What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-21 compared with 2022-10-21 · 117 added, 242 removed, 178 unchanged (67% of the section changed)

14 unchanged sentences

In 2022, we achieved our 27th consecutive year of underwriting profitability.

Over the 26-year period, we averaged an 88.4 combined ratio.

This drives our ability to provide shareholder returns in three different ways:

Over the 27-year period, we averaged an 88.2 combined ratio, allowing us to provide shareholder returns from three possible sources:

the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.

15 unchanged sentences

Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast, and wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii.

We seek to limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout insurance cycles.

We limit our net aggregate exposure to a catastrophic event by managing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout insurance cycles.

We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.

The surety segment specializes in writing small to large-sized commercial and contract surety coverages, including payment and performance bonds.

The surety segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds.

We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare as well as on and offshore energy, petrochemical and refining industries.

We also offer miscellaneous bonds including license and permit, notary and court bonds.

Often, our surety coverages involve a statutory requirement for bonds.

While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our principals.

While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds.

The contract surety product guarantees the construction work of a commercial contractor for a specific project.

Generally, losses occur due to the deterioration of a contractor’s financial condition.

This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

2 unchanged sentences

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

GAAP, non-GAAP and Performance Measures

Throughout this quarterly report, we include certain non-generally accepted accounting principles (non-GAAP) financial measures.

Management believes that these non-GAAP measures further explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business.

These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America (GAAP).

In addition, our definitions of these items may not be comparable to the definitions used by other companies.

The following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

Key Performance Measures

The following is a list of key performance measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

Underwriting Income

5 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

1 unchanged sentence

Earnings before income taxes

Equity in (earnings) loss of unconsolidated investees

Equity in earnings of unconsolidated investees

General corporate expenses

17 unchanged sentences

There have been no significant changes to critical accounting policies during the year.

IMPACT OF COVID-19

Our processes and controls continue to operate effectively and we have been able to maintain high service and support levels for our customers throughout the COVID-19 pandemic.

As of September 30, 2022, our premium production was unaffected by the direct impacts of the pandemic.

However, actuarial models base future loss emergence on historical experience, with adjustments for current trends, and the appropriateness of these assumptions still involves greater uncertainty.

We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages.

The industry experienced new issues throughout the pandemic, including the postponement of civil court cases, the extension of various statutes of limitations and changes in settlement trends.

Our booked reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods.

We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business.

Our diversified portfolio of products and financial strength have allowed us to remain on solid footing.

We believe we have a strong and sustainable underwriting approach that will allow us to weather the economic environment and any remaining uncertainty.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Net premiums earned for the Group increased 17 percent, driven by growth from our casualty and property segments.

Overall market declines resulted in $155.2 million of unrealized losses on equity securities in the first nine months of 2022, while positive market performance resulted in $29.5 million of unrealized gains in our equity portfolio in 2021.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Net premiums earned for the Group increased 14 percent, driven by growth from our property and casualty segments.

Positive market performance resulted in $15 million of unrealized gains on equity securities in the first three months of 2023, while overall market declines resulted in $28 million of unrealized losses in our equity portfolio in 2022.

Investment income was up 51 percent, due to an increased average asset base and higher interest rates relative to the prior year.

Realized gains during the first nine months of 2022 were comprised of $19.8 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $2.7 million of realized losses on the fixed income portfolio and a $574.5 million gain from the sale of our equity method investment in Maui Jim, Inc (Maui Jim).

This compares to $50.6 million of realized gains on the equity portfolio, $1.7 million of realized gains on the fixed income portfolio and $0.1 million of other realized gains for the same period in 2021.

For the Nine Months

Ended September 30,

Realized gains during the first three months of 2023 were comprised of $2 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $2 million of realized losses on the fixed income portfolio and $14 million of realized gains from the payout of the working capital escrow from our sale of Maui Jim, Inc (Maui Jim).

This compares to $6 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the previous year.

