What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-04-25 compared with 2024-10-23 · 98 added, 211 removed, 195 unchanged (61% of the section changed)

3 unchanged sentences

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.

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, 2024 and Part II within this report.

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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 casualty, property and surety products through three 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.

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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.

property, casualty and surety.

Growth is measured in terms of gross premiums written, and profitability is analyzed through underwriting income and combined ratios.

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.

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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.

1 unchanged sentence

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

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

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 all insurance cycles.

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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.

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

7 unchanged sentences

For the Three Months

For the Nine Months

Ended September 30,

Ended March 31,

(in thousands)

22 unchanged sentences

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Net premiums earned increased 19 percent, driven primarily by products in our property and casualty segments.

Positive market performance resulted in $87 million of unrealized gains on equity securities in the first nine months of 2024, compared to $15 million in 2023.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Net premiums earned increased 10 percent, driven primarily by products in our casualty segment.

Investment income was up 12 percent, due to an increased average asset base and higher reinvestment rates.

Realized gains during the first nine months of 2024 were comprised of $20 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $3 million of realized losses on the fixed income portfolio and $6 million of other realized losses.

This compares to $16 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 Nine Months

Ended September 30,

Adverse market performance resulted in $42 million of unrealized losses on equity securities in the first three months of 2025, compared to $45 million of unrealized gains in 2024.

Realized gains during the first three months of 2025 were comprised of $15 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and less than $1 million of realized losses on the fixed income portfolio.

This compares to $7 million of realized gains on the equity portfolio and $1 million of realized losses on the fixed income portfolio during the first three months of 2024.

For the Three Months

Ended March 31,

Consolidated Revenues (in thousands)

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Total consolidated revenue

Underwriting income was $188 million on an 83.3 combined ratio for the first nine months of 2024, compared to $113 million on an 88.0 combined ratio in the same period of 2023.

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

Underwriting results for 2024 were impacted by $37 million of pretax losses from Hurricanes Beryl and Helene, as well as $30 million of pretax storm losses.

Comparatively, 2023 included $52 million of pretax losses and $14 million of reinsurance reinstatement premium from the Hawaiian wildfires, as well as $27 million of pretax storm losses.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $85 million in the first nine months of 2024, compared to $94 million in 2023.

The loss ratio decreased to 45.5 from 48.3, due to lower levels of catastrophe losses and low levels of attritional, non-catastrophe property losses on a higher earned premium base in 2024.

Underwriting income was $71 million on an 82.3 combined ratio for the first three months of 2025, compared to $78 million on a 78.5 combined ratio in the same period of 2024.

Underwriting results for 2025 and 2024 were impacted by $12 million of pretax losses from catastrophe events.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $31 million in the first three months of 2025, compared to $42 million in 2024.

The loss ratio increased to 44.5 from 39.9, due to lower levels of favorable development on prior years’ loss reserves and a shift in the mix of business towards lines with higher loss ratios.

The expense ratio decreased to 37.8 from 38.6.

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.

Adverse equity market returns resulted in less book value growth in 2025 and a corresponding decrease in bonus expense accruals when compared to 2024.

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.

3 unchanged sentences

(Prime), a specialty insurance company.

We recognized $8 million of investee earnings from Prime in the first nine months of 2024 and $7 million in 2023.

Net earnings for the first nine months of 2024 totaled $305 million, compared to $190 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 $365 million for the first nine months of 2024, compared to $151 million for the first nine months of 2023.

We recognized $3 million of investee earnings from Prime in the first three months of 2025 and $5 million in 2024.

Net earnings for the first three months of 2025 totaled $63 million, compared to $128 million for the same period in 2024.

An increase in investment income partially offset unrealized losses on equity securities and a decline in underwriting income, which resulted in the overall reduction in earnings for the quarter.

Comprehensive earnings totaled $93 million for the first three months of 2025, compared to $115 million for the first three months of 2024.

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

Other comprehensive earnings of $60 million in the first nine months of 2024 was attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

Other comprehensive earnings of $30 million in the first three months of 2025 was primarily attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

Comparatively, $13 million of other comprehensive loss was recognized in 2024, as higher interest rates decreased the fair value of securities held in the fixed income portfolio.

Gross premiums written increased $168 million for the first nine months of 2024, compared to the same period of 2023.

Growth was achieved in all three segments.

