What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-26 compared with 2023-04-21 · 197 added, 92 removed, 203 unchanged (59% of the section changed)

3 unchanged sentences

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.

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, surety 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.

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You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.

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).

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

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

2 unchanged sentences

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:

Over the 27-year period, we averaged an 88.2 combined ratio.

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

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

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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.

If actual liabilities differ from recorded amounts, there will either 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.

28 unchanged sentences

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

(in thousands)

Income tax expense

Earnings before income taxes

Net earnings (loss)

Income tax expense (benefit)

Earnings (loss) before income taxes

Equity in earnings of unconsolidated investees

19 unchanged sentences

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.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

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

Positive market performance resulted in $41 million of unrealized gains on equity securities in the first six months of 2023, while overall market declines resulted in $129 million of unrealized losses in our equity portfolio in 2022.

Investment income was up 54 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,

Realized gains during the first six months of 2023 were comprised of $9 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $3 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.

This compares to $19 million of realized gains on the equity portfolio and $1 million of realized losses on the fixed income portfolio in the previous year.

For the Six Months

Ended June 30,

Consolidated Revenues (in thousands)

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Total consolidated revenue

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

Net earnings for the first six months of 2023 totaled $176 million, compared to $46 million for the same period in 2022.

The increase for 2023 was largely attributed to the $39 million of net after-tax realized and unrealized gains on equity securities, compared to $87 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.

Underwriting results for 2023 were impacted by $22 million of pretax storm losses, compared to $5 million of pretax storm losses in the first six months of 2022.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $72 million in the first six months of 2023, compared to $70 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.

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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.

Underwriting income was $109 million on an 82.7 combined ratio for the first six months of 2023, compared to $115 million on a 79.1 combined ratio in the same period of 2022.

The loss ratio increased to 42.6 from 40.5, due to higher levels of storm losses in 2023.

The expense ratio increased to 40.1 from 38.6, 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.

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(Prime), a specialty insurance company.

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.

In the first six months of 2023, we recognized $6 million of investee earnings from Prime.

Comparatively, the first six months of 2022 reflected investee earnings of $6 million from Prime and $15 million from Maui Jim.

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.

Comprehensive earnings totaled $194 million for the first six months of 2023, compared to $167 million of comprehensive loss for the first six 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.

Other comprehensive earnings of $18 million in the first six months of 2023 was attributable to modestly tighter credit spreads while interest rates remained relatively flat, which increased the fair value of securities held in the fixed income portfolio.

Comparatively, $213 million of other comprehensive loss was recognized in 2022, as interest rates increased.

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.

Gross premiums written increased $145 million for the first six 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 segment.

Net premiums earned increased $78 million, driven by products in our property and casualty segments.

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Net Premiums Earned

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

(in thousands)

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Miscellaneous

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.

Gross premiums written for the casualty segment were up $5 million in the first six months of 2023.

Continued growth within 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 six months.

As we mentioned in prior filings, we are running off our excess energy liability business, which resulted in a $9 million decrease within the commercial excess product and negatively impacted the production of our primary energy liability business within the general liability product.

Increased competition led to a further reduction in commercial excess business.

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

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

Gross premiums written for the property segment were up $135 million in the first six months of 2023.

Our commercial property business was up $123 million, as wind rates continued to increase and limited exposure growth was experienced.

Rate increases and new opportunities led to $10 million of premium growth for our marine product.

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

Contract surety benefited from new agency relationships and new construction projects.

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,

For the Six Months

Ended June 30,

Underwriting Income (in thousands)

Combined Ratio

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.

The casualty segment recorded underwriting income of $39 million in the first six months of 2023, compared to $49 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $47 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.

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

In comparison, $45 million of prior accident years’ reserves were released in the first six months of 2022.

General liability, professional services and transportation were drivers of the favorable development.

Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $1.7 million of losses in 2023 and $0.5 million of losses in 2022.

The combined ratio for the casualty segment was 89.6 in 2023, compared to 85.9 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 segment’s loss ratio was 52.2 in 2023, up from 51.0 in 2022.

A higher earned premium base, which reduced the loss ratio impact of favorable prior years’ reserve development, and an increased level of storm losses resulted in the higher loss ratio in 2023.

The expense ratio for the casualty segment was 37.4, up from 34.9 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.

Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.

The property segment recorded underwriting income of $54 million for the first six months of 2023, compared to $49 million for the same period last year.

Underwriting results for 2023 included $17 million of favorable development on prior years’ loss and catastrophe reserves and $20 million of storm losses.

Comparatively, the 2022 underwriting results included $17 million of favorable development on prior years’ loss and catastrophe reserves and $5 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.

