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
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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. 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 2024, we achieved our 29th consecutive year of underwriting profitability. Over the 29-year period, we averaged an 88.1 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: 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. 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.
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 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. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.
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.
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
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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 are 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 11 to the consolidated financial statements in our 2024 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized gains or losses on equity securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:
For the Three Months
Ended March 31,
(in thousands)
2025
2024
Net earnings
$
63,214
$
127,900
Income tax expense
15,417
32,091
Earnings before income taxes
$
78,631
$
159,991
Equity in earnings of unconsolidated investees
(3,048)
(4,769)
General corporate expenses
2,948
5,010
Interest expense on debt
1,335
1,618
Net unrealized (gains) losses on equity securities
42,318
(45,314)
Net realized gains
(14,912)
(5,994)
Net investment income
(36,726)
(32,847)
Net underwriting income
$
70,546
$
77,695
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.
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 2024 Annual Report on Form 10-K.
There have been no significant changes to critical accounting policies during the year.
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RESULTS OF OPERATIONS
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. 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)
2025
2024
Net premiums earned
$
398,345
$
360,676
Net investment income
36,726
32,847
Net realized gains
14,912
5,994
Net unrealized gains (losses) on equity securities
(42,318)
45,314
Total consolidated revenue
$
407,665
$
444,831
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. 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. 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 $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 $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.
Premiums
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.
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Gross Premiums Written
Net Premiums Earned
For the Three Months
For the Three Months
Ended March 31,
Ended March 31,
(in thousands)
2025
2024
% Change
2025
2024
% Change
Casualty
Commercial excess and personal umbrella
$
135,330
$
102,182
32
%
$
103,209
$
80,035
29
%
Commercial transportation
30,916
29,129
6
%
30,259
27,301
11
%
General liability
30,474
26,760
14
%
26,718
25,412
5
%
Professional services
28,412
26,792
6
%
26,587
25,085
6
%
Small commercial
21,145
21,626
(2)
%
19,915
18,337
9
%
Executive products
16,827
16,413
3
%
5,943
5,915
0
%
Other casualty
15,350
22,427
(32)
%
16,417
16,191
1
%
Total
$
278,454
$
245,329
14
%
$
229,048
$
198,276
16
%
Property
Commercial property
$
110,872
$
128,694
(14)
%
$
82,812
$
87,605
(5)
%
Marine
44,726
40,574
10
%
37,709
32,568
16
%
Other property
14,454
11,096
30
%
12,023
9,238
30
%
Total
$
170,052
$
180,364
(6)
%
$
132,544
$
129,411
2
%
Surety
Commercial
$
15,994
$
15,631
2
%
$
12,776
$
10,625
20
%
Transactional
14,708
14,114
4
%
12,660
12,108
5
%
Contract
11,898
13,237
(10)
%
11,317
10,256
10
%
Total
$
42,600
$
42,982
(1)
%
$
36,753
$
32,989
11
%
Grand Total
$
491,106
$
468,675
5
%
$
398,345
$
360,676
10
%
Casualty
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.
Property
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.
Surety
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.
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Underwriting Income
For the Three Months
Ended March 31,
2025
2024
Underwriting Income (in thousands)
Casualty
$
2,071
$
13,674
Property
56,915
57,716
Surety
11,560
6,305
Total
$
70,546
$
77,695
Combined Ratio
Casualty
99.1
93.1
Property
57.1
55.4
Surety
68.5
80.9
Total
82.3
78.5
Casualty
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 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.
Property
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. 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.
Surety
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. Results for 2025 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $8 million. Results for 2024 included $5 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 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
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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 $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 three months of 2025 and 2024 were as follows:
2025
2024
Pretax Yield
Taxable
4.00
%
3.72
%
Tax-Exempt
2.90
%
2.85
%
After-Tax Yield
Taxable
3.16
%
2.94
%
Tax-Exempt
2.75
%
2.70
%
The following table depicts the composition of our investment portfolio at March 31, 2025 as compared to December 31, 2024:
(in thousands)
March 31, 2025
December 31, 2024
Fixed income
$
3,274,276
77.9
%
$
3,175,796
77.8
%
Equity securities
725,946
17.3
%
736,191
18.0
%
Short-term investments
116,601
2.8
%
74,915
1.8
%
Other invested assets
60,357
1.4
%
57,939
1.4
%
Cash
27,058
0.6
%
39,790
1.0
%
Total investments and cash
$
4,204,238
100.0
%
$
4,084,631
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 $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.
Income Taxes
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 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
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.
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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)
2025
2024
Operating cash flows
$
103,514
$
70,946
Investing cash flows
(103,414)
(53,064)
Financing cash flows
(12,832)
(9,749)
Total
$
(12,732)
$
8,133
Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received. Operating cash flows in the first three months of 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. (PNC). 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. 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 12, 2024. The borrowing matures on November 12, 2025. Interest is paid monthly at an annualized rate of 4.44 percent.
Two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of March 31, 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.
We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.
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We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. Invested assets at March 31, 2025 have increased $120 million from December 31, 2024. As of March 31, 2025, 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
$
560,814
$
560,309
$
(505)
13.3
%
AA+
U.S. agency
56,036
55,641
(395)
1.3
%
AA+
Non-U.S. government & agency
12,728
11,884
(844)
0.3
%
A-
Agency MBS
437,829
403,391
(34,438)
9.6
%
AA+
ABS/CMBS/MBS**
436,159
418,741
(17,418)
10.0
%
AA
Corporate
1,424,850
1,384,635
(40,215)
32.9
%
A-
Municipal
520,330
439,675
(80,655)
10.5
%
AA+
Total fixed income
$
3,448,746
$
3,274,276
$
(174,470)
77.9
%
AA-
Equity
447,799
725,946
278,147
17.3
%
Short-term investments
116,601
116,601
—
2.8
%
Other invested assets
59,998
60,357
359
1.4
%
Cash
27,058
27,058
—
0.6
%
Total portfolio
$
4,100,202
$
4,204,238
$
104,036
100.0
%
*
Quality ratings provided by Moody’s, S&P and Fitch
**
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of March 31, 2025, our fixed income portfolio had the following rating distribution:
Below
Investment
AAA
AA
A
BBB
Grade
No Rating
Fair Value
U.S. government
-
560,309
-
-
-
-
560,309
U.S. agency
-
55,641
-
-
-
-
55,641
Non-U.S. government & agency
-
1,378
4,306
5,207
-
993
11,884
Agency MBS
-
403,391
-
-
-
-
403,391
ABS/CMBS/MBS*
224,963
42,205
97,261
6,306
2,734
45,272
418,741
Corporate
34,676
146,657
595,847
363,365
145,577
98,513
1,384,635
Municipal
131,982
278,802
28,078
-
-
813
439,675
Total
391,621
1,488,383
725,492
374,878
148,311
145,591
3,274,276
*
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
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 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 $1,385 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.
The municipal portfolio includes approximately 68 percent taxable securities and 32 percent tax-exempt securities. Approximately 93 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.
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Securities within the equity portfolio are well diversified and are primarily invested in broad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.
As of March 31, 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 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 $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 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.
Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of March 31, 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. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $107 million in liquid assets. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first three months of 2025, RLI Ins. paid $80 million in ordinary dividends to RLI Corp. In 2024, RLI Ins. paid ordinary dividends totaling $152 million. 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. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.
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