For the Three Months

Ended March 31,

Consolidated Revenues (in thousands)

4 unchanged sentences

Total consolidated revenue

Net earnings for the first nine months of 2022 totaled $485.6 million, compared to $184.1 million for the same period in 2021.

The increase for 2022 was primarily attributed to the $437.7 million after tax earnings recognized from the sale of our equity method investment in Maui Jim.

This gain was partially offset by $107.0 million of net after-tax realized and unrealized losses on equity securities, compared to $63.3 million of after-tax realized and unrealized gains in 2021.

Underwriting results for 2022 were impacted by $40.0 million of pretax hurricane losses and $5.0 million of pretax storm losses.

Comparatively, underwriting results for 2021 included $34.0 million of pretax hurricane losses and $25.0 million of pretax storm losses.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $103.0 million in the first nine months of 2022, compared to $97.0 million in 2021.

Net earnings for the first three months of 2023 totaled $99 million, compared to $48 million for the same period in 2022.

The increase for 2023 was largely attributed to the $14 million of net after-tax realized and unrealized gains on equity securities, compared to $17 million of after-tax realized and unrealized losses in 2022.

Underwriting results for 2023 were impacted by $4 million of pretax storm losses, compared to $2 million of pretax storm losses in the first quarter of 2022.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $52 million in the first three months of 2023, compared to $45 million in 2022.

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

1 unchanged sentence

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

Underwriting income was $124.2 million on an 85.3 combined ratio for the first nine months of 2022, compared to $80.2 million on an 88.9 combined ratio in the same period of 2021.

The loss ratio decreased to 46.1 from 49.2, due to lower levels of storm losses and higher levels of favorable development on prior years’ loss reserves in 2022.

The Group’s expense ratio decreased to 39.2 from 39.7, with 2022 benefiting from a larger earned premium base.

Our equity in earnings of unconsolidated investees primarily relate to our investments in Maui Jim, a manufacturer of high-quality sunglasses, and Prime Holdings Insurance Services, Inc.

Underwriting income was $68 million on a 77.9 combined ratio for the first three months of 2023, compared to $59 million on a 77.9 combined ratio in the same period of 2022.

The loss ratio decreased to 37.2 from 39.2, due to higher levels of favorable development on prior years’ loss reserves in 2023.

The Group’s expense ratio increased to 40.7 from 38.7, as higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023.

We also increased investments in our people and technology to support growth, improve customer experience and drive efficiencies, which impacted all segments.

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

(Prime), a specialty insurance company.

In the first nine months of 2022, $3.1 million of investee losses were recorded for Maui Jim, primarily due to transaction related expenses from the sale of the company.

We recognized $9.3 million of investee earnings from Prime.

Comparatively, the first nine months of 2021 reflected investee earnings of $19.7 million and $11.7 million from Maui Jim and Prime, respectively.

The decrease in earnings from Prime is largely attributable to unrealized loss on their equity security portfolio.

Comprehensive earnings totaled $191.2 million for the first nine months of 2022, compared to $142.3 million for the first nine months of 2021.

In the first three months of 2023, we recognized $4 million of investee

earnings from Prime.

Comparatively, the first three months of 2022 reflected investee earnings of $3 million from Prime and $6 million from Maui Jim, a manufacturer of high-quality sunglasses.

Our interest in Maui Jim was sold in the third quarter of 2022.

Comprehensive earnings totaled $137 million for the first three months of 2023, compared to $68 million of comprehensive loss for the first three months of 2022.

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

Other comprehensive loss of $294.4 million in the first nine months of 2022 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Other comprehensive earnings of $38 million in the first three months of 2023 was attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

Comparatively, $116 million of other comprehensive loss was recognized in 2022 as interest rates increased.

Gross premiums written for the Group increased $171.6 million for the first nine months of 2022, compared to the same period of 2021.

Growth was achieved in all three segments, though the increase was largely driven by products in the property and casualty segments.

Net premiums earned increased $120.4 million, also driven by products in our casualty and property segments.