Net premiums earned increased $181 million, driven primarily by products in our property and casualty segments.

Gross premiums written increased $22 million for the first three months of 2025, compared to the same period of 2024, driven by our casualty segment.

Net premiums earned increased $38 million, with all segments contributing.

Gross Premiums Written

Net Premiums Earned

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

(in thousands)

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Transactional

Gross premiums written for the casualty segment increased $103 million in the first nine 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 within our personal umbrella and small commercial distribution channels.

Commercial transportation benefited from an increase in new business submissions.

Our executive products premium decreased, largely due to the continued soft management liability marketplace.

Gross premiums written for the property segment increased $51 million in the first nine months of 2024.

Our commercial property business was up $26 million in premium, benefiting from rate increases, particularly in the first half of the year.

New opportunities led to $19 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 $14 million for the first nine 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.

Gross premiums written for the casualty segment increased $33 million in the first three months of 2025.

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

Expanded marketing efforts, while some of our competitors pulled back from the construction market, resulted in premium growth for commercial excess.

Additionally, increased construction spending in targeted markets has had a positive effect on premium production for our general liability business.

Other casualty premium was down for the quarter as we exited from various captive programs, reduced our participation on the reinsurance agreement with Prime and our binding authority group experienced increased competition.

Gross premiums written for the property segment decreased $10 million in the first three months of 2025.

After several consecutive years of rate increases, rates on wind and earthquake exposures declined in the first quarter of 2025, driven by more intense competition in the commercial property space.

However, new opportunities, rate increases and strong sections of the construction market led to $4 million of premium growth for our marine product.

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

Gross premiums written for the surety segment was flat for the first three months of 2025.

Transactional and commercial surety grew as result of continued marketing efforts and new regional bonding requirements.

However, a slowdown in bid activity for larger public construction projects resulted in a decline in contract surety premium, which offset the growth from our other products.

Underwriting Income

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Underwriting Income (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $27 million in the first nine months of 2024, compared to $57 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $42 million, primarily on accident years 2019, 2020, 2022 and 2023.

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

In comparison, $69 million of prior accident years’ reserves were released in the first nine months of 2023.

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

Hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $3 million of losses in 2024, compared to less than $2 million of storm losses in 2023.

The casualty segment recorded underwriting income of $2 million in the first three months of 2025, compared to $14 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $5 million in 2025, primarily on accident years 2019 through 2022 and 2024.

Larger drivers of the favorable development were commercial excess, general liability and subsegments within professional liability, while commercial transportation and personal umbrella had adverse development related to auto exposures.

In comparison, $18 million of prior accident years’ reserves were released in the first three months of 2024.

Personal umbrella, general liability, executive products and transportation were drivers of the favorable development in 2024.

The combined ratio for the casualty segment was 99.1 in 2025, compared to 93.1 in 2024.

The segment’s loss ratio was 63.7 in 2025, up from 55.2 in 2024.

Lower levels of reserve releases on prior accident years and current accident year reserve strengthening on select products resulted in the higher loss ratio in 2024.

Lower levels of reserve releases on prior accident years and higher initial loss estimates, primarily in auto exposed lines, resulted in the higher loss ratio in 2025.

The expense ratio for the casualty segment was 35.4, down from 37.9 for the same period last year.

The property segment recorded underwriting income of $141 million for the first nine months of 2024, compared to $34 million for the same period last year.

Underwriting results for 2024 included $33 million of favorable development on prior years’ loss and catastrophe reserves, $35 million of losses from Hurricanes Beryl and Helene, as well as $28 million of storm losses.

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

Underwriting results for the first nine months of 2024 translated into a combined ratio of 64.4, compared to 88.2 for the same period last year.

The property segment recorded underwriting income of $57 million for the first three months of 2025, compared to $58 million for the same period last year.

Underwriting results for 2025 included $18 million of favorable development on prior years’ loss and catastrophe reserves, as well as $12 million of storm and other catastrophe losses.

Comparatively, the 2024 underwriting results included $19 million of favorable development on prior years’ loss and catastrophe reserves, as well as $12 million of storm losses.

Underwriting results for the first three months of 2025 translated into a combined ratio of 57.1, compared to 55.4 for the same period last year.

The segment’s loss ratio was 24.7 in 2025, down from 25.2 in 2024.

Larger releases on prior years’ loss reserves, lower catastrophe losses, and low attritional, non-catastrophe losses on a higher earned premium base resulted in the lower loss ratio.

