What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-24 compared with 2023-10-25 · 115 added, 214 removed, 183 unchanged (64% of the section changed)

1 unchanged sentence

Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report.

These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company.

These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions.

Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance, 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.

Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors.

These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A.

1 unchanged sentence

Actual results could differ materially from those expressed in, or implied by, these forward looking statements.

We assume no obligation to update any such statements.

Forward looking statements reflect the Company’s expectations, plans or forecasts of future events and views as of the date of this report.

While the Company may elect to update these forward looking statements at some point in the future, the Company specifically disclaims any obligation to do so.

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

16 unchanged sentences

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.

We also assume a limited amount of risks through quota share and excess of loss reinsurance agreements.

The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop.

The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages.

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

Our property segment is comprised primarily of commercial fire, hurricane, earthquake, difference in conditions and marine coverages.

We also offer homeowners’ coverages in Hawaii.

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

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

Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast, and windstorms affecting commercial properties in coastal regions of the United States.

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

1 unchanged sentence

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 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.

We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare and energy, including renewable energy.

We also offer a variety of transactional bonds including, but not limited to license and permit, notary and court bonds.

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

10 unchanged sentences

Underwriting income or profit represents one measure of the pretax profitability of our insurance operations, and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures.

Each of these captions is presented in the statements of earnings but is not subtotaled.

Each of these components are presented in the statements of earnings but is not subtotaled.

However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our 2023 Annual Report on Form 10-K, regarding operating segment information.

2 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

1 unchanged sentence

Earnings before income taxes

Equity in (earnings) loss of unconsolidated investees

Equity in earnings of unconsolidated investees

General corporate expenses

Interest expense on debt

Net unrealized (gains) losses on equity securities

Net unrealized gains on equity securities

Net realized gains

15 unchanged sentences

RESULTS OF OPERATIONS

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.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Net premiums earned increased 17 percent, driven by products in our property and casualty segments.

Positive market performance resulted in $45 million of unrealized gains on equity securities in the first three months of 2024, compared to $15 million in 2023.

Investment income was up 21 percent, due to an increased average asset base and higher interest rates relative to the prior year.

Realized gains during the first nine months of 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,

Realized gains during the first three months of 2024 were comprised of $7 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and $1 million of realized losses on the fixed income portfolio.

This compares to $2 million of realized gains on the equity portfolio, $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) in the previous year.

For the Three Months

Ended March 31,

Consolidated Revenues (in thousands)

2 unchanged sentences

Net realized gains

Net unrealized gains (losses) on equity securities

Net unrealized gains on equity securities

Total consolidated revenue

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.

Underwriting income was $78 million on a 78.5 combined ratio for the first three months of 2024, compared to $68 million on a 77.9 combined ratio in the same period of 2023.

A larger earned premium base resulted in higher levels of underwriting income.

Underwriting results were impacted by $12 million of pretax storm losses in 2024 and $4 million of pretax storm losses in 2023.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $42 million in the first three months of 2024, compared to $52 million in 2023.

The loss ratio increased to 39.9 from 37.2, due to a decrease in favorable development on prior accident years’ loss reserves and higher levels of catastrophe losses in 2024.

The expense ratio decreased to 38.6 from 40.7.

Despite continued investments in our people and technology, as well as higher levels of bonus and profit-sharing expenses that resulted from improved operating performance, growth of net premiums earned allowed for improved leveraging of our expense base.

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 $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 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 $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.

We recognized $5 million of investee earnings from Prime in the first three months of 2024, compared to $4 million in 2023.

Net earnings for the first three months of 2024 totaled $128 million, compared to $99 million for the same period in 2023.

Higher levels of underwriting income, investment income and unrealized gains on equity securities all contributed to the improved results.

Comprehensive earnings totaled $115 million for the first three months of 2024, compared to $137 million for the first three months of 2023.

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

Other comprehensive loss of $13 million in the first three months of 2024 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $38 million of other comprehensive earnings was recognized in 2023, as declining interest rates increased the fair value of securities held in the fixed income portfolio.

Gross premiums written increased $54 million for the first three months of 2024, compared to the same period of 2023.

Growth was achieved in all three segments.

Net premiums earned increased $53 million, driven by products in our property and casualty segments.