Gross premiums written for the Group increased $56 million for the first three months of 2023, compared to the same period of 2022.

Growth was achieved in all three segments, though the increase was largely driven by products in the property and surety segments.

Net premiums earned increased $39 million, driven by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(in thousands)

7 unchanged sentences

Commercial property

Specialty personal

Other property

Miscellaneous

Gross premiums written for the casualty segment were up $46.5 million in the first nine months of 2022.

Gross premiums from commercial excess and personal umbrella increased $35.0 million, due to rate increases and an expanded distribution base.

Increases in new construction projects led to the increase in general liability premium.

Commercial transportation premium increased by $13.8 million, driven by our public transportation line, where customers put vehicles back in service on policies that were suspended throughout the first two years of the pandemic.

Executive products premium decreased as a result of a more competitive market and the exit from our large account cyber and representations and warranties programs.

Gross premiums written for the property segment were up $114.9 million in the first nine months of 2022.

Our commercial property business was up $94.0 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to grow while strengthening terms and conditions.

Rate increases, improved retention and new opportunities in the inland marine space led to $16.2 million of premium growth for our marine product.

Gross premiums written for the surety segment were up $10.2 million for the first nine months of 2022.

Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices.

The growth in miscellaneous surety is broad based and has been supported by our focus on customer experience and technology.

Gross premiums written for the casualty segment were up $2 million in the first three months of 2023.

Continued momentum with our personal umbrella distribution base and positive rate movement across a large portion of our casualty segment offset challenging conditions some lines experienced during the first quarter.

As we mentioned in prior filings, we are running off our excess energy liability business, which resulted in a $5 million decrease within the commercial excess product for the quarter.

Increased competition and a slowing of projects due to economic conditions led to a further reduction for commercial excess as well as for general liability.

Additionally, executive products premium decreased as a result of a more competitive market, particularly with directors and officers coverages.

However, the benefit of our diversified book of business is that a few products can work through challenges while the success of other products allows us to achieve positive overall results.

Gross premiums written for the property segment were up $49 million in the first three months of 2023.

Our commercial property business was up $43 million, as rates on wind exposures continued to increase, building valuations rose and market

disruption provided an opportunity to grow while strengthening terms and conditions.

Rate increases, improved retention and new opportunities led to $5 million of premium growth for our marine product.

Gross premiums written for the surety segment were up $5 million for the first three months of 2023.

The expansion of existing accounts and new business resulted in increased premium for commercial surety.

Contract surety benefited from new agency relationships and the continued inflation of material prices.

Underwriting Income

For the Nine Months

Ended September 30,

Underwriting Income (Loss) (in thousands)

For the Three Months

Ended March 31,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $60.4 million in the first nine months of 2022, compared to $74.3 million for the same period last year.

Reserve releases reduced loss and settlement expenses for the casualty segment by $72.9 million, primarily on accident years 2018 through 2021.

Favorable development was widespread, with notable amounts from general liability, professional services, transportation, executive products and commercial excess.

In comparison, $83.6 million of reserves were released in the first nine months of 2021.

General liability, transportation, professional services, small commercial, commercial excess and personal umbrella were drivers of the favorable development.

Offsetting the favorable development, hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $7.5 million of losses in 2022 and $4.0 million of losses in 2021.

The casualty segment recorded underwriting income of $32 million in the first three months of 2023, compared to $28 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $36 million, primarily on accident years 2018 through 2022.

Favorable development was widespread, with notable amounts from general liability, professional services, commercial excess, executive products and personal umbrella.

In comparison, $28 million of prior accident years’ reserves were released in the first three months of 2022.

Professional services, general liability, transportation, commercial excess and personal umbrella were drivers of the favorable development.

The combined ratio for the casualty segment was 82.9 in 2023, compared to 83.9 in 2022.

The segment’s loss ratio was 52.8 in 2022, up from 48.9 in 2021.

Lower levels of reserve releases on prior accident years and larger storm losses resulted in the higher loss ratio in 2022, while current accident year attritional losses were slightly improved.