The segment’s expense ratio decreased to 30.4 in 2024 from 35.9 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 $21 million for the first nine months of 2024, compared to $22 million for the same period last year.

The segment’s expense ratio increased to 32.4 in 2025 from 30.2 in the prior year, as a result of changes in our reinsurance cost and structure as well as a higher amount of acquisition-related expenses, which can fluctuate between periods.

The surety segment recorded underwriting income of $12 million for the first three months of 2025, compared to $6 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.

2 unchanged sentences

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 80.5 for the first nine months of 2024, compared to 77.8 for the same period in 2023.

The segment’s loss ratio was 9.0 in 2024, down from 11.8 in 2023.

The expense ratio was 71.5, up from 66.0 in the prior year.

The impact of the reinsurance reinstatement premium on the earned premium base increased the loss ratio by 0.1 points and the expense ratio by 1.4 points.

In addition, the increase in expense ratio was the result of increases in select policy acquisition costs, as well as continued investments in technology and people to support growth and improve customer experiences.

The combined ratio for the surety segment totaled 68.5 for the first three months of 2025, compared to 80.9 for the same period in 2024.

The segment’s loss ratio was (3.6) in 2025, down from 5.4 in 2024, due to higher levels of favorable prior accident years’ reserve development.

The expense ratio was 72.1, down from 75.5 in the prior year.

The impact of the

reinsurance reinstatement premium on the earned premium base increased the 2024 loss ratio by 0.3 points and the expense ratio by 4.3 points.

Investment Income

Our investment portfolio generated net investment income of $104 million during the first nine months of 2024, an increase of 18 percent from the same period in 2023.

Our investment portfolio generated net investment income of $37 million during the first three months of 2025, an increase of 12 percent from the same period in 2024.

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 nine months of 2024 and 2023 were as follows:

Yields on our fixed income investments for the first three months of 2025 and 2024 were as follows:

After-Tax Yield

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

The following table depicts the composition of our investment portfolio at March 31, 2025 as compared to December 31, 2024:

(in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

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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 $320 million in the first nine months of 2024, as cash flows were largely allocated to the fixed income portfolio.

Average fixed income duration was 4.8 years at September 30, 2024, reflecting our liability structure and sound capital position.

The equity portfolio increased by $140 million during the first nine months of 2024, due to the positive performance of equity markets.

The fixed income portfolio increased by $98 million in the first three months of 2025, as bonds rallied and cash flows were largely allocated to the fixed income portfolio.

Average fixed income duration was 4.9 years at March 31, 2025, reflecting our liability structure and sound capital position.

The equity portfolio decreased by $10 million during the first three months of 2025, due to weakness in the equity markets.

Short-term investments increased by $42 million, as yields on AAA-rated government money market funds remained relatively attractive.

Our effective tax rate for the first nine months of 2024 was 19.8 percent, compared to 18.7 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 nine-month period in 2024 due to higher levels of pretax income, which decreased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

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

Net premiums earned increased 22 percent, driven primarily by products in our property and casualty segments.

Positive market performance resulted in $38 million of unrealized gains on equity securities in the third quarter of 2024, compared to unrealized losses of $25 million for the same period in 2023.

Investment income was up 15 percent, due to an increased average asset base and higher reinvestment rates.

Realized gains during the third quarter of 2024 were comprised of $7 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 less than $1 million of other realized gains.

This compares to $7 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the third quarter of 2023.

For the Three Months

Ended September 30,

Consolidated Revenues (in thousands)

Net premiums earned

Net investment income

Net realized gains

Net unrealized gains (losses) on equity securities

Total consolidated revenue

Underwriting income was $41 million on an 89.6 combined ratio for the third quarter of 2024, compared to $4 million on a 98.7 combined ratio in the same period of 2023.

Underwriting results for 2024 were impacted by $37 million of pretax losses from Hurricanes Beryl and Helene, as well as $2 million of pretax storm losses.

Comparatively, 2023 included $52 million of pretax losses and $14 million of reinsurance reinstatement premium from the Hawaiian wildfires, as well as $5 million of pretax storm losses.

Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $21 million in the third quarter of 2024, compared to $22 million in 2023.

The loss ratio decreased to 51.9 from 59.5, due to lower levels of catastrophe losses on a higher earned premium base in 2024.

