losses and LAE at March 31,

For the first three months of 2023, incurred losses and LAE included $ 52 million of favorable development on prior years’ loss reserves, largely from accident years 2016 and 2018 through 2022.

Marine, general liability, professional services, commercial excess, executive products, personal umbrella, surety and commercial property 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.

For the first three months of 2022, incurred losses and LAE included $ 45 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2021.

Professional services, general liability, transportation, commercial excess, personal umbrella, marine, commercial property and surety 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.

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.

Our effective tax rate for the three months ended March 31, 2023 was 19.5 percent, compared to 18.1 percent for the same period in 2022.

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

items detailed in the below table.

The effective tax rate was higher for the three-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments.

Income tax expense attributable to income from operations for the three-month period ended March 31, 2023 and 2022 differed from the amounts computed by applying the U.S.

federal tax rate of 21 percent to pretax income by the 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

For the Three Months Ended March 31, 2023

(in thousands)

11 unchanged sentences

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.

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.

Long-Term Incentive Plan (2015 LTIP) provides for equity-based compensation.

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.

4 unchanged sentences

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.

The total compensation expense related to equity awards was $ 2.5 million in the three-month period ended March 31, 2023, compared to $ 1.5 million for the same period in 2022.

The total income tax benefit was $ 0.4 million for the three-month period ended March 31, 2023, compared to $ 0.2 million for the same period in 2022.

Total unrecognized compensation expense relating to outstanding and unvested awards was $ 5 million, which will be recognized over the weighted average vesting period of 3.04 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).

Under the 2015 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, 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.

3 unchanged sentences

Shares issued upon option exercise are newly issued shares.

The following tables summarize option activity for the nine-month period ended September 30, 2022:

The following tables summarize option activity for the three-month period ended March 31, 2023:

Exercise Price

3 unchanged sentences

Options exercised

Options canceled/forfeited

Outstanding options at September 30, 2022

Exercisable options at September 30, 2022

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:

Outstanding options at March 31, 2023

Exercisable options at March 31, 2023

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $ 11 million and $ 1 million during the first three months of 2023 and 2022, 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 March 31:

Weighted-average fair value of grants

13 unchanged sentences

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.

Nonvested at January 1, 2023

Nonvested at September 30, 2022

Nonvested at March 31, 2023

OPERATING SEGMENT INFORMATION

2 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

10 unchanged sentences

General corporate expense and interest on debt

Equity in earnings (loss) of unconsolidated investees

Equity in earnings of unconsolidated investees

Earnings before income taxes

2 unchanged sentences

For the Three Months

For the Nine Months

Net Premiums Earned

Ended September 30,

Ended March 31,

(in thousands)

7 unchanged sentences

Commercial property

Specialty personal

Other property

10 unchanged sentences

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:

The components of lease expense and other lease information as of and during the three-month period ended March 31, 2023 and 2022 were as follows:

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

9 unchanged sentences

(in thousands)

September 30, 2022

March 31, 2023

December 31, 2022

3 unchanged sentences

Weighted-average discount rate - operating leases

Future minimum lease payments under non-cancellable leases as of September 30, 2022 were as follows:

Future minimum lease payments under non-cancellable leases as of March 31, 2023 were as follows:

(in thousands)

September 30, 2022

March 31, 2023

Total future minimum lease payments

4 unchanged sentences

completed the sale of its equity method investment in Maui Jim to Kering Eyewear for cash proceeds of $ 687 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.

A net realized gain of $ 571 million was recognized during 2022 and the payout of the

working capital escrow during the first quarter of 2023 resulted in the recognition of an additional $ 14 million realized gain.

The gains were recorded in the net realized gain line item of the statement of earnings.

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 1. Financial Statements