What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-25 compared with 2023-07-26 · 171 added, 174 removed, 226 unchanged (60% of the section changed)

25 unchanged sentences

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.

The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and management liability 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.

2 unchanged sentences

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.

We also offer select personal lines policies, including homeowners’ coverages in Hawaii.

Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and other storms.

3 unchanged sentences

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.

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 onshore and offshore energy, petrochemical and refining industries.

We also offer a variety of miscellaneous bonds including, but not limited to:

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.

The contract surety product guarantees commercial contractors’ contractual obligations for a specific construction project.

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

12 unchanged sentences

For the Three Months

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

(in thousands)

Net earnings (loss)

Income tax expense (benefit)

Earnings (loss) before income taxes

Equity in earnings of unconsolidated investees

Income tax expense

Earnings before income taxes

Equity in (earnings) loss of unconsolidated investees

General corporate expenses

12 unchanged sentences

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.

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, 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.

3 unchanged sentences

RESULTS OF OPERATIONS

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.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Net premiums earned increased 12 percent, with all segments contributing to the growth.

Positive market performance resulted in $15 million of unrealized gains on equity securities in the first nine months of 2023, while overall market declines resulted in $155 million of unrealized losses in 2022.

Investment income was up 52 percent, due to an increased average asset base and higher interest rates relative to the prior year.

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,

Realized gains during the first nine months of 2023 were comprised of $16 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 $20 million of realized gains on the equity portfolio, $3 million of realized losses on the fixed income portfolio and $574 million of realized gains from the sale of our investment in Maui Jim in the previous year.

For the Nine Months

Ended September 30,

Consolidated Revenues (in thousands)

4 unchanged sentences

Total consolidated revenue

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 $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.

Net earnings for the first nine months of 2023 totaled $190 million, compared to $486 million for the same period in 2022.

The decrease for 2023 was primarily attributed to the $437.7 million of after-tax earnings recognized from the sale of our equity method investment in Maui Jim in 2022.

The impact was partially offset by the $25 million of net after-tax realized and unrealized gains on equity securities, compared to $107 million of after-tax realized and unrealized losses in 2022.

Underwriting results for 2023 were impacted by $52 million of pretax losses and $14 million of reinstatement premium from the Hawaiian wildfires, as well as $27 million of storm losses.

Comparatively, 2022 included $40 million of pretax hurricane losses and $5 million of pretax storm losses.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $94 million in the first nine months of 2023, compared to $103 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 $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.

Underwriting income was $113 million on an 88.0 combined ratio for the first nine months of 2023, compared to $124 million on an 85.3 combined ratio in the same period of 2022.

The loss ratio increased to 48.3 from 46.1, due to higher levels of catastrophe losses in 2023.

The expense ratio increased to 39.7 from 39.2, as improved year to date metrics 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 experiences 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 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 $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 $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.

In the first nine months of 2023, we recognized $7 million of investee earnings from Prime.

Comparatively, the first nine months of 2022 reflected $9 million of investee earnings from Prime and $3 million of investee losses for Maui Jim, primarily due to transaction related expenses from the sale of Maui Jim in the third quarter of 2022.

Comprehensive earnings totaled $151 million for the first nine months of 2023, compared to $191 million for the first nine months of 2022.

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

Other comprehensive loss of $39 million in the first nine months of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $294 million of other comprehensive loss was recognized in 2022, as interest rates increased.

Gross premiums written increased $145 million for the first six months of 2023, compared to the same period of 2022.

Gross premiums written increased $191 million for the first nine 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.

2 unchanged sentences

Net Premiums Earned

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

(in thousands)

9 unchanged sentences

Miscellaneous

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.

Gross premiums written for the casualty segment increased $19 million in the first nine months of 2023.

Continued new business growth across our personal umbrella and small commercial distribution channels, as well as positive rate movement across a large portion of our casualty segment, offset challenging conditions some lines experienced during the first nine months.