The expense ratio decreased to 37.7 from 39.2.

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 $1 million of investee earnings from Prime in the third quarter of 2024 and $2 million in 2023.

Net earnings for the third quarter of 2024 totaled $95 million, compared to $14 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 $175 million for the third quarter of 2024, compared to $43 million of comprehensive loss 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 earnings of $80 million in the third quarter of 2024 was attributable to lower interest rates, which increased the fair value of securities held in the fixed income portfolio.

Comparatively, $57 million of other comprehensive loss was recognized in 2023, as higher interest rates decreased the fair value of securities held in the fixed income portfolio.

Gross premiums written increased $58 million for the third quarter of 2024, compared to the same period in 2023.

Growth was achieved in all three segments.

Net premiums earned increased $71 million, driven primarily by products in our property and casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Three Months

Ended September 30,

(in thousands)

Commercial excess and personal umbrella

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 $40 million in the third 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.

New project work resulted in growth for general liability.

Taking advantage of market disruption, rate increases and expanding distribution led to growth in commercial transportation.

Competitive market conditions continued to negatively impact executive products.

Gross premiums written for the property segment increased $15 million in the third 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 $6 million increase in our commercial property business.

Wind rates declined in the third 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 $3 million for the third quarter 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 September 30,

Underwriting Income (Loss) (in thousands)

Combined Ratio

The casualty segment recorded underwriting income of $3 million in the third quarter of 2024, compared to $19 million for the same period last year.

Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $10 million, primarily on accident years 2017 through 2020, 2022 and 2023.

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

In comparison, $22 million of prior accident years’ reserves were released in the third quarter of 2023.

Executive products, commercial excess, general liability and personal umbrella were drivers of the favorable development in 2023.

Hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2024, compared to less than $1 million of storm losses in 2023.

The combined ratio for the casualty segment was 98.8 in 2024, compared to 90.1 in 2023.

The segment’s loss ratio was 62.8 in 2024, up from 53.7 in 2023.

Lower levels of reserve releases on prior accident years and current accident year reserve strengthening on select products resulted in the higher loss ratio in 2024.

The expense ratio for the casualty segment was 36.0, down from 36.4 for the same period last year.

The property segment recorded underwriting income of $30 million for the third quarter of 2024, compared to $21 million of underwriting loss for the same period last year.

Underwriting results for 2024 included $8 million of favorable development on prior years’ loss and catastrophe reserves, $35 million of losses from Hurricanes Beryl and Helene, as well as $2 million of storm losses.

Comparatively, the 2023 underwriting results included less than $1 million of unfavorable development on prior years’ loss and catastrophe reserves, $5 million of storm losses, as well as $52 million of losses and $14 million of reinsurance reinstatement premium from the Hawaiian wildfires.

Underwriting results for the third quarter of 2024 translated into a combined ratio of 77.2, compared to 121.8 for the same period last year.

The segment’s loss ratio was 45.8 in 2024, down from 86.3 in 2023.

Larger releases on prior years’ loss reserves and lower levels of catastrophe losses contributed to the decline in loss ratio.

The segment’s expense ratio decreased to 31.4 in 2024 from 35.5 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 $8 million for the third quarter of 2024, compared to $6 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 $3 million.

Results for 2023 included $1 million of favorable development on prior accident years’ reserves.

The combined ratio for the surety segment totaled 78.8 for the third quarter of 2024, compared to 81.7 for the same period in 2023.

The segment’s loss ratio was 8.7 in 2024, down from 17.2 in 2023, due to increased levels of favorable prior accident years’ reserve development.

The expense ratio was 70.1, up from 64.5 in the prior year, due to increases in select policy acquisition costs, as well as continued investments in technology and people to support growth and improve customer experiences.

Investment Income

Our investment portfolio generated net investment income of $37 million during the third quarter of 2024, an increase of 15 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 third quarter of 2024 and 2023 were as follows:

After-Tax Yield

Our effective tax rate for the third quarter of 2024 was 18.7 percent, compared to 9.9 percent for the same period in 2023.

Our effective tax rate for the first three months of 2025 was 19.6 percent, compared to 20.1 percent for the same period in 2024.

