Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2023 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking 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.
OVERVIEW
RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property, casualty and surety products through major subsidiaries. Our focus is on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In 2023, we achieved our 28th consecutive year of underwriting profitability. Over the 28-year period, we averaged an 88.2 combined ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.
The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law. One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will equal recorded amounts. If actual liabilities differ from recorded amounts, there will 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 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 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, 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 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. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.
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The surety segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare 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. 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 commercial contractors’ contractual obligations for a specific construction project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.
The insurance marketplace is competitive across all of our segments. However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.
Key Performance Measures
The following is a list of key performance measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.
Underwriting Income
Underwriting income or profit represents one measure of the pretax profitability of our insurance operations, and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these 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. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized gains or losses on equity securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:
For the Three Months
Ended March 31,
(in thousands)
2024
2023
Net earnings
$
127,900
$
98,811
Income tax expense
32,091
23,980
Earnings before income taxes
$
159,991
$
122,791
Equity in earnings of unconsolidated investees
(4,769)
(3,923)
General corporate expenses
5,010
4,214
Interest expense on debt
1,618
2,008
Net unrealized gains on equity securities
(45,314)
(15,496)
Net realized gains
(5,994)
(14,620)
Net investment income
(32,847)
(27,084)
Net underwriting income
$
77,695
$
67,890
Combined Ratio
The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.
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Critical Accounting Policies
In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2023 Annual Report on Form 10-K.
There have been no significant changes to critical accounting policies during the year.
RESULTS OF OPERATIONS
Three Months Ended March 31, 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 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)
2024
2023
Net premiums earned
$
360,676
$
307,723
Net investment income
32,847
27,084
Net realized gains
5,994
14,620
Net unrealized gains on equity securities
45,314
15,496
Total consolidated revenue
$
444,831
$
364,923
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. 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.
Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. We recognized $5 million of investee earnings from Prime in the first three months of 2024, compared to $4 million in 2023.
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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.
Premiums
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.
Gross Premiums Written
Net Premiums Earned
For the Three Months
For the Three Months
Ended March 31,
Ended March 31,
(in thousands)
2024
2023
% Change
2024
2023
% Change
Casualty
Commercial excess and personal umbrella
$
102,182
$
81,431
25
%
$
80,035
$
67,582
18
%
Commercial transportation
29,129
22,873
27
%
27,301
25,232
8
%
General liability
26,760
24,789
8
%
25,412
25,900
(2)
%
Professional services
26,792
26,189
2
%
25,085
24,357
3
%
Small commercial
21,626
19,959
8
%
18,337
17,941
2
%
Executive products
16,413
17,827
(8)
%
5,915
6,353
(7)
%
Other casualty
22,427
24,766
(9)
%
16,191
18,666
(13)
%
Total
$
245,329
$
217,834
13
%
$
198,276
$
186,031
7
%
Property
Commercial property
$
128,694
$
111,939
15
%
$
87,605
$
49,262
78
%
Marine
40,574
37,189
9
%
32,568
30,636
6
%
Other property
11,096
9,718
14
%
9,238
8,869
4
%
Total
$
180,364
$
158,846
14
%
$
129,411
$
88,767
46
%
Surety
Transactional
14,114
13,347
6
%
12,108
12,047
1
%
Commercial
$
15,631
$
15,096
4
%
$
10,625
$
12,418
(14)
%
Contract
13,237
9,889
34
%
10,256
8,460
21
%
Total
$
42,982
$
38,332
12
%
$
32,989
$
32,925
0
%
Grand Total
$
468,675
$
415,012
13
%
$
360,676
$
307,723
17
%
Casualty
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.
Property
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.
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Surety
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 Three Months
Ended March 31,
2024
2023
Underwriting Income (in thousands)
Casualty
$
13,674
$
31,831
Property
57,716
28,383
Surety
6,305
7,676
Total
$
77,695
$
67,890
Combined Ratio
Casualty
93.2
82.9
Property
55.3
68.0
Surety
80.8
76.7
Total
78.5
77.9
Casualty
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 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.
Property
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. Additionally, the expense ratio benefited from an increase in expense override we earn for writing business on behalf of other carriers.