We are running off our energy liability business, which resulted in a $19 million decrease within the commercial excess and general liability products.

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

Additionally, commercial transportation premium decreased, as trucking companies’ revenues are down compared to last year and there is some consolidation underway in the bus industry.

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.

Gross premiums written for the property segment increased $168 million in the first nine months of 2023.

Our commercial property business was up $154 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.

Gross premiums written for the surety segment increased $4 million for the first nine months of 2023.

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

1 unchanged sentence

Underwriting Income

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

Underwriting Income (in thousands)

Combined Ratio

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 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.

The casualty segment recorded underwriting income of $57 million in the first nine months of 2023, compared to $60 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $69 million, primarily on accident years 2015 through 2018 and 2020 through 2022.

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

In comparison, $73 million of prior accident years’ reserves were released in the first nine months of 2022.

General liability, professional services, transportation, executive products and commercial excess were drivers of the favorable development in 2022.

Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2023 and $8 million of losses in 2022.

The combined ratio for the casualty segment was 89.8 in 2023, compared to 88.6 in 2022.

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 segment’s loss ratio was 52.7 in 2023, down from 52.8 in 2022.

The expense ratio for the casualty segment was 37.1, up from 35.8 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 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 increase in expense ratio was the result of continued investments in technology and people to support growth and improve customer experiences.

The property segment recorded underwriting income of $34 million for the first nine months of 2023, compared to $40 million for the same period last year.

Underwriting results for 2023 included $17 million of favorable development on prior years’ loss and catastrophe reserves, $25 million of storm losses, as well as $52 million of losses and $14 million of reinstatement premium from the Hawaiian wildfires.

Comparatively, the 2022 underwriting results included $21 million of favorable development on prior years’ loss and catastrophe reserves, $33 million of hurricane losses and $5 million of other storm losses.

Underwriting results for the first nine months of 2023 translated into a combined ratio of 88.2, compared to 81.9 for the same period last year.

The segment’s loss ratio was 52.3 in 2023, up from 44.9 in 2022, due to an increase in catastrophe losses.

The segment’s expense ratio decreased to 35.9 in 2023 from 37.0 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.

The surety segment recorded underwriting income of $22 million for the first nine months of 2023, compared to $24 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 $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.

Results for 2023 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $8 million.

Results for 2022 included $9 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 77.8 for the first nine months of 2023, compared to 74.4 for the same period in 2022.

The segment’s loss ratio increased to 11.8 in 2023, up from 10.4 in 2022, due to lower levels of favorable prior accident years’ reserve development.

The expense ratio was 66.0, up from 64.0 in the prior year.

Investment Income

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.

Our investment portfolio generated net investment income of $88 million during the first nine months of 2023, an increase of 52 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 six months of 2023 and 2022 were as follows:

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

After-Tax Yield

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

The following table depicts the composition of our investment portfolio at September 30, 2023 as compared to December 31, 2022:

(in thousands)

June 30, 2023

September 30, 2023

December 31, 2022

4 unchanged sentences

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 $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.

The fixed income portfolio increased by $51 million in the first nine months of 2023.

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

The equity portfolio increased by $36 million during the first nine months of 2023, due to the positive performance of equity markets.

Short-term investments increased by $89 million, as improved yields made AAA-rated government money market funds an investable asset class.

Our effective tax rate for the first nine months of 2023 was 18.7 percent, compared to 20.0 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 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.

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

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

Net premiums earned increased 9 percent, with all segments contributing to the growth.

Overall equity market declines resulted in $25 million of unrealized losses on equity securities in the third quarter of 2023, compared to $26 million in the third quarter of 2022.

Investment income was up 50 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.

Realized gains during the third quarter of 2023 were comprised of $7 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 less than $1 million of realized gains on the equity portfolio, $2 million of realized losses on the fixed income portfolio and a $574 million gain from the sale of Maui Jim in the same period of 2022.

For the Three Months

Ended June 30,

Ended September 30,

Consolidated Revenues (in thousands)

4 unchanged sentences

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.