The segment’s loss ratio was 45.5 in 2023, down from 48.8 in 2022.

Increased levels of reserve releases on prior accident years resulted in the lower loss ratio in 2023.

The expense ratio for the casualty segment was 37.4, up from 35.1 for the same period last year.

The property segment recorded underwriting income of $40.3 million for the first nine months of 2022, compared to $8.7 million of underwriting loss for the same period last year.

Underwriting results for 2022 included $20.8 million of favorable development on prior years’ loss and catastrophe reserves across all products, $33.0 million of hurricane losses and $4.5 million of other storm losses.

Comparatively, the 2021 underwriting results included $10.8 million of favorable development on prior years’ loss and catastrophe reserves, $32.6 million of hurricane losses and $22.3 million of other storm losses.

Underwriting results for the first nine months of 2022 translated into a combined ratio of 81.9, compared to 105.2 for the same period last year.

The segment’s loss ratio was 44.9 in 2022, down from 66.3 in 2021, due to lower levels of storm losses and larger reserve releases.

The segment’s expense ratio decreased to 37.0 in 2022 from 38.9 in the prior year, with 2022 benefiting from a larger earned premium base.

The surety segment recorded underwriting income of $23.5 million for the first nine months of 2022, compared to $14.7 million for the same period last year.

The property segment recorded underwriting income of $28 million for the first three months of 2023, compared to $22 million for the same period last year.

Underwriting results for 2023 included $13 million of favorable development on prior years’ loss and catastrophe reserves and $4 million of storm losses.

Comparatively, the 2022 underwriting results included $13 million of favorable development on prior years’ loss and catastrophe reserves and $2.0 million of storm losses.

Underwriting results for the first three months of 2023 translated into a combined ratio of 68.0, compared to 66.7 for the same period last year.

The segment’s loss ratio was 29.8 in 2023, down from 30.2 in 2022.

The segment’s expense ratio increased to 38.2 in 2023 from 36.5 in the prior year.

The surety segment recorded underwriting income of $8 million for the first three months of 2023, compared to $9 million for the same period last year.

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

Results for 2022 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $9.3 million.

Comparatively, 2021 results included favorable development on prior accident years’ loss reserves, which decreased the segment’s loss and settlement expenses by $2.6 million.

The combined ratio for the surety segment totaled 74.4 for the first nine months of 2022, compared to 83.1 for the same period in 2021.

The segment’s loss ratio was 10.4 in 2022, down from 17.4 in 2021 due to larger reserve releases.

The expense ratio was 64.0, down from 65.7 in the prior year, as 2022 had a higher earned premium base.

Results for 2023 included favorable development on prior

accident years’ reserves, which decreased loss and settlement expenses for the segment by $3 million, compared to $4 million in 2022.

The combined ratio for the surety segment totaled 76.7 for the first three months of 2023, compared to 68.8 for the same period in 2022.

The segment’s loss ratio was 10.2 in 2023, up from 4.4 in 2022 due to lower levels of prior accident year reserve releases.

The expense ratio was 66.5, up from 64.4 in the prior year.

Investment Income

Our investment portfolio generated net investment income of $57.6 million during the first nine months of 2022, an increase of 13.1 percent from that reported for the same period in 2021.

Our investment portfolio generated net investment income of $27 million during the first three months of 2023, an increase of 51 percent from that reported for the same period in 2022.

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

Yields on our fixed income investments for the first nine months of 2022 and 2021 were as follows:

Yields on our fixed income investments for the first three months of 2023 and 2022 were as follows:

After-Tax Yield

The following table depicts the composition of our investment portfolio at September 30, 2022 as compared to December 31, 2021:

The following table depicts the composition of our investment portfolio at March 31, 2023 as compared to December 31, 2022:

(in thousands)

September 30, 2022

March 31, 2023

December 31, 2022

Equity securities

Short-term investments

Other invested assets

1 unchanged sentence

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

The fixed income portfolio increased by $42.2 million in the first nine months of 2022.