1 unchanged sentence

Net Premiums Earned

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(in thousands)

Commercial excess and personal umbrella

General liability

Commercial transportation

General liability

Professional services

4 unchanged sentences

Other property

Miscellaneous

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 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 increased $4 million for the first nine 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.

Transactional

Gross premiums written for the casualty segment increased $27 million in the first three months of 2024.

We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth across our personal umbrella and small commercial distribution channels.

General liability premium grew as we were able to secure new accounts and commercial transportation benefited from an increase in submissions, as well as the timing of a large renewal.

However, executive products premium continued to decline as a result of competitive market conditions.

Gross premiums written for the property segment increased $22 million in the first three months of 2024.

Our commercial property business was up $17 million, as wind rates continued to increase, though at a more moderate pace than in recent quarters.

New opportunities led to $3 million of premium growth for our marine product.

Additionally, some competitors have reduced their appetite for select Hawaii homeowner coverages, which has allowed our other property premium to grow.

Gross premiums written for the surety segment increased $5 million for the first three months of 2024.

Contract surety benefited from new agency relationships, new construction projects and continued increases in material costs.

Underwriting Income

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Underwriting Income (in thousands)

Combined Ratio

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 casualty segment recorded underwriting income of $14 million in the first three months of 2024, compared to $32 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $18 million, primarily on accident years 2016 through 2019 and 2023.

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

In comparison, $36 million of prior accident years’ reserves were released in the first three months of 2023.

General liability, professional services, commercial excess, executive products and personal umbrella were drivers of the favorable development in 2023.

The combined ratio for the casualty segment was 93.1 in 2024, compared to 82.9 in 2023.

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

The segment’s loss ratio was 55.2 in 2024, up from 45.5 in 2023.

Lower levels of reserve releases on prior accident years resulted in the higher loss ratio in 2024.

The expense ratio for the casualty segment was 37.9, up from 37.4 for the same period last year.

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 property segment recorded underwriting income of $58 million for the first three months of 2024, compared to $28 million for the same period last year.

Underwriting results for 2024 included $19 million of favorable development on prior years’ loss and catastrophe reserves and $12 million of storm losses in the current year.

Comparatively, the 2023 underwriting results included $13 million of favorable development on prior years’ loss and catastrophe reserves and $4 million of other storm losses.

Underwriting results for the first three months of 2024 translated into a combined ratio of 55.4, compared to 68.0 for the same period last year.

The segment’s loss ratio was 25.2 in 2024, down from 29.8 in 2023.

Larger releases on prior years’ loss reserves and low attritional, non-catastrophe losses more than offset the impact of higher storm losses.

The segment’s expense ratio decreased to 30.2 in 2024 from 38.2 in the prior year, as the growth in the earned premium base exceeded the growth in expense.

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.

Additionally, the expense ratio benefited from an increase in expense override we earn for writing business on behalf of other carriers.

The surety segment recorded underwriting income of $6 million for the first three months of 2024, compared to $8 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.

1 unchanged sentence

Results for 2023 included $3 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.

Additionally, $2 million of reinsurance

reinstatement premium was recorded in 2024 on a prior year loss, which reduced net premiums earned and underwriting income.

The combined ratio for the surety segment totaled 80.9 for the first three months of 2024, compared to 76.7 for the same period in 2023.

The segment’s loss ratio was 5.4 in 2024, down from 10.2 in 2023, due to higher levels of favorable prior accident years’ reserve development.

The expense ratio was 75.5, up from 66.5 in the prior year.

The impact of the reinsurance reinstatement premium on the earned premium base increased the expense ratio by 4.3 points.

In addition, the increase in expense ratio was the result of continued investments in technology and people to support growth and improve customer experiences.

Investment Income

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.

Our investment portfolio generated net investment income of $33 million during the first three months of 2024, an increase of 21 percent from that reported for the same period in 2023.

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

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

Yields on our fixed income investments for the first three months of 2024 and 2023 were as follows:

After-Tax Yield

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

The following table depicts the composition of our investment portfolio at March 31, 2024 as compared to December 31, 2023:

(in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

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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 $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.

The fixed income portfolio increased by $7 million in the first three months of 2024.