Net earnings for the third quarter of 2023 totaled $14 million, compared to $440 million for the same period in 2022.

The decrease for 2023 was primarily attributed to the $437.7 million of after-tax earnings recognized from the sale of our equity method investment in Maui Jim in 2022.

Underwriting results for 2023 were impacted by $52 million of pretax losses and $14 million of reinstatement premium from the Hawaiian wildfires, as well as $5 million of storm losses.

Comparatively, 2022 included $40 million of pretax hurricane losses.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $22 million in the third quarter of 2023, compared to $33 million in 2022.

1 unchanged sentence

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.

Underwriting income was $4 million on a 98.7 combined ratio for the third quarter of 2023, compared to $9 million on a 97.0 combined ratio in the same period of 2022.

The loss ratio increased to 59.5 from 56.6, due to higher net retained catastrophe losses and lower levels of favorable development on prior years’ loss reserves in 2023.

The expense ratio decreased to 39.2 from 40.4, with 2023 benefiting from a larger earned premium base.

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

Comparatively, the third quarter of 2022 reflected investee earnings of $3 million from Prime and $18 million of investee losses from Maui Jim, primarily due to transaction related expenses from the sale of the company in the third quarter of 2022.

Comprehensive loss totaled $43 million for the third quarter of 2023, compared to $359 million in comprehensive earnings for the same period of 2022.

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

Other comprehensive loss of $57 million in the third quarter of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $81 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.

Gross premiums written increased $46 million for the third quarter of 2023, compared to the same period of 2022.

Growth was achieved from the property and casualty segments.

Net premiums earned increased $27 million, driven by products in our property and casualty segments.

3 unchanged sentences

For the Three Months

Ended June 30,

Ended September 30,

(in thousands)

9 unchanged sentences

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.

Gross premiums written for the casualty segment increased $14 million in the third quarter of 2023.

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

The runoff of our energy liability business resulted in a $5 million decrease within the commercial excess and general liability products for the quarter.

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 increased $33 million in the third quarter of 2023.

Our commercial property business grew by $31 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

Net premiums earned are negative for other property in 2023, as a result of the $14 million of reinstatement premium recorded for Hawaiian wildfires.

Gross premiums written for the surety segment decreased $1 million for the third quarter of 2023.

The decline in commercial surety was due to the timing of select renewals that shifted to the fourth quarter.

While public sector construction appears to be holding steady, private sector construction has slowed, which led to declines in contract surety.

Underwriting Income (Loss)

For the Three Months

Ended June 30,

Underwriting Income (in thousands)

Ended September 30,

Underwriting Income (Loss) (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.

The casualty segment recorded underwriting income of $19 million in the third quarter of 2023, compared to $11 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $22 million, primarily on accident years 2015 through 2017 and 2020 through 2022.

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

In comparison, $28 million of prior accident years’ reserves were released in the third quarter of 2022.

General liability, commercial excess and executive products were drivers of the favorable development in 2022.

Storm losses on casualty-oriented package policies that include property coverage offset the favorable development and resulted in $0.5 million of losses in 2023 and $7.0 million of losses in 2022.

The combined ratio for the casualty segment was 90.1 in 2023, compared to 93.7 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.

The segment’s loss ratio was 53.7 in 2023, down from 56.1 in 2022.

The decrease in loss ratio was attributable to improved results in the current accident year, which included lower levels of storm losses.

The expense ratio for the casualty segment was 36.4, down from 37.6 for the same period last year, as the growth in the earned premium base exceeded the growth in expense for all segments.

The property segment recorded $21 million of underwriting loss for the third quarter of 2023, compared to $8 million of underwriting loss for the same period last year.

Underwriting results for 2023 included $0.4 million of unfavorable development on prior years’ loss and catastrophe reserves, $5 million of storm losses, as well as $52 million of losses and $14 million of reinstatement premium from the Hawaiian wildfires.