Positive operating cash flows were used to purchase fixed income securities, which offset fair value declines resulting from higher interest rates.

Average fixed income duration was 4.7 years at September 30, 2022, reflecting our current liability structure and sound capital position.

The equity portfolio decreased by $150.8 million during the first nine months of 2022, as we reduced our risk asset profile and equity markets declined over the first nine months of the year.

Our effective tax rate for the first nine months of 2022 was 20.0 percent, compared to 19.0 percent for the same period in 2021.

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

The effective rate was higher for the first nine months of 2022, as higher pretax income, resulting from the gain on our sale of Maui Jim, decreased the percentage impact of tax-favored adjustments.

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Net premiums earned for the Group increased 15 percent, driven by growth from our property and casualty segments.

Overall market declines resulted in $26.4 million of unrealized losses on equity securities in the third quarter of 2022, compared to $2.6 million of unrealized losses during the same period in 2021.

Investment income was up 19 percent, due to an increased asset base and higher interest rates relative to the prior year.

Realized gains during the third quarter of 2022 were comprised of $0.6 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $1.9 million of realized losses on the fixed income portfolio and a $574.5 million gain from the sale of equity method investment in Maui Jim.

This compares to $1.7 million of realized gains on the equity portfolio, $0.2 million of realized gains on the fixed income portfolio and $0.1 million of other realized losses for the same period in 2021.

For the Three Months

Ended September 30,

Consolidated Revenues (in thousands)

Net premiums earned

Net investment income

Net realized gains

Net unrealized gains (losses) on equity securities

Total consolidated revenue

Net earnings for the third quarter of 2022 totaled $439.9 million, compared to $29.2 million for the same period in 2021.

The increase for 2022 was primarily attributed to the $437.7 million after tax earnings recognized from the sale of our equity method investment in Maui Jim.

This gain was partially offset by $20.4 million of net after-tax realized and unrealized losses on equity securities, compared to $0.7 million of after-tax realized and unrealized losses in 2021.

Underwriting results for 2022 were impacted by $40.0 million of pretax hurricane losses.

Underwriting results for 2021 were impacted by $34.0 million of pretax hurricane losses and $1.0 million of pretax losses from other storms.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $33.3 million in the third quarter of 2022, compared to $29.5 million in 2021.

Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions.

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

Underwriting income was $8.8 million on a 97.0 combined ratio for the third quarter of 2022, compared to $13.7 million on a 94.6 combined ratio in the same period of 2021.

The loss ratio decreased to 56.6 from 56.7, due to larger amounts of favorable development on prior years’ loss reserves and a higher earned premium base, which offset the impact of larger catastrophe loss during the third quarter.

The Group’s expense ratio increased to 40.4 from 37.9.

Improved year to date results led to higher levels of bonus and profit-sharing expense.

Additionally, a one-time bonus related to the sale of our investment in Maui Jim was accrued for in the third quarter.

In the third quarter of 2022, $18.0 million of investee losses were recorded for Maui Jim, primarily due to transaction related expenses from the sale of the company, and $2.9 million of investee earnings were recorded for Prime.

Comparatively, the third quarter of 2021 reflected investee earnings of $5.4 million and $4.4 million from Maui Jim and Prime, respectively.

Comprehensive earnings totaled $358.6 million for the third quarter of 2022, compared to $17.0 million for the same period in 2021.

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

Other comprehensive loss of $81.2 million in the third quarter of 2022 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $12.2 million of other comprehensive loss was recognized in 2021 as interest rates increased.

Gross premiums written for the Group increased $47.5 million for the third quarter of 2022 when compared to the same period of 2021.

Growth was achieved in all three segments, though the increase was largely driven by the property segment.

Net premiums earned increased $38.1 million, driven by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Three Months

Ended September 30,

(in thousands)

Commercial excess and personal umbrella

General liability

Commercial transportation

Professional services

Small commercial

Executive products

Other casualty

Commercial property

Specialty personal

Other property

Miscellaneous

Gross premiums written for the casualty segment were up $7.6 million in the third quarter of 2022.