Underwriting results for the first six months of 2023 translated into a combined ratio of 71.5, compared to 65.8 for the same period last year.

The segment’s loss ratio was 35.5 in 2023, up from 28.7 in 2022, due to an increase in storm losses.

The segment’s expense ratio decreased to 36.0 in 2023 from 37.1 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

The surety segment recorded underwriting income of $16 million for the first six months of 2023, compared to $18 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

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.

accident years’ reserves, which decreased loss and settlement expenses for the segment by $7.5 million.

Results for 2022 also included $7.5 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 75.8 for the first six months of 2023, compared to 70.9 for the same period in 2022.

The segment’s loss ratio increased to 9.0 in 2023, up from 7.4 in 2022, as a higher earned premium base reduced the loss ratio impact of favorable prior accident years’ reserve development.

The expense ratio was 66.8, up from 63.5 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.

Our investment portfolio generated net investment income of $56 million during the first six months of 2023, an increase of 54 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:

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

After-Tax Yield

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

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

(in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

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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.

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.

The fixed income portfolio increased by $22 million in the first six months of 2023.

Average fixed income duration was 4.6 years at June 30, 2023, reflecting our liability structure and sound capital position.

The equity portfolio increased by $54 million during the first six months of 2023, due to the positive performance of equity markets.

Short-term investments increased by $235 million, as improved yields made AAA-rated government money market funds an investable asset class that also allowed us to maximize liquidity for events in the second half of the year.

Our effective tax rate for the first six months of 2023 was 19.4 percent, compared to 12.1 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.

The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

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

Positive market performance resulted in $25 million of unrealized gains on equity securities in the second quarter of 2023, while overall market declines resulted in $101 million of unrealized losses in our equity portfolio in the second quarter of 2022.

Investment income was up 56 percent, due to an increased average asset base and higher interest rates relative to the prior year.

Realized gains

during the second quarter of 2023 were comprised of $6 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and less than $1 million of realized losses on the fixed income portfolio.

This compares to $13 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the same period of 2022.

For the Three Months

Ended June 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 second quarter of 2023 totaled $78 million, compared to a net loss of $2 million for the same period in 2022.

The increase for 2023 was largely attributed to the $25 million of net after-tax realized and unrealized gains on equity securities, compared to $69 million of after-tax realized and unrealized losses in the second quarter of 2022.

Underwriting results for 2023 were impacted by $18 million of pretax storm losses, compared to $3 million of pretax storm losses in the second quarter of 2022.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $20 million in the second quarter of 2023, compared to $24 million in 2022.

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 $41 million on an 87.2 combined ratio for the second quarter of 2023, compared to $56 million on an 80.2 combined ratio in the same period of 2022.

The loss ratio increased to 47.8 from 41.7, due to higher storm losses and lower levels of favorable development on prior years’ loss reserves in 2023.

The expense ratio increased to 39.4 from 38.5, 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.

In the second quarter of 2023, we recognized $2 million of investee earnings from Prime.

Comparatively, the second quarter of 2022 reflected investee earnings of $4 million from Prime and $9 million from Maui Jim.

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

Comprehensive earnings totaled $58 million for the second quarter of 2023, compared to $100 million of comprehensive loss for the second quarter of 2022.

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

Other comprehensive loss of $20 million in the second quarter of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $98 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Gross premiums written increased $89 million for the second quarter 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 segment.

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

Ended June 30,

(in thousands)

Commercial excess and personal umbrella

General liability

Commercial transportation

Professional services

Small commercial

Executive products

Other casualty

Commercial property

Other property

Miscellaneous

Gross premiums written for the casualty segment were up $3 million in the second quarter of 2023.

Continued momentum with our personal umbrella distribution base offset challenging conditions some lines experienced during the second quarter.

The runoff of our excess energy liability business resulted in a $5 million decrease within the commercial excess product for the quarter and negatively impacted the production of our primary energy liability business within the general liability product.

Commercial transportation was down, as the trucking market continues to be highly competitive and trucking companies’ revenues are down compared to last year.

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

Gross premiums written for the property segment were up $86 million in the second quarter of 2023.

Our commercial property business was up $80 million.

Continued rate increases on wind exposures has allowed us to achieve this result with limited exposure growth, while also strengthening terms and conditions.

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

Gross premiums written for the surety segment were up $0.4 million for the second quarter of 2023.

The growth in contract surety was driven by new agency relationships, while the decline in commercial surety was due to accounts having non-recurring activity within select accounts that bolstered premium in 2022.

Underwriting Income

For the Three Months

Ended June 30,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $7 million in the second quarter of 2023, compared to $21 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $11 million, primarily on accident years 2020 through 2022.