Comparatively, the 2022 underwriting results included $3 million of favorable development on prior years’ loss and catastrophe reserves and $33 million of hurricane losses.

Underwriting results for the third quarter of 2023 translated into a combined ratio of 121.8, compared to 110.3 for the same period last year.

The segment’s loss ratio was 86.3 in 2023, up from 73.4 in 2022, due to the increase in catastrophe losses.

The segment’s expense ratio decreased to 35.5 in 2023 from 36.9 in the prior year.

The surety segment recorded underwriting income of $6 million for the third 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 $1 million, compared to $2 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.

The combined ratio for the surety segment totaled 81.7 for the third quarter of 2023, compared to 81.4 for the same period in 2022.

The segment’s loss ratio was 17.2 in 2023, up from 16.2 in 2022, due to lower levels of prior accident year reserve releases.

The expense ratio was 64.5, down from 65.2 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.

Our investment portfolio generated net investment income of $32 million during the third quarter of 2023, an increase of 50 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:

Yields on our fixed income investments for the third 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.

Our effective tax rate for the third quarter of 2023 was 9.9 percent, compared to 20.7 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.

The effective tax rate was lower for the third quarter of 2023, as lower pretax income increased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

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 six-month periods ended June 30, 2023 and 2022:

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

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

Operating cash flows in the first nine months of 2023 benefited from increased premium receipts relative to the first nine months of 2022, but were also impacted by elevated levels of loss and settlement expense payments.

Investing cash flows in 2022 reflect the cash received from the sale of our investment in Maui Jim at the end of the third quarter.

Given proceeds from the sale were received on September 30, 2022, only a portion of the funds could be reinvested prior to the end of the quarter.

As of September 30, 2023, we had $100 million in debt outstanding.

On September 15, 2023, we retired $150 million in senior notes that were originally issued in 2013.

Additionally, on September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A.

The borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent which will reset during the first quarter of 2024.

The credit facility with PNC 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.

The line of credit permits us to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount of $130 million under certain conditions.

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

Further, 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 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.

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 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.

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

Hawley Insurance Company, are members of the FHLBC.

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

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.

As of September 30, 2023, $57 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of September 30, 2023, we had cash and other investments maturing within one year of approximately $318 million and an additional $892 million maturing between one to five years.

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 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:

Invested assets at September 30, 2023 have increased $183 million from December 31, 2022.

As of September 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 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.

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

government & agency

ABS/CMBS/MBS*

Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

As of September 30, 2023, our fixed income portfolio remained well diversified, with 1,783 individual issues.

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

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).

As of September 30, 2023, we had $146 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, 2023, we had $119 million in commercial and non-agency mortgage-backed securities and $399 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 7.7 percent of our investment portfolio at quarter end.

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.

We had $1,153 million in corporate fixed income securities as of September 30, 2023, which includes $112 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 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.

As of September 30, 2023, our equity portfolio had a dividend yield of 2.4 percent, compared to 1.6 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 $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022.

We had $56 million of investments in unconsolidated investees at September 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 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.

As of September 30, 2023, our capital structure consisted of $100 million in debt and $1.3 billion of shareholders’ equity.

Debt outstanding comprised 7 percent of total capital as of September 30, 2023.

Interest and fees on debt obligations totaled $6 million for the first nine months of 2023 and 2022.

We incurred interest expense on debt at an average annual interest rate of 3.90 percent during the first nine months of 2023, compared to 3.89 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.27 per share on September 20, 2023, the same amount as 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 June 30, 2023, our holding company had $1.4 billion in equity.

On a GAAP basis, as of September 30, 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 $262 million in liquid assets, which was elevated by the cash proceeds received from the sale of Maui Jim.

The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $156 million in liquid assets.

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 six months of 2023, RLI Ins.

In the first nine months of 2023, RLI Ins.

paid $45 million in ordinary dividends to RLI Corp.

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

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 of September 30, 2023, $105 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