Surety
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. Results for 2024 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $5 million. Results for 2023 included $3 million of favorable development on prior accident years’ reserves. Additionally, $2 million of reinsurance
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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 $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 three months of 2024 and 2023 were as follows:
2024
2023
Pretax Yield
Taxable
3.72
%
3.39
%
Tax-Exempt
2.85
%
2.79
%
After-Tax Yield
Taxable
2.94
%
2.68
%
Tax-Exempt
2.70
%
2.64
%
The following table depicts the composition of our investment portfolio at March 31, 2024 as compared to December 31, 2023:
(in thousands)
March 31, 2024
December 31, 2023
Fixed income
$
2,863,321
76.2
%
$
2,855,849
77.7
%
Equity securities
643,367
17.1
%
590,041
16.0
%
Short-term investments
147,186
3.9
%
134,923
3.7
%
Other invested assets
59,273
1.6
%
59,081
1.6
%
Cash
44,557
1.2
%
36,424
1.0
%
Total investments and cash
$
3,757,704
100.0
%
$
3,676,318
100.0
%
We believe our overall asset allocation supports our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations and effectively grow book value over a long-term investment horizon.
The fixed income portfolio increased by $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.
Income Taxes
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 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
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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)
2024
2023
Operating cash flows
$
70,946
$
69,219
Investing cash flows
(53,064)
(57,804)
Financing cash flows
(9,749)
(11,464)
Total
$
8,133
$
(49)
Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received. Operating cash flows in the first three months of 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. (PNC). 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. 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, 2023. The borrowing matures on November 12, 2024. Interest is paid monthly at an annualized rate of 5.44 percent.
Two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of March 31, 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.
We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.
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We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. Invested assets at March 31, 2024 have increased $81 million from December 31, 2023. As of March 31, 2024, our investment portfolio had the following asset allocation breakdown:
Cost or
Fair
Unrealized
% of Total
(in thousands)
Amortized Cost
Value
Gain/(Loss)
Fair Value
Quality*
U.S. government
$
337,014
$
329,559
$
(7,455)
8.8
%
AA+
U.S. agency
59,956
58,455
(1,501)
1.6
%
AA+
Non-U.S. government & agency
4,800
3,844
(956)
0.1
%
BBB+
Agency MBS
456,358
414,428
(41,930)
11.0
%
AA+
ABS/CMBS/MBS**
315,414
289,476
(25,938)
7.7
%
AA+
Corporate
1,277,258
1,221,047
(56,211)
32.5
%
A-
Municipal
631,473
546,512
(84,961)
14.5
%
AA
Total fixed income
$
3,082,273
$
2,863,321
$
(218,952)
76.2
%
AA-
Equity
362,527
643,367
280,840
17.1
%
Short-term investments
147,186
147,186
—
3.9
%
Other invested assets
55,709
59,273
3,564
1.6
%
Cash
44,557
44,557
—
1.2
%
Total portfolio
$
3,692,252
$
3,757,704
$
65,452
100.0
%
*
Quality ratings provided by Moody’s, S&P and Fitch
**
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of March 31, 2024, our fixed income portfolio had the following rating distribution:
Below
Investment
AAA
AA
A
BBB
Grade
No Rating
Fair Value
U.S. government
-
329,559
-
-
-
-
329,559
U.S. agency
-
58,455
-
-
-
-
58,455
Non-U.S. government & agency
-
-
1,680
2,164
-
-
3,844
Agency MBS
-
414,428
-
-
-
-
414,428
ABS/CMBS/MBS*
182,626
23,560
64,620
-
-
18,670
289,476
Corporate
30,905
129,513
523,288
328,119
146,662
62,560
1,221,047
Municipal
142,850
350,658
52,664
-
-
340
546,512
Total
356,381
1,306,173
642,252
330,283
146,662
81,570
2,863,321
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
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 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 $1,221 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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The municipal portfolio includes approximately 58 percent taxable securities and 42 percent tax-exempt securities. Approximately 90 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 100 percent of the municipal bond portfolio is rated ‘A’ or better.
Securities within the equity portfolio are well diversified and are primarily invested in broad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.
As of March 31, 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. The equity portfolio is managed in a diversified and granular manner, with 85 individual securities and four ETF positions. No single company exposure in the equity portfolio represents more than 1 percent of invested assets.
Other invested assets include investments in low income housing tax credit and historic tax credit partnerships, membership in the FHLBC and investments in private funds.
We had $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 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.
Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of March 31, 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. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $153 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. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first three months of 2024, RLI Ins. paid $17 million in ordinary dividends 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. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.
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