Favorable development was widespread, with notable amounts from small commercial, commercial excess and personal umbrella.

In comparison, $17 million of prior accident years’ reserves were released in the second quarter of 2022.

General liability, professional services and transportation were drivers of the favorable development.

Storm losses on casualty-oriented package policies that include property coverage offset the favorable development and resulted in $1.3 million of losses in 2023 and $0.5 million of losses in 2022.

The combined ratio for the casualty segment was 96.3 in 2023, compared to 87.9 in 2022.

The segment’s loss ratio was 58.9 in 2023, up from 53.2 in 2022.

The increase in loss ratio was attributable to lower levels of reserve releases on prior accident years, as well as increased storm losses and modest additions to the current accident year for energy casualty.

The expense ratio for the casualty segment was 37.4, up from 34.7 for the same period last year.

Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.

The property segment recorded underwriting income of $26 million for the second quarter of 2023 and 2022.

Underwriting results for 2023 included $4 million of favorable development on prior years’ loss and catastrophe reserves and $17 million of storm losses.

Comparatively, the 2022 underwriting results included $4 million of favorable development on prior years’ loss and catastrophe reserves and $3 million of storm losses.

Underwriting results for the second quarter of 2023 translated into a combined ratio of 74.6, compared to 65.0 for the same period last year.

The segment’s loss ratio was 40.4 in 2023, up from 27.4 in 2022, due to the increase in storm losses.

The segment’s expense ratio decreased to 34.2 in 2023 from 37.6 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

The surety segment recorded underwriting income of $8 million for the second quarter of 2023 and 2022.

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

The combined ratio for the surety segment totaled 75.0 for the second quarter of 2023, compared to 72.9 for the same period in 2022.

The segment’s loss ratio was 7.8 in 2023, down from 10.3 in 2022, due to higher levels of prior accident year reserve releases.

The expense ratio was 67.2, up from 62.6 in the prior year.

Investment Income

Our investment portfolio generated net investment income of $29 million during the second quarter of 2023, an increase of 56 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 second quarter of 2023 and 2022 were as follows:

After-Tax Yield

Our effective tax rate for the second quarter of 2023 was 19.1 percent, compared to 65.8 percent for the same period in 2022.

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

Tax-favored adjustments acting on pretax income decreased the effective tax rate in 2023, whereas tax-favored adjustments acting on pretax loss increased the effective tax rate in 2022.

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 three-month periods ended March 31, 2023 and 2022:

The following table summarizes cash flows provided by (used in) our activities for the six-month periods ended June 30, 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 three months of 2023 benefited from increased premium receipts relative to the first three months of 2022.

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

We have $200 million in debt outstanding.

1 unchanged sentence

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 estimated fair value for the senior notes at June 30, 2023 was $150 million.

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

2 unchanged sentences

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.

As of June 30, 2023, we had cash and other investments maturing within one year of approximately $482 million and an additional $896 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.

3 unchanged sentences

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.

As of and during the six-month period ended June 30, 2023, no amounts were outstanding on either facility.

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

2 unchanged sentences

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.

As of June 30, 2023, $56 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.

1 unchanged sentence

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:

Invested assets at June 30, 2023 have increased $318 million from December 31, 2022.

As of June 30, 2023, our investment portfolio had the following asset allocation breakdown:

(in thousands)

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

As of 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.

As of June 30, 2023, our fixed income portfolio had the following rating distribution:

As of June 30, 2023, our fixed income portfolio remained well diversified, with 1,751 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).

As of June 30, 2023, we had $136 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 June 30, 2023, we had $116 million in commercial mortgage-backed securities and $372 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 7.0 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.

We had $1,148 million in corporate fixed income securities as of June 30, 2023, which includes $110 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 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.

As of June 30, 2023, our equity portfolio had a dividend yield of 2.0 percent, compared to 1.5 percent for the S&P 500 index.

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

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

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

We had $55 million of investments in unconsolidated investees at June 30, 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.

As of June 30, 2023, our capital structure consisted of $200 million in long-term debt and $1.4 billion of shareholders’ equity.

Debt outstanding comprised 13 percent of total capital as of June 30, 2023.

Interest and fees on debt obligations totaled $4 million for the first six months of 2023 and 2022.

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

We paid a regular quarterly cash dividend of $0.27 per share on June 20, 2023, an increase of $0.01 from the prior quarter.

We have increased dividends in each of the last 48 years.

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shareholders.

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

On a GAAP basis, as of June 30, 2023, our holding company had $1.4 billion in equity.

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

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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.

In the first six months of 2023, RLI Ins.

paid $30 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 of June 30, 2023, $120 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