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 three 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, 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. 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 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
For the Six Months
Ended June 30,
Ended June 30,
(in thousands)
2024
2023
2024
2023
Net earnings
$
81,992
$
77,652
$
209,892
$
176,463
Income tax expense
21,311
18,379
53,402
42,359
Earnings before income taxes
$
103,303
$
96,031
$
263,294
$
218,822
Equity in earnings of unconsolidated investees
(1,646)
(1,514)
(6,415)
(5,437)
General corporate expenses
4,140
4,219
9,150
8,433
Interest expense on debt
1,604
2,047
3,222
4,055
Net unrealized gains on equity securities
(3,608)
(25,214)
(48,922)
(40,710)
Net realized (gains) losses
192
(5,580)
(5,802)
(20,200)
Net investment income
(33,961)
(28,788)
(66,808)
(55,872)
Net underwriting income
$
70,024
$
41,201
$
147,719
$
109,091
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 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
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 $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 Six Months
Ended June 30,
Consolidated Revenues (in thousands)
2024
2023
Net premiums earned
$
739,741
$
630,003
Net investment income
66,808
55,872
Net realized gains (losses)
5,802
20,200
Net unrealized gains on equity securities
48,922
40,710
Total consolidated revenue
$
861,273
$
746,785
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 $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. 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 $6 million of investee earnings from Prime in the first six months of 2024 and 2023.
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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 $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 $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.
Premiums
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. Net premiums earned increased $110 million, driven by products in our property and casualty segments.
Gross Premiums Written
Net Premiums Earned
For the Six Months
For the Six Months
Ended June 30,
Ended June 30,
(in thousands)
2024
2023
% Change
2024
2023
% Change
Casualty
Commercial excess and personal umbrella
$
225,219
$
176,840
27
%
$
166,021
$
136,843
21
%
Commercial transportation
67,875
58,715
16
%
56,624
50,630
12
%
General liability
55,568
55,612
(0)
%
51,516
51,916
(1)
%
Professional services
57,600
55,282
4
%
51,085
48,959
4
%
Small commercial
44,769
40,246
11
%
37,796
36,396
4
%
Executive products
38,093
40,345
(6)
%
11,363
12,506
(9)
%
Other casualty
42,761
41,851
2
%
32,971
35,829
(8)
%
Total
$
531,885
$
468,891
13
%
$
407,376
$
373,079
9
%
Property
Commercial property
$
305,671
$
284,945
7
%
$
175,005
$
109,481
60
%
Marine
85,996
74,970
15
%
69,637
63,048
10
%
Other property
24,711
20,820
19
%
18,866
18,079
4
%
Total
$
416,378
$
380,735
9
%
$
263,508
$
190,608
38
%
Surety
Transactional
$
27,390
$
25,821
6
%
$
24,416
$
23,934
2
%
Commercial
29,906
27,039
11
%
23,325
24,923
(6)
%
Contract
26,489
20,490
29
%
21,116
17,459
21
%
Total
$
83,785
$
73,350
14
%
$
68,857
$
66,316
4
%
Grand Total
$
1,032,048
$
922,976
12
%
$
739,741
$
630,003
17
%
Casualty
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. Commercial transportation benefited from an increase in submissions. However, executive products premium continued to decline as a result of competitive market conditions.
Property
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.
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Surety
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 Six Months
Ended June 30,
2024
2023
Underwriting Income (in thousands)
Casualty
$
23,989
$
38,808
Property
110,896
54,260
Surety
12,834
16,023
Total
$
147,719
$
109,091
Combined Ratio
Casualty
94.1
89.6
Property
57.9
71.5
Surety
81.4
75.8
Total
80.0
82.7
Casualty
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. The segment’s loss ratio was 56.8 in 2024, up from 52.2 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 37.3, down from 37.4 for the same period last year.
Property
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 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. 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 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 the expense override we earn for writing business on behalf of other carriers.
Surety
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
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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 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 $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:
2024
2023
Pretax Yield
Taxable
3.74
%
3.40
%
Tax-Exempt
2.86
%
2.78
%
After-Tax Yield
Taxable
2.95
%
2.69
%
Tax-Exempt
2.71
%
2.63
%
The following table depicts the composition of our investment portfolio at June 30, 2024 as compared to December 31, 2023:
(in thousands)
June 30, 2024
December 31, 2023
Fixed income
$
2,989,527
76.9
%
$
2,855,849
77.7
%
Equity securities
666,563
17.2
%
590,041
16.0
%
Short-term investments
125,865
3.2
%
134,923
3.7
%
Other invested assets
55,364
1.4
%
59,081
1.6
%
Cash
50,030
1.3
%
36,424
1.0
%
Total investments and cash
$
3,887,349
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 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.
Income Taxes
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 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.
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Table of Contents
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)
2024
2023
Net premiums earned
$
379,065
$
322,280
Net investment income
33,961
28,788
Net realized gains (losses)
(192)
5,580
Net unrealized gains on equity securities
3,608
25,214
Total consolidated revenue
$
416,442
$
381,862
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.
Premiums
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.
