What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-24 compared with 2024-04-24 · 193 added, 89 removed, 209 unchanged (57% of the section changed)

9 unchanged sentences

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

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

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

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

24 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 and energy, including renewable energy.

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

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

12 unchanged sentences

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.

However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated 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.

1 unchanged sentence

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

(in thousands)

5 unchanged sentences

Net unrealized gains on equity securities

Net realized gains

Net realized (gains) losses

Net investment income

8 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, 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 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

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

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 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.

Positive market performance resulted in $49 million of unrealized gains on equity securities in the first six months of 2024, compared to $41 million in 2023.

Investment income was up 20 percent, due to an increased average asset base and higher reinvestment rates.

Realized gains during the first six months of 2024 were comprised of $13 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $2 million of realized losses on the fixed income portfolio and $5 million of other realized losses.

This compares to $9 million of realized gains on the equity portfolio, $3 million of realized losses on the fixed income portfolio and $14 million of other 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,

For the Six Months

Ended June 30,

Consolidated Revenues (in thousands)

1 unchanged sentence

Net investment income

Net realized gains

Net realized gains (losses)

Net unrealized gains on equity securities

Total consolidated revenue

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.

Underwriting income was $148 million on an 80.0 combined ratio for the first six months of 2024, compared to $109 million on an 82.7 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 $28 million of pretax storm losses in 2024 and $22 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.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $65 million in the first six months of 2024, compared to $72 million in 2023.

The loss ratio decreased to 42.1 from 42.6, due to low levels of attritional, non-catastrophe property losses on a higher earned premium base in 2024.

The expense ratio decreased to 37.9 from 40.1.

5 unchanged sentences

(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.

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

We recognized $6 million of investee earnings from Prime in the first six months of 2024 and 2023.

Net earnings for the first six months of 2024 totaled $210 million, compared to $176 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.

Comprehensive earnings totaled $189 million for the first six months of 2024, compared to $194 million for the first six 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.

Other comprehensive loss of $21 million in the first six months of 2024 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $18 million of other comprehensive earnings was recognized in 2023, as modestly tighter credit spreads on relatively steady interest rates increased the fair value of securities held in the fixed income portfolio.

Gross premiums written increased $109 million for the first six months of 2024, compared to the same period of 2023.

Growth was achieved in all three segments.

2 unchanged sentences

Net Premiums Earned

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

(in thousands)

9 unchanged sentences

Transactional

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

Gross premiums written for the casualty segment increased $63 million in the first six 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.

Commercial transportation benefited from an increase in submissions.

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.

Gross premiums written for the property segment increased $36 million in the first six months of 2024.

Our commercial property business was up $21 million, as rates continued to increase.

New opportunities led to $11 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.

Gross premiums written for the surety segment increased $10 million for the first six months of 2024.

Contract surety benefited from new agency relationships, new construction projects and elevated material costs.

The expansion of existing accounts and new business resulted in increased premium for commercial surety.

Underwriting Income

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $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 casualty segment recorded underwriting income of $24 million in the first six months of 2024, compared to $39 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $32 million, primarily on accident years 2016 and 2019 through 2023.

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

In comparison, $47 million of prior accident years’ reserves were released in the first six months of 2023.

Commercial excess, professional services, general liability and personal umbrella were drivers of the favorable development in 2023.

The combined ratio for the casualty segment was 94.1 in 2024, compared to 89.6 in 2023.

1 unchanged sentence

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 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.

The expense ratio for the casualty segment was 37.3, down from 37.4 for the same period last year.

The property segment recorded underwriting income of $111 million for the first six months of 2024, compared to $54 million for the same period last year.

Underwriting results for 2024 included $25 million of favorable development on prior years’ loss and catastrophe reserves and $26 million of storm losses in the current year.

Comparatively, the 2023 underwriting results included $17 million of favorable development on prior years’ loss and catastrophe reserves and $20 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.

Underwriting results for the first six months of 2024 translated into a combined ratio of 57.9, compared to 71.5 for the same period last year.

The segment’s loss ratio was 28.1 in 2024, down from 35.5 in 2023.

1 unchanged sentence

The segment’s expense ratio decreased to 29.8 in 2024 from 36.0 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.

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.

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

The surety segment recorded underwriting income of $13 million for the first six months of 2024, compared to $16 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 $8 million.

Results for 2023 included $3 million of favorable development on prior accident years’ reserves.

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.

Results for 2023

included $7 million of favorable development on prior accident years’ reserves.

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 81.4 for the first six months of 2024, compared to 75.8 for the same period in 2023.

The segment’s loss ratio was 9.2 in 2024, up from 9.0 in 2023.