Gross premiums from commercial excess and personal umbrella increased $11.0 million, due to rate increases and an expanded distribution base.

Increases in new construction projects led to the increase in general liability.

Commercial transportation premium increased by $3.5 million, driven by our public transportation line, where customers put vehicles back in service on policies that were suspended throughout the first two years of the pandemic.

Executive products premium was down as a result of a more competitive market and the exit from our large account cyber and representations and warranties programs.

Gross premiums written for the property segment were up $35.9 million in the third quarter of 2022.

Our commercial property business was up $26.6 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to grow while strengthening terms and conditions.

Rate increases and new opportunities in the inland marine space led to $7.3 million of premium growth for our marine product.

Gross premiums written for the surety segment were up $4.0 million for the third quarter of 2022.

Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices.

Commercial surety premium increased as a result of new business and the expansion of existing accounts.

Underwriting Income

For the Three Months

Ended September 30,

Underwriting Income (Loss) (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $11.3 million in the third quarter of 2022, compared to $22.9 million for the same period last year.

Reserve releases reduced loss and settlement expenses for the casualty segment by $28.0 million, primarily on accident years 2016 through 2021.

Products which generated the majority of the favorable development included general liability, commercial excess and executive products.

In comparison, $26.0 million of reserves were released in the third quarter of 2021.

Transportation, general liability and commercial excess were drivers of the favorable development.

Offsetting the favorable development, hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $7.0 million of losses in 2022 and $1.6 million of losses in 2021.

The combined ratio for the casualty segment was 93.7 in 2022, compared to 85.9 in 2021.

The segment’s loss ratio was 56.1 in 2022, up from 51.7 in 2021.

Larger hurricane losses resulted in the higher loss ratio in 2022.

The expense ratio for the casualty segment was 37.6, up from 34.2 for the same period last year, primarily due to larger bonus accruals associated with improved year to date metrics and the Maui Jim sale.

The property segment recorded underwriting loss of $8.3 million for the third quarter of 2022, compared to $16.6 million of underwriting loss for the same period last year.

Underwriting results for 2022 included $3.5 million of favorable development on prior years’ loss and catastrophe reserves and $33.0 million of hurricane losses.

Comparatively, the 2021 underwriting results included $0.9 million of favorable development on prior years’ loss and catastrophe reserves, $32.6 million of hurricane losses and $0.7 million of storm losses.

Underwriting results for the third quarter of 2022 translated into a combined ratio of 110.3, compared to 127.2 for the same period last year.

The segment’s loss ratio was 73.4 in 2022, down from 91.5 in 2021, due to larger levels of favorable development on prior years’ reserves and a higher earned premium base, which helped to offset the impact of catastrophe losses.

The segment’s expense ratio increased to 36.9 in 2022 from 35.7 in the prior year.

The surety segment recorded underwriting income of $5.8 million for the third quarter of 2022, compared to $7.3 million for the same period last year.

Both periods reflected positive current accident year underwriting performance.

Results for 2022 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $1.8 million.

Comparatively, 2021 results included $2.5 million of favorable development on prior accident years’ loss reserves.

The combined ratio for the surety segment totaled 81.4 for the third quarter of 2022, compared to 75.3 for the same period in 2021.

The segment’s loss ratio was 16.2 in 2022, up from 12.9 in 2021 due to differences in prior accident year reserve development.

The expense ratio was 65.2, up from 62.4 in the prior year.

Investment Income

Our investment portfolio generated net investment income of $21.3 million during the third quarter of 2022, an increase of 19.2 percent from that reported for the same period in 2021.

The increase in investment income was largely due to an increased asset base and higher interest rates relative to the prior year.

Yields on our fixed income investments for the third quarter of 2022 and 2021 were as follows:

After-Tax Yield

Our effective tax rate for the third quarter of 2022 was 20.7 percent, compared to 17.5 percent for the same period in 2021.