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Gross Premiums Written
Net Premiums Earned
For the Three Months
For the Three Months
Ended June 30,
Ended June 30,
(in thousands)
2024
2023
% Change
2024
2023
% Change
Casualty
Commercial excess and personal umbrella
$
123,037
$
95,409
29
%
$
85,986
$
69,261
24
%
Commercial transportation
38,746
35,842
8
%
29,323
25,398
15
%
General liability
28,808
30,823
(7)
%
26,104
26,016
0
%
Professional services
30,808
29,093
6
%
26,000
24,602
6
%
Small commercial
23,143
20,287
14
%
19,459
18,455
5
%
Executive products
21,680
22,518
(4)
%
5,448
6,153
(11)
%
Other casualty
20,334
17,085
19
%
16,780
17,163
(2)
%
Total
$
286,556
$
251,057
14
%
$
209,100
$
187,048
12
%
Property
Commercial property
$
176,977
$
173,006
2
%
$
87,400
$
60,219
45
%
Marine
45,422
37,781
20
%
37,069
32,412
14
%
Other property
13,615
11,102
23
%
9,628
9,210
5
%
Total
$
236,014
$
221,889
6
%
$
134,097
$
101,841
32
%
Surety
Transactional
$
13,276
$
12,474
6
%
$
12,308
$
11,887
4
%
Commercial
14,275
11,943
20
%
12,700
12,505
2
%
Contract
13,252
10,601
25
%
10,860
8,999
21
%
Total
$
40,803
$
35,018
17
%
$
35,868
$
33,391
7
%
Grand Total
$
563,373
$
507,964
11
%
$
379,065
$
322,280
18
%
Casualty
Gross premiums written for the casualty segment increased $35 million in the second quarter 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. 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.
Property
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.
Surety
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.
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Underwriting Income
For the Three Months
Ended June 30,
2024
2023
Underwriting Income (in thousands)
Casualty
$
10,315
$
6,977
Property
53,180
25,877
Surety
6,529
8,347
Total
$
70,024
$
41,201
Combined Ratio
Casualty
95.1
96.3
Property
60.3
74.6
Surety
81.8
75.0
Total
81.5
87.2
Casualty
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.
Property
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.
Surety
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.
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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:
2024
2023
Pretax Yield
Taxable
3.75
%
3.41
%
Tax-Exempt
2.90
%
2.79
%
After-Tax Yield
Taxable
2.96
%
2.69
%
Tax-Exempt
2.75
%
2.64
%
Income Taxes
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 six-month periods ended June 30, 2024 and 2023:
(in thousands)
2024
2023
Operating cash flows
$
212,771
$
243,595
Investing cash flows
(177,009)
(226,116)
Financing cash flows
(22,156)
(23,590)
Total
$
13,606
$
(6,111)
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 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. (PNC). 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. 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
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liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. 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.
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.
We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. Invested assets at June 30, 2024 have increased $211 million from December 31, 2023. As of June 30, 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
$
442,734
$
434,800
$
(7,934)
11.2
%
AA+
U.S. agency
60,058
58,309
(1,749)
1.5
%
AA+
Non-U.S. government & agency
4,800
3,828
(972)
0.1
%
BBB+
Agency MBS
458,944
414,675
(44,269)
10.7
%
AA+
ABS/CMBS/MBS**
345,072
320,061
(25,011)
8.2
%
AA
Corporate
1,310,888
1,250,780
(60,108)
32.2
%
A-
Municipal
595,370
507,074
(88,296)
13.0
%
AA+
Total fixed income
$
3,217,866
$
2,989,527
$
(228,339)
76.9
%
AA-
Equity
381,138
666,563
285,425
17.2
%
Short-term investments
125,865
125,865
—
3.2
%
Other invested assets
52,776
55,364
2,588
1.4
%
Cash
50,030
50,030
—
1.3
%
Total portfolio
$
3,827,675
$
3,887,349
$
59,674
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 June 30, 2024, our fixed income portfolio had the following rating distribution:
Below
Investment
AAA
AA
A
BBB
Grade
No Rating
Fair Value
U.S. government
-
434,800
-
-
-
-
434,800
U.S. agency
-
58,309
-
-
-
-
58,309
Non-U.S. government & agency
-
-
1,667
2,161
-
-
3,828
Agency MBS
-
414,675
-
-
-
-
414,675
ABS/CMBS/MBS*
190,159
30,454
67,071
3,137
-
29,240
320,061
Corporate
32,806
124,183
542,778
336,411
146,507
68,095
1,250,780
Municipal
139,241
319,227
48,606
-
-
-
507,074
Total
362,206
1,381,648
660,122
341,709
146,507
97,335
2,989,527
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
As of June 30, 2024, our fixed income portfolio remained well diversified, with 1,831 individual issues.
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Our investment portfolio has limited exposure to structured asset-backed securities. 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 $1,251 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.
The municipal portfolio includes approximately 61 percent taxable securities and 39 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 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. 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 $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 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.
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 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. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $155 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.
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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 six months of 2024, RLI Ins. paid $34 million in ordinary dividends to RLI Corp. In 2023, RLI Ins. paid ordinary dividends totaling $145 million. 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. 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.