The expense ratio was 72.2, up from 66.8 in the prior year.

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

The impact of the reinsurance reinstatement premium on the earned premium base increased the loss ratio by 0.3 points and the expense ratio by 2.0 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:

Our investment portfolio generated net investment income of $67 million during the first six months of 2024, an increase of 20 percent from the same period in 2023.

The increase in investment income was due to higher reinvestment 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 2024 and 2023 were as follows:

After-Tax Yield

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

The following table depicts the composition of our investment portfolio at June 30, 2024 as compared to December 31, 2023:

(in thousands)

March 31, 2024

June 30, 2024

December 31, 2023

3 unchanged sentences

Total investments and cash

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.

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.

We believe our overall asset allocation supports our strategy to preserve capital for policyholders, provide sufficient income to support our insurance operations and effectively grow book value over a long-term investment horizon.

The fixed income portfolio increased by $134 million in the first six months of 2024, as cash flows were allocated to the fixed income portfolio.

Average fixed income duration was 4.7 years at June 30, 2024, reflecting our liability structure and sound capital position.

The equity portfolio increased by $77 million during the first six months of 2024, due to the positive performance of equity markets.

Short-term investments decreased by $9 million, as we deployed cash to manage reinvestment risk.

Our effective tax rate for the first six months of 2024 was 20.3 percent, compared to 19.4 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.

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Net premiums earned increased 18 percent, driven by products in our property and casualty segments.

Positive market performance resulted in $4 million of unrealized gains on equity securities in the second quarter of 2024, compared to $25 million in 2023.

Investment income was up 18 percent, due to an increased average asset base and higher reinvestment rates.

Realized gains during the second quarter of 2024 were comprised of $6 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $1 million of realized losses on the fixed income portfolio and $5 million of other realized losses.

This compares to $6 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the second quarter of 2023.

For the Three Months

Ended June 30,

Consolidated Revenues (in thousands)

Net premiums earned

Net investment income

Net realized gains (losses)

Net unrealized gains on equity securities

Total consolidated revenue

Underwriting income was $70 million on an 81.5 combined ratio for the second quarter of 2024, compared to $41 million on an 87.2 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 $16 million of pretax storm losses in 2024 and $18 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 $23 million in the second quarter of 2024, compared to $20 million in 2023.

The loss ratio decreased to 44.3 from 47.8, due to an increase in favorable development on prior accident years’ loss reserves, lower levels of catastrophe losses and low levels of attritional, non-catastrophe property losses on a higher earned premium base in 2024.

The expense ratio decreased to 37.2 from 39.4.

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 $2 million of investee earnings from Prime in the second quarter of 2024 and 2023.

Net earnings for the second quarter of 2024 totaled $82 million, compared to $78 million for the same period in 2023.

Higher levels of underwriting income and investment income more than offset a decline in unrealized gains on equity securities.

Comprehensive earnings totaled $74 million for the second quarter of 2024, compared to $58 million for the same period of 2023.

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

Other comprehensive loss of $8 million in the second quarter of 2024 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio.

Comparatively, $20 million of other comprehensive loss was recognized in 2023, as interest rates increased.

Gross premiums written increased $55 million for the second quarter of 2024, compared to the same period of 2023.

Growth was achieved in all three segments.

Net premiums earned increased $57 million, driven by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Three Months

Ended June 30,

(in thousands)

Commercial excess and personal umbrella

Commercial transportation

General liability

Professional services

Small commercial

Executive products

Other casualty

Commercial property

Other property

Transactional

Gross premiums written for the casualty segment increased $35 million in the second quarter of 2024.

However, a reduction of available projects and our exit from energy casualty business resulted in a decline in general liability premium, while competitive market conditions continued to negatively impact executive products.

Gross premiums written for the property segment increased $14 million in the second quarter of 2024.

New opportunities and improved retention led to $8 million of premium growth for our marine product.

Rate increases as well as new opportunities on fire and other peril lines resulted in a $4 million increase in our commercial property business.

Wind rates declined slightly in the second quarter, after four consecutive years of double-digit increases.

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 $6 million for the second quarter of 2024.

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

The expansion of existing accounts and new business resulted in increased premium for commercial surety.

Underwriting Income

For the Three Months

Ended June 30,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $10 million in the second quarter of 2024, compared to $7 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $14 million, primarily on accident years 2019 through 2023.

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

In comparison, $11 million of prior accident years’ reserves were released in the second quarter of 2023.

Small commercial, commercial excess and personal umbrella were drivers of the favorable development in 2023.

The combined ratio for the casualty segment was 95.1 in 2024, compared to 96.3 in 2023.