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

The effective tax rate was higher for the third quarter of 2024 due to higher levels of pretax income, which 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 lower for the three-month period in 2025 due to lower levels of pretax income, which increased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes cash flows provided by (used in) our activities for the nine-month periods ended September 30, 2024 and 2023:

The following table summarizes cash flows provided by (used in) our activities for the three-month periods ended March 31, 2025 and 2024:

(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 nine months of 2024 benefited from increased premium receipts relative to the first nine months of 2023.

As of September 30, 2024, we had $100 million in debt outstanding.

Operating cash flows in the first three months of 2025 benefited from increased premium receipts relative to the first three months of 2024.

As of March 31, 2025, 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 6.68 percent, which will reset during the fourth quarter of 2024.

The borrowing may be repaid at any time and carries an adjustable interest rate of 5.92 percent, which will reset during the second quarter of 2025.

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.

1 unchanged sentence

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.

Further, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 12, 2024.

The borrowing matures on November 12, 2025.

4 unchanged sentences

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

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

As of September 30, 2024, we had cash and other investments maturing within one year of approximately $513 million and an additional $801 million maturing between one to five years.

As of March 31, 2025, $56 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

As of March 31, 2025, we had cash and other investments maturing within one year of approximately $429 million and an additional $710 million maturing between one to five years.

Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

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

Invested assets at September 30, 2024 have increased $547 million from December 31, 2023.

As of September 30, 2024, our investment portfolio had the following asset allocation breakdown:

Invested assets at March 31, 2025 have increased $120 million from December 31, 2024.

As of March 31, 2025, our investment portfolio had the following asset allocation breakdown:

(in thousands)

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

As of September 30, 2024, our fixed income portfolio had the following rating distribution:

As of March 31, 2025, our fixed income portfolio had the following rating distribution:

government & agency

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

As of September 30, 2024, our fixed income portfolio remained well diversified, with 1,844 individual issues.

As of March 31, 2025, our fixed income portfolio remained well diversified, with 1,851 individual issues.

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

As of September 30, 2024, we had $176 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of September 30, 2024, we had $182 million in commercial and non-agency MBS and $420 million in MBS backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae).

As of March 31, 2025, we had $220 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, 2025, we had $196 million in commercial and non-agency MBS and $403 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 10.0 percent of our investment portfolio at quarter end.

We had $1,353 million in corporate fixed income securities as of September 30, 2024, which includes $121 million invested in a high-yield credit strategy.

We had $1,385 million in corporate fixed income securities as of March 31, 2025, which includes $124 million invested in a high-yield credit strategy.

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

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

As of September 30, 2024, our equity portfolio had a dividend yield of 1.9 percent, compared to 1.3 percent for the S&P 500 index.

As of March 31, 2025, 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.

The equity portfolio is managed in a diversified and granular manner, with 83 individual securities and five 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 $65 million of investments in unconsolidated investees at September 30, 2024, compared to $57 million at December 31, 2023.

We had $57 million of investments in unconsolidated investees at March 31, 2025, compared to $56 million at December 31, 2024.

Our investment portfolio does not have any exposure to derivatives.

As of September 30, 2024, our capital structure consisted of $100 million in debt and $1.7 billion of shareholders’ equity.

Debt outstanding comprised 5 percent of total capital as of September 30, 2024.

Interest and fees on debt obligations totaled $5 million for the first nine months of 2024, compared to $6 million for the same period in 2023.

We incurred interest expense on debt at an average annual interest rate of 6.20 percent during the first nine months of 2024, compared to 3.90 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.29 per share on September 20, 2024, the same amount as the prior quarter.

As of March 31, 2025, 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 March 31, 2025.

Interest and fees on debt obligations totaled $1 million for the first three months of 2025, compared to $2 million for the same period in 2024.

We incurred interest expense on debt at an average annual interest rate of 5.18 percent during the first three months of 2025, compared to 6.24 percent during the same period last year.

We paid a regular quarterly cash dividend of $0.15 per share on March 20, 2025, an increase of $0.01 from the prior quarter.

We have increased dividends in each of the last 50 years.

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shareholders.

On a GAAP basis, as of September 30, 2024, our holding company had $1.7 billion in equity.

On a GAAP basis, as of March 31, 2025, 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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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.

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.

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

In the first nine months of 2024, RLI Ins.

In the first three months of 2025, RLI Ins.

paid $80 million in ordinary dividends to RLI Corp.

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paid ordinary dividends totaling $152 million.

As of September 30, 2024, $1 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp.

As of March 31, 2025, $26 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