The fixed income portfolio increased by $35 million in the first three months of 2023.

The fair value of our fixed income portfolio increased as interest rates declined during the quarter.

Average fixed income duration was 4.4 years at March 31, 2023, reflecting our current liability structure and sound capital position.

The equity portfolio increased by $21 million during the first three months of 2023, due to the positive performance of equity markets.

Our effective tax rate for the first three months of 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 or losses and the related tax effects.

The effective rate was higher for the third quarter of 2022, as higher pretax income, resulting from the gain on our sale of Maui Jim, decreased the percentage impact of tax-favored adjustments.

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.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes cash flows provided by (used in) our activities for the nine-month periods ended September 30, 2022 and 2021:

The following table summarizes cash flows provided by (used in) our activities for the three-month periods ended March 31, 2023 and 2022:

(in thousands)

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

Operating cash flows in the first nine months of 2022 benefited from increased premium receipts relative to the first nine months of 2021, but were partially offset by increased levels of loss and settlement expense payments.

Investing cash flows reflects the cash received from the sale of our investment in Maui Jim at the end of the third quarter.

Operating cash flows in the first three months of 2023 benefited from increased premium receipts relative to the first three months of 2022.

We have $200 million in debt outstanding.

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The notes were issued at a discount resulting in proceeds, net of discount and commission, of $149 million.

The estimated fair value for the senior notes at September 30, 2022 was $150.0 million.

The estimated fair value for the senior notes at March 31, 2023 was $149 million.

The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

Additionally, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 10, 2021.

The borrowing matures on November 10, 2023 and has an option to be paid off early on November 10, 2022.

The borrowing matures on November 10, 2023 and has an option to be paid off prior to maturity.

Interest is paid monthly at an annualized rate of 0.84 percent.

As of September 30, 2022, we had cash and other investments maturing within one year of approximately $929.9 million and an additional $851.5 million maturing between one to five years.

The cash balance was elevated by the cash proceeds received from our sale of Maui Jim on September 30, 2022.

Whereas our strategy is to be fully invested at all times, short-term

investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

We also maintain a revolving line of credit with Bank of Montreal, Chicago Branch, which permits us to borrow up to an aggregate principal amount of $60.0 million.

This facility was entered into during the first quarter of 2020 and replaced the previous $50.0 million facility with JP Morgan Chase Bank N.A., which was set to expire on May 24, 2020.

As of March 31, 2023, we had cash and other investments maturing within one year of approximately $432 million and an additional $901 million maturing between one to five years.

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

We also maintain a revolving line of credit with PNC Bank, N.A., which permits us to borrow up to an aggregate principal amount of $100 million.

This facility was entered into during the first quarter of 2023 and replaced the previous $60 million facility with Bank of Montreal, Chicago Branch, which expired on March 27, 2023.

Under certain conditions, the line may be increased up to an aggregate principal amount of $130 million.

The facility has a three-year term that expires on March 27, 2023.

As of and during the nine-month period ended September 30, 2022, no amounts were outstanding on either facility.

The facility has a three-year term that expires on May 29, 2026.

As of and during the three-month period ended March 31, 2023, no amounts were outstanding on either facility.

Additionally, two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt.

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

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.

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.

We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months.

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We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders.

Invested assets at September 30, 2022 have increased $524.4 million from December 31, 2021.

As of September 30, 2022, our investment portfolio had the following asset allocation breakdown:

Invested assets at March 31, 2023 have increased $152 million from December 31, 2022.

As of March 31, 2023, our investment portfolio had the following asset allocation breakdown:

(in thousands)

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Total fixed income

Short-term investments

Other invested assets

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

As of September 30, 2022, our fixed income portfolio had the following rating distribution:

As of September 30, 2022, our fixed income portfolio remained well diversified, with 1,639 individual issues.