The segment’s loss ratio was 58.3 in 2024, down from 58.9 in 2023.

Larger levels of reserve releases on prior accident years resulted in the lower loss ratio in 2024.

The expense ratio for the casualty segment was 36.8, down from 37.4 for the same period last year.

The property segment recorded underwriting income of $53 million for the second quarter of 2024, compared to $26 million for the same period last year.

Underwriting results for 2024 included $6 million of favorable development on prior years’ loss and catastrophe reserves and $15 million of storm losses in the current year.

Comparatively, the 2023 underwriting results included $4 million of favorable development on prior years’ loss and catastrophe reserves and $17 million of other storm losses.

Underwriting results for the second quarter of 2024 translated into a combined ratio of 60.3, compared to 74.6 for the same period last year.

The segment’s loss ratio was 30.9 in 2024, down from 40.4 in 2023.

Larger releases on prior years’ loss reserves, lower levels of storm losses and low attritional, non-catastrophe losses all contributed to the decline the loss ratio.

The segment’s expense ratio decreased to 29.4 in 2024 from 34.2 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 the expense override we earn for writing business on behalf of other carriers.

The surety segment recorded underwriting income of $7 million for the second quarter 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 $2 million.

Results for 2023 included $4 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 81.8 for the second quarter of 2024, compared to 75.0 for the same period in 2023.

The segment’s loss ratio was 12.7 in 2024, up from 7.8 in 2023, due to lower levels of favorable prior accident years’ reserve development.

The expense ratio was 69.1, up from 67.2 in the prior year, due to increases in select policy acquisition costs.

Investment Income

Our investment portfolio generated net investment income of $34 million during the second quarter of 2024, an increase of 18 percent from 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 second quarter of 2024 and 2023 were as follows:

After-Tax Yield

Our effective tax rate for the second quarter of 2024 was 20.6 percent, compared to 19.1 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 second quarter of 2024 due to lower levels of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation, and higher levels of pretax income, which decreased the percentage impact of tax-favored adjustments.

LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows:

(1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing

activities related to the purchase, sale and maturity of investments and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the three-month periods ended March 31, 2024 and 2023:

(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, 2024 and 2023:

(in thousands)

4 unchanged sentences

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.

Operating cash flows in the first six months of 2024 benefited from increased premium receipts relative to the first six months of 2023, but the impact was offset by elevated levels of loss and settlement expense payments.

As of June 30, 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 borrowing may be repaid at any time and carries an adjustable interest rate of 6.94 percent, which will reset during the third 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.

6 unchanged sentences

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.

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.

As of June 30, 2024, $57 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of June 30, 2024, we had cash and other investments maturing within one year of approximately $415 million and an additional $846 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.

2 unchanged sentences

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:

Invested assets at June 30, 2024 have increased $211 million from December 31, 2023.

As of June 30, 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 March 31, 2024, our fixed income portfolio had the following rating distribution:

As of June 30, 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 March 31, 2024, our fixed income portfolio remained well diversified, with 1,781 individual issues.

As of June 30, 2024, our fixed income portfolio remained well diversified, with 1,831 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).

As of June 30, 2024, we had $166 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, 2024, we had $152 million in commercial and non-agency MBS and $415 million in MBS 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 8.2 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.

We had $1,251 million in corporate fixed income securities as of June 30, 2024, which includes $119 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.

3 unchanged sentences

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.

As of June 30, 2024, our equity portfolio had a dividend yield of 1.8 percent, compared to 1.3 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 $66 million of investments in unconsolidated investees at March 31, 2024, compared to $57 million at December 31, 2023.

We had $67 million of investments in unconsolidated investees at June 30, 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.

As of June 30, 2024, our capital structure consisted of $100 million in debt and $1.6 billion of shareholders’ equity.

Debt outstanding comprised 6 percent of total capital as of June 30, 2024.

Interest and fees on debt obligations totaled $3 million for the first six months of 2024, compared to $4 million for the same period in 2023.

We incurred interest expense on debt at an average annual interest rate of 6.21 percent during the first six months of 2024, compared to 3.89 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.29 per share on June 20, 2024, an increase of $0.02 from the prior quarter.

We have increased dividends in each of the last 49 years.

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shareholders.

On a GAAP basis, as of March 31, 2024, our holding company had $1.5 billion in equity.

On a GAAP basis, as of June 30, 2024, our holding company had $1.6 billion in equity.

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

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Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI).

In the first three months of 2024, RLI Ins.

In the first six months of 2024, RLI Ins.

paid $34 million in ordinary dividends to RLI Corp.

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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 of June 30, 2024, $3 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