Average fixed income duration was 4.6 years at March 31, 2024, reflecting our liability structure and sound capital position.

The equity portfolio increased by $53 million during the first three months of 2024, due to the positive performance of equity markets.

Short-term investments increased by $12 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 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 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 September 30,

Consolidated Revenues (in thousands)

Net premiums earned

Net investment income

Net realized gains

Net unrealized gains (losses) on equity securities

Total consolidated revenue

Net earnings for the third quarter of 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.

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 $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 $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.

Gross Premiums Written

Net Premiums Earned

For the Three Months

Ended September 30,

(in thousands)

Commercial excess and personal umbrella

General liability

Commercial transportation

Professional services

Small commercial

Executive products

Other casualty

Commercial property

Other property

Miscellaneous

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.

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 September 30,

Underwriting Income (Loss) (in thousands)

Combined Ratio

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 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 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 $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 third quarter of 2023 and 2022 were as follows:

After-Tax Yield

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.

Our effective tax rate for the first three months of 2024 was 20.1 percent, compared to 19.5 percent for the same period in 2023.

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

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.

The effective tax rate was higher for the three-month period in 2024, as higher pretax income decreased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows:

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

The following table summarizes cash flows provided by (used in) our activities for the nine-month periods ended September 30, 2023 and 2022:

(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, 2024 and 2023:

(in thousands)

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

Operating cash flows in the first nine months of 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.

Operating cash flows in the first three months of 2024 benefited from increased premium receipts relative to the first three months of 2023, but were also impacted by elevated levels of loss and settlement expense payments.

As of March 31, 2024, we had $100 million in debt outstanding.

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 an adjustable interest rate of 6.93 percent, which will reset during the second 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.

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Further, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 10, 2023.

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

The borrowing matures on November 12, 2024.

Interest is paid monthly at an annualized rate of 5.44 percent.

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

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.

As of March 31, 2024, $57 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of March 31, 2024, we had cash and other investments maturing within one year of approximately $378 million and an additional $879 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.

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

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

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

Invested assets at March 31, 2024 have increased $81 million from December 31, 2023.

As of March 31, 2024, our investment portfolio had the following asset allocation breakdown:

(in thousands)

9 unchanged sentences

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

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

As of March 31, 2024, our fixed income portfolio had the following rating distribution:

government & agency

1 unchanged sentence

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.

As of March 31, 2024, our fixed income portfolio remained well diversified, with 1,781 individual issues.

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

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).

As of March 31, 2024, we had $148 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, 2024, we had $139 million in commercial and non-agency mortgage-backed securities and $414 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 $1,153 million in corporate fixed income securities as of September 30, 2023, which includes $112 million invested in a high-yield credit strategy.

We had $1,221 million in corporate fixed income securities as of March 31, 2024, which includes $115 million invested in a high-yield credit strategy.

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

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

As of September 30, 2023, our equity portfolio had a dividend yield of 2.4 percent, compared to 1.6 percent for the S&P 500 index.

As of March 31, 2024, our equity portfolio had a dividend yield of 1.9 percent, compared to 1.4 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 $56 million of investments in unconsolidated investees at September 30, 2023, compared to $58 million at December 31, 2022.

We had $66 million of investments in unconsolidated investees at March 31, 2024, compared to $57 million at December 31, 2023.

Our investment portfolio does not have any exposure to derivatives.

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.

As of March 31, 2024, our capital structure consisted of $100 million in debt and $1.5 billion of shareholders’ equity.

Debt outstanding comprised 6 percent of total capital as of March 31, 2024.

Interest and fees on debt obligations totaled $2 million for the first three months of 2024 and 2023.

We incurred interest expense on debt at an average annual interest rate of 6.24 percent during the first three months of 2024, compared to 3.89 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.27 per share on March 20, 2024, 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 September 30, 2023, our holding company had $1.3 billion in equity.

On a GAAP basis, as of March 31, 2024, our holding company had $1.5 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 nine months of 2023, RLI Ins.

In the first three months of 2024, RLI Ins.

paid $17 million in ordinary dividends to RLI Corp.

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

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.

In 2023, RLI Ins.

paid ordinary dividends totaling $145 million.

As of March 31, 2024, $5 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.

2 unchanged sentences

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