Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2022 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.
OVERVIEW
RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group (Group). Our focus is on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In 2022, we achieved our 27th consecutive year of underwriting profitability. 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.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.
The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law. One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will equal recorded amounts. If actual liabilities differ from recorded amounts, there will be an adverse or favorable effect on net earnings.
The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.
Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and other storms. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast, and wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. 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.
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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 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.
The insurance marketplace is competitive across all of our segments. However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.
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
Underwriting income or profit represents one measure of the pretax profitability of our insurance operations, and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our 2022 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized gains or losses on equity securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:
For the Three Months
Ended March 31,
(in thousands)
2023
2022
Net earnings
$
98,811
$
47,923
Income tax expense
23,980
10,602
Earnings before income taxes
$
122,791
$
58,525
Equity in earnings of unconsolidated investees
(3,923)
(8,759)
General corporate expenses
4,214
3,363
Interest expense on debt
2,008
2,010
Net unrealized (gains) losses on equity securities
(15,496)
27,810
Net realized gains
(14,620)
(5,588)
Net investment income
(27,084)
(17,883)
Net underwriting income
$
67,890
$
59,478
Combined Ratio
The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.
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Critical Accounting Policies
In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2022 Annual Report on Form 10-K.
There have been no significant changes to critical accounting policies during the year.
RESULTS OF OPERATIONS
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 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)
2023
2022
Net premiums earned
$
307,723
$
269,152
Net investment income
27,084
17,883
Net realized gains
14,620
5,588
Net unrealized gains (losses) on equity securities
15,496
(27,810)
Total consolidated revenue
$
364,923
$
264,813
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. 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 $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 three months of 2023, we recognized $4 million of investee
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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 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.
Premiums
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 Three Months
For the Three Months
Ended March 31,
Ended March 31,
(in thousands)
2023
2022
% Change
2023
2022
% Change
Casualty
Commercial excess and personal umbrella
$
81,431
$
77,786
5
%
$
67,582
$
60,072
13
%
General liability
24,789
27,894
(11)
%
25,900
23,740
9
%
Commercial transportation
22,873
22,301
3
%
25,232
23,628
7
%
Professional services
26,189
24,510
7
%
24,357
23,555
3
%
Small commercial
19,959
18,138
10
%
17,941
16,645
8
%
Executive products
17,827
20,681
(14)
%
6,353
6,577
(3)
%
Other casualty
24,766
24,511
1
%
18,666
17,539
6
%
Total
$
217,834
$
215,821
1
%
$
186,031
$
171,756
8
%
Property
Commercial property
$
111,939
$
69,080
62
%
$
49,262
$
33,289
48
%
Marine
37,189
32,083
16
%
30,636
26,729
15
%
Other property
9,718
8,435
15
%
8,869
7,422
19
%
Total
$
158,846
$
109,598
45
%
$
88,767
$
67,440
32
%
Surety
Commercial
$
15,096
$
12,663
19
%
$
12,418
$
11,703
6
%
Miscellaneous
13,347
13,362
(0)
%
12,047
11,353
6
%
Contract
9,889
7,715
28
%
8,460
6,900
23
%
Total
$
38,332
$
33,740
14
%
$
32,925
$
29,956
10
%
Grand Total
$
415,012
$
359,159
16
%
$
307,723
$
269,152
14
%
Casualty
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.
Property
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
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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.
Surety
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 Three Months
Ended March 31,
2023
2022
Underwriting Income (in thousands)
Casualty
$
31,831
$
27,647
Property
28,383
22,476
Surety
7,676
9,355
Total
$
67,890
$
59,478
Combined Ratio
Casualty
82.9
83.9
Property
68.0
66.7
Surety
76.7
68.8
Total
77.9
77.9
Casualty
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 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.
Property
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.
Surety
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 2023 included favorable development on prior
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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 $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 three months of 2023 and 2022 were as follows:
2023
2022
Pretax Yield
Taxable
3.39
%
2.70
%
Tax-Exempt
2.79
%
2.65
%
After-Tax Yield
Taxable
2.68
%
2.13
%
Tax-Exempt
2.64
%
2.51
%
The following table depicts the composition of our investment portfolio at March 31, 2023 as compared to December 31, 2022:
(in thousands)
March 31, 2023
December 31, 2022
Fixed income
$
2,701,814
78.9
%
$
2,666,950
81.5
%
Equity securities
519,097
15.1
%
498,382
15.2
%
Short-term investments
116,202
3.4
%
36,229
1.1
%
Other invested assets
64,134
1.9
%
47,922
1.5
%
Cash
22,769
0.7
%
22,818
0.7
%
Total investments and cash
$
3,424,016
100.0
%
$
3,272,301
100.0
%
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 $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.
Income Taxes
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 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
We have three primary types of cash flows: (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.
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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)
2023
2022
Operating cash flows
$
69,219
$
39,014
Investing cash flows
(57,804)
(45,897)
Financing cash flows
(11,464)
(9,773)
Total
$
(49)
$
(16,656)
Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. 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 three months of 2023 benefited from increased premium receipts relative to the first three months of 2022.
We have $200 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. 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 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 prior to maturity. Interest is paid monthly at an annualized rate of 0.84 percent.
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 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. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. 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. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.
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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 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:
Cost or
Fair
Unrealized
% of Total
(in thousands)
Amortized Cost
Value
Gain/(Loss)
Fair Value
Quality*
U.S. government
$
391,336
$
385,199
$
(6,137)
11.2
%
AAA
U.S. agency
75,257
73,659
(1,598)
2.2
%
AAA
Non-U.S. government & agency
6,798
5,952
(846)
0.2
%
BBB+
Agency MBS
395,736
359,974
(35,762)
10.5
%
AAA
ABS/CMBS/MBS**
278,309
246,382
(31,927)
7.2
%
AA+
Corporate
1,156,944
1,083,500
(73,444)
31.6
%
A-
Municipal
628,933
547,148
(81,785)
16.0
%
AA
Total fixed income
$
2,933,313
$
2,701,814
$
(231,499)
78.9
%
AA-
Equity
333,229
519,097
185,868
15.1
%
Short-term investments
116,202
116,202
—
3.4
%
Other invested assets
60,203
64,134
3,931
1.9
%
Cash
22,769
22,769
—
0.7
%
Total portfolio
$
3,465,716
$
3,424,016
$
(41,700)
100.0
%
*
Quality ratings provided by Moody’s, S&P and Fitch
**
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of March 31, 2023, our fixed income portfolio had the following rating distribution:
AAA
39.7
%
AA
20.2
%
A
20.7
%
BBB
11.7
%
BB
2.8
%
B
2.1
%
CCC
0.0
%
D
0.0
%
NR
2.8
%
Total
100.0
%
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 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 $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.
The municipal portfolio includes approximately 55 percent taxable securities and 45 percent tax-exempt securities. Approximately 89 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 100 percent of the municipal bond portfolio is rated ‘A’ or better.
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Securities within the equity portfolio are well diversified and are primarily invested in broad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.
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. The equity portfolio is managed in a diversified and granular manner, with 85 individual securities and four ETF positions. 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 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 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.
Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of 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 $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. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. 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 three months of 2023, RLI Ins. paid $15 million in ordinary dividends 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. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.
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