As of March 31, 2023, our fixed income portfolio had the following rating distribution:

As of March 31, 2023, our fixed income portfolio remained well diversified, with 1,694 individual issues.

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

As of September 30, 2022, we had $128.2 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of September 30, 2022, we had $113.4 million in commercial mortgage-backed securities and $317.0 million in mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae).

As of March 31, 2023, we had $132 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of March 31, 2023, we had $114 million in commercial mortgage-backed securities and $360 million in mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae).

Excluding the GSE-backed MBS, our exposure to ABS and CMBS was 7.2 percent of our investment portfolio at quarter end.

We had $963.9 million in corporate fixed income securities as of September 30, 2022, which includes $98.8 million invested in a high-yield credit strategy.

We had $1,084 million in corporate fixed income securities as of March 31, 2023, which includes $106 million invested in a high-yield credit strategy.

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

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Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.

As of September 30, 2022, our equity portfolio had a dividend yield of 2.5 percent, compared to 1.8 percent for the S&P 500 index.

As of March 31, 2023, our equity portfolio had a dividend yield of 2.2 percent, compared to 1.7 percent for the S&P 500 index.

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

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No single company exposure in the equity portfolio represents more than 1 percent of invested assets.

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

We had $58.1 million of investments in unconsolidated investees at September 30, 2022, compared to $171.3 million at December 31, 2021.

At September 30, 2022 our investment in Prime was $47.0 million.

During the third quarter, we completed the sale of our equity method investment in Maui Jim to Kering Eyewear for cash proceeds of $686.6 million.

We recognized net realized gains of $574.5 million as a result of the sale.

As always, our top priority is to ensure we have adequate capital to support our business.

However, we have demonstrated discipline in returning capital to shareholders if it exceeds our near-term needs.

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

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

Our investment portfolio does not have any exposure to derivatives.

Our capital structure is comprised of equity and debt outstanding.

As of September 30, 2022, our capital structure consisted of $199.8 million in long-term debt and $1.4 billion of shareholders’ equity.

Debt outstanding comprised 12.5 percent of total capital as of September 30, 2022.

Interest and fees on debt obligations totaled $6.0 million for the first nine months of 2022, compared to $5.7 million during the same period of 2021.

We incurred interest expense on debt at an average annual interest rate of 3.89 percent during the first nine months of 2022, compared to 4.91 percent for the same time period during 2021.

We paid a regular quarterly cash dividend of $0.26 per share on September 20, 2022, the same amount as the prior quarter.

As of March 31, 2023, our capital structure consisted of $200 million in long-term debt and $1.3 billion of shareholders’ equity.

Debt outstanding comprised 13.3 percent of total capital as of March 31, 2023.

Interest and fees on debt obligations totaled $2 million for the first three months of 2023 and 2022.

We incurred interest expense on debt at an average annual interest rate of 3.89 percent during the first three months of 2023 and 2022.

We paid a regular quarterly cash dividend of $0.26 per share on March 20, 2023, the same amount as the prior quarter.

We have increased dividends in each of the last 47 years.

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shareholders.

On a GAAP basis, as of September 30, 2022, our holding company had $1.4 billion in equity.

On a GAAP basis, as of March 31, 2023, our holding company had $1.3 billion in equity.

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

The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $828.9 million in liquid assets, which was elevated by the cash proceeds received from the sale of Maui Jim at

the end of the quarter.

The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $259 million in liquid assets, which was elevated by the cash proceeds received from the sale of Maui Jim.

Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders.

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

In the first nine months of 2022, RLI Ins.

In the first three months of 2023, RLI Ins.

paid $15 million in ordinary dividends to RLI Corp.

In 2021, our principal insurance subsidiary paid ordinary dividends totaling $70.0 million and extraordinary dividends totaling $110.0 million.

As of September 30, 2022, $83.1 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp.

In 2022, our principal insurance subsidiary paid ordinary dividends totaling $13 million.

As of March 31, 2023, $135 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp.

as ordinary dividends without prior approval from the IDOI.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis