RLI 10K 2023 Annual report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


☒		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023


☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-09463

RLI CORP.

(Exact name of registrant as specified in its charter)


Delaware		37-0889946
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9025 North Lindbergh Drive, Peoria, Illinois		61615
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (309) 692-1000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock $0.01 par value	RLI	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2023, based upon the closing sale price of the Common Stock on June 30, 2023, was $5,668,979,903. Shares of Common Stock held by each reporting officer and director along with shares held by the Company ESOP have been excluded in that such persons may be deemed to be affiliates.

The number of shares outstanding of the registrant’s common stock, $0.01 par value, on February 14, 2024 was 45,659,290.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2024 annual meeting of shareholders are incorporated herein by reference into Part III of this document.

Table of Contents

RLI Corp.

Index to Annual Report on Form 10-K

		Page
Part I
Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	24
Item 1C.	Cybersecurity	24
Item 2.	Properties	25
Item 3.	Legal Proceedings	25
Item 4.	Mine Safety Disclosures	25

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Reserved	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 8.	Financial Statements and Supplementary Data	52
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	92
Item 9A.	Controls and Procedures	92
Item 9B.	Other Information	92
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	92

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	92
Item 11.	Executive Compensation	93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
Item 13.	Certain Relationships and Related Transactions and Director Independence	93
Item 14.	Principal Accountant Fees and Services	93

Part IV
Item 15.	Exhibits and Financial Statement Schedules	93
Item 16.	Form 10-K Summary	95

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PART I

Item 1. Business

RLI Corp. was founded in 1965. References to “the Company,” “we,” “our,” “us” or like terms refer to the business of RLI Corp. and its subsidiaries. We underwrite select property, casualty and surety products through major subsidiaries collectively known as RLI Insurance Group. We conduct operations through three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI Corp. and our principal insurance subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois. We have no material foreign operations.

As a specialty insurance company with a niche focus, we offer insurance coverages in the specialty admitted and excess and surplus markets. We distribute our property, casualty and surety products through locations across the country that market to wholesale and retail brokers, independent agents and carrier partners. We offer limited coverages on a direct basis to select insureds, as well as various reinsurance coverages. From time to time, we also write a limited amount of business under agreements with managing general agents under the direction of our product leadership.

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the Securities and Exchange Commission (SEC) available free of charge on our website (http://www.rlicorp.com). Information contained on our website is not intended to be incorporated by reference in this annual report and you should not consider that information a part of this annual report. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company.

SPECIALTY INSURANCE MARKET OVERVIEW

The specialty insurance market differs significantly from the standard market. In the standard market, products and coverage are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for risks that do not fit the underwriting criteria of the standard carriers. Competition tends to focus less on price and more on availability, coverage, service and other value-based considerations. While specialty market exposures may have higher insurance risks than their standard admitted market counterparts, we manage these risks to achieve superior financial returns. To reach our financial and operational goals, we must have extensive knowledge of, and expertise in, our markets. Many of our risks are underwritten on an individual basis and tailored coverages are employed in order to respond to distinctive risk characteristics. We operate in the specialty admitted insurance market, the excess and surplus insurance market and the specialty reinsurance markets.

SPECIALTY ADMITTED INSURANCE MARKET

We write business in the specialty admitted market. Many of these risks are unique and harder to place than in the standard admitted market, but for marketing and regulatory reasons, they must remain with an admitted insurance company. The specialty admitted market is subject to greater state regulation than the excess and surplus market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. For 2023, our specialty admitted operations produced gross premiums written of $992 million, representing approximately 55 percent of our total gross premiums for the year.

EXCESS AND SURPLUS INSURANCE MARKET

The excess and surplus market focuses on hard-to-place risks. Participating in this market allows the Company to underwrite non-standard risks with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and, in many cases, more expensive than in the standard admitted market. The excess and surplus lines environment and production model effectively filter submission flow and match market opportunities to our expertise and appetite. The excess and surplus market represented less than 10 percent of the entire domestic property and casualty industry as of December 31, 2022, according to AM Best and as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of $794 million, or 44 percent, of our total gross premiums written in 2023.

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SPECIALTY REINSURANCE MARKET

The business we write in the specialty reinsurance market is generally written on a portfolio basis. We write contracts on an excess of loss and a proportional basis. Contract provisions are written and agreed upon between the company and its reinsurance clients. The business is typically more volatile as a result of unique underlying exposures and excess and aggregate attachments. For 2023, our specialty reinsurance operations wrote gross premiums of $21 million, representing approximately 1 percent of our total gross premiums written for the year.

BUSINESS SEGMENT OVERVIEW

The segments of our insurance operations are casualty, property and surety. For additional information, see note 12 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. The table below summarizes the composition of net premiums earned by major product.


	Year ended December 31,
(in thousands)	2023				2022				2021
CASUALTY
Commercial excess and personal umbrella	$	286,178	22	%	$	253,921	22	%	$	219,437	22	%
Commercial transportation		103,719	8	%		96,992	8	%		83,352	8	%
General liability		103,066	8	%		100,374	9	%		90,853	9	%
Professional services		99,596	8	%		95,187	9	%		88,855	9	%
Small commercial		72,920	6	%		67,673	6	%		64,660	7	%
Executive products		24,687	2	%		26,606	2	%		21,873	2	%
Other casualty		68,180	5	%		71,079	6	%		64,609	8	%
Total	$	758,346	59	%	$	711,832	62	%	$	633,639	65	%

PROPERTY
Commercial property	$	244,798	19	%	$	163,078	14	%	$	107,941	11	%
Marine		129,428	10	%		113,208	10	%		97,745	10	%
Other property		27,304	2	%		31,600	3	%		26,151	2	%
Total	$	401,530	31	%	$	307,886	27	%	$	231,837	23	%

SURETY
Commercial	$	49,707	4	%	$	47,652	4	%	$	43,738	4	%
Transactional		47,983	3	%		45,826	4	%		43,982	5	%
Contract		36,740	3	%		31,240	3	%		27,707	3	%
Total	$	134,430	10	%	$	124,718	11	%	$	115,427	12	%
Grand total	$	1,294,306	100	%	$	1,144,436	100	%	$	980,903	100	%

CASUALTY SEGMENT

Commercial Excess and Personal Umbrella

Our commercial excess coverage is written in excess of primary liability insurance provided by other carriers and, in some cases, in excess of primary liability written by the Company. The personal umbrella coverage is generally written in excess of homeowners’ and automobile liability coverage provided by other carriers.

Commercial Transportation

Our transportation insurance provides commercial automobile liability and physical damage insurance to local, intermediate and long-haul truckers, public transportation entities and other types of specialty commercial automobile risks. We also offer incidental related insurance coverages including general liability, excess liability and motor truck cargo. We produce business through independent agents and brokers nationwide.

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General Liability

Our general liability business consists primarily of coverage for third-party liability of commercial insureds including manufacturers, contractors, apartments and mercantile. We also offer coverages for security guards and environmental liability for underground storage tanks, contractors and asbestos and environmental remediation specialists.

Professional Services

We offer professional liability coverages focused on providing errors and omission coverage for small to medium-sized design, technical, computer and other miscellaneous professionals. Our product suite for these customers also includes a full array of multi-peril package products including general liability, property, automobile, excess liability and workers’ compensation coverages. This business primarily markets its products through specialty retail agents nationwide.

Small Commercial

Our small commercial business offers property and casualty insurance coverages for small to mid-sized contractors. The coverages included in these packages are predominantly general liability, but also have some inland marine coverages, as well as commercial automobile, property and excess coverage. These products are primarily marketed through retail agents.

Executive Products

We provide a suite of management liability coverages, such as directors and officers (D&O) liability insurance, fiduciary liability, employment practice liability and fidelity coverages, for a variety of risk classes, including both public and private businesses. Our publicly traded D&O appetite generally focuses on offering excess Side A D&O coverage (where corporations cannot indemnify the individual directors and officers) as well as excess full coverage D&O.

Other Casualty

We offer a variety of other smaller products in our casualty segment, including home business insurance, which provides limited liability and property coverage for a variety of small business owners who work from their own home. We have a quota share reinsurance agreement with Prime Insurance Company and Prime Property and Casualty Insurance Inc., the two insurance subsidiaries of Prime Holdings Insurance Services, Inc. (Prime). Through our reinsurance agreement with Prime, we assume general liability, excess, commercial auto, property and professional liability coverages on hard-to-place risks that are written in the excess and surplus and admitted insurance markets. Separately, we assume mortgage reinsurance, which provides credit risk transfer on pools of mortgages. We also offer general liability and package coverages through a general binding authority (GBA) group, a program in which select surplus lines producers are granted limited underwriting authority through our on-line system to bind business on behalf of the Company.

PROPERTY SEGMENT

Commercial Property

Our commercial property coverage consists primarily of excess and surplus lines and specialty insurance such as fire, earthquake, wind and difference in conditions (DIC), which can include earthquake, flood and collapse coverages. We provide insurance for a wide range of commercial and industrial risks, such as office buildings, apartments, condominiums, builders’ risks and certain industrial and mercantile structures.

Marine

Our marine coverages include cargo, hull, protection and indemnity, marine liability, as well as inland marine coverages including builders’ risks and contractors’ equipment. Although the predominant exposures are located within the United States, there is some incidental international exposure written within these coverages.

Other Property

We offer specialized homeowners’ and dwelling fire insurance through retail agents in Hawaii, as well as property coverages through our general binding authority group.

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SURETY SEGMENT

Commercial

We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare, as well as onshore and offshore energy, petrochemical and refining industries. These risks are underwritten on an account basis and coverage is marketed through a select number of regional and national brokers with surety expertise.

Transactional

Our transactional surety coverage includes small bonds for businesses and individuals written through independent insurance agencies throughout the United States. Examples of these types of bonds are license and permit, notary and court bonds. The underwriting and delivery of these bonds is highly automated.

Contract

We offer bonds for small to medium-sized contractors throughout the United States, underwritten on an account basis. Typically, these are performance and payment bonds that guarantee commercial contractors’ contractual obligations for a specific construction project. These bonds are marketed through a select number of insurance agencies that have surety and construction expertise. We also offer bonds for small and emerging contractors that are reinsured through the Federal Small Business Administration.

MARKETING AND DISTRIBUTION

We distribute our coverages across the country, primarily through wholesale and retail brokers, independent agents and carrier partners.

BROKERS

The largest volume of broker-generated premium is in our commercial property, general liability, commercial surety, executive products, commercial excess and commercial transportation coverages. This business is produced through independent wholesale and retail brokers.

INDEPENDENT AGENTS

We target classes of insurance, such as homeowners’ and dwelling fire, home business, surety and personal umbrella through independent agents. Several of these products involve detailed eligibility criteria, which are incorporated into strict underwriting guidelines and prequalification of each risk using a system accessible by the independent agent. The independent agent cannot bind the risk unless they receive approval from our underwriters or through our automated systems.

CARRIER PARTNERS

We partner with other insurance carriers for home business and personal umbrella. The carriers place the business with us through their associated agencies when the underlying risk does not meet their underwriting appetite.

UNDERWRITING AGENTS

We contract with certain underwriting agencies, which have limited authority to bind or underwrite business on our behalf. The underwriting agreements involve strict underwriting guidelines and the agents are subject to regular audits.

DIGITAL AND DIRECT

We utilize digital efforts to produce and efficiently process and service business including home business, general binding authority, small commercial and personal umbrella risks and surety bonding. On a direct basis, we also assume premium on various reinsurance treaties.

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COMPETITION

Our specialty property and casualty insurance subsidiaries are part of a very competitive industry that is cyclical and historically characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe competition and excess underwriting capacity. Within the United States alone, approximately 2,600 companies actively market property and casualty coverages. Our primary competitors in the casualty segment include AIG, Arch, Aspen, Beazley, Berkley, Chubb, CNA, Great American, Great West, Hartford, Hudson, James River, Kinsale, Lancer, Liberty, Markel, Protective, RSUI, Sompo, Travelers, USLI and Zurich. Primary competitors in the property segment include AmRisc, Arch, Arrowhead, CNA, Golden Bear, Lexington, Liberty Mutual, Markel, Palomar, RSUI, Special Risk Underwriters, Travelers, Velocity and Westchester. Primary competitors in the surety segment are AIG, Arch, Beazley, Berkley, Chubb, CNA, Great American, Hartford, Intact, Liberty Mutual, Markel, Merchants, Philadelphia, Sompo, Swiss Re, Travelers and Zurich. The combination of coverages, service, pricing and other methods of competition vary from line to line. Our principal methods of meeting this competition are innovative coverages, quality and consistent service to the agents and policyholders, and fair pricing. We compete favorably, in part, because of our sound financial condition and reputation, as well as our broad, geographic footprint in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. In all segments, we have experienced underwriting and claim specialists. We continue to maintain our underwriting standards by not seeking market share at the expense of underwriting profit. We have a track record of withdrawing from markets when conditions become overly adverse and offering new coverages and programs where the opportunity exists to provide needed risk transfer with exceptional service on a profitable basis.

FINANCIAL STRENGTH RATINGS

Financial strength ratings are an important factor in establishing the relative competitive position of insurance companies. The ratings are independent opinions of an insurer’s financial strength and ability to meet ongoing insurance policy and contract obligations, based on a comprehensive quantitative and qualitative analysis of balance sheet strength, operating performance, business profile and enterprise risk management. These ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not specifically related to securities issued by the company. Publications of AM Best, Standard & Poor’s and Moody’s indicate that A and A+ ratings are assigned to those companies that, in their opinion, have a superior ability to meet ongoing insurance obligations, a strong capacity to meet financial commitments or a low credit risk, respectively.

At December 31, 2023, the following ratings were assigned to our insurance companies and represent affirmations of previously assigned ratings:


AM Best
RLI Ins., Mt. Hawley and CBIC* (group-rated)		A+, Superior
Standard & Poor’s
RLI Ins. and Mt. Hawley		A, Strong
Moody’s
RLI Ins. and Mt. Hawley		A2

*CBIC is only rated by AM Best

REINSURANCE

In the ordinary course of business, we rely on other insurance companies to share risks through reinsurance, paying or ceding to the reinsurer a portion of the premiums received on such policies. These arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss on catastrophes and large risks. We use reinsurance as an alternative to using our own capital to take risks and reduce volatility. Retention levels are evaluated each year to maintain a balance between the growth in surplus and the cost of reinsurance. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the insurance ceded. The following table illustrates the degree to which we have utilized reinsurance during the past three years. For an expanded discussion of the impact of reinsurance on our operations, see note 5 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

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	Year Ended December 31,
(in thousands)	2023		2022		2021
PREMIUMS WRITTEN
Direct and Assumed	$	1,806,660	$	1,565,486	$	1,347,354
Reinsurance ceded		(378,913)		(323,950)		(289,821)
Net	$	1,427,747	$	1,241,536	$	1,057,533
PREMIUMS EARNED
Direct and Assumed	$	1,699,419	$	1,460,845	$	1,253,296
Reinsurance ceded		(405,113)		(316,409)		(272,393)
Net	$	1,294,306	$	1,144,436	$	980,903

Reinsurance is subject to certain risks, specifically market risk, which affects the cost and ability to secure reinsurance contracts, and credit risk, which is the risk that our reinsurers may not pay on losses in a timely fashion or at all. We strive to purchase reinsurance from financially strong reinsurers. We evaluate reinsurers’ ability to pay based on their financial results, level of surplus, financial strength ratings and other risk characteristics. A reinsurance committee, comprised of senior management, reviews and approves our security guidelines and reinsurer usage. More than 93 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better by AM Best and Standard & Poor’s rating services.

We utilize both treaty and facultative reinsurance coverage for our risks. Treaty coverage refers to a reinsurance contract under which the company agrees to cede all risks within a defined class of business to the reinsurer, who agrees to provide coverage on all risks ceded without individual underwriting. Facultative coverage is applied to individual risks at the company’s discretion and is subject to underwriting by the reinsurer. It is used for a variety of reasons, including supplementing the limits provided by the treaty coverage or covering risks or perils excluded from treaty reinsurance.

Much of our reinsurance is purchased on an excess of loss basis. Under an excess of loss arrangement, we retain losses on a risk up to a specified amount and the reinsurers assume any losses above that amount. We may choose to participate in the reinsurance layers purchased by retaining a percentage of the layer. It is common to find conditions in excess of loss covers such as occurrence limits, aggregate limits and reinstatement premium charges. Occurrence limits cap our recovery for multiple losses caused by the same event. Aggregate limits cap our recovery for all losses ceded during the contract term. Lastly, we may be required to pay additional premium to reinstate the reinsurance limits for potential future recoveries during the same contract year.

Excluding catastrophe reinsurance, the table below summarizes the reinsurance treaty coverage currently in effect. We may purchase facultative coverage in addition to the treaty coverages shown below.


					Per Risk
(in millions)		Renewal	Attachment		Limit		Maximum
Product Line(s) Covered	Contract Type	Date	Point		Purchased		Retention *
General liability	Excess of Loss	1/1	$	1.0	$	9.0	$	2.8
Commercial excess	Excess of Loss	1/1		1.0		9.0		2.8
Personal umbrella	Excess of Loss	1/1		1.0		9.0		2.8
Commercial transportation	Excess of Loss	1/1		1.0		9.0		2.8
Package - liability and workers' compensation	Excess of Loss	1/1		1.0		10.0		4.2
Workers' compensation catastrophe	Excess of Loss	1/1		11.0		14.0		—	**
Professional services - professional liability	Excess of Loss	4/1		1.0		9.0		3.3
Executive products	Quota Share	7/1		N/A		25.0		6.3
Property - risk cover	Excess of Loss	1/1		2.0		23.0		5.4
Marine	Excess of Loss	6/1		2.5		27.5		2.5
Surety	Excess of Loss	4/1		2.0		73.0		9.7	***

*Maximum retention includes first-dollar retention plus any co-participation we retain through the reinsurance tower.

**	The workers’ compensation catastrophe treaty responds after our package liability and workers’ compensation excess of loss treaty with no additional retention.

***	A limited number of commercial surety accounts are permitted to exceed the $75 million limit. These accounts are subject to additional levels of review and are monitored on a monthly basis.

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At each renewal, we consider any plans to change the underlying insurance coverage we offer, as well as updated loss activity, the level of RLI Insurance Group’s surplus, changes in our risk appetite and the cost and availability of reinsurance. In the last renewal cycle, we increased co-participations within the ceded layers of the property reinsurance structure.

PROPERTY REINSURANCE — CATASTROPHE COVERAGE

Our property catastrophe reinsurance reduces the financial impact of a catastrophe event involving multiple claims and policyholders, including earthquakes, hurricanes, floods, wildfires, convective storms and certain other aggregating events. Reinsurance limits purchased fluctuate due to changes in the amount of exposure we insure, reinsurance costs, insurance company surplus levels and our risk appetite. In addition, we monitor the expected rate of return for each of our catastrophe lines of business. At high rates of return, we grow the book of business and may purchase additional reinsurance to increase our capacity. As the rate of return decreases, we may reduce exposure and may purchase less reinsurance as this capacity becomes unnecessary. Our reinsurance coverage for 2022 through 2024 are shown in the table below. Amounts for 2023 and 2022 reflect additional catastrophe reinsurance protection that was purchased mid-year to support growth in our catastrophe-exposed business.

Catastrophe Coverages

(in millions)


	2024				2023				2022
	First-Dollar				First-Dollar				First-Dollar
	Retention		Limit		Retention		Limit		Retention		Limit
California earthquake	$	25	$	850	$	25	$	850	$	25	$	750
Non-California earthquake		50		850		50		850		25		775
Other perils, including hurricane		50		750		50		750		25		625

Our property catastrophe program continues to be applied on an excess of loss basis. Although covered in one program, limits and attachment points differ for California earthquakes and all other perils. These catastrophe limits are in addition to the per-occurrence coverage provided by facultative and other treaty coverages. We have participated in the catastrophe layers purchased by retaining a percentage of certain layers throughout this period. Our participation has varied over time based on price and the amount of risk transferred by each layer. All layers of the treaty include one reinstatement, which for certain layers requires the payment of additional premium.

The following table shows the likelihood that a loss from a single event would be less than the amount shown. For example, the 1-in-100 return period for hurricane means that the largest modeled hurricane occurrence had losses less than the amount shown in 99 out of 100 modeled years, while the largest modeled hurricane occurrence exceeded the amount shown in one out of 100 modeled years. Losses were modeled based on our exposure as of December 31, 2023, utilizing the reinsurance treaty structure in place as of January 1, 2024. The loss amounts are pre-tax and include the impact of reinsurance reinstatement premium.


(Losses in millions)			Hurricane				California Earthquake				Non-California Earthquake
Probability	Return Period	Gross Loss		Net Loss		Gross Loss		Net Loss		Gross Loss		Net Loss
90.0%	10 Year	$	93	$	50	$	15	$	11	$	1	$	1
96.0%	25 Year		208		69		88		28		13		8
98.0%	50 Year		322		86		209		46		50		30
99.0%	100 Year		457		99		375		72		128		44
99.6%	250 Year		688		112		647		97		265		63

Actual results could vary significantly from these modeled losses as the actual nature or severity of a particular event cannot be accurately predicted. Reinsurance limits are purchased based on the anticipated losses from large events. The largest losses shown above are possible, but have a lower probability of actually occurring. However, there is a remote chance that a larger event could occur. If the actual event losses are larger than anticipated, we could retain additional losses above the limit of our catastrophe reinsurance.

We regularly monitor and quantify our exposure to catastrophes. In the normal course of business, we manage our concentrations of exposures to catastrophic events, primarily by limiting concentrations of locations insured to acceptable levels and by purchasing reinsurance. Exposure and coverage detail is recorded for each risk location. We quantify and monitor the total policy limit insured in each geographical region. In addition, we use third-party catastrophe exposure models and an internally developed analysis to assess each risk to ensure we include an appropriate charge for assumed catastrophe risks.

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Catastrophe exposure modeling is inherently uncertain due to the model’s reliance on an infrequent observation of actual events, increasing the importance of capturing accurate policy coverage data. The modeled results are used both in the underwriting analysis of individual risks and at a corporate level for the aggregate book of catastrophe-exposed business. From both perspectives, we consider the potential loss produced by individual events that represent moderate-to-high loss potential at varying probabilities and magnitudes. In calculating potential losses, we use assumptions including, but not limited to, loss amplification and loss adjustment expense. We establish risk tolerances at the portfolio level based on market conditions, the level of reinsurance available, changes to the assumptions in the catastrophe models, rating agency capital constraints, underwriting guidelines and coverages and internal preferences. Our risk tolerances for each type of catastrophe, and for all perils in aggregate, change over time as these internal and external conditions change.

We are required to report to the rating agencies estimated loss to a single event that could include all potential earthquakes and hurricanes contemplated by the catastrophe modeling software. This reported loss includes the impact of insured losses based on the estimated frequency and severity of potential events, loss adjustment expense, reinstatements paid after the loss, reinsurance recoveries and taxes. Based on the catastrophe reinsurance treaty purchased on January 1, 2024, there is a 99.6 percent likelihood that the net loss will be less than 8.0 percent of policyholders’ statutory surplus as of December 31, 2023. Comparatively, based on the catastrophe reinsurance treaty purchased on January 1, 2023, there was a 99.6 percent likelihood that the net loss would have been less than 10.8 percent of policyholders’ statutory surplus as of December 31, 2022. The comparable metric over the past five years, as measured at the beginning of each of those treaty years, has ranged from 4.6 percent of surplus to 15.1 percent of surplus. The exposure levels are within our tolerances for this risk.

OPERATING RATIOS

PREMIUMS TO SURPLUS RATIO

The following table shows, for the periods indicated, our insurance subsidiaries’ statutory ratios of net premiums written to policyholders’ surplus. While there is no statutory requirement applicable to the Company that establishes a permissible net premiums written to surplus ratio, guidelines established by the National Association of Insurance Commissioners (NAIC) provide that this ratio should generally be no greater than 3 to 1. While the NAIC provides this general guideline, rating agencies often require a more conservative ratio to maintain strong or superior ratings.


	Year Ended December 31,
(dollars in thousands)	2023		2022		2021		2020		2019
Statutory net premiums written	$	1,427,747	$	1,241,536	$	1,057,533	$	892,088	$	860,337
Policyholders’ surplus		1,520,135		1,407,925		1,240,649		1,121,592		1,029,671
Ratio		0.9 to 1		0.9 to 1		0.9 to 1		0.8 to 1		0.8 to 1

COMBINED RATIO AND STATUTORY COMBINED RATIO

Our underwriting experience is best indicated by our combined ratio, which is the sum of (a) the ratio of incurred loss and settlement expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and insurance operating expenses to net premiums earned (expense ratio). The difference between the combined ratio and 100 reflects the per dollar rate of underwriting income or loss, with ratios below 100 indicating underwriting profit and ratios above 100 indicating underwriting loss.


	Year Ended December 31,
	2023	2022	2021	2020	2019
Loss ratio	46.7	44.9	46.5	51.2	49.3
Expense ratio	39.9	39.5	40.3	40.8	42.6
Combined ratio	86.6	84.4	86.8	92.0	91.9

We also calculate the statutory combined ratio, which is not indicative of underwriting income due to accounting for policy acquisition costs differently for statutory accounting purposes, but is a standardized industry measure. The statutory combined ratio is the sum of (a) the ratio of statutory loss and loss adjustment expenses incurred to statutory net premiums earned (loss ratio), (b) the ratio of statutory other underwriting expenses incurred to statutory net premiums written (expense ratio) and (c) the ratio of policyholder dividends to statutory net premiums earned (policyholder dividend ratio).

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	Year Ended December 31,
Statutory	2023		2022		2021		2020		2019
Statutory loss ratio	46.7		44.9		46.5		51.0		49.3
Statutory expense ratio	37.7		38.3		38.8		40.8		41.8
Statutory combined ratio	84.4		83.2		85.3		91.8		91.1

P&C industry combined ratio	102.2	*	102.7	**	99.7	**	98.8	**	98.9	**

*	Source: Conning (2023). Property-Casualty Forecast & Analysis: By Line of Business, Fourth Quarter 2023. Estimated for the year ended December 31, 2023.

**Source: AM Best (2023). Aggregate & Averages – Property/Casualty, United States & Canada. 2019 – 2022.

INVESTMENTS

Our investment portfolio serves as a resource for loss payments and secondarily as a source of income to support operations. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on growing book value through total return. Investments of the highest quality and marketability are critical for preserving our claims-paying ability. In addition, we have a diversified investment portfolio that distributes credit risk across many issuers and an investment policy that limits aggregate credit exposure. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed significantly to our growth in book value over time. Our portfolio does not contain derivatives.

Investment portfolios are managed both internally and externally by experienced portfolio managers. We follow an investment policy that is reviewed quarterly and revised periodically, with oversight conducted by our senior officers and board of directors.

Our investments include fixed income debt securities, common stock equity securities, exchange traded funds (ETFs) and a small number of limited partnership interests. The fixed income portfolio was 78 percent of the total portfolio, down 4 percent from the prior year, while the equity allocation was 16 percent of the overall portfolio, up 1 percent from the previous year. Other invested assets represented 1 percent of the total portfolio and include investments in low-income housing tax credit and historic tax credit partnerships, membership stock in the Federal Home Loan Bank of Chicago and investments in private funds. The remaining 5 percent was made up of cash and short-term investments. As of December 31, 2023, 81 percent of the fixed income portfolio was rated A or better and 58 percent was rated AA or better.

We classify all of the securities in our fixed income portfolio as available-for-sale, which are carried at fair value. Beyond available operating cash flow, the portfolio provides an additional source of liquidity and can be used to address potential future changes in our asset/liability structure. Aggregate maturities for the fixed income portfolio as of December 31, 2023, were as follows:


(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	157,831	$	156,463
Due after one year through five years		904,769		874,375
Due after five years through 10 years		674,761		654,068
Due after 10 years		548,021		464,476
ABS/CMBS/MBS*		769,009		706,467
Total available-for-sale	$	3,054,391	$	2,855,849

*	Asset-backed, commercial mortgage-backed and mortgage-backed securities

We had cash and fixed income securities maturing within one year of $328 million at year-end 2023. This total represented 9 percent of cash and investments, compared to 12 percent at year-end 2022.

REGULATION

STATE REGULATION

As an insurance holding company, we and our insurance company subsidiaries, are subject to regulation by the states and territories in which the insurance subsidiaries are domiciled or transact business. Registration in each insurer’s state of domicile requires periodic reporting to such state’s insurance regulatory authority of the financial, operational and management information regarding the insurers within the holding company system. All transactions within a holding company system affecting insurers must have fair and reasonable terms, and the insurers’ policyholders’ surplus, following any transaction, must be both reasonable in relation

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to its outstanding liabilities and adequate for its needs. Notice to and, in some cases, consent from regulators is required prior to the completion of certain transactions affecting insurance company subsidiaries of the holding company system. Each state and territory individually regulates the insurance operations of both insurance companies and insurance agents/brokers. Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors.

The primary focus of state regulation of insurance companies is financial solvency and market conduct practices. Regulations designed to ensure the financial solvency of insurers are enforced by various filing, reporting and examination requirements. Marketplace oversight is conducted by monitoring and periodically examining trade practices, approving policy forms, licensing agents and brokers and requiring the filing and, in some cases, approval of premiums and commission rates to ensure they are fair and adequate.

Because our insurance company subsidiaries operate in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam, we must comply with the individual insurance laws, regulations, rules and case law of each state and territory, including those regulating the filing of insurance rates and forms. Each of our three insurance company subsidiaries are domiciled in Illinois, with the Illinois Department of Insurance (IDOI) as its principal insurance regulator. Changes to the state insurance regulatory requirements are frequent, including changes caused by state legislation, regulations by the state insurance departments and court rulings.

As a holding company, the amount of dividends we are able to pay depends upon the funds available for distribution, including dividends or distributions from our subsidiaries. The Illinois insurance laws applicable to our insurance company subsidiaries impose certain restrictions on their ability to pay dividends. The Illinois insurance holding company laws require that ordinary dividends paid by an insurance company be reported to the IDOI prior to payment of the dividend, and provide that extraordinary dividends may not be paid without such regulator’s prior approval (or the absence of disapproval). The IDOI has broad authority to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that extraordinary dividend payments would be permitted.

Illinois has adopted the Amended Holding Company Model Act, which imposes reporting obligations on parents and other affiliates of licensed insurers or reinsurers, with the purpose of protecting the licensed companies from enterprise risk. The Amended Holding Company Model Act requires the ultimate controlling person (in our case RLI Corp.) to file an annual enterprise risk report identifying the material risks within the insurance holding company system that could pose enterprise risk to the licensed companies. An enterprise risk is generally defined as an activity or event involving affiliates of an insurer that could have a material adverse effect on the insurer or the insurer’s holding company system. We report on these risks on an annual basis and are in compliance with this law.

Illinois has adopted the Own Risk and Solvency Assessment (ORSA) model act. ORSA is applicable to Illinois domiciled insurance companies that meet certain size requirements, including ours. The ORSA program is a key component of an insurance company’s overall enterprise risk management (ERM) framework, and is the process by which organizations identify, measure, monitor and manage key risks affecting the entire enterprise. The Company files an ORSA summary report with the IDOI each year, which includes an internal identification, description and assessment of the risks associated with our business plan and the sufficiency of capital resources to support those risks.

The NAIC uses a risk-based capital (RBC) model to monitor and regulate the solvency of licensed property and casualty insurance companies. Illinois has adopted a version of the NAIC’s model law. The RBC calculation is used to measure an insurer’s capital adequacy with respect to: the risk characteristics of the insurer’s premiums written and unpaid losses and loss adjustment expenses, rate of growth and quality of assets, among other measures. Depending on the results of the RBC calculation, insurers may be subject to varying degrees of regulatory action. RBC is calculated annually by insurers, as of December 31 of each year. As of December 31, 2023, each of our insurance company subsidiaries had RBC levels significantly in excess of the company action level RBC, defined as being 200 percent of the authorized control level RBC, which would prompt corrective action under Illinois law. RLI Ins., our principal insurance company subsidiary, had an authorized control level RBC of $273 million compared to actual statutory capital and surplus of $1.5 billion as of December 31, 2023, resulting in statutory capital that is more than five times the authorized control level. The calculation of RBC requires certain judgments to be made, and, accordingly, each of our insurance company subsidiaries’ current RBC may be greater or less than the RBC calculated as of any date of determination.

Each of our insurance company subsidiaries is required to file detailed annual reports, including financial statements, in accordance with prescribed statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct business. The quarterly and annual financial reports filed with those states utilize statutory accounting principles (SAP) that are different from generally accepted accounting principles in the United States of America (GAAP). As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders.

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As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations, generally once every three to five years, of the books, records, accounts and operations of insurance companies that are domiciled in their states. Examinations are generally carried out in cooperation with the insurance departments of other, non-domiciliary states under guidelines promulgated by the NAIC. The most recent examination report of our insurance company subsidiaries completed by the IDOI was issued on December 29, 2023, for the five-year period ending December 31, 2022. The examination report is available to the public.

Each of our insurance company subsidiaries is subject to Illinois laws and regulations that impose restrictions on the amount and type of investments our insurance company subsidiaries may have. Such laws and regulations generally require diversification of the insurer’s investment portfolio and limit the amounts of investments in certain asset categories, such as below investment grade fixed income securities, real estate-related equity, other equity investments and derivatives. Failure to comply with these laws and regulations would generally cause investments that exceed regulatory limitations to be treated as non-admitted assets for measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.

Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a withdrawal plan that may lead to marketplace disruption. Laws and regulations that limit cancellation and non-renewal, and that subject program withdrawals to prior approval requirements, may restrict our ability to exit unprofitable marketplaces in a timely manner.

Virtually all states require licensed insurers to participate in various forms of guaranty associations in order to bear a portion of the loss suffered by qualified policyholders of insurance companies that become insolvent. Depending upon state law, licensed insurers can be assessed a small percentage of the annual premiums written for the relevant lines of insurance in that state to contribute to paying the claims of insolvent insurers. These assessments may increase or decrease in the future, depending upon the rate of insurance company insolvencies. In some states, these assessments may be wholly or partially recovered through policy fees paid by insureds. We cannot predict the amount and timing of future assessments. Therefore, the liabilities we have currently established for these potential assessments may not be adequate and an assessment may materially impact our financial condition.

In addition, the insurance holding company laws require advance approval by state insurance commissioners of any change in control of an insurance company that is domiciled, or in some cases, having such substantial business that it is deemed to be commercially domiciled in that state. “Control” is generally presumed to exist through the ownership of 10 percent or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. In addition, insurance laws in many states contain provisions that require pre-notification to the insurance commissioners of a change in control of a non-domestic insurance company licensed in those states. Any future transactions that would constitute a change in control of our insurance company subsidiaries, including a change of control of RLI Ins., would generally require the party acquiring control to obtain the prior approval by the insurance departments of the insurance company subsidiaries’ state of domicile (Illinois) or commercial domicile, if applicable. It may also require pre-acquisition notification in applicable states that have adopted pre-acquisition notification provisions. Obtaining these approvals could result in a material delay of, or deter, any such transaction.

In light of the number and severity of U.S. company data breaches, a number of states have enacted new insurance laws that require certain regulated entities to implement and maintain comprehensive information security programs to safeguard the personal information of insureds. For example, the New York State Department of Financial Services (NYDFS) enacted a comprehensive cybersecurity regulation in 2017, and revised the regulation in 2023. This regulation requires banks, insurance companies and other financial services institutions regulated by the NYDFS to establish and maintain a cybersecurity program “designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.” Other states have enacted similar regulations. We are in compliance with the requirements of these regulations.

The NAIC adopted the Insurer Climate Risk Disclosure Data Survey to provide regulators with information about the assessment of risks posed by climate change to insurers and the actions insurers are taking in response to their understanding of climate change risks. A number of states require the Company to provide annual responses to the survey, all of which accept the filing of the Company’s response with the California Department of Insurance. The Company’s 2023 survey response, for calendar year 2022, can be accessed on the California Department of Insurance website.

The rates, policy terms and conditions of reinsurance agreements generally are not subject to regulation by any regulatory authority. However, the ability of a ceding insurer to take credit for the reinsurance purchased from reinsurance companies is a significant component of reinsurance regulation. Typically, a ceding insurer will only enter into a reinsurance agreement if it can

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obtain credit against its reserves on its statutory basis financial statements for the reinsurance ceded to the reinsurer. With respect to U.S. domiciled ceding companies, credit is usually granted when the reinsurer is licensed, accredited, certified or identified as a reciprocal jurisdiction reinsurer in the state where the ceding company is domiciled. States also generally permit ceding insurers to take credit for reinsurance if the reinsurer is: (1) domiciled in a state with a credit for reinsurance law that is substantially similar to the credit for reinsurance law in the primary insurer’s state of domicile and (2) meets certain financial requirements. Credit for reinsurance purchased from a reinsurer that does not meet the foregoing conditions is generally allowed to the extent that such reinsurer secures its obligations with qualified collateral.

Insurers are also subject to state laws regulating claim handling practices. The NAIC created a model unfair claims practices law which most states have fully or partially adopted. These laws and regulations set the standards by which insurers must investigate and resolve claims; however, a private cause of action for violation is not available to claimants. These laws typically prohibit: (1) misrepresentation of policy provisions, (2) failing to act promptly when claims are presented and (3) refusing to pay claims without an investigation. Market conduct examinations or insurance regulator investigations may be prompted through annual reviews or excessive numbers of complaints against an insurer. After an investigation or market conduct review by an insurance regulator, insurers found to be in violation of these laws and regulations face potential fines, cease and desist orders, remediation orders or loss of authority to write business in the particular state.

FEDERAL LEGISLATION AND REGULATION

The U.S. insurance industry is not currently subject to any significant federal regulation related to the business of insurance and instead is regulated principally at the state level. The Company is subject to a number of federal regulatory requirements related to securities, employment practices, qualified employee benefits plans and financial disclosures, among others.

Other federal laws and regulations apply to many aspects of our company and its business operations. These federal regulations include laws such as the Gramm-Leach-Bliley Act, which establishes privacy and security requirements for insurance companies, and enables state departments of insurance to enforce these requirements; and the Fair Credit Reporting Act as amended by the Fair and Accurate Credit Transactions Act, which establishes rules regarding access to and use of information (including but not limited to credit information and motor vehicle reports) from consumer reporting agencies.

LICENSES AND TRADEMARKS

We hold a U.S. federal service mark registration of our corporate name “RLI” and several other company service marks and trademarks with the U.S. Patent and Trademark Office. Such registrations protect our intellectual property nationwide from deceptively similar use. The duration of these registrations is 10 years, unless renewed. We monitor our trademarks and service marks and protect them from unauthorized use as necessary.

HUMAN CAPITAL

RLI is a specialty underwriting company whose achievement emanates from our entrepreneurial, ownership culture. We strive to hire top underwriting and claim talent, who work closely with our customers throughout the United States. Compensation plans are designed to reward profitability and shareholder value creation to better align compensation with the longer-term nature of insurance products and stakeholder expectations. Underwriters have the resources and authority to operate within established underwriting guidelines and share in the rewards when they succeed. We solicit employee feedback to help ensure employees are engaged, feel valued and are contributing to our success.

The Company employed 1,099 associates throughout the United States as of December 31, 2023, compared to 1,001 as of December 31, 2022, and the average employee tenure was 8.8 years. We prefer to utilize our own underwriting, claims and support staff, given the complex nature of our products. The niche markets we operate within require unique experience and deep knowledge to select appropriate risks and serve our customers. Ensuring a seamless transfer of knowledge as employees retire and developing newer talent continues to be a focus of the Company. We enable employees to maintain and expand their industry knowledge and technical expertise through education and training, as well as through memberships in industry and trade associations. We leverage the services of a limited number of third-party contractors when it is difficult to hire employees that address a needed skill set outside of our core insurance functions or when efficiencies can be gained.

Human Capital Oversight

At the board of directors level, oversight of human capital is provided by the Human Capital and Compensation Committee (HCCC). Executive oversight for human capital is provided by the Company’s Vice President of Human Resources, who reports to the

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President & CEO. Key responsibilities of the Vice President of Human Resources include providing effective programs related to staffing and succession planning, employee recruiting and development, compensation and benefits, and compliance, which are monitored by the HCCC.

Compensation and Benefits

We compensate employees through a competitive compensation (Total Rewards) program that includes a base salary or hourly wage, annual incentives for all full-time employees, long-term incentives for management, retirement benefits, as well as health, disability and life insurance. We utilize various information sources, including local, regional and national compensation surveys, to establish competitive pay targets for each position in the company to ensure our Total Rewards program attracts and retains a talented workforce.

An important element of the Total Rewards program is to promote alignment of employee and shareholder interests, which is achieved through the Company’s Employee Stock Ownership Plan (ESOP) and long-term incentive plan (LTIP). The ESOP is a qualified retirement plan that provides shares of RLI Corp. stock to employees based on the profitability of the Company, while management is granted stock options and restricted stock units through the LTIP. Management, at the level of vice president and above, is subject to stock ownership guidelines requiring them to hold Company shares valued at a multiple of their base salary, depending on their role. As of December 31, 2023, 9 percent of RLI Corp. shares were owned by insiders.

Diversity and Inclusion

We strive to cultivate an exceptional workforce to perpetuate our ownership culture, deliver excellent customer service and continue to achieve superior business results. Our goal is to attract, develop and retain the best talent from diverse backgrounds, while promoting a culture where different viewpoints are valued and individuals feel respected, are treated fairly and have an opportunity to excel in their chosen careers.

FORWARD LOOKING STATEMENTS

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 and are subject to various risks, uncertainties and other factors, including, without limitation those set forth below in “Item 1A Risk Factors.” 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.

Item 1A. Risk Factors

Insurance Industry

Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may cause the price of our securities to be volatile.

The results of operations of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be significantly affected, and has been affected to varying degrees, by:

●

Competitive pressures impacting our ability to write new business or retain existing business at an adequate rate,

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Rising levels of loss costs that we cannot anticipate at the time we price our coverages, including inflation in the cost of materials, delays that cause increased business interruption losses and social inflation, as influenced by higher jury verdicts,

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Volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes, terrorist attacks or geopolitical events,

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Significant price changes of the commodities we insure,

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Changes in the availability and level of reinsurance capacity,

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Changes in the amount of losses resulting from new types of claims and new or changing judicial interpretations relating to the scope of insurers’ liabilities and

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The ability of our underwriters to accurately select and price risk and our claim personnel to appropriately deliver fair outcomes.

In addition, the demand for property and casualty insurance, both admitted and excess and surplus lines, can vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases, causing our revenues to fluctuate. These fluctuations in results of operations and revenues may not reflect long-term results and may cause the price of our securities to be volatile.

A significant percentage of our premium revenues are sold through a few brokers and carrier partners and a loss of business provided by any of them could adversely affect us.

We market our insurance products through brokers, agents and carrier partners. In 2023, 42 percent of our gross premiums written were produced through six producer entities, while no other entity’s production exceeded 2 percent of our gross premiums written. Accordingly, our business is dependent on the willingness of these agents, brokers and carrier partners to recommend our products to their customers, who may also promote and distribute the products of our competitors. Loss of all or a substantial portion of the business written through these parties could have a material adverse effect on our business.

Our business is concentrated in several key states and a change in our business in one of those states could disproportionately affect our financial condition or results of operations.

Although we operate in all 50 states, 57 percent of our direct premiums earned were generated in four states in 2023: Florida – 20 percent; California – 17 percent; Texas – 11 percent; and New York – 9 percent. An interruption in our operations, or a negative change in the business environment, insurance market or regulatory environment in one or more of these states could have a disproportionate effect on our business and direct premiums earned.

We compete with a large number of companies in the insurance industry and their actions could ultimately impact our overall results.

We are vulnerable to the actions of other companies who may seek to write business without the appropriate regard for risk and profitability, especially during periods of intense competition for premium. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting income.

We face competition from specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than we are, and that have significantly greater financial, marketing, management and other resources. We may also face competition from new sources of capital such as institutional investors seeking access to the insurance market, sometimes referred to as alternative capital, which may depress pricing or limit our opportunities to write business. Some of these competitors also have stronger brand awareness than we do. We may incur increased costs in competing for premium. If we are unable to compete effectively in the markets we operate in or are not successful in expanding our operations into new markets, the amount of premium we write may decline, pressuring overall business results.

A number of new, proposed or potential legislative or industry developments could further increase competition in our industry, including:

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An increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry,

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The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers for our excess and surplus lines of insurance business,

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Programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative market types of coverage,

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Changing practices, which may lead to greater competition in the insurance business and

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The emergence of Insurtech companies and the development of new technologies, which may lead to disruption of current business models and the insurance value chain.

New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.

A downgrade in our ratings from AM Best, Standard & Poor’s or Moody’s could negatively affect our business.

Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Our insurance companies are rated for overall financial strength by AM Best, Standard & Poor’s and Moody’s. AM Best, Standard & Poor’s and Moody’s ratings are independent opinions of an insurer’s financial strength and ability to meet ongoing insurance policy and contract obligations, based on a comprehensive quantitative and qualitative analysis of balance sheet strength, operating performance, business profile and enterprise risk management. These financial strength ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not specifically related to securities issued by the company. The view of required capital may differ between rating agencies, as well as from RLI Corp.’s own view of desired capital. Our ratings are subject to periodic review by such firms, and the criteria used in the rating methodologies is subject to change. As such, we cannot assure we will continue to maintain of our current ratings.

All of our ratings were reviewed during 2023. AM Best reaffirmed its A+, Superior rating for the combined entity of RLI Ins., Mt. Hawley and CBIC (group-rated). Standard & Poor’s reaffirmed our A rating for the group of RLI Ins. and Mt. Hawley. Moody’s reaffirmed our group rating of A2 for RLI Ins. and Mt. Hawley. If our ratings are significantly reduced from their current levels by AM Best, Standard & Poor’s or Moody’s, our competitive position in the industry, and therefore our business, could be adversely affected. A significant downgrade could result in a substantial loss of business, as policyholders might move to other companies with greater financial strength ratings.

We are subject to extensive governmental regulation, which may adversely affect our ability to achieve our business objectives. Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition, results of operations and reputation.

Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other stakeholders. These regulations, generally administered by a department of insurance in each state and territory in which we do business, relate to, among other things:

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Approval of policy forms and premium rates,

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Standards of solvency, including risk-based capital measurements,

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Licensing of insurers and their producers,

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Restrictions on agreements with our large revenue-producing agents,

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Cancellation and non-renewal of policies,

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Restrictions on the nature, quality and concentration of investments,

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Restrictions on the ability of our insurance company subsidiaries to pay dividends to the Company,

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Restrictions on transactions between insurance company subsidiaries and their affiliates,

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Restrictions on the size of risks insurable under a single policy,

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Requiring deposits for the benefit of policyholders,

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Requiring certain methods of accounting,

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Periodic examinations of our operations and finances,

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Prescribing the form and content of records of financial condition required to be filed and

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Requiring reserves for unearned premium, losses and other purposes.

These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could initiate investigations or other proceedings, fine the Company, preclude or temporarily suspend the Company from carrying on some or all of its activities or otherwise penalize the Company. This could adversely affect our ability to operate our business. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business as currently conducted.

Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would negatively impact our profitability.

Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. Loss reserves are estimates of the ultimate cost of claims and do not represent an exact calculation of liability. These estimates are based on historical information and on estimates of future trends that may affect the frequency and severity of claims that may be reported in the future.

Estimating loss reserves is a difficult, complex and inherently uncertain process involving many variables and subjective judgments. Changes in industry practices, and in legal, legislative, regulatory, judicial, social and other conditions under which we operate may require us to pay claims we did not intend to cover when we wrote the policies. These changes may serve to extend the time for making claims, extend coverage and increase damages. These changes may not become apparent until after we have issued policies or bonds that are affected by the changes and, consequently, we may not know the extent of our liability and the impact to our financial performance until many years after a policy or bond was issued. The effects of these and other coverage issues are difficult to predict and could have a materially adverse effect on our financial performance.

As part of the reserving process, we review historical data and consider the impact of various factors such as:

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Loss emergence and claim reporting patterns,

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Underlying policy terms and conditions,

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Business and exposure mix,

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Emerging coverage issues,

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Trends in claim frequency and severity,

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Changes in operations,

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Emerging economic and social trends,

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State reviver statutes that permit claims after a statute of limitation has expired,

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Court closures or increased time-to-trial,

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Inflation in amounts awarded by courts and juries and

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Changes in the regulatory and litigation environments.

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes adequate historical or other data exists upon which to make these judgments. For more information on the estimates used in the establishment of loss reserves, see the Losses and Settlement Expenses section of our Critical Accounting Policies contained within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, there is no precise method for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.

Catastrophic losses are unpredictable and could cause the Company to suffer material financial losses.

Our insurance coverages include exposure to catastrophic events, particularly earthquakes on the West Coast and hurricanes and tropical storms affecting coastal regions of the United States. Weather-related catastrophes may include meteorological events such as hurricanes, severe convective storms and winter weather; and climatological events such as drought, wildfires and heatwaves. In addition, catastrophe losses can occur from events such as lava flows in Hawaii and terrorist events in the United States.

The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured values in the area affected by the event and the severity of the event. Most catastrophes are restricted to fairly specific geographic areas. However, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. It is possible that a catastrophic event or multiple catastrophic events could cause the Company to suffer material financial losses. In addition, catastrophe claim costs may be higher than we originally estimate and could cause substantial volatility in our financial results for any fiscal quarter or year.

We use models to help assess exposure to catastrophic events against established thresholds. Models include underlying assumptions based on a limited set of actual events and cannot contemplate all possible catastrophe scenarios. In addition, models are revised periodically, which could change modeled losses. The losses we might incur from an actual catastrophe could be higher than our expectation of losses generated from modeled catastrophe scenarios, which could have a materially adverse effect on our results of operations and financial condition. To address uncertainty related to catastrophe models, we also monitor against thresholds using non-modeled scenarios.

Changing climate and weather conditions may adversely affect our financial condition or profitability.

Climate change is a complex and evolving issue and we cannot predict the cumulative impact it may have on our results of operations or financial condition at this time. The effects on the Company could include:

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Changes in the frequency, severity and location of weather-related catastrophes, which may result in higher levels of losses,

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Additional uncertainty in third party catastrophe models, which could impair our ability to assess exposure and adequately price the catastrophe risks we insure,

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Flooding of coastal property, resulting from rising sea levels, making certain geographic areas uninhabitable, reducing demand for insurance products we offer in those areas,

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Increased losses from weather-related catastrophes may make it more difficult to obtain reinsurance at desired levels, or more expensive to acquire reinsurance coverage, which may reduce the amount of business we write and the revenues we generate,

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A transition from carbon-based energy to other sources of energy may decrease demand for insurance coverage we provide to the industries that produce or use carbon-based energy, decrease the availability of reinsurance available for

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coverages we provide for those industries, or increase claims and losses related to those industries, any of which could affect our profitability,

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Changes in legislation, regulation and court decisions could increase our compliance costs, impose liability on policyholders that we did not contemplate when we underwrote policies, or limit our ability to sell insurance coverage to certain policyholders and

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Losses on our invested assets that could have a material adverse impact on our results of operations and financial condition.

Our reinsurers may not pay on losses in a timely fashion, or at all, which may increase our costs and have an adverse effect on our business.

We purchase reinsurance to transfer part of the risk we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, it does not relieve the Company (the reinsured) of its liability to its policyholders. Accordingly, we bear credit risk with respect to our reinsurers. That is, our reinsurers may not pay claims made by the Company on a timely basis, or they may not pay some or all of these claims for a variety of reasons. Either of these events would increase our costs and could have a material adverse effect on our business.

If we cannot obtain adequate reinsurance protection for the risks we have underwritten or at prices we deem acceptable, we may be exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which would reduce our revenues.

Market conditions beyond our control determine the availability and cost of the reinsurance protection that we purchase. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. Our reinsurance agreements are generally subject to annual renewal. We cannot be sure that we can maintain our current reinsurance protection, obtain other reinsurance facilities in adequate amounts and at favorable rates, or diversify our exposure among an adequate number of high-quality reinsurance partners. If we are unable to renew our expiring facilities or obtain new reinsurance facilities on terms we deem acceptable, either our net loss exposures would increase, which could increase the volatility of our results, or we would have to reduce the level of our underwriting commitments when possible, which would reduce our revenues. Many of the bonds we issue, particularly in the energy sector, are non-cancelable and may expose the Company to greater losses, should the surety reinsurance coverage we are able to secure be reduced or become unavailable.

Financial and Investment

Adverse changes in the economy could lower the demand for our insurance products and could have an adverse effect on the revenue and profitability of our operations.

Factors such as business revenue, construction spending, government spending, the volatility and strength of the capital markets and inflation can all affect the business and economic environment. These same factors affect our ability to generate revenue and profits. Insurance premiums in our markets are heavily dependent on our customer revenues, payroll, value of goods transported, miles traveled and number of new projects initiated. In an economic downturn characterized by higher unemployment, declines in construction spending and reduced corporate revenues, the demand for insurance products is adversely affected. Adverse changes in the economy may lead our customers to have less need or desire for insurance coverage, to cancel existing insurance policies, to modify coverage or to not renew with the Company, all of which affect our ability to generate revenue. In addition, as approximately a third of our business relates to the construction industry, our results of operations could be significantly impacted in an economic downturn if the construction industry is affected disproportionally.

Access to capital and market liquidity may adversely affect our ability to take advantage of business opportunities as they arise.

Our ability to grow our business depends, in part, on our ability to access capital when needed. We cannot predict capital market liquidity or the availability of capital. We also cannot predict the extent and duration of future economic and market disruptions, the impact of government interventions into the market to address these disruptions and their combined impact on our industry, business and investment portfolios. If our company needs capital but cannot raise it, our business and future growth could be adversely affected.

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We are an insurance holding company and therefore may not be able to receive adequate or timely dividends from our insurance subsidiaries.

RLI Corp. is the holding company for our three insurance operating companies. At the holding company level, our principal assets are the shares of capital stock of our insurance company subsidiaries. We rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. 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 IDOI. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay RLI Corp. obligations and desired dividends to shareholders. Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon 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 (or non-disapproval) from the IDOI. Because the limitations are based upon a rolling 12-month period, the presence, amount and impact of these restrictions vary over time.

We may not be able to, or might not choose to, continue paying dividends on our common stock.

We have a history of paying regular, quarterly dividends and have paid annual special dividends since 2010. The payment of either type of dividend to our shareholders in the future is not guaranteed, is at the discretion of our board of directors and will depend on our results of operations, financial condition and other factors deemed relevant by our board of directors. Our ability to pay dividends depends largely on our subsidiaries’ earnings and operating capital requirements, and is subject to the regulatory, contractual and other constraints of our subsidiaries, including the effect of any such dividends or distributions on the AM Best rating or other ratings of our insurance subsidiaries. In addition, we may choose to retain capital to support growth or further mitigate risk, instead of returning excess capital to our shareholders.

Our investment results and, therefore, our financial condition may be impacted by changes in the business, financial condition or operating results of the entities in which we invest, as well as changes in interest rates, government monetary policies, general economic conditions, liquidity and overall market conditions.

We invest the premiums we receive from customers until they are needed to pay expenses or policyholder claims. Funds remaining after paying expenses and claims remain invested and are included in retained earnings. The value of our investment portfolio can fluctuate as a result of changes in the business, financial condition or operating results of the entities in which we invest. In addition, fluctuations can result from changes in interest rates, credit risk, government monetary policies, liquidity of holdings and general economic conditions. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is positively correlated with movements in domestic stocks. The bond portfolio is affected by interest rate changes and movement in credit spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-diversified portfolio of high-quality securities with varied maturities. These fluctuations may negatively impact our financial condition.

Operational

Our success will depend on our ability to maintain and enhance effective operating procedures and manage risks on an enterprise-wide basis.

Operational risk and losses can result from, among other things, fraud, errors, failure to document transactions properly, failure to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures or external events. We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. The NAIC and state legislatures have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to insurers. The Illinois legislature has adopted the Risk Management and Own Risk and Solvency Assessment (ORSA) Law, which requires domestic insurers to maintain a risk management framework and establishes a legal requirement for domestic insurers to conduct an ORSA in accordance with the NAIC’s ORSA Guidance Manual. The ORSA Law also provides that, no less than annually, an insurer must submit an ORSA summary report. Under the Illinois insurance holding company laws, on an annual basis, we are also required to file an enterprise risk report with the IDOI, which is intended to identify the material risks within our insurance holding company system that could pose enterprise risk to our insurance company subsidiaries. We operate within an enterprise risk management (ERM) framework designed to assess and monitor our risks. However, assurance that we can effectively review and monitor all risks or that all of our employees will operate within the ERM framework cannot be

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guaranteed. Assurances that our ERM framework will result in the Company accurately identifying all risks and accurately limiting our exposures based on our assessments also cannot be guaranteed.

We may not be able to effectively start up or integrate new product opportunities.

Our ability to grow our business depends, in part, on our creation, implementation or acquisition of new insurance products that are profitable and fit within our business model. Our ability to grow profitably requires that we identify market opportunities, which may include acquisitions, and that we attract and retain underwriting and claims expertise to support that growth. New product launches, as well as resources to integrate business acquisitions are subject to many obstacles, including ensuring we have sufficient business and system processes, determining appropriate pricing, obtaining reinsurance, assessing opportunity costs and regulatory burdens and planning for internal infrastructure needs. If we cannot effectively or accurately assess and overcome these obstacles, or we improperly implement new insurance products, our ability to grow profitably could be impaired.

We may be unable to attract and retain qualified key employees.

We depend on our ability to attract and retain experienced underwriting and claim talent, who have deep knowledge of the niche business we write, and other skilled employees. If we cannot attract or retain top-performing executive officers, underwriters and other employees, the quality of their performance decreases or we fail to implement succession plans for our key employees, we may be unable to maintain our current competitive position in the markets in which we operate or expand our operations into new markets.

We rely on third-party vendors for a number of key components of our business.

We contract with a number of third-party vendors to support our business. For example, we have license agreements for software that we use to model natural catastrophes, process claims, and manage policies, producers and financial processes. The vendors range from large national companies, who are dominant in their area of expertise and would be difficult to quickly replace, to smaller or start-up vendors with leading technology, but with shorter operating histories and fewer financial resources. Failures of certain vendors to provide services could adversely affect our ability to deliver products and services to our customers, disrupting our business and causing the Company to incur significant expense. If one or more of our vendors fail to protect personal information of our customers, claimants or employees, we may incur operational impairments, or could be exposed to litigation, compliance costs or reputational damage. We maintain a vendor management program to establish procurement policies and to monitor vendor risk, including the security and stability of our critical vendors.

Any significant interruption in the operation of our facilities, systems and business functions could adversely affect our financial condition and results of operations.

We rely on multiple computer systems to interact with producers and customers, issue policies, pay claims, run modeling functions, assess insurance risks and complete various important internal processes including accounting and bookkeeping. Our business is highly dependent on our ability to access these systems to perform necessary business functions. Additionally, some of these systems may include or rely upon third-party systems not located on our premises. Any of these systems may be exposed to unplanned interruption, unreliability or intrusion from a variety of causes, including among others, storms and other natural disasters, terrorist attacks, cyber attacks, utility outages or complications encountered as existing systems are replaced or upgraded.

Any such issues could materially impact our company, including the impairment of information availability, compromise of system integrity/accuracy, misappropriation of confidential information, reduction of our volume of transactions and interruption of our general business. Although we believe our computer systems are secure and continue to take steps to ensure they are protected against such risks, we cannot guarantee such problems will not occur. If they do, interruption to our business and damage to our reputation and related costs, could be significant, which could impair our profitability.

Technology breaches or failures, including but not limited to cyber security incidents, could disrupt our operations, result in the loss of critical and confidential information and expose us to additional liabilities, which could adversely impact our reputation and results of operations.

Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems, and those of our business or service providers, to sophisticated and targeted measures known as advanced persistent threats. Like other companies, RLI Corp. is also subject to insider threats that may impact the confidentiality, integrity or availability of our data. We, as well as our business partners and service providers, employ measures to prevent, detect, address, mitigate and recover from these threats (including employee training, access controls, data encryption, vulnerability assessments, continuous monitoring of information technology networks and systems and maintenance of backup and protective systems).

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However, cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Security breaches could expose the Company to a risk of loss or misuse of Company or third-party confidential information, litigation and potential liability. In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of our technology systems could impact our operations. We may not have the resources or technical sophistication to anticipate or prevent every type of cyber attack. A significant cyber incident, including system failure, security breach, disruption by malware or other damage could interrupt or delay our operations, result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to remediation costs, monetary fines and other penalties, which could be significant. We have cyber insurance, but it is possible that the coverage we have in place would not entirely protect the Company in the event that we experienced a cyber security incident, interruption or widespread failure of our information technology systems.

If we are unable to keep pace with the technological advancements in the insurance industry, our ability to compete effectively could be impaired.

Our operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers and other business partners. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards and serve our customers. If we are unable to keep pace with the advancements being made in technology, our ability to compete with other insurance companies who have advanced technological capabilities will be negatively affected. Furthermore, if we are unable to effectively update or replace our key legacy technology systems as they become obsolete, or as emerging technology renders them competitively inefficient, our competitive position, security and our cost structure could be adversely affected.

Epidemics, pandemics and public health outbreaks could adversely affect our business, including revenues, profitability, results of operations and/or cash flows, in a manner and to a degree that could be material.

Epidemics, pandemics and other public health outbreaks, such as the COVID-19 pandemic, generally result in significant disruptions in economic activity and financial markets. The cumulative effects on the Company could include, without limitation:

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Reduced demand for our insurance policies due to reduced economic activity, which could negatively impact our revenues,

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Reduced cash flows from our policyholders, delaying premium payments,

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Increased costs and disruption of operations due to employees working remotely or unavailability of our employees,

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Increased claims, losses, litigation and related expenses,

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Legislative, regulatory and judicial actions in response to the public health outbreak, including, but not limited to, actions prohibiting us from cancelling insurance policies in accordance with our policy terms, requiring us to cover losses when our underwriting intent in those policies was not to provide coverage or was to exclude coverage, ordering us to provide premium refunds, granting extended grace periods for payment of premiums and providing for extended periods of time to pay premiums that are past due,

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Policyholder losses from pandemic-related claims could be greater than our reserves for those losses,

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Volatility and declines in financial markets could reduce the fair market value, or result in the impairment, of invested assets held by the Company and

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Changes in interest rates, which could reduce future investment results.

Although we have investigated and closed a substantial number of COVID-19-related claims without payment, state and federal courts could rule that such claims are covered under our policies. Court decisions upholding our position that these COVID-19 related claims are not covered under our policies could also be overturned on appeal. These actions could result in an increase in claims and paid losses, which could have a materially adverse effect on our financial performance. Such appellate court decisions may take several years to become final and their ultimate outcome remains uncertain at this time.

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We may suffer losses from litigation, which could materially and adversely affect our financial condition and business operations.

We continually face risks associated with litigation of various types, including general commercial and corporate litigation, and disputes relating to bad faith allegations that could result in the Company incurring losses in excess of policy limits. We are party to a variety of litigation matters throughout the year. Litigation is subject to inherent uncertainties, and if there were an unfavorable outcome, it could have a material adverse impact on our results of operations and financial position in the period in which the outcome occurs. Even if an unfavorable outcome does not materialize, we still may face substantial expense and disruption associated with the litigation.

Anti-takeover provisions affecting the Company could prevent or delay a change of control that is beneficial to you.

Provisions of our certificate of incorporation and by-laws, as well as applicable Delaware law, federal and state regulations and insurance company regulations may discourage, delay or prevent a merger, tender offer or other change of control that holders of our securities may consider favorable. Some of these provisions impose various procedural and other requirements that could make it more difficult for shareholders to affect certain corporate actions. These provisions could:

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Have the effect of delaying, deferring or preventing a change in control of the Company,

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Discourage bids for our securities at a premium over the market price,

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Adversely affect the market price, the voting and other rights of the holders of our securities or

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Impede the ability of the holders of our securities to change our management.

In particular, we are subject to Section 203 of the Delaware General Corporation Law which, under certain circumstances, restricts our ability to engage in a business combination, such as a merger or sale of assets, with any shareholder that, together with affiliates, owns 15 percent or more of our common stock, which similarly could prohibit or delay the accomplishment of a change of control transaction.

Item 1B. Unresolved Staff Comments

None.

Item 1C. Cybersecurity

Risks from cybersecurity threats or incidents (cybersecurity risks) are assessed, identified and managed by the Company in a manner that is consistent with leading cybersecurity frameworks, including the National Institute of Standards and Technology Cybersecurity Framework (NIST Framework). The Company’s approach to cybersecurity risk management is generally based on the five core functions contained within the NIST Framework organizing structure: identify, protect, detect, respond and recover.

As of the date of this report, risks from cybersecurity threats or incidents have not materially affected, nor are they reasonably likely to materially affect, the Company’s business strategy, results of operations or financial condition. However, in light of emerging and changing cybersecurity threats and vulnerabilities, the Company cannot guarantee that it will not be a victim of a cybersecurity attack in the future that could materially affect the Company. See Item 1A, Risk Factors for more information.

The RLI Corp. Board of Directors provides oversight for cybersecurity risks primarily through its audit committee. The Company’s chief information officer (CIO), who also serves as the Company’s chief information security officer (CISO), along with the head of the Company’s IT security department, present quarterly to the audit committee on cybersecurity risks and the Company’s strategies and actions to assess and manage those risks. Additionally, the board receives periodic updates on emerging cybersecurity issues and developments through director education provided by the Company and third-party experts, detailed reviews provided by the CIO/CISO and the Company’s head of IT security on select cyber security topics, and “table top” simulations of a cybersecurity event.

Management oversight of cybersecurity risks is provided through the Company’s risk committee, which is chaired by the chief executive officer and comprised of members of senior management. Among its responsibilities, the risk committee identifies the Company’s material risks and reviews the strategies, processes and controls in place to facilitate the understanding, identification, prevention, measurement, reporting and mitigation of those risks. The risk committee meets quarterly and reviews the Company’s

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current assessment of cybersecurity risks conducted by the Company’s CIO/CISO and IT security department based on leading cybersecurity frameworks. The risk committee also periodically conducts a detailed review of cybersecurity risks.

The Company’s IT security department, which operates under general oversight of the Company’s CIO/CISO, is responsible for day-to-day assessment and management of cybersecurity risks, including efforts to prevent and, if necessary, mitigate the effects of a cybersecurity incident. The Company’s CIO/CISO has 25 years of technology and technology leadership experience, including 13 years serving as a CISO in the insurance industry.

The Company maintains a Cybersecurity Incident Response Plan (CIRP) providing a framework for identifying, evaluating and escalating potential or actual cybersecurity events. The CIRP assigns responsibilities and provides a workflow between the Company’s IT security department; members of an Executive Cybersecurity Committee comprised of the chief executive officer and senior management; and the board of directors regarding the detection, assessment and response to a cybersecurity event.

The Company’s internal audit department routinely engages third-party cybersecurity consultants to conduct network security audits. The Company also engages other third-party consultants in a number of areas to support the assessment, identification and management of cybersecurity risks, including risk assessments, log monitoring, threat intelligence, system penetration testing, training and incident response, among others. The Company performs cybersecurity due diligence and monitoring of third-party vendors, which may include the review of System and Organization Control (SOC) reports or the results of a security questionnaire to identify the cybersecurity controls and protections maintained by a third party.

Item 2. Properties

We own five commercial buildings totaling 173,000 square feet on our 23-acre campus that serves as our corporate headquarters in Peoria, Illinois. All of our branch offices and other company operations lease office space throughout the country. Management considers our office facilities suitable and adequate for our current levels of operations.

RLI’s Peoria, Illinois campus includes a 1.8-megawatt solar field that is capable of producing annual electrical power equal to or exceeding the yearly electrical needs for all of our office buildings in Peoria.

Item 3. Legal Proceedings

Information on our legal proceedings is set forth in note 10 to the Consolidated Financial Statements included under Item 8, Financial Statements and Supplementary Data.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

RLI Corp. common stock trades on the New York Stock Exchange under the symbol “RLI”. RLI Corp. has paid dividends for 190 consecutive quarters and increased quarterly dividends in each of the last 48 years. In December 2023 and 2022, RLI Corp. paid special cash dividends of $2.00 and $7.00 per share to shareholders, respectively. As of February 14, 2024, there were 1,071 registered holders of the Company’s common stock.

The payment of dividends to our shareholders is at the discretion of our board of directors and will depend on our results of operations, our financial condition, regulatory restrictions of our insurance subsidiaries and other factors deemed relevant by our board of directors. Although the Company currently intends to continue paying quarterly cash dividends to our shareholders, there can be no assurance as to the amount of such dividends or whether the Company will continue to pay such dividends.

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Performance

The following graph provides a five-year comparison of RLI Corp.’s total return to shareholders compared to that of the S&P 500 and S&P 500 P&C Index:


		2018		2019		2020		2021		2022		2023
RLI	--------------	$	100	$	133	$	157	$	174	$	217	$	225
S&P 500	••••••••••••••••		100		131		156		200		164		207
S&P 500 P&C Index	— — —		100		126		134		157		187		207

Assumes $100 invested on December 31, 2018, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends. Comparison of five-year annualized total return — RLI: 17.7%, S&P 500: 15.7% and S&P 500 P&C Index: 15.7%.

Securities Authorized for Issuance under Equity Compensation Plans

Information on securities authorized for issuance under our equity compensation plan is incorporated by reference to the “Share Ownership of Certain Beneficial Owners and Management” section of the Proxy Statement.

Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities - Not applicable.

Issuer Purchases of Equity Securities

In 2010, our board of directors implemented a $100 million share repurchase program. In 2023, our board of directors terminated the share repurchase program. We did not repurchase any shares during 2023.

Item 6. [Reserved] - Not applicable.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

RLI Corp. is a U.S. based, specialty insurance company that underwrites select property, casualty and surety products through major subsidiaries collectively known as RLI Insurance Group (Group). 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.

KEY PERFORMANCE MEASURES

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 12 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. 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:


	Year ended December 31,
(in thousands)	2023		2022
Net earnings	$	304,611	$	583,411
Income tax expense		72,654		137,267
Earnings before income taxes	$	377,265	$	720,678
Equity in earnings of unconsolidated investees		(9,610)		(9,853)
General corporate expenses		15,917		12,900
Interest expense on debt		7,301		8,047
Net unrealized (gains) losses on equity securities		(64,787)		121,037
Net realized gains		(32,518)		(588,515)
Net investment income		(120,383)		(86,078)
Underwriting income	$	173,185	$	178,216

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 loss 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 consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial

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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.

LOSSES AND SETTLEMENT EXPENSES

Overview

Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related settlement expenses from claims that have been reported but not paid, and those losses that have been incurred but not yet reported (IBNR) to the Company. Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These estimates are based on facts and circumstances then known to the Company, review of historical settlement patterns, estimates of trends in claim frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In establishing reserves, we also consider estimated recoveries from reinsurance as well as salvage and subrogation.

We record two categories of loss and LAE reserves: case-specific reserves and IBNR reserves. Within a reasonable period of time after a claim is reported, our claim department completes an initial investigation and establishes a case reserve. This case-specific reserve is an estimate of the ultimate amount we will have to pay for the claim, including related legal expenses and other costs associated with resolving and settling it. The estimate reflects all of the current information available regarding the claim, the informed judgment of our professional claim personnel regarding the nature and value of the specific type of claim and our reserving practices. During the life cycle of a particular claim, as more information becomes available, we may revise the estimate of the ultimate value of the claim either upward or downward. We may determine that it is appropriate to pay portions of the reserve to the claimant or related settlement expenses before final resolution of the claim. The amount of the individual case reserve will be adjusted accordingly and is based on the most recent information available.

We establish IBNR reserves to estimate the amount we will have to pay for claims that have occurred, but have not yet been reported to the Company, claims that have been reported to the Company that may ultimately be paid out differently than reflected in our case-specific reserves and claims that have been closed but may reopen and require future payment.

LAE represents the cost involved in adjusting and administering losses from policies we issued. The LAE reserves are frequently separated into two components: allocated and unallocated. Allocated loss adjustment expense (ALAE) reserves represent an estimate of claims settlement expenses that can be identified with a specific claim. Examples of ALAE would be the hiring of an outside adjuster to investigate a claim or an outside attorney to defend our insured. The claim adjuster typically estimates this cost separately from the loss component in the case reserve. Unallocated loss adjustment expense (ULAE) reserves represent an estimate of claims settlement expenses that cannot be identified with a specific claim. An example of ULAE would be the cost of an internal claim examiner to manage or investigate claims.

The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claim handling procedures, claim personnel, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for loss and LAE is difficult to estimate. Loss reserve estimations also differ significantly by coverage due to differences in claim complexity, the volume of claims, the policy limits written, the terms and conditions of the underlying policies, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. We continually refine our loss reserve estimates as historical loss experience develops and additional claims are reported and settled. We rigorously attempt to consider all significant facts and circumstances known at the time loss reserves are established.

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Following is a table of significant risk factors involved in estimating losses grouped by major product line. We distinguish between loss ratio risk and reserve estimation risk. Loss ratio risk refers to the possible dispersion of loss ratios from year to year due to inherent volatility in the business, such as high severity or aggregating exposures. Reserve estimation risk recognizes the difficulty in estimating a given year’s ultimate loss liability. As an example, our property catastrophe business (included below in other property) has significant variance in year over year results; however, its reserving estimation risk is relatively moderate.


				Expected loss	Reserve
	Length of	Emergence		ratio	estimation
Product line	reserve tail	patterns relied upon	Other risk factors	variability	variability
Commercial excess	Long	Internal	Low frequency	High	High
			High severity
			Loss trend volatility
			Exposure growth
			Unforeseen tort potential

Personal umbrella	Medium	Internal	Low frequency	Medium	Medium
			High severity
			Loss trend volatility
			Exposure growth
			Unforeseen tort potential

General liability	Long	Internal	Exposure changes/mix	Medium	High
			Unforeseen tort potential

Professional services	Medium	Internal	Highly varied exposures	Medium	Medium
			Loss trend volatility
			Unforeseen tort potential

Commercial transportation	Medium	Internal	High severity	Medium	Medium
			Exposure change/mix
			Loss trend volatility
			Unforeseen tort potential

Small commercial	Medium	Internal	Exposure change/mix	Medium	Medium
			Unforeseen tort potential
			Small volume

Executive products	Long	Internal & external	Low frequency	High	High
			High severity
			Loss trend volatility
			Economic volatility
			Unforeseen tort potential
			Exposure growth/mix
			Heavily reinsured

Other casualty	Medium	Internal & external	Small volume	Medium	Medium

Marine	Medium	Internal & external	Exposure growth/mix	High	Medium
			Aggregation exposure

Other property	Short	Internal	Aggregation exposure	High	Medium
			Low frequency
			High severity

Surety	Medium	Internal	Economic volatility	Medium	Medium
			Unique exposures

Runoff including asbestos & environmental	Long	Internal & external	Loss trend volatility	High	High
			Mass tort/latent exposure

Due to inherent uncertainty underlying loss reserve estimates, including, but not limited to, the future settlement environment, final resolution of the estimated liability may be different from that anticipated at the reporting date. The amount by which current estimated losses differ from those estimated for a period at a prior valuation date is known as development. Development is unfavorable when the losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

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Our IBNR reserving process involves three steps: (1) an initial IBNR generation process that is prospective in nature, (2) a loss and LAE reserve estimation process that occurs retrospectively and (3) a subsequent discussion and reconciliation between our prospective and retrospective IBNR estimates, which includes changes in our provisions for IBNR where deemed appropriate.

Initial IBNR Generation Process

Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve.

For certain property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are determined by IBNR percentages applied to premium earned. The percentages are determined based on expected loss ratios and loss development assumptions. The loss development assumptions are typically based on historical reporting patterns but could consider alternative sources of information. The IBNR percentages are reviewed and updated periodically. No deductions for paid or case reserves are made. This alternative method of determining initial IBNR allows incurred losses and ALAE to react more rapidly to the actual emergence, and is more appropriate for our property products where final claim resolution occurs over a shorter period of time.

We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we review insured locations exposed to the event and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. These reserves are reviewed frequently to consider actual losses reported and appropriate changes to our estimates are made to reflect the new information.

The initial loss and ALAE ratios that are applied to earned premium are reviewed at least semi-annually. Prospective estimates are made based on historical loss experience adjusted for exposure mix, price change and loss cost trends. The initial loss and ALAE ratios also reflect our judgment as to estimation risk. We consider estimation risk by product and coverage within product, if applicable. A product with greater volatility and uncertainty has greater estimation risk. Products or coverages with higher estimation risk include, but are not limited to, the following characteristics:

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Significant changes in underlying policy terms and conditions,

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A new business or one experiencing significant growth and/or high turnover,

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Small volume or lacking internal data requiring significant utilization of external data,

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Unique reinsurance features including those with aggregate stop-loss, reinstatement clauses, commutation provisions or clash protection,

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Longer emergence patterns with exposures to latent unforeseen mass tort,

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Assumed reinsurance businesses where there is an extended reporting lag and/or a heavier utilization of ceding company data and claims and product expertise,

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High severity and/or low frequency,

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Operational processes undergoing significant change and/or

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High sensitivity to significant swings in loss trends, economic change or judicial change.

The historical and prospective loss and ALAE estimates, along with the risks listed, are the basis for determining our initial and subsequent carried reserves. Adjustments in the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors.

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Loss and LAE Reserve Estimation Process

Estimates of the expected value of the unpaid loss and LAE are derived using standard actuarial methodologies on a quarterly basis. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.

The process of estimating ultimate payment for claims and claim expenses begins with the collection and analysis of current and historical claim data. Data on individual reported claims, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics. There is judgment involved in this grouping. Considerations when grouping data include the volume of the data available, the credibility of the data available, the homogeneity of the risks in each grouping and both settlement and payment pattern consistency. We use this data to determine historical claim reporting and payment patterns, which are used in the analysis of ultimate claim liabilities. In some analyses, including businesses without sufficiently large numbers of policies or that have not accumulated sufficient historical statistics, our own data is supplemented with external or industry average data as available and when appropriate. For liabilities arising out of directors and officers, management liability and workers’ compensation, we utilize external data extensively.

We also incorporate estimated losses relative to premium (loss ratios) by year into the analysis. The expected loss ratios are based on a review of historical loss performance, trends in frequency and severity and price level changes. The estimates are subject to judgment including consideration given to available internal and industry data, growth and policy turnover, changes in policy limits, changes in underlying policy provisions, changes in legal and regulatory interpretations of policy provisions and changes in reinsurance structure. For the most current year, these are equivalent with the ratios used in the initial IBNR generation process. Increased recognition is given to actual emergence as the years age.

We use historical development patterns, expected loss ratios and standard actuarial methods to derive an estimate of the ultimate level of loss and LAE payments necessary to settle all the claims occurring as of the end of the evaluation period.

Our reserve processes include multiple standard actuarial methods for determining estimates of IBNR reserves. Other supplementary methodologies are incorporated as necessary. Mass tort and latent liabilities are examples of exposures for which supplementary methodologies are used. Each method produces an estimate of ultimate loss by accident year. We review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed.

The methodologies we have chosen to incorporate are a function of data availability and are reflective of our own book of business. From time to time, we evaluate the need to add supplementary methodologies. New methods are incorporated if it is believed they improve the estimate of our ultimate loss and LAE liability. All of the actuarial methods eventually converge to the same estimate as an accident year matures. Our core methodologies are listed below with a short description and their relative strengths and weaknesses:

Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for current claims. These patterns are applied to current payments by accident year to yield an expected ultimate loss.

Strengths: The method reflects only the claim dollars that have been paid and is not subject to case-basis reserve changes or changes in case reserve practices.

Weaknesses: External claims environment changes can impact the rate at which claims are settled and losses paid (e.g. increase in attorney involvement or change in legal precedent). Adjustments to reflect changes in payment patterns on a prospective basis are difficult to quantify. For losses that have occurred recently, payments can be minimal and thus early estimates are subject to significant instability.

Incurred Loss Development — Historical case-incurred patterns (paid losses plus case reserves) for past claims are used to estimate future case-incurred amounts for current claims. These patterns are applied to current case-incurred losses by accident year to yield an expected ultimate loss.

Strengths: Losses are reported more quickly than paid, therefore, the estimates stabilize sooner. The method reflects more information in the analysis than the paid loss development method.

Weaknesses: Method involves additional estimation risk if significant changes to case reserving practices have occurred.

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Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are determined. These patterns are applied to current case reserves by accident year and the result is combined with paid losses to yield an expected ultimate loss.

Strengths: Like the incurred development method, this method benefits from using the additional information available in case reserves that is not available from paid losses only. It also can provide a more reasonable estimate than other methods when the proportion of claims still open for an accident year is unusually high or low.

Weaknesses: It is subject to the risk of changes in case reserving practices or philosophy. It may provide unstable estimates when an accident year is immature and more of the IBNR is expected to come from unreported claims rather than development on reported claims and when accident years are very mature with infrequent case reserves.

Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio for each accident year. The expected loss ratio is then applied to the earned premium for each year to estimate the expected ultimate losses. The current accident year expected loss ratio is also the prospective loss and ALAE ratio used in our initial IBNR generation process.

Strengths: Reflects an estimate independent of how losses are emerging on either a paid or a case reserve basis. This method is particularly useful in the absence of historical development patterns or where losses take a long time to emerge.

Weaknesses: Ignores how losses are actually emerging and thus produces the same estimate of ultimate loss regardless of favorable/unfavorable emergence.

Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid or incurred loss development method. In effect, the BF methods produce weighted average indications for each accident year. As an example, if the current accident year for commercial automobile liability is estimated to be 20 percent paid, then the paid loss development method would receive a weight of 20 percent and the expected loss ratio method would receive an 80 percent weight. Over time, this method will converge with the ultimate estimated by the respective loss development method.

Strengths: Reflects actual emergence that is favorable/unfavorable, but assumes remaining emergence will continue as previously expected. Does not overreact to the early emergence (or lack of emergence) where patterns are most unstable.

Weaknesses: Could potentially understate favorable or unfavorable development by putting weight on the expected loss ratio.

In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations, and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods, when applied to a particular group of claims, can also change over time. Therefore, the weight given to each estimation method will likely change by accident year and with each evaluation.

The actuarial central estimates typically follow a progression that places significant weight on the BF methods when accident years are younger and claim emergence is immature. As accident years mature and claims emerge over time, increasing weight is placed on the incurred development method, the paid development method and the case reserve development method. For product lines with faster loss emergence, the progression to greater weight on the incurred and paid development methods occurs more quickly.

For our long and medium-tail products, the BF methods are typically given the most weight for more evaluation periods than the short-tailed lines. These methods are also predominant for the first 12 months of evaluation for short-tail lines. Beyond these time periods, our actuaries apply their professional judgment when weighting the estimates from the various methods deployed, but place significant reliance on the expected stage of development in normal circumstances.

Judgment can supersede this natural progression if risk factors and assumptions change, or if a situation occurs that amplifies a particular strength or weakness of a methodology. Extreme projections are critically analyzed and may be adjusted, given less credence or discarded altogether. Internal documentation is maintained that records any substantial changes in methods or assumptions from one loss reserve study to another.

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Our estimates of ultimate loss and LAE reserves are subject to change as additional data emerges. This could occur as a result of change in loss development patterns, a revision in expected loss ratios, the emergence of exceptional loss activity, a change in weightings between actuarial methods, the addition of new actuarial methodologies, new information that merits inclusion or the emergence of internal variables or external factors that would alter our view.

There is uncertainty in the estimates of ultimate losses. Significant risk factors to the reserve estimate include, but are not limited to, unforeseen or unquantifiable changes in:

●

Loss payment patterns,

●

Loss reporting patterns,

●

Frequency and severity trends,

●

Underlying policy terms and conditions,

●

Business or exposure mix,

●

Operational or internal processes affecting the timing of loss and LAE transactions,

●

Regulatory and legal environment and/or

●

Economic environment.

Our actuaries engage in discussions with senior management, underwriters and the claim department on a regular basis to ascertain any substantial changes in operations or other assumptions that are necessary to consider in the reserving analysis.

A considerable degree of judgment in the evaluation of all these factors is involved in the analysis of reserves. The human element in the application of judgment is unavoidable when faced with uncertainty. Different experts will choose different assumptions based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected by various qualified experts may differ significantly from each other. We consider this uncertainty by examining our historic reserve accuracy and through an internal and external review process.

Given the substantial impact of the reserve estimates on our financial statements, we subject the reserving process to significant diagnostic testing and reasonability checks. In addition, there are data validity checks and balances in our front-end processes. Data anomalies are researched and explained to reach a comfort level with the data and results. Leading indicators such as actual versus expected emergence and other diagnostics are also incorporated into the reserving processes.

Determination of Our Best Estimate

Our best estimate of ultimate loss and LAE reserves are proposed by our lead reserving actuary and then discussed and approved by our Loss Reserve Committee (LRC). The LRC is made up of various members of the management team including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer, chief legal officer and other selected executives. As part of the discussion with the LRC, the analysis supporting the actuarial central estimate of the IBNR reserve by product is reviewed. The actuaries also present explanations supporting any changes to the underlying assumptions used to calculate the indicated central estimate. Our actuaries make a recommendation to management in regard to booked reserves that reflect both their analytical assessment and relevant qualitative factors, such as their view of estimation risk. After discussion of these analyses, recommendations and all relevant risk factors among the LRC, our actuaries determine whether the reserve balances require further adjustment.

As a predominantly excess and surplus lines and specialty admitted insurer serving niche markets, we believe we are subject to above-average variation in estimates and that this variation is not symmetrical around the actuarial central estimate.

One reason for the variation is the above-average policyholder turnover and changes in the underlying mix of exposures typical of an excess and surplus lines business. This constant change can cause estimates based on prior experience to be less reliable than estimates for more stable, admitted books of business. Also, as a niche market insurer, there is little industry-level information for

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direct comparisons of current and prior experience and other reserving parameters. These unknowns create greater-than-average variation in the actuarial central estimates.

Actuarial methods attempt to quantify future outcomes. However, insurance companies are subject to unique exposures that are difficult to foresee when coverage is initiated. Judicial and regulatory bodies involved in interpretation of insurance contracts have increasingly found opportunities to expand coverage beyond that which was intended or contemplated at the time the policy was issued. Many of these policies offer broad coverages (with named exclusion) and are issued on an occurrence basis. Claimants have at times sought coverage beyond the insurer’s original intent, including seeking to void or limit exclusionary language.

Because of the variation and the likelihood that there are unforeseen and under-quantified liabilities absent from the actuarial estimate, we believe there are circumstances where it is prudent to enhance our normal reserving process. Generally, these are circumstances where we have qualitative information and knowledge of increased risk, but those circumstances have not occurred within the history of our quantitative data. In these situations, we will rely on that qualitative information, usually from our claim team or underwriting staff, and make an enhancement to our normal process. In general, these enhancements will result in an increased overall reserve level compared to reserves based only on observed quantitative information. In the cases where these risks fail to materialize, favorable loss development will likely occur in subsequent periods. It is also possible that the risks materialize above the enhanced reserve level, in which case unfavorable loss development will likely occur in subsequent periods.

Our best estimate of loss and LAE reserves may change as a result of a revision in the actuarial central estimate, the actuary’s certainty in the estimates and processes and our overall view of the underlying risks. From time to time, we benchmark our reserving policies and procedures and refine them by adopting industry best practices where appropriate. A detailed, ground-up analysis of the reserve estimation risks associated with each of our products and segments, including an assessment of industry information, is performed annually. This information is used when determining management’s best estimate of booked reserves.

We do not use discounting (recognition of the time value of money) in reporting our estimated reserves for losses and settlement expenses.

Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate settlement values. Periodic adjustments to these estimates will likely occur as the actual loss emergence reveals itself over time. Our loss reserving processes reflect accepted actuarial practices and our methodologies result in a reasonable provision for reserves as of December 31, 2023.

Reserve Sensitivities

There are three major parameters that have significant influence on our actuarial estimates of ultimate liabilities by product. They are the actual losses that are reported, the expected loss emergence pattern and the expected loss ratios used in the analyses. If the actual losses reported do not emerge as expected, it may cause the Company to challenge all or some of our previous assumptions. We may change expected loss emergence patterns, the expected loss ratios used in our analysis and/or the weights we place on a given actuarial method. The impact will be much greater and more leveraged for products with longer emergence patterns. Our general liability product is an example of a product with a relatively long emergence pattern. The following chart illustrates the sensitivity of our general liability reserve estimates to these key parameters. We believe the scenarios to be reasonable, as similar favorable variations have occurred in recent years. For example, our general liability emergence has ranged from 17 percent to 20 percent favorable and our small commercial emergence has ranged from 27 percent adverse to 9 percent favorable over the last three years, while our overall emergence for all products combined has ranged from 16 percent to 27 percent favorable. The numbers below are the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2023, resulting from the change in the parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance of $215 million, in addition to associated ULAE and latent liability reserves, at December 31, 2023.


	Result from favorable		Result from unfavorable
(in millions)	change in parameter		change in parameter
+/- 5 point change in expected loss ratio for all accident years	$	(18.7)	$	16.9
+/- 10% change in expected emergence patterns	$	(6.5)	$	4.4
+/- 30% change in actual loss emergence over a calendar year	$	(10.0)	$	8.2
Simultaneous change in expected loss ratio (5pts), expected emergence patterns (10%) and actual loss emergence (30%).	$	(32.8)	$	31.8

There are often significant interrelationships between our reserving assumptions that have offsetting or compounding effects on the reserve estimate. Thus, in almost all cases, it is impossible to discretely measure the effect of a single assumption or construct a

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meaningful sensitivity expectation that holds true in all cases. The scenario above is representative of general liability, one of our largest and longest-tailed products. It is unlikely that all of our products would have variations as wide as illustrated in the example. It is also unlikely that all of our products would simultaneously experience favorable or unfavorable loss development in the same direction or at their extremes during a calendar year. Because our portfolio is made up of a diversified mix of products, there would ordinarily be some offsetting favorable and unfavorable emergence by product as actual losses start to emerge and our loss estimates become more reliable.

INVESTMENT VALUATION

Throughout each year, we and our investment managers buy and sell securities to achieve investment objectives in accordance with investment policies established and monitored by our board of directors and executive officers.

Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings. We classify our investments in fixed income securities into one of three categories: trading, held-to-maturity or available-for-sale. We do not hold any securities classified as trading or held-to-maturity. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determine the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

RECOVERABILITY OF REINSURANCE BALANCES

Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, rather than being netted with the related liabilities, since reinsurance does not relieve the Company of its liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review their annual financial statements and Securities and Exchange Commission (SEC) filings for reinsurers that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid balance recoverable from the reinsurer are specifically identified and charged to earnings in the form of an allowance for uncollectible amounts. We subject our remaining reinsurance balances receivable to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and record an additional allowance for unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover.

DEFERRED POLICY ACQUISITION COSTS

We defer incremental direct costs that relate to the successful acquisition of new or renewal insurance contracts, including commissions and premium taxes. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract, or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs expected to be incurred, but does not consider investment income. Judgments as to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums and acquisition costs.

DEFERRED TAXES

We record deferred tax assets and liabilities to the extent that temporary differences between the tax basis and GAAP basis of an asset or liability result in future taxable or deductible amounts. Our deferred tax assets relate to expected future tax deductions arising from claim reserves and future taxable income related to changes in our unearned premium and unrealized losses on our fixed income

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portfolio. We also have a significant amount of deferred tax liabilities from unrealized gains on the equity portfolio and deferred acquisition costs.

Periodically, management reviews our deferred tax positions to determine if it is more likely than not that the assets will be realized. These reviews include, among other things, the nature and amount of the taxable income and expense items, the expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax planning strategies it can use to increase the likelihood that the tax assets will be realized. After conducting the periodic review, if management determines that the realization of the tax asset does not meet the more likely than not criteria, an offsetting valuation allowance is recorded, thereby reducing net earnings and the deferred tax asset in that period. In addition, management must make estimates of the tax rates expected to apply in the periods in which future taxable items are realized. Such estimates include determinations and judgments as to the expected manner in which certain temporary differences, including deferred amounts related to our equity method investment, will be recovered. These estimates enter into the determination of the applicable tax rates and are subject to change based on the circumstances.

We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.

Additional discussion of other significant accounting policies may be found in note 1 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

RESULTS OF OPERATIONS

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, incorporated herein by reference.

Consolidated revenue for 2023 totaled $1.5 billion, down $186 million from 2022 as the sale of our equity method investment in Maui Jim, Inc. (Maui Jim) resulted in $571 million of realized gains in the prior year. Net premiums earned for the Group increased 13 percent, driven by growth from our property and casualty segments. A rally in equity markets during 2023 resulted in $65 million of unrealized gains on equity securities, while market declines in 2022 resulted in $121 million of unrealized losses in our equity portfolio. Net investment income increased by 40 percent in 2023, primarily due to higher reinvestment rates and a larger average asset base relative to the prior year.


CONSOLIDATED REVENUE	Year ended December 31,
(in thousands)	2023		2022
Net premiums earned	$	1,294,306	$	1,144,436
Net investment income		120,383		86,078
Net realized gains		32,518		588,515
Net unrealized gains (losses) on equity securities		64,787		(121,037)
Total consolidated revenue	$	1,511,994	$	1,697,992

Net earnings for 2023 totaled $305 million, down from $583 million in 2022, as the comparable period was elevated by the gain recognized on the sale of our interest in Maui Jim in 2022.

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NET EARNINGS	Year ended December 31,
(in thousands)	2023		2022
Underwriting income	$	173,185	$	178,216
Net investment income		120,383		86,078
Net realized gains		32,518		588,515
Net unrealized gains (losses) on equity securities		64,787		(121,037)
Interest expense on debt		(7,301)		(8,047)
General corporate expenses		(15,917)		(12,900)
Equity in earnings of unconsolidated investees		9,610		9,853
Earnings before income taxes	$	377,265	$	720,678
Income tax expense		(72,654)	��	(137,267)
Net earnings	$	304,611	$	583,411

UNDERWRITING RESULTS

We achieved our 28th consecutive year of underwriting profitability in 2023. Our track record is built on our diversified product portfolio and underwriting discipline in all markets.

Gross premiums written increased $241 million, or 15 percent, in 2023 when compared to 2022, with all three segments contributing. Positive rate momentum continued in 2023 for much of the property and casualty portfolio and our investments in technology and underwriting staff should put us in a position to take advantage of opportunities in 2024. Net premiums earned were up 13 percent in 2023, when compared to 2022, reflecting the broadly positive environment over the last twelve months. We anticipate healthy market conditions should support profitable growth across much of our diverse product portfolio in 2024.

In total, underwriting income was $173 million on an 86.6 combined ratio in 2023, compared to $178 million on an 84.4 combined ratio in 2022. Underwriting results for 2023 included $49 million of pretax losses and $12 million of reinsurance reinstatement premium from the Hawaiian wildfires, as well as $31 million of other storm losses. Comparatively, 2022 included $38 million of pretax losses from Hurricane Ian and $13 million of other storm losses. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $109 million in 2023, compared to $123 million in 2022. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

The loss ratio was 46.7 in 2023, compared to 44.9 in 2022. Higher net retained catastrophe losses in 2023 were partially offset by modest improvements in the current accident year’s attritional, non-catastrophe loss ratio. The expense ratio increased to 39.9 in 2023, from 39.5 in 2022, as operating performance and a larger growth in book value led to higher levels of bonus and profit-sharing expenses in 2023. Additionally, we continue to invest in our people and technology to support growth, improve customer experiences and drive efficiencies, which impacted all segments.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value would 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 impact policy acquisition, insurance operating and general corporate expenses.

We remain optimistic about the potential underlying profitability of our portfolio. The January 1, 2024 reinsurance renewals were more orderly than in the 2023 renewal cycle. For our casualty treaties, the risk-adjusted rate change will be up mid-to high single digits, with similar structures and retentions. For our property treaties, the risk-adjusted rate change will be flat to slightly down and we increased our co-participations on our non-catastrophe cover, for which the combined effect should be an increased level of property premium retention in 2024 as compared to 2023.

The following tables and narrative provide a more detailed look at individual segment performance over the last two years.

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GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED


	Gross Premiums Written						Net Premiums Earned
(in thousands)	2023		2022		% Change		2023		2022		% Change
CASUALTY
Commercial excess and personal umbrella	$	370,571	$	325,218	14	%	$	286,178	$	253,921	13	%
Commercial transportation		125,434		123,099	2	%		103,719		96,992	7	%
General liability		106,032		110,659	(4)	%		103,066		100,374	3	%
Professional services		108,503		103,922	4	%		99,596		95,187	5	%
Small commercial		76,644		72,347	6	%		72,920		67,673	8	%
Executive products		95,356		103,742	(8)	%		24,687		26,606	(7)	%
Other casualty		79,125		87,244	(9)	%		68,180		71,079	(4)	%
Total casualty	$	961,665	$	926,231	4	%	$	758,346	$	711,832	7	%

PROPERTY
Commercial property	$	505,413	$	326,609	55	%	$	244,798	$	163,078	50	%
Marine		148,829		133,539	11	%		129,428		113,208	14	%
Other property		43,130		39,313	10	%		27,304		31,600	(14)	%
Total property	$	697,372	$	499,461	40	%	$	401,530	$	307,886	30	%

SURETY
Commercial	$	57,704	$	55,026	5	%	$	49,707	$	47,652	4	%
Transactional		49,624		48,926	1	%		47,983		45,826	5	%
Contract		40,295		35,842	12	%		36,740		31,240	18	%
Total surety	$	147,623	$	139,794	6	%	$	134,430	$	124,718	8	%

Grand total	$	1,806,660	$	1,565,486	15	%	$	1,294,306	$	1,144,436	13	%

Casualty

Gross premiums written for casualty were up $35 million in 2023. Continued new business growth of our personal umbrella and small commercial distribution channels, as well as positive rate movement across a large portion of our casualty segment, offset headwinds in several lines. We slowed writing business in our loss-challenged energy liability business in late 2022 and suspended this line in late 2023, which resulted in a $22 million decrease within the commercial excess and general liability products. Additionally, executive products premium decreased as a result of a more competitive market, particularly with public directors and officers coverages.

Commercial transportation premium experienced limited growth during the year and remains a highly competitive line despite some loss severity for the industry. We continue to apply for rate increases to cover loss costs, will bring our underwriting discipline to bear where necessary and look to avoid binding business that we believe is underpriced.

The casualty segment remains highly diversified, allowing select products to work through challenges, while the success of other products allows us to achieve positive overall results. Product level market conditions will influence opportunities for near-term growth. Rate adequacy is dependent on regulatory approval in the admitted markets and our personal umbrella product has received authorizations that we expect will accelerate rate increases in 2024. As with all our segments, our investments in underwriting talent, as well as strong relationships with producers, should provide continued growth opportunities.

Property

Gross premiums written for the property segment were up $198 million in 2023, principally driven by wind-exposed commercial property business, which is written on an excess and surplus basis. This business has experienced favorable market conditions over several consecutive years due to market disruption and a lack of capacity. As competition in the market has recently increased, we have moderated the growth in our hurricane exposure while we assess near-term market conditions. Our underwriters are empowered with the flexibility to navigate the market and achieve profitable growth. We expect rates to increase at a slower pace in 2024, but to maintain a level of adequacy sought by our underwriters.

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Rate increases and new opportunities led to $15 million of premium growth for our marine product. Additionally, other property premium grew as a result of underwriting efforts within our Hawaii homeowners product, which continues to benefit from our strong relationships with local producers and competitors reducing their appetite for condominium coverages.

Surety

Gross premiums written for the surety segment were up $8 million in 2023. Contract surety benefited from new agency relationships and construction projects. The expansion of existing accounts and new business resulted in increased premium for commercial surety. We continue to invest in people and technology to support long-term growth in the surety segment, but believe that actively moderating the trajectory of growth may be prudent in the current economic and competitive environment.

UNDERWRITING INCOME


Underwriting Income
(in thousands)	2023		2022
Casualty	$	59,479	$	73,789
Property		86,316		72,522
Surety		27,390		31,905
Total	$	173,185	$	178,216


Combined Ratio	2023	2022
Casualty	92.2	89.6
Property	78.5	76.4
Surety	79.6	74.4
Total	86.6	84.4

Casualty

Underwriting income for the casualty segment was $59 million on a 92.2 combined ratio in 2023, compared to $74 million on an 89.6 combined ratio in 2022. The decline was the result of decreased favorable development on prior accident years’ reserves and a slight increase in current accident year losses and expenses.

Favorable development on prior accident years’ loss reserves contributed to underwriting earnings in each of the past two years. The total benefit from favorable development on prior years’ reserves was $78 million for 2023, which was broadly attributable to accident years 2015 through 2022. Favorable development was widespread, with notable amounts from commercial excess, general liability, personal umbrella, executive products, professional services, and transportation. Comparatively, results for the casualty segment in 2022 included favorable development of $87 million, with the bulk of the development attributable to general liability, professional services, commercial excess, transportation, small commercial and executive products across accident years 2016 and 2018 through 2021. Storm losses on casualty-oriented package policies that include property coverage resulted in $2 million of losses in 2023, compared to $8 million of hurricane and storm losses in 2022.

The segment’s loss ratio was 55.1 in 2023, compared to 53.6 in 2022. The higher loss ratio in 2023 was due to lower amounts of favorable development on prior years’ reserves and strengthening our current accident year reserves for our personal umbrella and transportation products. The expense ratio for the casualty segment was 37.1 in 2023, compared to 36.0 in 2022.

Property

Underwriting income from the property segment was $86 million on a 78.5 combined ratio in 2023, compared to $73 million on a 76.4 combined ratio in 2022. Underwriting results for 2023 included $21 million of favorable development on prior years’ loss and catastrophe reserves, largely from the commercial property business, $49 million of losses and $12 million of reinstatement premium from Hawaiian wildfires, as well as $29 million of other storm losses. Results for 2022 included $25 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the marine business, $31 million of hurricane losses and $12 million of other storm losses.

A larger earned premium base resulted in higher levels of underwriting income as well as a lower expense ratio. The segment’s loss ratio was 42.9 in 2023, compared to 39.2 in 2022. Catastrophe losses added 20 points to the loss ratio in 2023, compared to 14 points of impact in 2022. However, the current accident year attritional loss ratio improved in 2023, which partially offset the increase in net retained catastrophe activity. The expense ratio for the property segment declined to 35.6 in 2023, from 37.2 in 2022.

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Surety

Underwriting income for the surety segment totaled $27 million on a 79.6 combined ratio in 2023, compared to $32 million on a 74.4 combined ratio in 2022. Underwriting performance for each year reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. Results for 2023 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $9 million. Comparatively, 2022 results included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $10 million.

The segment’s loss ratio was 10.7 in 2023, compared to 9.8 in 2022. A decreased amount of favorable development on prior years’ reserves in 2023 led to a higher loss ratio. The expense ratio for the surety segment was 68.9 in 2023, up from 64.6 in 2022, as we increased investments in our people and technology to support long-term growth and improve customer experiences. We also recorded $2 million of non-recurring expense during 2023.

NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS

During 2023, net investment income increased by 40 percent. The increase was primarily due to higher interest rates and an increased asset base relative to the prior year. The average annual yields on our investments were as follows for 2023 and 2022:


	2023		2022
PRETAX YIELD
Taxable (on book value)	3.51	%	2.94	%
Tax-exempt (on book value)	2.80	%	2.71	%
Equities (on fair value)	2.27	%	2.20	%

AFTER-TAX YIELD
Taxable (on book value)	2.77	%	2.32	%
Tax-exempt (on book value)	2.65	%	2.57	%
Equities (on fair value)	1.97	%	1.91	%

The after-tax yield reflects the different tax rates applicable to each category of investment. Our taxable fixed income securities were subject to a corporate tax rate of 21 percent, our tax-exempt municipal securities were subject to a tax rate of 5.3 percent and our dividend income was generally subject to a tax rate of 13.1 percent. During 2023, the average after-tax yield on the taxable fixed income portfolio was 2.8 percent, an increase from 2.3 percent in the prior year. The average after-tax yield on the tax-exempt portfolio increased slightly to 2.7 percent.

The fixed income portfolio increased by $189 million during the year, as we allocated the majority of available cash flow to investment grade bonds and experienced strong market performance throughout the year. The tax-adjusted total return on a mark-to-market basis was 6.7 percent. Our equity portfolio increased by $92 million to $590 million in 2023 as a result of strong equity market returns during the year. The total return for the year on the equity portfolio was 19.3 percent.

Our investment results for the last five years are shown in the following table:

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											Tax
									Pre-tax		Equivalent
									Annualized		Annualized
							Change in		Return on		Return on
	Average		Net				Unrealized		Avg.		Avg.
	Invested		Investment		Net Realized		Appreciation		Invested		Invested
(in thousands)	Assets (1)		Income (2)(3)		Gains (3)(4)		(3)(5)		Assets		Assets
2019	$	2,377,295	$	68,870	$	17,520	$	161,848	10.4	%	10.5	%
2020		2,698,721		67,893		17,885		99,451	6.9	%	6.9	%
2021		3,000,025		68,862		64,222		(6,280)	4.2	%	4.3	%
2022		3,217,635		86,078		588,515		(462,981)	6.6	%	6.6	%
2023		3,474,310		120,383		32,518		144,569	8.6	%	8.6	%
5-yr Avg.	$	2,953,597	$	82,417	$	144,132	$	(12,679)	7.3	%	7.4	%

(1)	Average market values at beginning and end of year (inclusive of cash and short-term investments).

(2)	Investment income, net of investment expenses.

(3)	Before income taxes.

(4)	Net realized gains for 2022 include $571 million of gains from the sale of our equity method investment in Maui Jim.

(5)	Relates to available-for-sale fixed income and equity securities.

In 2023, we recognized $22 million of net realized gains in the equity portfolio, $3 million of net realized losses in the fixed income portfolio and $14 million of other net realized gains, primarily from the payout of the working capital escrow associated with our sale of Maui Jim. In 2022, we recognized $20 million of net realized gains in the equity portfolio, $3 million of net realized gains in the fixed income portfolio and $571 million of other net realized gains, primarily from our sale of Maui Jim.

Investment income was aided by higher interest rates in 2023, as the Federal Reserve raised the Fed Funds target to fight inflation. Entering 2024, consensus is the Federal Reserve has made enough progress in tightening policy and there remains a low probability for further rate increases. A stable interest rate environment and a larger invested asset base should offer continued investment income growth. However, if yields decline dramatically from current levels, investment income growth may be limited.

INVESTMENTS

We maintain a diversified investment portfolio with a prudent mix of fixed income and risk assets. We continually monitor economic conditions, our capital position, the insurance market and relative value in the capital markets to determine our tactical allocation. As of December 31, 2023, the portfolio had a fair value of $3.7 billion, an increase of $404 million from the end of 2022. Excluding U.S. government and agency issues, no single issuer in either the fixed income or equity portfolio represented more than 1 percent of invested assets.

We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. For additional information, see notes 1 and 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

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As of December 31, 2023, our investment portfolio had the following asset allocation breakdown:


	Cost or				Unrealized		% of Total
(in thousands)	Amortized Cost		Fair Value		Gain/(Loss)		Fair Value		Quality*
U.S. government	$	312,632	$	308,031	$	(4,601)	8.4	%	AA+
U.S. agency		60,763		59,826		(937)	1.6	%	AA+
Non-U.S. government & agency		4,800		3,882		(918)	0.1	%	BBB+
Agency MBS		460,551		425,285		(35,266)	11.6	%	AA+
ABS/CMBS/MBS**		308,458		281,182		(27,276)	7.7	%	AA+
Corporate		1,273,187		1,225,019		(48,168)	33.3	%	A-
Municipal		634,000		552,624		(81,376)	15.0	%	AA
Total fixed income	$	3,054,391	$	2,855,849	$	(198,542)	77.7	%	AA-
Equities		354,022		590,041		236,019	16.0	%
Short-term investments		134,923		134,923		—	3.7	%
Other invested assets		56,009		59,081		3,072	1.6	%
Cash		36,424		36,424		—	1.0	%
Total portfolio	$	3,635,769	$	3,676,318	$	40,549	100.0	%

*Quality ratings provided by Moody’s, S&P and Fitch

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

Quality in the previous table and in all subsequent tables is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio.

In selecting the maturity of securities in which we invest, we consider the relationship between the duration of our fixed income investments and the duration of our liabilities, including the expected ultimate payout patterns of our reserves. We believe that both liquidity and interest rate risk can be minimized by such asset/liability management. As of December 31, 2023, our fixed income portfolio’s duration was 4.6 years.

Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk asset classes. Equities comprised 16 percent of our total 2023 portfolio, up from 15 percent at the end of 2022, as equity markets rose over the course of the year. 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 extended investment horizon.

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FIXED INCOME PORTFOLIO

As of December 31, 2023, our fixed income portfolio had the following rating distributions:


FAIR VALUE									Below
									Investment
(in thousands)	AAA		AA		A		BBB		Grade		No Rating		Fair Value
Bonds:
U.S. government & agency (GSE)	$	—	$	367,857	$	—	$	—	$	—	$	—	$	367,857
Non-U.S. government & agency		—		—		1,698		2,184		—		—		3,882
Corporate - industrial		20,228		77,638		246,974		210,245		35,358		5,157		595,600
Corporate - financial		9,820		42,103		227,822		82,881		12,480		2,262		377,368
Corporate - utilities		1,082		5,524		56,840		30,561		3,850		—		97,857
Corporate industrial - private placements		—		—		1,681		1,191		81,616		24,447		108,935
Corporate financial - private placements		—		—		—		—		10,430		34,343		44,773
Corporate utilities - private placements		—		—		—		—		486		—		486
Municipal		145,011		353,902		53,369		—		—		342		552,624
Structured:
GSE - RMBS		—		369,301		—		—		—		—		369,301
Non-GSE RMBS		93,897		10,990		—		—		—		—		104,887
CLO		24,044		3,984		—		—		—		2,441		30,469
ABS - auto loans		10,408		—		—		—		—		—		10,408
ABS - railcars		—		—		12,997		—		—		—		12,997
All other ABS/MBS		18,001		1,991		31,569		—		—		16,171		67,732
GSE - CMBS		—		55,984		—		—		—		—		55,984
CMBS		33,946		6,545		14,198		—		—		—		54,689
Total	$	356,437	$	1,295,819	$	647,148	$	327,062	$	144,220	$	85,163	$	2,855,849

Percent of total fair value		12.5%		45.4%		22.7%		11.4%		5.0%		3.0%		100.0%

Mortgage-Backed, Asset-Backed and Commercial Mortgage-Backed Securities

We believe mortgage-backed securities (MBS), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) add diversification, liquidity, credit quality and additional yield to our portfolio. The following table summarizes the distribution of our mortgage-backed securities (MBS) portfolio by investment type, as of December 31:


(in thousands)	Amortized Cost		Fair Value		% of Total
2023
Pass-throughs	$	295,060	$	275,113	64.7	%
Planned amortization class		102,726		94,188	22.1	%
Sequential		62,765		55,984	13.2	%
Total	$	460,551	$	425,285	100.0	%

2022
Pass-throughs	$	238,259	$	214,226	64.6	%
Planned amortization class		71,051		59,806	18.0	%
Sequential		64,377		57,774	17.4	%
Total	$	373,687	$	331,806	100.0	%

Agency MBS represented 15 percent of the fixed income portfolio, compared to 12 percent as of December 31, 2022. Our objective for the agency MBS portfolio is to provide reasonable cash flow stability where we are compensated for the call risk associated with residential mortgage refinancing. The agency MBS portfolio includes mortgage-backed pass-through securities and collateralized mortgage obligations (CMO), which include planned amortization classes and sequential pay structures. As of December 31, 2023, all of the securities in our agency MBS portfolio were rated AA and issued by Government Sponsored Enterprises (GSEs) such as the Governmental National Mortgage Association, Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.

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Variability in the average life of principal repayment is an inherent risk of owning mortgage-related securities. However, we reduce our portfolio’s exposure to prepayment risk by seeking characteristics that tighten the probable scenarios for expected cash flows. As of December 31, 2023, the agency MBS portfolio contained 65 percent of pure pass-throughs, the same as of December 31, 2022. An additional 13 percent of the MBS portfolio was invested in sequential payer, down from 17 percent in 2022.

The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of December 31:


	Amortized
(in thousands)	Cost		Fair Value		% of Total
2023
Non-GSE RMBS	$	119,374	$	104,887	37.3	%
CMBS		61,878		54,689	19.4	%
CLO		30,620		30,469	10.8	%
Railcars		14,415		12,997	4.6	%
Auto		10,748		10,408	3.7	%
Marine		11,657		10,338	3.7	%
Consumers		11,067		10,268	3.7	%
Other		48,699		47,126	16.8	%
Total	$	308,458	$	281,182	100.0	%

2022
Non-GSE RMBS	$	109,852	$	92,321	38.4	%
CMBS		49,333		41,593	17.3	%
CLO		31,393		30,407	12.6	%
Railcars		16,072		13,923	5.8	%
Auto		17,194		16,198	6.7	%
Marine		8,554		7,319	3.0	%
Consumers		12,241		10,904	4.5	%
Other		31,487		28,071	11.7	%
Total	$	276,126	$	240,736	100.0	%

An ABS, CMBS or non-agency residential mortgage-backed security (RMBS) is a securitization collateralized by the cash flows from a specific pool of underlying assets. These asset pools can include items such as credit card payments, auto loans, structured bank loans in the form of collateralized loan obligations (CLOs) and residential or commercial mortgages. As of December 31, 2023, ABS/CMBS/RMBS investments were 10 percent of the fixed income portfolio, compared to 9 percent as of December 31, 2022. Sixty-four percent of the securities in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2023, while 93 percent were rated A or better. We believe that ABS/CMBS investments often add superior cash flow stability over mortgage pass-throughs or CMOs.

When making investments in MBS/ABS/CMBS, we evaluate the quality of the underlying collateral, the structure of the transaction, which dictates how any losses in the underlying collateral will be distributed, and prepayment risks. We had $63 million in unrealized losses in these asset classes as of December 31, 2023.

Municipal Fixed Income Securities

As of December 31, 2023, municipal bonds composed 19 percent of our fixed income portfolio, compared to 20 percent as of December 31, 2022. We believe municipal fixed income securities can provide diversification and additional tax-advantaged yield to our portfolio. Our objective for the municipal fixed income portfolio is to provide reasonable cash flow stability and increased after-tax yield.

Our municipal fixed income portfolio is comprised of general obligation (GO) and revenue securities. The revenue sources include sectors such as sewer and water, public improvement, school, transportation and colleges and universities. As of December 31, 2023, approximately 46 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining 54 percent were revenue based. The municipal portfolio is diversified amongst 326 issues.

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Ninety percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better. The municipal portfolio includes 58 percent taxable and 42 percent tax-exempt securities.

Corporate Debt Securities

As of December 31, 2023, our corporate debt portfolio comprised 43 percent of the fixed income portfolio, compared to 39 percent as of December 31, 2022. The corporate allocation includes floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio. Non-investment grade bonds totaled $144 million while non-rated Regulation D securities totaled $60 million at the end of 2023. While these Regulation D securities are not rated by a traditional nationally recognized statistical rating organization, they all carry an equivalent investment-grade rating from the Securities Valuation Office of the NAIC. The corporate debt portfolio has an overall quality rating of A- diversified among 904 issues.

The table below illustrates our corporate debt exposure as of December 31, 2023. Private placements include bank loan and Regulation D securities.


	Amortized
(in thousands)	Cost		Fair Value		% of Total
Bonds:
Corporate - industrial	$	617,745	$	595,600	48.6	%
Corporate - financial		395,745		377,368	30.8	%
Corporate - utilities		100,561		97,857	8.0	%
Corporate industrial - private placements		111,121		108,935	8.9	%
Corporate financial - private placements		47,531		44,773	3.7	%
Corporate utilities - private placements		484		486	-	%
Total	$	1,273,187	$	1,225,019	100.0	%

We believe corporate debt investments add diversification and additional yield to our portfolio.

EQUITY SECURITIES

As of December 31, 2023, our equity portfolio comprised 16 percent of the investment portfolio, up from 15 percent at the end of the previous year. The securities within the equity portfolio are well diversified and are primarily invested in broad index ETFs that represent market indexes similar to the Russell 3000 Index, Russell 1000 Index, S&P 500 Index and S&P 600 Index. The ETF portfolio is congruent with the actively managed equity portfolios and solves for exposures that line up with our overall benchmark index, the Russell 3000. In total, the equity portfolio is comprised of 88 securities.

INTEREST AND GENERAL CORPORATE EXPENSE

We incurred $7 million of interest expense on outstanding debt during 2023 and $8 million in 2022. At December 31, 2023, our debt consisted of $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent, which will reset during the first quarter of 2024. Additionally, we borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) that matures on November 12, 2024 and pays interest monthly at an annualized rate of 5.44 percent. Comparatively, at December 31, 2022, our debt consisted of $150 million in senior notes that matured on September 15, 2023 and paid interest semi-annually at a rate of 4.875 percent, as well as $50 million of borrowings from the FHLBC that matured on November 10, 2023 and paid interest monthly at an annualized rate of 0.84 percent.

We incurred $16 million of general corporate expense during 2023 and $13 million in 2022. As discussed previously, general corporate expenses tend to fluctuate relative to our incentive compensation plans. Our compensation model measures components of comprehensive earnings against a minimum required return on our capital. Bonuses are earned as we generate earnings in excess of this required return. In 2023 and 2022, we exceeded the required return, resulting in the accrual of executive bonuses. Positive market returns and book value growth in 2023 resulted in higher variable compensation earned than in 2022.

INVESTEE EARNINGS

As of December 31, 2023, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services, Inc. (Prime). Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and surplus lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. As a private company, the market for Prime’s stock is limited. While we have certain rights under our shareholder agreement, we are subject to the decisions of the

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controlling shareholder, which may impact the value of our investment. In 2023, we recorded $10 million in investee earnings for Prime, compared to $13 million in 2022. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $7 million of gross premiums written and $13 million of net premiums earned during 2023, compared to $21 million of gross premiums written and $23 million of net premiums earned during 2022. The decrease in premiums is attributable to a reduction of our participation in the quota share reinsurance treaty in 2023, as well as the competitive market in which Prime operates.

We owned a 40 percent equity interest in Maui Jim, a manufacturer of high-quality sunglasses, but sold our interest in 2022. For more information on the sale, see note 13 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. Our investment in Maui Jim was carried at the RLI Corp. holding company level, as it was not core to our insurance operations. We did not recognize investee earnings from Maui Jim in 2023 and recorded less than $1 million in 2022.

We did not receive a dividend from our equity method investments in 2023 or 2022. Dividends from our equity method investees have been irregular in nature, and while they provide added liquidity when received, we do not rely on those dividends to meet our liquidity needs.

INCOME TAXES

Our effective tax rates were 19.3 percent and 19.0 percent for 2023 and 2022, respectively. Effective rates are dependent upon components of pretax earnings, which is impacted by the volatility of unrealized gains and losses in equity securities, and the related tax effects. The effective rate was higher in 2023 due to lower levels of tax-favored adjustments, such as dividends paid to our Employee Stock Ownership Plan (ESOP), tax credits and excess tax benefits on share-based compensation.

Dividends paid to our ESOP result in a tax deduction. Dividends paid to the ESOP in 2023 and 2022 resulted in tax benefits of $1.6 million and $4.2 million, respectively. These tax benefits reduced the effective tax rate for 2023 and 2022 by 0.4 percent and 0.6 percent, respectively.

NET UNPAID LOSSES AND SETTLEMENT EXPENSES

The primary liability on our balance sheet relates to unpaid losses and settlement expenses, which represents our estimated liability for losses and related settlement expenses before considering offsetting reinsurance balances recoverable. The largest asset on our balance sheet, outside of investments, is the reinsurance balances recoverable on unpaid losses and settlement expenses, which serves to offset this liability. The liability can be split into two parts: (1) case reserves representing estimates of losses and settlement expenses on known claims and (2) IBNR reserves representing estimates of losses and settlement expenses on claims that have occurred but have not yet been reported to the Company. Our gross liability for both case and IBNR reserves is reduced by reinsurance balances recoverable on unpaid losses and settlement expenses to calculate our net reserve balance. This net reserve balance increased to $1.7 billion at December 31, 2023, from $1.6 billion as of December 31, 2022. This reflects incurred losses of $604 million in 2023 offset by paid losses of $491 million, compared to incurred losses of $514 million offset by $374 million paid in 2022. For more information on the changes in loss and LAE reserves by segment, see note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

Gross reserves (liability) and the reinsurance balances recoverable (asset) are generally subject to the same influences that affect net reserves, though changes to our reinsurance agreements can cause reinsurance balances recoverable to behave differently. Total gross loss and LAE reserves increased to $2.4 billion at December 31, 2023, from $2.3 billion at December 31, 2022, while ceded loss and LAE reserves increased to $757 million from $740 million over the same period.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) investing cash flows related to the purchase, sale and maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt, issuance of common stock and dividend payments. The following table summarizes these three cash flows over the last two years:

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(in thousands)	2023		2022
Net cash provided by operating activities	$	464,257	$	250,448
Net cash provided by (used in) investing activities		(211,803)		48,879
Net cash used in financing activities		(238,848)		(365,313)

We have posted positive operating cash flow in the last two years. Variations in operating cash flow between periods are largely driven by the volume and timing of premium receipt, claim payments, reinsurance and taxes. In addition, fluctuations in insurance operating expenses impact operating cash flow. During 2022, we received $687 million of cash proceeds from the sale of our equity method investment in Maui Jim, which were classified as investing cash flows. However, tax payments associated with Maui Jim were classified as operating activities and totaled $142 million. During 2023, the majority of cash outflows were associated with the net purchase of fixed income securities, classified as investing activities, and the payment of our regular quarterly dividends and $2.00 per share special dividend, classified as financing activities. During 2022, we used a portion of the proceeds from the sale of Maui Jim to pay a $7.00 special dividend.

We have entered into certain contractual obligations that require the Company to make recurring payments. The following table summarizes our contractual obligations as of December 31, 2023:


	Payments due by period
(in thousands)	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Loss and settlement expense reserves	$	720,303	$	861,838	$	458,414	$	405,470	$	2,446,025
Debt		100,000		—		—		—		100,000
Interest on debt		2,388		—		—		—		2,388
Operating leases		4,090		5,515		2,810		4,503		16,918
Other invested assets		2,136		2,395		38		65		4,634
Total	$	828,917	$	869,748	$	461,262	$	410,038	$	2,569,965

Loss and settlement expense reserves represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by periods are based on our historical claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on unpaid loss and settlement reserves are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge the Company of its liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $757 million at December 31, 2023, compared to $740 million in 2022.

The next largest contractual obligation relates to debt outstanding. On September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). As the borrowing may be repaid at any time and carries a floating interest rate of 7.07 percent, which will reset during the first quarter of 2024, interest on this $50 million borrowing is excluded from the table above. Additionally, on November 10, 2023 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2024 and monthly interest is paid at an annualized rate of 5.44 percent. We are not party to any off-balance sheet arrangements. See note 4 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data for more information on our debt. Additionally, see note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data for information on our obligations for other invested assets.

At December 31, 2023, we had cash, short-term investments and other investments maturing within one year of approximately $328 million and an additional $911 million of investments maturing between 1 to 5 years. Our revolving line of credit with PNC 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. As of December 31, 2023, $50 million was outstanding on this facility. Additionally, based on qualifying assets and the $50 million borrowing outstanding with the FHLBC as of year-end, additional aggregate borrowing capacity from the FHBLC is approximately $15 million. However, under certain circumstances, that capacity may be increased based on additional FHLBC stock purchased and available collateral. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing.

Our primary objective in managing our capital is to preserve and grow shareholders’ equity and statutory surplus to improve our competitive position and allow for expansion of our insurance operations. Our insurance subsidiaries must maintain certain minimum

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capital levels in order to meet the requirements of the states in which we are regulated. Our insurance companies are also evaluated by rating agencies that assign financial strength ratings that measure our ability to meet our obligations to policyholders over an extended period of time.

We have historically grown our total capital as a result of three sources of funds: (1) earnings on underwriting and investing activities, (2) appreciation in the value of our investments and (3) the issuance of common stock and debt. We believe that cash generated by operations, cash generated by investments and cash available from financing activities will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. We have consistently generated positive operating cash flow. The primary factor in our ability to generate positive operating cash flow is underwriting profitability, which we have achieved for 28 consecutive years.

OPERATING ACTIVITIES

The following list highlights some of the major sources and uses of cash flow from operating activities:


Sources		Uses
Premiums received		Claims
Loss payments from reinsurers		Ceded premium to reinsurers
Investment income (interest and dividends)		Commissions paid
Funds held		Operating expenses
		Interest expense
		Income taxes
		Funds held

Our largest source of cash is from premiums received from our customers, which we receive at the beginning of the coverage period for most policies. Our largest cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that earn interest and dividends. We use cash to pay commissions to brokers and agents, as well as to pay for ongoing operating expenses such as salaries, rent, taxes and interest expense. We also utilize reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid.

The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. We are subject to the risk of incurring significant losses on catastrophes, both natural (such as earthquakes and hurricanes) and man-made (such as terrorism). If we were to incur such losses, we would have to make significant claim payments in a relatively concentrated period of time.

INVESTING ACTIVITIES

The following list highlights some of the major sources and uses of cash flow from investing activities:


Sources		Uses
Proceeds from sale, call or maturity of bonds		Purchase of bonds
Proceeds from sale of stocks		Purchase of stocks
Proceeds from sale of other invested assets		Purchase of other invested assets
		Acquisitions
		Purchase of property and equipment

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. As of December 31, 2023, our portfolio had a carrying value of $3.7 billion. Portfolio assets at December 31, 2023, increased by $404 million, or 12 percent, from December 31, 2022.

Our overall investment philosophy is designed to first protect policyholders by maintaining sufficient funds to meet corporate and policyholder obligations and then generate long-term growth in shareholders’ equity. Because our existing and projected liabilities are sufficiently funded by the fixed income portfolio, we can improve returns by investing a portion of the surplus (within limits) in a risk assets portfolio largely made up of equities. As of December 31, 2023 and 2022, 42 percent of our shareholders’ equity was invested in equities.

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The fixed income portfolio is structured to meet policyholder obligations and optimize the generation of after-tax investment income and total return.

FINANCING ACTIVITIES

In addition to the previously discussed operating and investing activities, we also engage in financing activities to manage our capital structure. The following list highlights some of the major sources and uses of cash flow from financing activities:


Sources		Uses
Proceeds from stock offerings		Shareholder dividends
Proceeds from debt offerings		Debt repayment
Shares issued under stock option plans		Share buy-backs

Our capital structure is comprised of equity and debt obligations. As of December 31, 2023, our capital structure consisted of $100 million in debt and $1.4 billion of shareholders’ equity. Debt outstanding comprised 7 percent of total capital as of December 31, 2023.

At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company 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 December 31, 2023, our holding company had $1.4 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 $145 million in liquid investment assets, which exceeds our normal annual holding company expenditures. Unrestricted funds at the holding company level are available to fund debt interest, general corporate obligations and regular 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 the 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. In 2023 and 2022, our principal insurance subsidiary paid ordinary dividends totaling $145 million and $13 million, respectively, to RLI Corp. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the IDOI. No extraordinary dividends were paid in 2023 or 2022. As of December 31, 2023, $7 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp. as ordinary dividends. 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.

Our 191st consecutive dividend payment was declared in February 2024 and will be paid on March 20, 2024, in the amount of $0.27 per share. Since the inception of cash dividends in 1976, we have increased our annual dividend every year.

PROSPECTIVE ACCOUNTING STANDARDS

Prospective accounting standards are those which we have not implemented because the implementation date has not yet occurred. For a discussion of relevant prospective accounting standards, see note 1.D. to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK DISCLOSURE

Market risk is a general term describing the potential economic loss associated with adverse changes in the fair value of financial instruments. Management of market risk is a critical component of our investment decisions and objectives. We manage our exposure to market risk by using the following tools:

●

Monitoring the fair value of all financial assets on a constant basis,

●

Changing the character of future investment purchases as needed and

●

Maintaining a balance between existing asset and liability portfolios.

FIXED INCOME AND INTEREST RATE RISK

The most significant short-term influence on our fixed income portfolio is a change in interest rates. Because there is intrinsic difficulty predicting the direction and magnitude of interest rate moves, we attempt to minimize the impact of interest rate risk on the balance sheet by matching the duration of assets to that of our liabilities. Furthermore, the diversification of sectors and given issuers is core to our risk management process, increasing the granularity of individual credit risk. Liquidity and call risk are elements of fixed income that we regularly evaluate to ensure we are receiving adequate compensation. Our fixed income portfolio has a meaningful impact on financial results and is a key component in our enterprise risk simulations.

Interest rate risk at the time of debt refinancing can also affect our consolidated statement of earnings due to its impact on interest expense. We monitor the interest rate environment and evaluate refinancing opportunities as debt maturity dates approach. Changes in interest rates do affect the fair value of our debt. However, our debt is reported at amortized cost on the consolidated balance sheet and is not adjusted for changes in fair value.

EQUITY PRICE RISK

Equity price risk is the potential that we will incur economic loss due to the decline of common stock prices. Beta analysis is used to measure the sensitivity of our equity portfolio to changes in the value of the S&P 500 Index (an index representative of the broad equity market). Our current equity portfolio has a beta of 0.9 in comparison to the S&P 500 with a beta of 1.0. This lower beta statistic reflects our long-term emphasis on maintaining a value-oriented, dividend-driven investment philosophy for our equity portfolio.

SENSITIVITY ANALYSIS

The tables that follow detail information on the market risk exposure for our financial investments as of December 31, 2023. Listed on each table is the December 31, 2023 fair value for our assets and the expected pretax reduction in fair value given the stated hypothetical events. This sensitivity analysis assumes the composition of our assets remains constant over the period being measured and also assumes interest rate changes are reflected uniformly across the yield curve. For example, our ability to hold non-trading securities to maturity mitigates price fluctuation risks. For purposes of this disclosure, market risk sensitive instruments are all classified as held for non-trading purposes, as we do not hold any trading securities. The examples given are not predictions of future market events, but rather illustrations of the effect such events may have on the fair value of our investment portfolio.

As of December 31, 2023, our fixed income portfolio had a fair value of $2.9 billion. The sensitivity analysis uses scenarios of interest rates increasing 100 and 200 basis points from their December 31, 2023, levels with all other variables held constant. Such scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $132 million and $255 million, respectively. Comparatively, our fixed income portfolio had a fair value of $2.7 billion as of December 31, 2022 and scenarios of interest rates increasing 100 and 200 basis points would have resulted in modeled decreases of $111 million and $215 million, respectively.

As of December 31, 2023, our equity portfolio had a fair value of $590 million. The base sensitivity analysis uses market scenarios of the S&P 500 Index declining both 10 percent and 20 percent. These scenarios would result in approximate decreases in the equity fair value of $55 million and $110 million, respectively. Comparatively, our equity portfolio had a fair value of $498 million as of December 31, 2022 and scenarios of the S&P 500 Index declining by 10 percent and 20 percent would have resulted in approximate decreases of $46 million and $93 million, respectively.

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While the declines in market value outlined below are modeled as instantaneous changes, we would expect movements in capital markets to occur over time, with investment income offering an offset to any decrease in prices.

Under the assumptions of rising interest rates and a decreasing S&P 500 Index, the fair value of our assets will decrease from their present levels by the indicated amounts.

Effect of a 100 basis-point increase in interest rates and a 10 percent decline in the S&P 500:


	12/31/23 Fair		Interest		Equity
(in thousands)	Value		Rate Risk		Risk
Held for non-trading purposes:
Fixed income securities	$	2,855,849	$	(131,647)	$	—
Equity securities		590,041		—		(54,927)
Total	$	3,445,890	$	(131,647)	$	(54,927)

Effect of a 200 basis-point increase in interest rates and a 20 percent decline in the S&P 500:


	12/31/23 Fair		Interest		Equity
(in thousands)	Value		Rate Risk		Risk
Held for non-trading purposes:
Fixed income securities	$	2,855,849	$	(254,624)	$	—
Equity securities		590,041		—		(109,854)
Total	$	3,445,890	$	(254,624)	$	(109,854)

Comparatively, under the assumptions of falling interest rates and an increasing S&P 500 Index, the fair value of our assets will increase from their present levels by the indicated amounts.

Effect of a 100 basis-point decrease in interest rates and a 10 percent increase in the S&P 500:


	12/31/23 Fair		Interest		Equity
(in thousands)	Value		Rate Risk		Risk
Held for non-trading purposes:
Fixed income securities	$	2,855,849	$	141,076	$	—
Equity securities		590,041		—		54,927
Total	$	3,445,890	$	141,076	$	54,927

Effect of a 200 basis-point decrease in interest rates and 20 percent increase in the S&P 500:


	12/31/23 Fair		Interest		Equity
(in thousands)	Value		Rate Risk		Risk
Held for non-trading purposes:
Fixed income securities	$	2,855,849	$	291,715	$	—
Equity securities		590,041		—		109,854
Total	$	3,445,890	$	291,715	$	109,854

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Item 8. Financial Statements and Supplementary Data


Index to Financial Statements		Page
Consolidated Balance Sheets		53
Consolidated Statements of Earnings and Comprehensive Earnings		54
Consolidated Statements of Shareholders’ Equity		55
Consolidated Statements of Cash Flows		56
Notes to Consolidated Financial Statements		57
Reports of Independent Registered Public Accounting Firms		90

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RLI Corp.

Consolidated Balance Sheets


	December 31,
(in thousands, except per share data)	2023		2022
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	2,855,849	$	2,666,950
(amortized cost of $3,054,391 and allowance for credit losses of $306 in 2023)
(amortized cost of $2,945,273 and allowance for credit losses of $339 in 2022)
Equity securities, at fair value (cost - $354,022 in 2023 and $328,019 in 2022)		590,041		498,382
Short-term investments, at cost which approximates fair value		134,923		36,229
Other invested assets		59,081		47,922
Cash		36,424		22,818
Total investments and cash	$	3,676,318	$	3,272,301
Accrued investment income		24,062		21,259
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $21,438 in 2023 and $18,696 in 2022		221,206		189,501
Ceded unearned premiums		112,257		138,457
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,608 in 2023 and $11,250 in 2022		757,349		740,089
Deferred policy acquisition costs		146,566		127,859
Property and equipment, at cost, net of accumulated depreciation of $74,279 in 2023 and $68,633 in 2022		46,715		49,573
Investment in unconsolidated investees		56,966		58,275
Goodwill and intangibles		53,562		53,562
Income taxes - deferred		15,872		40,269
Other assets		69,348		75,923
TOTAL ASSETS	$	5,180,221	$	4,767,068

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and settlement expenses	$	2,446,025	$	2,315,637
Unearned premiums		892,326		785,085
Reinsurance balances payable		71,507		61,100
Funds held		101,446		101,144
Income taxes - current		3,757		—
Debt		100,000		199,863
Accrued expenses		108,880		94,869
Other liabilities		42,766		32,029
TOTAL LIABILITIES	$	3,766,707	$	3,589,727

SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 200,000,000)
(68,570,261 shares issued and 45,640,047 shares outstanding in 2023)
(68,399,966 shares issued and 45,469,752 shares outstanding in 2022)	$	686	$	684
Paid-in capital		362,345		352,391
Accumulated other comprehensive earnings		(166,303)		(229,076)
Retained earnings		1,609,785		1,446,341
Deferred compensation		13,539		12,015
Treasury stock, at cost (22,930,214 shares in 2023 and 2022)		(406,538)		(405,014)
TOTAL SHAREHOLDERS' EQUITY	$	1,413,514	$	1,177,341
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	5,180,221	$	4,767,068

��

See accompanying notes to consolidated financial statements.

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RLI Corp.

Consolidated Statements of Earnings and Comprehensive Earnings


		Years ended December 31,
(in thousands, except per share data)	2023		2022		2021
Net premiums earned	$	1,294,306	$	1,144,436	$	980,903
Net investment income		120,383		86,078		68,862
Net realized gains		32,518		588,515		64,222
Net unrealized gains (losses) on equity securities		64,787		(121,037)		65,258
Consolidated revenue	$	1,511,994	$	1,697,992	$	1,179,245
Losses and settlement expenses		604,413		514,376		456,602
Policy acquisition costs		418,325		369,632		317,468
Insurance operating expenses		98,383		82,212		76,907
Interest expense on debt		7,301		8,047		7,677
General corporate expenses		15,917		12,900		13,330
Total expenses	$	1,144,339	$	987,167	$	871,984
Equity in earnings of unconsolidated investees		9,610		9,853		37,060
Earnings before income taxes	$	377,265	$	720,678	$	344,321
Income tax expense (benefit):
Current		64,944		186,906		46,040
Deferred		7,710		(49,639)		18,927
Income tax expense	$	72,654	$	137,267	$	64,967
Net earnings	$	304,611	$	583,411	$	279,354

Other comprehensive earnings (loss), net of tax		62,773		(278,902)		(58,888)
Comprehensive earnings	$	367,384	$	304,509	$	220,466

Basic net earnings per share	$	6.68	$	12.86	$	6.18
Diluted net earnings per share	$	6.61	$	12.74	$	6.11

Weighted average number of common shares outstanding:
Basic		45,596		45,368		45,230
Diluted		46,077		45,794		45,712

See accompanying notes to consolidated financial statements.

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RLI Corp.

Consolidated Statements of Shareholders’ Equity


		Total						Accumulated Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury Stock
(in thousands, except per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		at Cost
Balance, January 1, 2021	45,142,580	$	1,135,978	$	681	$	335,365	$	108,714	$	1,084,217	$	8,292	$	(401,291)
Net earnings	—		279,354		—		—		—		279,354		—		—
Other comprehensive earnings (loss), net of tax	—		(58,888)		—		—		(58,888)		—		—		—
Deferred compensation	—		—		—		—		—		—		1,350		(1,350)
Share-based compensation	146,757		8,378		1		8,377		—		—		—		—
Dividends and dividend equivalents ($2.99 per share)	—		(135,461)		—		—		—		(135,461)		—		—
Balance, December 31, 2021	45,289,337	$	1,229,361	$	682	$	343,742	$	49,826	$	1,228,110	$	9,642	$	(402,641)
Net earnings	—		583,411		—		—		—		583,411		—		—
Other comprehensive earnings (loss), net of tax	—		(278,902)		—		—		(278,902)		—		—		—
Deferred compensation	—		—		—		—		—		—		2,373		(2,373)
Share-based compensation	180,415		8,651		2		8,649		—		—		—		—
Dividends and dividend equivalents ($8.03 per share)	—		(365,180)		—		—		—		(365,180)		—		—
Balance, December 31, 2022	45,469,752	$	1,177,341	$	684	$	352,391	$	(229,076)	$	1,446,341	$	12,015	$	(405,014)
Cumulative-effect adjustment from ASU 2023-02			(951)								(951)
Net earnings	—		304,611		—		—		—		304,611		—		—
Other comprehensive earnings (loss), net of tax	—		62,773		—		—		62,773		—		—		—
Deferred compensation	—		—		—		—		—		—		1,524		(1,524)
Share-based compensation	170,295		9,956		2		9,954		—		—		—		—
Dividends and dividend equivalents ($3.07 per share)	—		(140,216)		—		—		—		(140,216)		—		—
Balance, December 31, 2023	45,640,047	$	1,413,514	$	686	$	362,345	$	(166,303)	$	1,609,785	$	13,539	$	(406,538)

See accompanying notes to consolidated financial statements.

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RLI Corp.

Consolidated Statements of Cash Flows


	Years ended December 31,
(in thousands)	2023		2022		2021
Cash flows from operating activities:
Net earnings	$	304,611	$	583,411	$	279,354
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net realized gains		(32,518)		(588,515)		(64,222)
Net unrealized (gains) losses on equity securities		(64,787)		121,037		(65,258)
Depreciation		8,545		7,981		7,394
Deferred income tax expense (benefit)		7,710		(49,639)		18,927
Other items, net		24,947		(20,467)		14,141
Change in:
Accrued investment income		(2,803)		(3,754)		(1,379)
Premiums and reinsurance balances receivable (net of direct write-offs and commutations)		(31,705)		(22,222)		7,349
Reinsurance balances payable		10,407		18,249		586
Funds held		302		11,371		8,026
Ceded unearned premiums		26,200		(7,541)		(17,428)
Reinsurance balances recoverable on unpaid losses and settlement expenses		(17,260)		(132,003)		(164,357)
Deferred policy acquisition costs		(18,707)		(24,306)		(15,128)
Accrued expenses		14,011		(3,405)		22,349
Unpaid losses and settlement expenses		130,388		272,082		293,506
Unearned premiums		107,241		104,641		94,058
Current income taxes payable		7,285		(6,619)		4,047
Changes in investment in unconsolidated investees:
Undistributed earnings		(9,610)		(9,853)		(37,060)
Net cash provided by operating activities	$	464,257	$	250,448	$	384,905

Cash flows from investing activities:
Purchase of:
Fixed income securities, available-for-sale	$	(662,070)	$	(2,053,359)	$	(733,811)
Equity securities		(55,652)		(45,007)		(140,721)
Property and equipment		(5,913)		(5,889)		(8,310)
Equity method investee		—		(3,819)		(8,978)
Other		(10,786)		(5,704)		(11,428)
Proceeds from sale of:
Fixed income securities, available-for-sale		50,135		53,300		63,811
Equity securities		51,881		62,212		180,256
Equity method investee		14,284		686,666		—
Property and equipment		27		375		—
Other		817		2,659		7,605
Proceeds from call or maturity of:
Fixed income, available-for-sale		504,168		1,393,674		376,750
Net purchase of short-term investments		(98,694)		(36,229)		—
Net cash provided by (used in) investing activities	$	(211,803)	$	48,879	$	(274,826)

Cash flows from financing activities:
Proceeds from issuance of debt	$	100,000	$	—	$	50,000
Repayment of debt		(200,000)		—		—
Proceeds from stock option exercises		1,245		(465)		1,838
Cash dividends paid		(140,093)		(364,848)		(135,330)
Net cash used in financing activities	$	(238,848)	$	(365,313)	$	(83,492)

Net increase (decrease) in cash	$	13,606	$	(65,986)	$	26,587
Cash at beginning of year		22,818		88,804		62,217
Cash at end of year	$	36,424	$	22,818	$	88,804

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.	DESCRIPTION OF BUSINESS

RLI Corp. is an insurance holding company. References to “the Company,” “we,” “our,” “us” or like terms refer to the business of RLI Corp. and its subsidiaries. We underwrite select property and casualty insurance coverages through major subsidiaries collectively known as RLI Insurance Group. We conduct operations principally through three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI Corp. and our principal insurance subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia.

B.	PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. The consolidated financial statements include the accounts of our holding company and our subsidiaries. Intercompany balances and transactions have been eliminated. Certain reclassifications were made to 2022 and 2021 to conform to the classifications used in the current year. The Company has evaluated subsequent events through the date these consolidated financial statements were issued. There were no subsequent events requiring adjustment to the financial statements or disclosure.

C.	ADOPTED ACCOUNTING STANDARDS

2023-02—Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Method

The amendments in this Accounting Standards Update (ASU) permit the use of the proportional amortization method for investments in tax credits if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits presented as a component of income tax expense. Under previous guidance, equity investments in tax credit structures, other than qualified affordable housing projects, were accounted for using the equity method of accounting, which required the presentation of income, gains and losses, and tax credits in their respective line items of the statement of earnings. This ASU allows entities to make an accounting policy election on an individual tax credit program basis for all equity investments whose primary purpose is receiving income tax credits or other income tax benefits.

We adopted ASU 2023-02 on January 1, 2023 using a modified-retrospective approach. Through 2022, our investment in historic tax credit partnerships was presented in the balance sheet as an investment in unconsolidated investee. On January 1, 2023, the $11 million investment was moved to the other invested assets line item, and the asset and retained earnings were reduced by $1 million to reflect the difference between applying the equity method and the proportional method since the investment was entered into. While the amortization of the investment will be presented in income tax expense going forward, rather than in equity in earnings of unconsolidated investees, the impact to net earnings will not have a material impact on our financial statements.

D.	PROSPECTIVE ACCOUNTING STANDARDS

2023-07—Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

The guidance in ASU 2023-07 was designed to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Although the Company continues to evaluate the impact of adopting this new accounting standard, the amendments are disclosure-related and should not have a material impact on our financial statements.

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2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures

The guidance in ASU 2023-09 was designed to increase transparency about income tax information through improvements to the rate reconciliation and disclosure of income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024. Although the Company continues to evaluate the impact of adopting this new accounting standard, the amendments are disclosure-related and should not have a material impact on our financial statements.

E.	INVESTMENTS

Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings. Investments in fixed income securities are classified into one of three categories: trading, held-to-maturity or available-for-sale. All of our fixed income securities are classified as available-for-sale and reported at fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.

Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on the specific identification of the investments sold on the settlement date.

F.	CASH, SHORT-TERM INVESTMENTS AND OTHER INVESTED ASSETS

Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated government money market funds. Short-term investments are carried at cost. Other invested assets include investments in low-income housing tax credit (LIHTC) and historic tax credit (HTC) partnerships, membership in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC and HTC investments are carried at amortized cost, and our investment in FHLBC stock is carried at cost. Due to the nature of cash, the LIHTC and HTC partnerships, and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

G.	REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review reinsurers’ annual financial statements and SEC filings for those that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and S&P ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the remaining allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.

H.	POLICY ACQUISITION COSTS

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This process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs expected to be incurred, but does not consider investment income. Judgments as to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums and acquisition costs.

I.	PROPERTY AND EQUIPMENT

Property and equipment are presented at cost less accumulated depreciation and are depreciated on a straight-line basis over periods ranging from 3 to 10 years for equipment and up to 30 years for buildings and improvements.

J.	INVESTMENTS IN UNCONSOLIDATED INVESTEES

Our investments accounted for under the equity method are primarily related to Prime Holdings Insurance Services, Inc. (Prime) and Maui Jim, Inc. (Maui Jim). As of December 31, 2023, we had a 23 percent interest in the equity and earnings of Prime. Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and surplus lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. Our investment in Prime was $56 million at December 31, 2023 and $47 million at December 31, 2022. In 2023, we recorded $10 million in investee earnings for Prime, compared to $13 million in 2022 and $17 million in 2021. The decrease in investee earnings is reflective of the competitive market in which Prime writes business. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $7 million of gross premiums written and $13 million of net premiums earned during 2023, compared to $21 million of gross premiums written and $23 million of net premiums earned during 2022, and $22 million of gross premiums written and $19 million of net premiums earned during 2021. The decrease in gross premiums written and net premiums earned is attributable to a reduction of our participation in the quota share reinsurance treaty in 2023, as well as the competitive market in which Prime operates.

We owned a 40 percent interest in the equity and earnings of Maui Jim, a manufacturer of high-quality sunglasses, but sold our interest in 2022. See note 13 for more information on the sale. We carried this investment at the holding company level as it was not core to our insurance operations. We did not recognize investee earnings from Maui Jim in 2023, but recorded less than $1 million in 2022 and $23 million in 2021.

Our equity method investments recorded net income of $45 million in 2023, $59 million in 2022 and $125 million in 2021. Additional summarized financial information for our equity method investments as of 2023 and 2022 is outlined in the following table:


(in millions)	2023		2022
Total assets	$	944	$	906
Total liabilities		691		690
Total equity		253		216

Approximately $62 million of undistributed earnings from our equity method investees were included in our retained earnings as of December 31, 2023. Undistributed earnings exceeded our investment in unconsolidated investees as rising interest rates on Prime’s fixed income portfolio resulted in the recognition of other comprehensive losses. We did not receive any dividends from our equity method investees during 2023, 2022 or 2021.

We perform annual impairment reviews of our investments in unconsolidated investees, which take into consideration current valuation and operating results. Based upon the most recent reviews, the assets were not impaired.

K.	GOODWILL AND INTANGIBLE ASSETS

The composition of goodwill and intangibles at December 31, 2023 and 2022, is detailed in the following table:


(in thousands)	2023		2022
Goodwill
Surety	$	40,816	$	40,816
Casualty		5,246		5,246
Total goodwill	$	46,062	$	46,062
Indefinite-lived intangibles	$	7,500	$	7,500
Total goodwill and intangibles	$	53,562	$	53,562

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As the amortization of goodwill and indefinite-lived intangible assets is not permitted, the assets are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Annual impairment testing was performed on each of our goodwill and indefinite-lived intangible assets during 2023. Based upon these reviews, our goodwill and state insurance license indefinite-lived intangible assets were not impaired. In addition, as of December 31, 2023, there were no triggering events on goodwill and intangible assets that would suggest an updated review was necessary.

L.	UNPAID LOSSES AND SETTLEMENT EXPENSES

The liability for unpaid losses and settlement expenses represents estimates of amounts needed to pay reported and unreported claims and related expenses. The estimates are based on certain actuarial and other assumptions related to the ultimate cost to settle such claims. Such assumptions are subject to occasional changes due to evolving economic, social and political conditions. All estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are determined. Due to the inherent uncertainty in estimating reserves for losses and settlement expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts. If actual liabilities do exceed recorded amounts, there will be an adverse effect. Furthermore, we may determine that recorded reserves are more than adequate to cover expected losses, which would lead to a reduction in our reserves.

M.	INSURANCE REVENUE RECOGNITION

Insurance premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Our policies are short-term in nature and premium is generally earned over a one-year period. Unearned premiums are calculated on a monthly pro rata basis.

N.	INCOME TAXES

We file a consolidated federal income tax return. Federal income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some of the deferred tax assets will not be realized.

As an insurance company, we are subject to minimal state income tax liabilities. Since the majority of our income on a state basis is from insurance operations, we pay premium taxes, which are calculated as a percentage of gross premiums written in lieu of state income taxes. Premium taxes are a component of policy acquisition costs.

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O.	EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of these items increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding these items. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the consolidated financial statements:


			Weighted Average
	Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount
For the year ended December 31, 2023
Basic EPS
Income available to common shareholders	$	304,611	45,596	$	6.68
Stock options		—	481
Diluted EPS
Income available to common shareholders and assumed conversions	$	304,611	46,077	$	6.61
Anti-dilutive options excluded from diluted EPS			173

For the year ended December 31, 2022
Basic EPS
Income available to common shareholders	$	583,411	45,368	$	12.86
Stock options		—	426
Diluted EPS
Income available to common shareholders and assumed conversions	$	583,411	45,794	$	12.74
Anti-dilutive options excluded from diluted EPS			295

For the year ended December 31, 2021
Basic EPS
Income available to common shareholders	$	279,354	45,230	$	6.18
Stock options		—	482
Diluted EPS
Income available to common shareholders and assumed conversions	$	279,354	45,712	$	6.11
Anti-dilutive options excluded from diluted EPS			214

P.	COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio. In reporting the components of comprehensive earnings, we used the federal statutory tax rate of 21 percent. Other comprehensive income (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $17 million, $(74) million and $(16) million for 2023, 2022 and 2021, respectively.

The table below illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the consolidated financial statements.


Unrealized Gains/Losses on Available-for-Sale Securities	For the Year Ended December 31,
(in thousands)	2023		2022		2021
Beginning balance	$	(229,076)	$	49,826	$	108,714
Other comprehensive earnings before reclassifications		59,922		(281,189)		(57,454)
Amounts reclassified from accumulated other comprehensive earnings		2,851		2,287		(1,434)
Net current period other comprehensive earnings (loss)	$	62,773	$	(278,902)	$	(58,888)
Ending balance	$	(166,303)	$	(229,076)	$	49,826
Balance of securities for which an allowance for credit losses has not been recognized in net earnings	$	1,224	$	1,693	$	124

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Credit losses or the sale of an available-for-sale security resulted in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.


Amount Reclassified from Accumulated Other Comprehensive Earnings
(in thousands)
Component of Accumulated		For the Year Ended December 31,					Affected line item in the
Other Comprehensive Earnings	2023		2022		2021		Consolidated Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	(3,641)	$	(2,997)	$	1,859	Net realized gains (losses)
		32		102		(44)	Credit gains (losses) presented within net realized gains
	$	(3,609)	$	(2,895)	$	1,815	Earnings (loss) before income taxes
		758		608		(381)	Income tax (expense) benefit
	$	(2,851)	$	(2,287)	$	1,434	Net earnings (loss)

Q.	FAIR VALUE DISCLOSURES

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All Corporate, Agencies, Government and Municipal securities are deemed Level 2.

Mortgage-backed Securities (MBS)/Collateralized Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (nonvolatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

Regulation D Private Placement Securities: All Regulation D privately placed bonds are classified as corporate securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of observable and

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unobservable inputs. Observable inputs include public corporate spread matrices classified by sector, rating and average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company.

For all of our fixed income securities classified as Level 2, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. If discrepancies are found in our comparisons, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing services are reasonable.

Equity Securities: As of December 31, 2023, nearly all of our equity holdings were traded on an exchange. Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). Equity securities not traded on an exchange, for which pricing is provided by a third-party pricing source using observable inputs, are classified as Level 2. Equity securities not traded on an exchange and that rely on one or more unobservable inputs in pricing are classified as Level 3.

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy. The fair value of our debt is discussed further in note 4.

R.	SHARE-BASED COMPENSATION

We expense the estimated fair value of employee stock options and similar awards. We measure compensation cost for awards of equity instruments to employees based on the grant-date fair value of those awards and recognize compensation expense over the service period that the awards are expected to vest. The tax effects related to share-based payments are made through net earnings. See note 8 for further discussion and related disclosures regarding stock options.

S.	RISKS AND UNCERTAINTIES

Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our consolidated financial statements. The more significant risks and uncertainties, as well as our attempt to mitigate, quantify and minimize such risks, are presented below and throughout the notes to the consolidated financial statements.

Insurance Risks

We compete with a large number of other companies in our selected lines of business. During periods of intense competition for premium, we are vulnerable to the actions of other companies who may seek to write business without the appropriate regard for risk and profitability. The insurance industry is often highly competitive, which can make it difficult to grow or maintain premium volume without sacrificing underwriting discipline and income. Our profitability can be significantly affected by the ability of our underwriters to accurately select and price risk and our claim personnel to appropriately deliver fair outcomes. We attempt to mitigate this risk by incentivizing our underwriters to maximize underwriting profit and remain disciplined in pricing and selecting risks. If we are unable to compete effectively in the markets in which we operate or expand our operations into new markets, our underwriting revenues may decline, as well as overall business results.

Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would negatively impact our profitability. As of December 31, 2023, we had $2.4 billion of gross loss and LAE reserves. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to the Company and our payment of that loss. As part of the reserving process, we review historical data and consider the impact of various factors such as trends in claim frequency and severity, emerging economic and social trends, inflation and changes in the regulatory and litigation environments. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability would suffer.

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Catastrophe Exposures

Our insurance coverages include exposure to catastrophic events. We monitor catastrophe exposures by quantifying our exposed policy limits in each region and by using computer-assisted modeling techniques. Additionally, we limit our risk to such catastrophes by restraining the total policy limits written in each region and by purchasing reinsurance. 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 are also exposed to convective storms, winter weather, wildfires, lava flows in Hawaii as well as terrorist events in the United States.

For our catastrophe reinsurance treaty, which renewed on January 1, 2023, we purchased limits of $700 million in excess of $25 million first-dollar retention for earthquakes in California, $700 million in excess of a $50 million first-dollar retention for earthquakes outside of California and $600 million in excess of a $50 million first-dollar retention for all other perils, including wind. These amounts were subject to certain co-participations by the Company on losses in excess of the first-dollar retentions. On June 1, 2023, we purchased $150 million of additional catastrophe reinsurance protection on top of the previously described coverage, to support growth in our catastrophe-exposed business. This increased the limits to $850 million in excess of $25 million first-dollar retention for earthquakes in California, $850 million in excess of $50 million first-dollar retention for earthquakes outside of California and $750 million in excess of $50 million first-dollar retention for all other perils, including wind, all of which were still subject to certain co-participations in excess of the retentions.

The majority of our catastrophe reinsurance treaty renewed on January 1, 2024 and the remaining portions of certain layers of coverage will renew on June 1, 2024. We purchased the same limits over the same first-dollar retention amounts outlined above, subject to certain retentions by us in the excess layers. We actively manage our catastrophe program to keep our net retention in line with risk tolerances and to optimize the risk/return trade off.

Environmental Exposures

We are subject to environmental claims and exposures primarily through our commercial excess, general liability and discontinued assumed casualty reinsurance lines of business. Although exposure to environmental claims exists in these lines of business, we seek to mitigate or control the extent of this exposure on the vast majority of this business. Our policies include pollution exclusions that have been continually updated to further strengthen them and our policies primarily cover moderate hazard risks.

We offer coverage for low to moderate environmental liability exposures for small contractors and asbestos and mold remediation specialists. We also provide limited coverage for individually underwritten underground storage tanks. The overall exposure is mitigated by focusing on smaller risks with low to moderate exposures. Risks that have large-scale exposures are avoided including petrochemical, chemical, mining, manufacturers and other risks that might be exposed to superfund sites. This business is covered under our casualty ceded reinsurance treaties.

We made loss and settlement expense payments on environmental liability claims and have loss and settlement expense reserves for others. We include this historical environmental loss experience with the remaining loss experience in the applicable line of business to project ultimate incurred losses and settlement expenses as well as related incurred but not reported (IBNR) loss and settlement expense reserves.

Although historical experience on environmental claims may not accurately reflect future environmental exposures, we used this experience to record loss and settlement expense reserves in the exposed lines of business. See further discussion of environmental exposures in note 6.

Reinsurance

Reinsurance does not discharge the Company from our primary liability to policyholders, and to the extent that a reinsurer is unable to meet its obligations, we would be liable. We continuously monitor the financial condition of prospective and existing reinsurers. As a result, we purchase reinsurance from a number of financially strong reinsurers. We provide an allowance for reinsurance balances deemed uncollectible. See further discussion of reinsurance exposures in note 5.

Investment Risk

Our investment portfolio is subject to market, credit and interest rate risks. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is positively correlated with movements in domestic stocks. The bond portfolio is affected by interest rate changes and movement in

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credit spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-diversified portfolio with high-quality securities with varied maturities. Downturns in the financial markets could have a negative effect on our portfolio. However, we attempt to manage this risk through asset allocation, duration and security selection.

Liquidity Risk

Liquidity is essential to our business and a key component of our concept of asset-liability matching. Our liquidity may be impaired by an inability to collect premium receivable or reinsurance recoverable balances in a timely manner, an inability to sell assets or redeem our investments, an inability to access funds from our insurance subsidiaries, unforeseen outflows of cash or large claim payments or an inability to access debt or equity capital markets. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption, an operational problem that affects third parties or the Company, or even by the perception among market participants that we, or other market participants, are experiencing greater liquidity risk.

Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position by increasing our borrowing costs or limiting our access to the capital markets.

Financial Statements

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. The most significant of these amounts is the liability for unpaid losses and settlement expenses. Other estimates include investment valuation, the allowance for credit losses on fixed income securities, the collectability of reinsurance balances, recoverability of deferred tax assets and deferred policy acquisition costs. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Although recorded estimates are supported by actuarial computations and other supportive data, the estimates are ultimately based on our expectations of future events. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

External Factors

Our insurance subsidiaries are highly regulated by the state in which they are incorporated and by the states in which they do business. Such regulations, among other things, limit the amount of dividends, impose restrictions on the amount and types of investments and regulate rates and forms insurers may charge for various coverages. We are also subject to insolvency and guaranty fund assessments for various programs designed to ensure policyholder indemnification. We generally accrue an assessment during the period in which it becomes probable that a liability has been incurred from an insolvency and the amount of the related assessment can be reasonably estimated.

The National Association of Insurance Commissioners (NAIC) has developed Property and Casualty Risk-Based Capital (RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in its overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level to support investment and underwriting risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. We regularly monitor our subsidiaries’ internal capital requirements and the NAIC’s RBC developments. As of December 31, 2023, we determined that our capital levels are well in excess of the minimum capital requirements for all RBC action levels and that our capital levels are sufficient to support the level of risk inherent in our operations. See note 9 for further discussion of statutory information and related insurance regulatory restrictions.

In addition, ratings are a critical factor in establishing the competitive position of insurance companies. Our insurance companies are rated by AM Best, S&P and Moody’s. Their ratings reflect their opinions of an insurance company’s and an insurance holding company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders.

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2.	INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. All of our debt securities are classified as available-for-sale, which are carried at fair value. Our equity portfolio consists of common stocks and exchange traded funds (ETF), which are carried at fair value.

A summary of net investment income is as follows:


(in thousands)	2023		2022		2021
Interest on fixed income securities	$	103,446	$	77,164	$	60,624
Dividends on equity securities		12,238		11,912		11,787
Interest on cash, short-term investments and other invested assets		10,940		2,467		2,639
Gross investment income	$	126,624	$	91,543	$	75,050
Less investment expenses		(6,241)		(5,465)		(6,188)
Net investment income	$	120,383	$	86,078	$	68,862

Pretax net realized gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized below.


(in thousands)	2023		2022		2021
Net realized gains (losses):
Fixed income:
Available-for-sale	$	(3,641)	$	(2,997)	$	1,859
Equity securities		22,232		20,287		62,512
Investment in unconsolidated investees		14,084		570,952		(61)
Other		(157)		273		(88)
Total net realized gains (losses)	$	32,518	$	588,515	$	64,222

Net changes in unrealized gains (losses) on investments:
Equity securities	$	65,655	$	(118,912)	$	58,459
Other invested assets		(868)		(2,125)		6,799
Total unrealized gains (losses) on equity securities recognized in net earnings	$	64,787	$	(121,037)	$	65,258

Fixed income:
Available-for-sale	$	79,782	$	(341,944)	$	(71,538)
Investment in unconsolidated investees		(290)		(10,994)		(3,047)
Other		(33)		(102)		44
Total unrealized gains (losses) recognized in other comprehensive earnings	$	79,459	$	(353,040)	$	(74,541)
Net realized gains (losses) and changes in unrealized gains (losses) on investments	$	176,764	$	114,438	$	54,939

The change in the portfolio’s unrealized gain (loss) position was due to a rally in fixed income securities, as well as strong equity market returns during the year.

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The following is a summary of the disposition of fixed income securities and equities for the years ended December 31, with separate presentations for sales and calls/maturities:


SALES			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2023
Available-for-sale	$	49,960	$	451	$	(2,174)	$	(1,723)
Equities		51,881		23,482		(1,250)		22,232
2022
Available-for-sale	$	51,355	$	287	$	(2,849)	$	(2,562)
Equities		62,212		21,623		(1,336)		20,287
2021
Available-for-sale	$	65,262	$	2,161	$	(815)	$	1,346
Equities		180,256		64,298		(1,786)		62,512


CALLS/MATURITIES			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2023
Available-for-sale	$	506,910	$	39	$	(162)	$	(123)
2022
Available-for-sale	$	1,393,704	$	196	$	(55)	$	141
2021
Available-for-sale	$	376,751	$	638	$	(125)	$	513

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of December 31, 2023 and 2022, are summarized below:


	2023
	Quoted in Active		Significant Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	308,031	$	—	$	308,031
U.S. agency		—		59,826		—		59,826
Non-U.S. government & agency		—		3,882		—		3,882
Agency MBS		—		425,285		—		425,285
ABS/CMBS/MBS*		—		281,182		—		281,182
Corporate		—		1,164,548		60,471		1,225,019
Municipal		—		552,624		—		552,624
Total fixed income securities - available-for-sale	$	—	$	2,795,378	$	60,471	$	2,855,849
Equity securities		588,416		—		1,625		590,041
Total	$	588,416	$	2,795,378	$	62,096	$	3,445,890

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

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	2022
	Quoted in Active		Significant Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	454,021	$	—	$	454,021
U.S. agency		—		73,063		—		73,063
Non-U.S. government & agency		—		5,847		—		5,847
Agency MBS		—		331,806		—		331,806
ABS/CMBS/MBS*		—		240,736		—		240,736
Corporate		—		980,676		53,654		1,034,330
Municipal		—		527,147		—		527,147
Total fixed income securities - available-for-sale	$	—	$	2,613,296	$	53,654	$	2,666,950
Equity securities		496,731		39		1,612		498,382
Total	$	496,731	$	2,613,335	$	55,266	$	3,165,332

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

The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3).


(in thousands)	Level 3 Securities
Balance as of January 1, 2023	$	55,266
Net realized and unrealized gains
Included in other comprehensive earnings		2,461
Purchases		7,921
Sales		(3,552)
Balance as of December 31, 2023	$	62,096
Change in unrealized gains during the period for Level 3 assets held at period-end - included in other comprehensive earnings	$	2,461

The amortized cost and estimated fair value of fixed income securities at December 31, 2023, by contractual maturity, are shown as follows:


(in thousands)	Amortized Cost			Fair Value
Due in one year or less	$	157,831		$	156,463
Due after one year through five years		904,769			874,375
Due after five years through 10 years		674,761			654,068
Due after 10 years		548,021			464,476
ABS/CMBS/MBS*		769,009			706,467
Total available-for-sale	$	3,054,391	��	$	2,855,849

*Asset-backed, commercial mortgage-backed and mortgage-backed securities

Expected maturities may differ from contractual maturities due to call provisions on some existing securities.

The amortized cost and fair value of available-for-sale securities at December 31, 2023 and 2022 are presented in the tables below. Amortized cost does not include the $23 million and $20 million of accrued interest receivable as of December 31, 2023 and 2022, respectively.

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	2023
			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized
(in thousands)	Cost		Losses		Gains		Losses		Fair Value
U.S. government	$	312,632	$	—	$	1,257	$	(5,858)	$	308,031
U.S. agency		60,763		—		652		(1,589)		59,826
Non-U.S. government & agency		4,800		—		—		(918)		3,882
Agency MBS		460,551		—		2,636		(37,902)		425,285
ABS/CMBS/MBS*		308,458		(3)		611		(27,884)		281,182
Corporate		1,273,187		(303)		8,766		(56,631)		1,225,019
Municipal		634,000		—		2,238		(83,614)		552,624
Total fixed income	$	3,054,391	$	(306)	$	16,160	$	(214,396)	$	2,855,849


	2022
			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized
(in thousands)	Cost		Losses		Gains		Losses		Fair Value
U.S. government	$	462,884	$	—	$	8	$	(8,871)	$	454,021
U.S. agency		75,074		—		26		(2,037)		73,063
Non-U.S. government & agency		6,798		—		—		(951)		5,847
Agency MBS		373,687		—		336		(42,217)		331,806
ABS/CMBS/MBS*		276,126		(8)		62		(35,444)		240,736
Corporate		1,122,097		(331)		541		(87,977)		1,034,330
Municipal		628,607		—		1,265		(102,725)		527,147
Total fixed income	$	2,945,273	$	(339)	$	2,238	$	(280,222)	$	2,666,950

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

ALLOWANCE FOR CREDIT LOSSES AND UNREALIZED LOSSES ON FIXED INCOME SECURITIES

A reversible allowance for credit losses is required to be recognized on available-for-sale fixed income securities. Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including:

●

Changes in technology that may impair the earnings potential of the investment,

●

The discontinuance of a segment of business that may affect future earnings potential,

●

Reduction of or non-payment of interest and/or principal,

●

Specific concerns related to the issuer’s industry or geographic area of operation,

●

Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and

●

Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security, or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the fair value is below amortized cost. As of December 31, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 14 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

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(in thousands)	2023		2022
Beginning balance	$	339	$	441
Increase to allowance from securities for which credit losses were not previously recorded		71		337
Reduction from securities sold during the period		(154)		(671)
Net increase (decrease) from securities that had an allowance at the beginning of the period		50		232
Ending balance	$	306	$	339

Net realized gains included $2 million of losses on fixed income securities for which the cost basis was written down to fair value due to a credit event, restructurings and losses on securities for which we no longer had the intent to hold until recovery. In 2022, less than $1 million in such losses were recognized. We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

As of December 31, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,267 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $214 million in associated unrealized losses represents 7 percent of the fixed income portfolio’s cost basis and 6 percent of total invested assets. Isolated to these securities, unrealized losses at the end of 2023 decreased compared to the previous year due to positive price movements as markets rallied in the later part of 2023. Of the total 1,267 securities, 1,138 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of December 31, 2023 and 2022. We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

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	December 31, 2023						December 31, 2022
				12 Mos.						12 Mos.
(in thousands)	< 12 Mos.		& Greater		Total		< 12 Mos.		& Greater		Total
U.S. government
Fair value	$	37,718	$	204,556	$	242,274	$	399,361	$	8,828	$	408,189
Amortized cost		37,950		210,182		248,132		407,340		9,720		417,060
Unrealized loss	$	(232)	$	(5,626)	$	(5,858)	$	(7,979)	$	(892)	$	(8,871)
U.S. agency
Fair value	$	8,736	$	29,632	$	38,368	$	32,987	$	2,170	$	35,157
Amortized cost		8,790		31,167		39,957		34,627		2,567		37,194
Unrealized loss	$	(54)	$	(1,535)	$	(1,589)	$	(1,640)	$	(397)	$	(2,037)
Non-U.S. government & agency
Fair value	$	—	$	3,882	$	3,882	$	3,626	$	2,221	$	5,847
Amortized cost		—		4,800		4,800		3,798		3,000		6,798
Unrealized loss	$	—	$	(918)	$	(918)	$	(172)	$	(779)	$	(951)
Agency MBS
Fair value	$	61,196	$	275,707	$	336,903	$	197,252	$	117,851	$	315,103
Amortized cost		61,714		313,091		374,805		212,776		144,544		357,320
Unrealized loss	$	(518)	$	(37,384)	$	(37,902)	$	(15,524)	$	(26,693)	$	(42,217)
ABS/CMBS/MBS*
Fair value	$	12,240	$	211,436	$	223,676	$	96,754	$	136,149	$	232,903
Amortized cost		12,367		239,193		251,560		104,724		163,623		268,347
Unrealized loss	$	(127)	$	(27,757)	$	(27,884)	$	(7,970)	$	(27,474)	$	(35,444)
Corporate
Fair value	$	67,402	$	822,731	$	890,133	$	660,830	$	323,337	$	984,167
Amortized cost		68,345		878,419		946,764		697,437		374,707		1,072,144
Unrealized loss	$	(943)	$	(55,688)	$	(56,631)	$	(36,607)	$	(51,370)	$	(87,977)
Municipal
Fair value	$	61,218	$	391,361	$	452,579	$	228,827	$	204,324	$	433,151
Amortized cost		61,697		474,496		536,193		255,240		280,636		535,876
Unrealized loss	$	(479)	$	(83,135)	$	(83,614)	$	(26,413)	$	(76,312)	$	(102,725)
Total fixed income
Fair value	$	248,510	$	1,939,305	$	2,187,815	$	1,619,637	$	794,880	$	2,414,517
Amortized cost		250,863		2,151,348		2,402,211		1,715,942		978,797		2,694,739
Unrealized loss	$	(2,353)	$	(212,043)	$	(214,396)	$	(96,305)	$	(183,917)	$	(280,222)

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

OTHER INVESTED ASSETS

We had $59 million of other invested assets at December 31, 2023, compared to $48 million at the end of 2022. Other invested assets include investments in low-income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC and HTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC, HTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investments’ net asset value.

Our LIHTC interests had a balance of $10 million at December 31, 2023, compared to $13 million at December 31, 2022. Our LIHTC interests recognized amortization of $3 million as a component of income tax expense in 2023, compared to $3 million in 2022 and $3 million in 2021. Additionally, our LIHTC recognized a total tax benefit of $3 million during 2023, compared to $3 million during 2022 and $4 million during 2021. Our unfunded commitment for our LIHTC investments was less than $1 million at December 31, 2023 and will be paid out in installments through 2035.

Our HTC investment had a balance of $13 million at December 31, 2023, compared to $11 million at December 31, 2022. Through 2022, the investment was accounted for as an investment in unconsolidated investee. Due to the adoption of ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, the investment was reclassified as an other invested asset during 2023. A total tax benefit of $6 million was recognized from our HTC investment during 2023,

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compared to $5 million during 2022 and $4 million during 2021. Our HTC recognized $4 million of amortization as a component of income tax expense during 2023.

Our investments in private funds totaled $28 million at December 31, 2023 and 2022, and we had $4 million of associated unfunded commitments at December 31, 2023. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities and the timed dissolution of the partnerships would trigger redemption.

Restricted Assets

As of December 31, 2023, $59 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of the FHLBC stock provides. On November 10, 2023, RLI Insurance Company borrowed $50 million from the FHLBC, which was outstanding as of December 31, 2023.

As of December 31, 2023, fixed income securities with a carrying value of $93 million were on deposit with regulatory authorities as required by law.

3.	POLICY ACQUISITION COSTS

Policy acquisition costs deferred and amortized to income for the years ended December 31 are summarized as follows:


(in thousands)	2023		2022		2021
Deferred policy acquisition costs (DAC), beginning of year	$	127,859	$	103,553	$	88,425
Deferred:
Direct commissions	$	313,675	$	277,553	$	236,145
Premium taxes		19,736		18,616		17,012
Ceding commissions		(38,809)		(39,458)		(47,592)
Net deferred	$	294,602	$	256,711	$	205,565
Amortized		275,895		232,405		190,437
DAC, end of year	$	146,566	$	127,859	$	103,553

Policy acquisition costs:
Amortized to expense - DAC	$	275,895	$	232,405	$	190,437
Period costs:
Ceding commission - contingent		(11,857)		(5,882)		(4,303)
Other underwriting expenses		154,287		143,109		131,334
Total policy acquisition costs	$	418,325	$	369,632	$	317,468

DEBT

As of December 31, 2023, outstanding debt balances totaled $100 million.

On September 15, 2023, we retired $150 million in senior notes that were originally issued in 2013 and paid interest semi-annually at the rate of 4.875 percent. Additionally, 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 a floating interest rate of 7.07 percent, which will reset during the first 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.

On November 10, 2023, we repaid $50 million that was borrowed from the Federal Home Loan Bank of Chicago (FHLBC) in 2021 and paid interest monthly at an annualized rate of 0.84 percent. Additionally, on November 10, 2023 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2024 and monthly interest is paid at an annualized rate of 5.44 percent.

Due to the lack of marketability and short tenor of our borrowings, the fair value of our debt approximates the carrying value. We paid $9 million of interest on our debt in 2023, compared to $8 million in 2022 and $7 million in 2021. The average rate on debt was 4.07 percent in 2023, 3.89 percent in 2022 and 4.77 percent in 2021. The weighted average interest rate on debt outstanding was 6.26 percent as of December 31, 2023.

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5.	REINSURANCE

In the ordinary course of business, our insurance subsidiaries assume and cede premiums and selected insured risks with other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk known as facultative reinsurance. In addition, there are several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. The arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, we monitor the concentration of risks exposed to catastrophic events.

Through the purchase of reinsurance, we also limit our net loss on any individual risk to a maximum of $10 million, although retentions can vary.

Premiums written and earned along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:


(in thousands)	2023		2022		2021
WRITTEN
Direct	$	1,783,862	$	1,531,656	$	1,313,093
Reinsurance assumed		22,798		33,830		34,261
Reinsurance ceded		(378,913)		(323,950)		(289,821)
Net	$	1,427,747	$	1,241,536	$	1,057,533

EARNED
Direct	$	1,671,044	$	1,425,165	$	1,222,346
Reinsurance assumed		28,375		35,680		30,950
Reinsurance ceded		(405,113)		(316,409)		(272,393)
Net	$	1,294,306	$	1,144,436	$	980,903

LOSSES AND SETTLEMENT EXPENSES INCURRED
Direct	$	840,255	$	776,448	$	703,903
Reinsurance assumed		10,228		22,813		18,087
Reinsurance ceded		(246,070)		(284,885)		(265,388)
Net	$	604,413	$	514,376	$	456,602

More than 93 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better by AM Best and S&P rating services. The following table displays net reinsurance balances recoverable, after consideration of collateral, from our top reinsurers as of December 31, 2023. These reinsurers all have financial strength ratings of A or better by AM Best and S&P’s ratings services. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year 2023.

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			Net Reinsurer				Ceded
	AM Best	S&P	Exposure as of		Percent of		Premiums		Percent of
(dollars in thousands)	Rating	Rating	12/31/2023		Total		Written		Total
Munich Re / HSB	A+, Superior	AA-, Very Strong	$	105,823	13.1	%	$	35,989	9.5	%
Renaissance Re	A+, Superior	A+, Strong		77,488	9.6	%		21,868	5.8	%
Nationwide Mutual	A, Excellent	A+, Strong		50,172	6.2	%		20,412	5.4	%
Partner Re	A+, Superior	A+, Strong		43,389	5.4	%		27,746	7.3	%
Safety National	A++, Superior	A+, Strong		38,897	4.8	%		6,734	1.8	%
Lloyds of London	A, Excellent	AA-, Very Strong		33,622	4.2	%		37,927	10.0	%
Berkley Insurance Co.	A+, Superior	A+, Strong		33,575	4.2	%		7,610	2.0	%
Aspen UK Ltd.	A, Excellent	A-, Strong		33,327	4.1	%		350	0.1	%
Endurance Re	A+, Superior	A+, Strong		33,220	4.1	%		4,142	1.1	%
Hannover Ruckversicherung	A+, Superior	AA-, Very Strong		30,340	3.7	%		17,856	4.7	%
Toa Re	A, Excellent	A, Strong		29,585	3.7	%		11,232	3.0	%
All other reinsurers*				298,579	36.9	%		187,047	49.3	%
Total ceded exposure			$	808,017	100.0	%	$	378,913	100.0	%

*	All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of shareholders’ equity.

The allowances for uncollectible amounts on paid and unpaid recoverables were $16 million and $11 million, respectively, at December 31, 2023 and 2022. Changes in the allowances during 2023 were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs were applied to the allowances in 2023 and less than $1 million was recovered. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

6.	HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the years 2023, 2022 and 2021:


(in thousands)	2023		2022		2021
Unpaid losses and LAE at beginning of year:
Gross	$	2,315,637	$	2,043,555	$	1,750,049
Ceded		(740,089)		(608,086)		(443,729)
Net	$	1,575,548	$	1,435,469	$	1,306,320

Increase (decrease) in incurred losses and LAE:
Current accident year	$	712,960	$	636,955	$	582,065
Prior accident years		(108,547)		(122,579)		(125,463)
Total incurred	$	604,413	$	514,376	$	456,602

Loss and LAE payments for claims incurred:
Current accident year	$	(165,364)	$	(97,525)	$	(101,590)
Prior accident year		(325,921)		(276,772)		(225,863)
Total paid	$	(491,285)	$	(374,297)	$	(327,453)

Net unpaid losses and LAE at end of year	$	1,688,676	$	1,575,548	$	1,435,469

Unpaid losses and LAE at end of year:
Gross	$	2,446,025	$	2,315,637	$	2,043,555
Ceded		(757,349)		(740,089)		(608,086)
Net	$	1,688,676	$	1,575,548	$	1,435,469

Loss development occurs when our current estimate of ultimate losses, established through our reserve analysis processes, differs from the initial reserve estimate. The recognition of the changes in initial reserve estimates occurred over time as claims were reported, initial case reserves were established, initial reserves were reviewed in light of additional information and ultimate payments were made on the collective set of claims incurred as of that evaluation date. The new information on the ultimate settlement value of claims is continually updated until all claims in a defined set are settled. As a specialty insurer with a diversified product portfolio, our experience will ordinarily exhibit fluctuations from period to period. While we attempt to identify and react to changes in the loss

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environment, we also must consider the volume of claim experience directly available to the Company and interpret any particular period’s indications with a realistic technical understanding of the reliability of those observations.

The following is information about incurred and paid loss development as of December 31, 2023, net of reinsurance, as well as cumulative claim frequency, the total of IBNR liabilities included within the net incurred loss amounts and average historical claims duration as of December 31, 2023. The loss information has been disaggregated so that only losses that are expected to develop in a similar manner are grouped together. This has resulted in the presentation of loss information for our property and surety segments at the segment level, while information for our casualty segment has been separated in four groupings: primary occurrence, excess occurrence, claims made and transportation. Primary occurrence includes select lines within the professional services product along with general liability, small commercial and other casualty products. Excess occurrence encompasses commercial excess and personal umbrella, while claims made includes select lines within the professional services product, executive products and other casualty. Reported claim counts represent claim events on a specified policy rather than individual claimants and includes claims that did not or are not expected to result in an incurred loss. The information about incurred and paid claims development for the years ended December 31, 2014 to 2022 is presented as unaudited required supplementary information.


Casualty - Primary Occurrence
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	88,092	$	79,497	$	71,592	$	67,237	$	66,389	$	66,702	$	65,636	$	63,727	$	64,449	$	64,160	$	1,844	4,303
2015				94,835		84,975		83,579		78,675		76,398		75,470		75,438		77,110		75,958		3,048	4,416
2016						101,950		96,753		90,611		85,449		83,374		79,440		77,729		78,358		5,321	4,349
2017								119,741		111,391		102,583		95,513		90,759		90,344		90,744		8,014	4,550
2018										141,513		130,281		125,731		115,076		114,414		115,793		13,981	4,902
2019												146,011		135,209		120,570		109,051		111,156		24,277	5,334
2020														145,171		137,439		122,785		117,962		42,852	4,697
2021																142,797		128,483		125,672		59,412	4,581
2022																		155,203		144,861		88,355	4,557
2023																				152,443		115,076	3,770
																		Total	$	1,077,107


	Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023
2014	$	11,436	$	18,771	$	29,545	$	40,270	$	47,343	$	52,387	$	55,965	$	56,784	$	58,361	$	59,783
2015				10,157		19,902		33,020		45,056		54,270		58,866		62,997		68,650		69,635
2016						10,142		24,186		35,764		48,042		56,152		60,349		65,517		69,968
2017								13,154		25,933		38,783		52,823		62,236		71,419		76,283
2018										15,066		32,365		48,424		63,980		78,103		93,504
2019												15,698		30,673		41,911		57,750		74,380
2020														17,096		30,596		45,267		60,764
2021																14,428		29,633		43,951
2022																		17,714		38,712
2023																				17,707
		* Presented as unaudited required supplementary information.																Total	$	604,687
										All outstanding liabilities before 2014, net of reinsurance										10,149
								Liabilities for losses and loss adjustment expenses, net of reinsurance											$	482,569


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		13.6%		13.6%		13.9%		14.9%		11.8%		8.5%		5.7%		4.8%		1.9%		2.2%

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Casualty - Excess Occurrence
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	50,889	$	39,095	$	35,119	$	32,274	$	33,372	$	33,458	$	35,128	$	35,683	$	35,918	$	37,804	$	1,811	932
2015				53,672		50,857		47,392		42,840		43,328		42,446		41,690		41,471		40,580		2,287	707
2016						56,341		49,385		37,676		33,125		30,251		29,671		29,940		27,733		3,281	656
2017								62,863		55,868		48,363		44,737		43,249		41,620		39,600		9,045	656
2018										69,362		62,646		54,626		51,023		49,861		47,949		17,886	622
2019												88,078		89,691		79,083		80,147		77,185		29,498	694
2020														107,579		98,409		90,274		81,284		48,145	635
2021																136,433		136,354		125,028		64,648	820
2022																		153,895		156,822		90,640	866
2023																				178,887		120,637	540
																		Total	$	812,872


	Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023
2014	$	1,899	$	4,006	$	11,002	$	18,852	$	22,541	$	23,376	$	26,068	$	28,963	$	30,484	$	33,423
2015				2,048		10,127		19,571		23,184		28,756		31,352		32,752		35,958		36,559
2016						1,068		3,396		7,441		10,054		12,703		14,400		17,807		20,603
2017								17		5,679		9,275		15,441		18,470		22,835		25,328
2018										2,506		5,823		10,801		17,294		22,016		23,958
2019												4,213		19,044		25,389		33,375		38,291
2020														2,901		13,856		20,988		24,657
2021																5,317		23,841		38,977
2022																		7,479		28,764
2023																				7,091
		* Presented as unaudited required supplementary information.																Total	$	277,651
										All outstanding liabilities before 2014, net of reinsurance										21,757
								Liabilities for losses and loss adjustment expenses, net of reinsurance											$	556,978


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		4.1%		12.9%		13.1%		11.9%		9.5%		6.0%		7.3%		8.5%		2.8%		7.8%


Casualty - Claims Made
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	53,929	$	55,386	$	58,152	$	55,350	$	51,554	$	53,841	$	53,783	$	52,619	$	52,796	$	52,557	$	1,335	1,306
2015				55,006		47,831		42,206		39,906		39,653		39,619		38,609		37,578		37,332		935	1,338
2016						59,992		67,760		69,493		67,728		64,730		65,078		61,876		61,881		1,452	1,507
2017								60,572		62,450		62,714		57,450		59,907		61,546		60,340		3,053	1,648
2018										66,128		62,416		56,468		48,457		47,692		43,912		4,611	1,394
2019												62,918		61,712		52,224		46,500		43,969		10,846	1,513
2020														60,278		56,785		46,853		40,878		18,725	1,297
2021																51,219		45,854		38,946		22,443	1,224
2022																		58,289		55,316		34,438	1,139
2023																				54,679		40,398	1,077
																		Total	$	489,810


	Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*			2023
2014	$	1,705	$	9,775	$	27,923	$	35,755	$	40,080	$	44,127	$	46,122	$	50,714	$	51,063	$		51,078
2015				2,215		10,738		16,774		20,920		28,795		32,241		33,529		34,671			35,408
2016						2,060		14,558		27,465		39,370		47,999		52,846		53,737			56,342
2017								2,455		11,350		22,728		36,522		42,918		47,087			50,623
2018										1,964		11,965		18,840		24,918		27,351			31,002
2019												1,839		8,123		14,117		19,930			27,133
2020														1,488		5,687		10,412			16,537
2021																999		5,615			8,661
2022																		2,088			8,836
2023																					1,421
		* Presented as unaudited required supplementary information.																Total		$	287,041
										All outstanding liabilities before 2014, net of reinsurance											4,795
								Liabilities for losses and loss adjustment expenses, net of reinsurance												$	207,564


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		3.8%		16.1%		17.4%		15.7%		12.6%		8.0%		3.6%		5.3%		1.3%		0.0%

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Casualty - Transportation
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	38,361	$	33,015	$	36,452	$	38,590	$	40,202	$	40,508	$	41,156	$	41,974	$	42,067	$	41,940	$	274	3,099
2015				38,561		46,258		47,021		46,395		45,162		45,525		45,807		46,685		47,466		570	3,188
2016						50,430		53,519		54,105		52,277		52,818		53,915		55,718		56,515		959	3,944
2017								55,640		53,641		45,017		43,764		45,351		46,742		47,619		1,075	3,640
2018										57,597		54,592		38,719		36,468		35,442		35,776		1,538	3,405
2019												58,297		56,129		43,976		41,925		44,236		2,996	3,318
2020														43,573		35,524		27,665		28,856		4,251	1,647
2021																51,322		51,581		47,913		6,990	2,318
2022																		60,862		53,680		14,840	2,708
2023																				66,863		16,584	2,488
																		Total	$	470,864


		Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
		For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023
2014	$	7,125	$	13,933	$	19,676	$	27,457	$	33,190	$	38,282	$	40,006	$	40,427	$	41,528	$	41,564
2015				6,984		20,709		29,554		37,222		39,339		41,345		42,626		45,002		46,159
2016						8,923		18,354		30,354		38,001		43,564		47,488		52,555		54,245
2017								7,979		17,070		24,090		30,260		36,141		41,064		43,891
2018										6,980		12,827		19,216		24,503		28,844		30,916
2019												7,148		15,852		21,120		26,422		35,546
2020														3,986		7,876		12,035		20,749
2021																5,341		15,345		25,886
2022																		6,442		18,296
2023																				7,407
		* Presented as unaudited required supplementary information.																Total	$	324,659
										All outstanding liabilities before 2014, net of reinsurance										2,021
								Liabilities for losses and loss adjustment expenses, net of reinsurance											$	148,226


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		14.8%		19.3%		16.8%		16.9%		12.2%		7.9%		5.4%		3.0%		2.5%		0.1%


Property
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	56,587	$	49,441	$	48,801	$	48,761	$	49,217	$	49,444	$	49,479	$	49,520	$	49,468	$	49,413	$	2	4,564
2015				59,863		56,103		53,958		52,720		53,111		52,781		52,878		53,359		54,065		6	4,077
2016						62,900		55,594		55,384		55,930		55,424		55,383		55,536		55,385		34	3,379
2017								90,803		83,273		84,961		82,671		82,319		81,912		81,677		517	2,893
2018										89,091		83,457		79,961		80,470		79,093		79,234		1,177	2,339
2019												71,232		65,189		61,116		59,901		61,185		975	2,458
2020														118,247		110,466		108,546		108,363		6,190	2,861
2021																135,447		116,424		115,587		7,512	3,103
2022																		138,756		119,877		18,613	2,940
2023																				184,252		51,040	2,881
																		Total	$	909,038


	Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023
2014	$	30,550	$	43,380	$	46,148	$	46,528	$	47,799	$	49,027	$	49,259	$	49,317	$	49,339	$	49,400
2015				32,184		49,348		50,197		51,290		52,078		52,342		52,400		53,208		53,369
2016						33,134		46,921		51,371		53,006		54,328		54,747		55,215		55,247
2017								41,314		66,818		74,415		78,360		80,581		80,958		80,965
2018										37,048		68,264		72,357		75,253		76,378		77,696
2019												30,703		51,740		55,092		57,038		59,015
2020														43,192		79,660		88,401		96,350
2021																57,272		89,174		99,671
2022																		44,667		84,235
2023																				111,137
		* Presented as unaudited required supplementary information.																Total	$	767,085
										All outstanding liabilities before 2014, net of reinsurance										923
								Liabilities for losses and loss adjustment expenses, net of reinsurance											$	142,876


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		51.6%		31.3%		6.5%		3.5%		2.3%		1.2%		0.4%		0.6%		0.2%		0.1%

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Surety
(in thousands, except number of claims)
	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance																				As of December 31, 2023
	For the Years Ended December 31,																						Cumulative
																							Number of
																							Reported
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023		Total IBNR		Claims
2014	$	16,450	$	8,106	$	5,225	$	4,427	$	4,267	$	4,319	$	4,266	$	4,227	$	4,230	$	4,219	$	2	1,364
2015				16,958		12,957		11,113		10,456		9,792		9,521		9,275		8,580		8,586		27	1,253
2016						18,928		11,062		9,351		8,895		8,391		7,948		8,134		7,963		53	1,392
2017								16,127		8,641		8,798		8,116		8,034		7,769		7,644		67	1,869
2018										16,765		7,227		4,564		3,947		3,996		3,760		85	1,373
2019												14,785		7,205		5,053		4,062		3,453		390	1,205
2020														19,241		14,840		12,378		11,516		3,158	954
2021																18,540		11,724		12,127		7,411	907
2022																		20,185		11,490		6,192	951
2023																				21,242		19,993	468
																		Total	$	92,000


	Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
AY	2014*		2015*		2016*		2017*		2018*		2019*		2020*		2021*		2022*		2023
2014	$	722	$	4,283	$	4,166	$	4,059	$	4,131	$	4,234	$	4,214	$	4,197	$	4,218	$	4,213
2015				3,192		6,719		7,695		9,436		9,183		9,186		9,168		8,462		8,575
2016						3,087		5,817		6,299		7,640		8,086		7,673		7,946		7,795
2017								979		2,862		7,062		7,221		7,362		7,372		7,342
2018										1,835		2,588		2,368		2,536		3,020		2,079
2019												336		2,433		2,765		3,039		3,093
2020														835		2,719		3,828		3,907
2021																1,197		3,229		3,075
2022																		(241)		4,161
2023																				841
		* Presented as unaudited required supplementary information.																Total	$	45,081
										All outstanding liabilities before 2014, net of reinsurance										(106)
								Liabilities for losses and loss adjustment expenses, net of reinsurance											$	46,813


	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years	1		2		3		4		5		6		7		8		9		10
		18.3%		37.4%		10.2%		7.1%		3.4%		(5.5)%		0.6%		(3.5)%		0.9%		(0.1)%

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The following is a reconciliation of the net incurred and paid loss development tables to the liability for unpaid losses and settlement expenses in the consolidated balance sheet:


(in thousands)	December 31, 2023		December 31, 2022
Net outstanding liabilities:
Casualty - Primary Occurrence	$	482,569	$	461,527
Casualty - Excess Occurrence		556,978		467,592
Casualty - Claims Made		207,564		211,296
Casualty - Transportation		148,226		141,737
Property		142,876		149,901
Surety		46,813		40,116
Unallocated loss adjustment expenses		66,111		61,752
Allowance for uncollectible reinsurance balances recoverable on unpaid losses and settlement expenses		10,608		11,250
Other		26,931		30,377
Liabilities for unpaid loss and settlement expenses, net of reinsurance	$	1,688,676	$	1,575,548

Reinsurance recoverable on unpaid claims:
Casualty - Primary Occurrence	$	53,177	$	46,674
Casualty - Excess Occurrence		149,502		138,822
Casualty - Claims Made		292,803		298,930
Casualty - Transportation		68,126		78,456
Property		152,714		137,613
Surety		51,526		50,737
Allowance for uncollectible reinsurance balances recoverable on unpaid losses and settlement expenses		(10,608)		(11,250)
Other		109		107
Total reinsurance balances recoverable on unpaid losses and settlement expenses	$	757,349	$	740,089

Total gross liability for unpaid loss and settlement expenses	$	2,446,025	$	2,315,637

DETERMINATION OF IBNR

Initial carried IBNR reserves are determined through a reserve estimation process. For most casualty and surety products, this process involves the use of an initial loss and allocated loss adjustment expense (ALAE) ratio that is applied to the earned premium for a given period. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve. For most property products, the IBNR reserves are determined by IBNR percentages applied to premium earned. The percentages are determined based on historical reporting patterns and are updated periodically. No deductions for paid or case reserves are made. Shortly after natural or man-made catastrophes, we review insured locations exposed to the event and estimate losses based on our own exposures and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. Adjustments to the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors.

Actuaries perform a ground-up reserve study of the expected value of the unpaid loss and LAE derived using multiple standard actuarial methodologies on a quarterly basis. Each method produces an estimate of ultimate loss by accident year. We review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary.

Upon completion of our loss and LAE estimation analysis, a review of the resulting variance between the indicated reserves and the carried reserves takes place. Our actuaries make a recommendation to management in regards to booked reserves that reflect their analytical assessment and view of estimation risk. After discussion of these analyses and all relevant risk factors, the Loss Reserve Committee, a panel of management including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer and other executives, confirms the appropriateness of the reserve balances.

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DEVELOPMENT OF IBNR RESERVES

The following table summarizes our prior accident years’ loss reserve development by segment for 2023, 2022 and 2021:


(in thousands)	2023		2022		2021
Casualty	$	(78,498)	$	(87,225)	$	(108,632)
Property		(21,196)		(24,927)		(10,981)
Surety		(8,853)		(10,427)		(5,850)
Total	$	(108,547)	$	(122,579)	$	(125,463)

A discussion of significant components of reserve development for the three most recent calendar years follows:

2023. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2023. The casualty segment contributed $78 million in favorable development. Accident years 2015 through 2022 contributed significantly to the favorable development. This was predominantly caused by favorable frequency and severity trends that continued to be better than our long-term expectations. In addition, we believe this to be the result of our underwriters’ ability to select risk, as well as a favorable rate environment within many of our casualty sublines. Nearly all of our casualty products contributed to the favorable development. Within the primary occurrence grouping, the general liability product contributed $13 million to our favorable development. Within the excess occurrence grouping, commercial excess developed favorably by $15 million and our personal umbrella product developed favorably by $11 million. Within the claims made grouping, professional services coverages developed favorably by $10 million and executive products developed favorably by $12 million. Transportation contributed $4 million for the year.

Marine contributed $4 million of the $21 million total favorable property development, primarily in accident years 2020 through 2022. Commercial property was favorable by $11 million.

The surety segment experienced favorable development of $9 million. The majority of the favorable development was from accident year 2022. Commercial and contract surety products were the main contributors with favorable development of $6 million and $3 million, respectively.

2022. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2022. The casualty segment contributed $87 million in favorable development. Accident years 2016 and 2018 through 2021 contributed the majority of the favorable development, with earlier years developing favorably in aggregate to a lesser extent. Risk selection by our underwriters continued to provide better results than estimated in our reserving process. Within the primary occurrence grouping, the general liability product contributed $28 million to our favorable development. Small commercial products were favorable by $5 million. Within the excess occurrence grouping, commercial excess was favorable by $6 million and our personal umbrella product developed favorably by $4 million. Within the claims made grouping, professional services coverages developed favorably by $19 million and executive products developed favorably by $4 million. Transportation experienced favorable development of $6 million.

Marine contributed $17 million of the $25 million total favorable property development. Accident years 2019 through 2021 contributed to the marine products’ favorable development. Hawaii homeowners contributed $2 million of favorable development.

The surety segment experienced favorable development of $10 million. The majority of the favorable development was from accident years 2019 through 2021. Contract surety had favorable development of $5 million and commercial surety had favorable development of $4 million.

2021. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2021. Development from the casualty segment totaled $109 million. Favorable development was experienced across accident years 2014 through 2020, with the largest amounts attributable to accident years 2018 through 2020. We continued to experience emergence that was generally better than previously estimated. We attribute the favorable emergence to loss trends in most lines outperforming our long-term expectations, our underwriters’ ability to select risk and an increasing rate environment. Within the primary occurrence grouping, the general liability product contributed $25 million to our favorable development and small commercial was favorable by $8 million. Within the excess occurrence grouping, commercial excess was favorable by $11 million and personal umbrella developed favorably by $10 million. Within the claims made grouping, professional services coverages developed favorably by $14 million and executive products developed favorably by $6 million. Transportation had $20 million of favorable development.

Our marine product was the predominant driver of the favorable development in the property segment, accounting for $7 million of the $11 million total favorable development for the segment. Accident years 2019 and 2020 made the largest contribution. Commercial property was favorable by $2 million.

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The surety segment experienced $6 million of favorable development. The majority of the favorable development came from the 2019 and 2020 accident years. Contract surety was the main contributor with favorable development of $5 million.

ENVIRONMENTAL, ASBESTOS AND MASS TORT EXPOSURES

We are subject to environmental site cleanup, asbestos removal and mass tort claims and exposures through our commercial excess, general liability and discontinued assumed casualty reinsurance lines of business. The majority of the exposure is in the excess layers of our commercial excess and assumed reinsurance books of business.

The following table represents paid and unpaid environmental, asbestos and mass tort claims data (including incurred but not reported losses) as of December 31, 2023, 2022 and 2021:


(in thousands)	2023		2022		2021
Loss and LAE Payments (Cumulative):
Gross	$	144,882	$	142,377	$	141,768
Ceded		(70,130)		(69,696)		(69,576)
Net	$	74,752	$	72,681	$	72,192

Unpaid Losses and LAE at End of Year:
Gross	$	25,180	$	26,871	$	25,747
Ceded		(5,490)		(5,786)		(5,718)
Net	$	19,690	$	21,085	$	20,029

Our environmental, asbestos and mass tort exposure is limited, relative to other insurers, as a result of entering the affected liability lines after the insurance industry had already recognized environmental and asbestos exposure as a problem and adopted appropriate coverage exclusions. The majority of our reserves are associated with products that went into runoff at least two decades ago. Some are for assumed reinsurance, some are for excess liability business and some followed from the acquisition of Underwriters Indemnity Company in 1999.

During 2023, our reserves for asbestos, environmental and mass tort exposures decreased slightly.

While our environmental exposure is limited, the ultimate liability for this exposure is difficult to assess because of the extensive and complicated litigation involved in the settlement of claims and evolving legislation on issues such as joint and several liability, retroactive liability and standards of cleanup. Additionally, we participate primarily in the excess layers of coverage, where accurate estimates of ultimate loss are more difficult to derive than for primary coverage.

7.	INCOME TAXES

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized below.

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(in thousands)	2023		2022
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses	$	25,491	$	23,788
Unearned premium offset		32,763		27,158
Net unrealized depreciation of securities		—		19,839
Deferred compensation		4,170		4,058
Share-based compensation expense		3,556		3,202
Capitalized research and development costs		4,970		2,544
Lease liability		3,113		3,026
Other		2,949		938
Deferred tax assets before allowance	$	77,012	$	84,553
Less valuation allowance		—		—
Total deferred tax assets	$	77,012	$	84,553

Deferred tax liabilities:
Net unrealized appreciation of securities	$	10,981	$	—
Deferred policy acquisition costs		30,779		26,850
Lease asset		2,870		2,681
Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset		1,272		1,909
Fixed assets		2,745		3,083
Intangible assets		1,552		1,543
Undistributed earnings of unconsolidated investees		10,351		7,399
Other		590		819
Total deferred tax liabilities	$	61,140	$	44,284
Net deferred tax asset	$	15,872	$	40,269

Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2023, 2022 and 2021, differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income from continuing operations as demonstrated in the following table:


(in thousands)	2023				2022				2021
Provision for income taxes at the statutory federal tax rates	$	79,226	21.0	%	$	151,342	21.0	%	$	72,307	21.0	%
Increase (reduction) in taxes resulting from:
Excess tax benefit on share-based compensation		(3,774)	(1.0)	%		(4,491)	(0.6)	%		(3,090)	(0.9)	%
Tax-exempt interest income		(1,092)	(0.3)	%		(1,143)	(0.2)	%		(1,219)	(0.3)	%
Dividends received deduction		(938)	(0.2)	%		(912)	(0.1)	%		(891)	(0.3)	%
Tax credit		(3,644)	(1.0)	%		(6,204)	(0.9)	%		(4,657)	(1.3)	%
ESOP dividends paid deduction		(1,591)	(0.4)	%		(4,171)	(0.6)	%		(1,566)	(0.5)	%
Nondeductible expenses		3,351	0.9	%		1,263	0.2	%		3,834	1.1	%
Other items, net		1,116	0.3	%		1,583	0.2	%		249	0.1	%
Total	$	72,654	19.3	%	$	137,267	19.0	%	$	64,967	18.9	%

Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in 2023 due to lower levels of tax-favored adjustments.

Our net earnings include equity in earnings of unconsolidated investees. The investees do not have a policy or pattern of paying dividends. As a result, we record a deferred tax liability on the earnings at the corporate capital gains rate of 21 percent in anticipation of recovering our investments through means other than through the receipt of dividends, such as a sale. No dividends were declared from unconsolidated investees in 2023, 2022 or 2021, therefore having no impact to their respective effective tax rates.

Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 2023, 2022 and 2021 resulted in tax benefits of $2 million, $4 million and $2 million, respectively. These tax benefits reduced the effective tax rate for 2023, 2022 and 2021 by 0.4 percent, 0.6 percent and 0.5 percent, respectively.

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We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the projected results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, we believe when these deferred items reverse in future years, our taxable income will be taxed at an effective rate of 21 percent.

Federal and state income taxes paid in 2023, 2022 and 2021 amounted to $50 million, $190 million and $39 million, respectively. The larger amount paid in 2022 was the result of taxes paid on the sale of our investment in Maui Jim. See note 13 for more information on the sale.

Although we are not currently under audit by the IRS, tax years 2020 through 2023 remain open and are subject to examination.

8.	EMPLOYEE BENEFITS

EMPLOYEE STOCK OWNERSHIP, 401(K) AND INCENTIVE PLANS

We maintain ESOP, 401(k) and incentive plans covering executives, managers and associates. Funding of these plans is primarily dependent upon reaching predetermined levels of operating return on equity, combined ratio and Market Value Potential (MVP). MVP is a compensation model that measures components of comprehensive earnings against a minimum required return on our capital. Bonuses are earned as we generate earnings in excess of this required return. While some management incentive plans may be affected somewhat by other performance factors, the larger influence of corporate performance ensures that the interests of our executives, managers and associates align with those of our shareholders.

Our 401(k) plan allows voluntary contributions by employees and permits ESOP diversification transfers for employees meeting certain age and service requirements. We provide a basic 401(k) contribution of 3 percent of eligible compensation. Participants are 100 percent vested in both voluntary and basic contributions. Additionally, an annual discretionary profit-sharing contribution may be made to the ESOP and 401(k), subject to the achievement of certain overall financial goals and board approval. Profit-sharing contributions vest after three years of plan service.

Our ESOP and 401(k) cover all employees meeting eligibility requirements. ESOP and 401(k) profit-sharing contributions are approved annually by our board of directors and are expensed in the year earned. ESOP and 401(k)-related expenses (basic and profit-sharing) were $23 million, $18 million and $18 million for 2023, 2022 and 2021, respectively.

During 2023, the ESOP purchased 65,773 shares of RLI Corp. stock on the open market at an average price of $136.42 ($9 million) relating to the contribution for plan year 2022. Shares held by the ESOP as of December 31, 2023, totaled 2,447,357 and are treated as outstanding in computing our earnings per share. During 2022, the ESOP purchased 87,367 shares of RLI Corp. stock on the open market at an average price of $103.01 ($9 million) relating to the contribution for plan year 2021. During 2021, the ESOP purchased 65,815 shares of RLI Corp. stock on the open market at an average price of $107.95 ($7 million) relating to the contribution for plan year 2020. The above-mentioned ESOP purchases relate only to our annual contributions to the plan and do not include amounts or shares resulting from the reinvestment of dividends.

Annual awards are provided to executives, managers and associates through our incentive plans, provided certain strategic and financial goals are met. Annual expenses for these incentive plans totaled $38 million, $24 million and $39 million for 2023, 2022 and 2021, respectively.

DEFERRED COMPENSATION

We maintain rabbi trusts for deferred compensation plans for directors, key employees and executive officers through which contributions can be invested in RLI Corp. stock or mutual funds. The employer stock in the plan cannot be diversified and is accounted for as equity, in a manner consistent with the accounting for treasury stock. At December 31, 2023, the trusts’ assets were valued at $61 million.

STOCK PLANS

Our RLI Corp. Long-Term Incentive Plan (2015 LTIP) was in place from 2015 to 2023. The 2015 LTIP provided for equity-based compensation, including stock options and restricted stock units, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 3,291,388 stock options under the 2015 LTIP. The 2015 LTIP was replaced in 2023.

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In 2023, our shareholders approved the 2023 RLI Corp. Long-Term Incentive Plan (2023 LTIP), which provides for equity-based compensation. In conjunction with the adoption of the 2023 LTIP, effective May 4, 2023, awards were no longer granted under the 2015 LTIP. Awards under the 2023 LTIP may be in the form of restricted stock, restricted stock units, stock options (incentive or non-qualified), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2023 LTIP is limited to employees, directors, consultants and independent contractors of the Company or any affiliate. The granting of awards under the 2023 LTIP is solely at the discretion of the Human Capital and Compensation Committee of the board of directors or its delegate. The maximum number of shares of common stock available for distribution under the 2023 LTIP is 4,004,891 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted 195,538 awards under the 2023 LTIP.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $9 million, $9 million and $6 million for 2023, 2022 and 2021, respectively. The total income tax benefit was $1 million for 2023, 2022 and 2021. Total unrecognized compensation expense relating to outstanding and unvested awards was $6 million, which will be recognized over the weighted average vesting period of 2.69 years.

Stock Options

Under the 2023 LTIP, as under the 2015 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, including special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or more, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

The following table summarize option activity in 2023:


				Weighted	Aggregate
		Weighted		Average	Intrinsic
		Average		Remaining	Value
	Options	Exercise Price		Contractual Life	(in 000’s)
Outstanding as of January 1, 2023	1,695,660	$	82.42
Granted	201,125		135.46
Exercised	(246,490)		57.27
Forfeited or expired	(8,585)		96.99
Outstanding as of December 31, 2023	1,641,710	$	92.62	4.62	$	66,995
Exercisable at December 31, 2023	872,462	$	78.24	3.46	$	47,884

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $19 million, $22 million and $12 million during 2023, 2022 and 2021, respectively.

The fair values of options were estimated using a Black-Scholes based option pricing model with the following weighted-average grant-date assumptions and weighted-average fair values as of December 31:


	2023			2022			2021
Weighted-average fair value of grants	$	27.24		$	21.43		$	17.11
Risk-free interest rates		3.59	%		2.95	%		0.75	%
Dividend yield		2.28	%		2.50	%		2.06	%
Expected volatility		22.97	%		22.89	%		22.73	%
Expected option life		4.96	years		5.05	years		4.97	years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise

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behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

Restricted Stock Units

In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or more. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period. The total fair value of restricted stock units that vested was $3 million, $2 million and $2 million during 2023, 2022 and 2021, respectively.


		Weighted
		Average
		Grant Date
	RSUs	Fair Value
Nonvested at January 1, 2023	44,208	$	109.51
Granted	22,013		136.04
Reinvested	1,058		131.11
Vested	(19,957)		103.61
Forfeited	(2,229)		118.00
Nonvested at December 31, 2023	45,093	$	125.16

9.	STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS

The statutory financial statements of our three insurance companies are presented on the basis of accounting practices prescribed or permitted by the Illinois Department of Insurance (IDOI), which has adopted the NAIC’s statutory accounting principles (SAP). We do not use any permitted SAP that differ from NAIC prescribed SAP. In converting from SAP to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory non-admitted assets and the inclusion of net unrealized holding gains or losses in shareholders’ equity relating to fixed income securities.

The NAIC has risk-based capital (RBC) requirements for insurance companies to calculate and report information under a risk-based formula, which measures statutory capital and surplus needs based upon a regulatory definition of risk relative to the company’s balance sheet and mix of products. As of December 31, 2023, each of our insurance subsidiaries had an RBC amount in excess of the authorized control level RBC, as defined by the NAIC. RLI Insurance Company (RLI Ins.), our principal insurance company subsidiary, had an authorized control level RBC of $273 million, $250 million and $225 million as of December 31, 2023, 2022 and 2021, respectively, compared to actual statutory capital and surplus of $1.5 billion, $1.4 billion and $1.2 billion, respectively, for these same periods.

Year-end statutory surplus for 2023 presented in the table below includes $294 million of RLI Corp. stock (cost basis of $65 million) held by Mt. Hawley Insurance Company, compared to $327 million and $271 million in 2022 and 2021, respectively. The Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our GAAP consolidated financial statements.

The following table includes selected information for our insurance subsidiaries for the year ended and as of December 31:


(in thousands)	2023		2022		2021
Consolidated net income, statutory basis	$	231,321	$	229,111	$	207,550
Consolidated surplus, statutory basis	$	1,520,135	$	1,407,925	$	1,240,649

As discussed in note 1.A., our three insurance companies are subsidiaries of RLI Corp., with RLI Ins. as the first-level, or principal, insurance subsidiary. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company 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 December 31, 2023, our holding company had $1.4 billion in equity. This includes

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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 $145 million in liquid assets, which exceeds our normal annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and regular 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. In 2023, 2022 and 2021, our principal insurance subsidiary paid ordinary dividends totaling $145 million, $13 million and $70 million, respectively, to RLI Corp. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the IDOI. In 2021, our principal insurance subsidiary sought and received regulatory approval prior to the payment of extraordinary dividends totaling $110 million. No extraordinary dividends were paid in 2023 or 2022. As of December 31, 2023, $7 million of the net assets of our principal insurance subsidiary are not restricted and could be distributed to RLI Corp. as ordinary dividends. 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.

10.	COMMITMENTS AND CONTINGENT LIABILITIES

COMMITMENTS

As of December 31, 2023, we had $5 million of unfunded commitments related to our investments in private funds and low-income housing tax credit investments. See note 2 for more information on our investments in private funds and low-income housing tax credits.

LITIGATION

We are party to numerous claims, loss and litigation matters that arise in the normal course of our business. Many of such claims, loss or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the resolution of these claims and losses is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. From time to time, we are also involved in various other legal proceedings and litigation unrelated to our insurance business that arise in the ordinary course of business operations. Management believes that any liabilities that may arise as a result of these legal matters is not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows.

11.

LEASES

Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Operating lease costs for future minimum lease payments are recognized on a straight-line basis over the lease terms. Variable lease costs are expensed in the period in which the obligations are incurred. Sublease income is recognized on a straight-line basis over the sublease term.

The components of lease expense and other lease information as of and during the years ended December 31, 2023, 2022 and 2021 were as follows:

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(in thousands)	2023		2022		2021
Operating lease cost	$	4,935	$	4,957	$	5,131
Variable lease cost		1,469		1,423		1,433
Sublease income		(469)		(555)		(508)
Total lease cost	$	5,935	$	5,825	$	6,056

Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	5,407	$	5,435	$	5,738

ROU assets obtained in exchange for new operating lease liabilities	$	5,805	$	2,694	$	4,828

Reduction to ROU assets resulting from reduction to lease liabilities	$	300	$	2	$	1,042

Other non-cash reductions to ROU assets	$	—	$	73	$	48


(in thousands)	2023			2022
Operating lease ROU assets	$	13,666		$	12,766
Operating lease liabilities	$	14,880		$	14,499
Weighted-average remaining lease term - operating leases		6.08	years		4.21	years
Weighted-average discount rate - operating leases		3.21	%		2.11	%

Future minimum lease payments under non-cancellable leases as of December 31, 2023 were as follows:


(in thousands)	2023
2024	$	4,090
2025		3,202
2026		2,313
2027		1,544
2028		1,266
Thereafter		4,503
Total future minimum lease payments	$	16,918
Less imputed interest		(2,038)
Total operating lease liability	$	14,880

12.	OPERATING SEGMENT INFORMATION

The segments of our insurance operations include casualty, property and surety. 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 hard-to-place risks through a quota share reinsurance agreement. 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 minimizing 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.

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, as well as onshore and offshore energy, petrochemical and refining 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

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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.

Net investment income consists of the interest and dividend income streams from our investments in fixed income and equity securities. Interest and general corporate expenses include the cost of debt, other director and shareholder relations costs and other compensation-related expenses incurred for the benefit of the corporation, but not attributable to the operations of our insurance segments. Investee earnings represent our 23 percent share in earnings of Prime Holdings Insurance Services, Inc., a privately held insurance company which specializes in hard-to-place risks. Additionally, we owned 40 percent of Maui Jim, a privately held company which operates in the sunglass and optical goods industries, which we sold in 2022. See note 13 for more information on the sale. Our investment in Maui Jim was carried at the holding company, as it was unrelated to our core insurance operations.

The following table summarizes our segment data based on the internal structure and reporting of information as it is used by management. The net earnings of each segment are before taxes and include revenues (if applicable), direct product or segment costs (such as commissions and claims costs), as well as allocated costs from various support departments. Assets are not managed at the segment level and therefore are not allocated to segments.

REVENUES


(in thousands)	2023		2022		2021
Casualty	$	758,346	$	711,832	$	633,639
Property		401,530		307,886		231,837
Surety		134,430		124,718		115,427
Net premiums earned	$	1,294,306	$	1,144,436	$	980,903
Net investment income		120,383		86,078		68,862
Net realized gains		32,518		588,515		64,222
Net unrealized gains (losses) on equity securities		64,787		(121,037)		65,258
Total	$	1,511,994	$	1,697,992	$	1,179,245

INSURANCE EXPENSES


(in thousands)	2023		2022		2021
Loss and settlement expenses:
Casualty	$	418,032	$	381,436	$	311,627
Property		172,062		120,745		129,924
Surety		14,319		12,195		15,051
Total loss and settlement expenses	$	604,413	$	514,376	$	456,602

Policy acquisition costs:
Casualty	$	221,589	$	204,397	$	179,354
Property		116,344		95,203		72,008
Surety		80,392		70,032		66,106
Total policy acquisition costs	$	418,325	$	369,632	$	317,468

Other insurance expenses:
Casualty	$	59,246	$	52,210	$	47,139
Property		26,808		19,416		18,605
Surety		12,329		10,586		11,163
Total other insurance expenses	$	98,383	$	82,212	$	76,907
Total	$	1,121,121	$	966,220	$	850,977

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NET EARNINGS


(in thousands)	2023		2022		2021
Casualty	$	59,479	$	73,789	$	95,519
Property		86,316		72,522		11,300
Surety		27,390		31,905		23,107
Net underwriting income	$	173,185	$	178,216	$	129,926
Net investment income		120,383		86,078		68,862
Net realized gains		32,518		588,515		64,222
Net unrealized gains (losses) on equity securities		64,787		(121,037)		65,258
Interest on debt		(7,301)		(8,047)		(7,677)
General corporate expense		(15,917)		(12,900)		(13,330)
Equity in earnings of unconsolidated investees		9,610		9,853		37,060
Total earnings before incomes taxes	$	377,265	$	720,678	$	344,321
Income tax expense		72,654		137,267		64,967
Net earnings	$	304,611	$	583,411	$	279,354

The following table further summarizes revenues by major product type within each segment:

NET PREMIUMS EARNED


	Year ended December 31,
(in thousands)	2023		2022		2021
CASUALTY
Commercial excess and personal umbrella	$	286,178	$	253,921	$	219,437
Commercial transportation		103,719		96,992		83,352
General liability		103,066		100,374		90,853
Professional services		99,596		95,187		88,855
Small commercial		72,920		67,673		64,660
Executive products		24,687		26,606		21,873
Other casualty		68,180		71,079		64,609
Total	$	758,346	$	711,832	$	633,639

PROPERTY
Commercial property	$	244,798	$	163,078	$	107,941
Marine		129,428		113,208		97,745
Other property		27,304		31,600		26,151
Total	$	401,530	$	307,886	$	231,837

SURETY
Commercial	$	49,707	$	47,652	$	43,738
Transactional		47,983		45,826		43,982
Contract		36,740		31,240		27,707
Total	$	134,430	$	124,718	$	115,427
Grand total	$	1,294,306	$	1,144,436	$	980,903

13. ACQUISITONS AND DISPOSITIONS

On September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim to Kering Eyewear for cash proceeds of $687 million. A net realized gain of $571 million was recognized during 2022, and the payout of the working capital escrow during 2023 resulted in the recognition of an additional $14 million realized gain. The gains were recorded in the net realized gain line item of the statement of earnings.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of RLI Corp.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of RLI Corp. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Unpaid losses and settlement expenses — Refer to Notes 1 and 6 to the financial statements

Critical Audit Matter Description

We identified the assessment of the Company’s estimate of unpaid losses and settlement expenses as a critical audit matter. Specialized actuarial skills and knowledge were required to assess the methodologies and assumptions used to estimate unpaid losses and settlement expenses. The assumptions used by the Company to estimate unpaid losses and settlement expenses included expected loss ratios, loss development patterns, qualitative factors, and the weighting of actuarial methodologies. These assumptions included a range of potential inputs and changes to these assumptions could affect the estimate of unpaid losses and settlement expenses recorded by the Company.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to unpaid losses and settlement expenses included the following, among others:

●

We tested the effectiveness of controls related to unpaid losses and settlement expenses, including those controls over the inputs, methods, and assumptions used in the Company’s estimation processes.

●

We tested the underlying data, including historical claims, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete.

●

With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by the Company to estimate the unpaid losses and settlement expenses by:

Developing a range of independent estimates of unpaid losses and settlement expenses for certain lines of business and comparing our estimates to the recorded reserves.

We compared our prior year estimates of expected incurred losses to actual experience during the current year to identify potential management bias in the determination of the unpaid losses and settlement expenses.

/s/ Deloitte & Touche LLP

Chicago, Illinois
February 23, 2024

We have served as the Company’s auditor since 2020.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in accountants or disagreements with accountants on any matters of accounting principles or practices or financial statement disclosure.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2023.

Management’s Report on Internal Control Over Financial Reporting

��

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2023.

Our internal control over financial reporting as of December 31, 2023 has been audited by Deloitte & Touche LLP (PCAOB ID No. 34), an independent registered public accounting firm, as stated in their report on page 90 of this report.

There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Securities Trading Plans of Executive Officers and Directors

Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables prearranged transactions in Company securities in a manner that avoids concerns about initiating transactions at a future date while possibly in possession of material nonpublic information. Our Insider Trading Policy permits our executive officers and directors to enter into trading plans designed to comply with Rule 10b5-1.

During the year ended December 31, 2023, no director or officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

PART III

Items 10. Directors, Executive Officers and Corporate Governance

Information required for Item 10 is incorporated by reference to the sections of the proxy statement entitled: “Executive Management,” “Proposal One: Election of Directors,” “Corporate Governance and Board Matters” and “Committees of the Board of Directors.”

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Items 11. Executive Compensation

Information required for Item 11 is incorporated by reference to the sections of the proxy statement entitled: “Board Meetings and Compensation,” “Human Capital and Compensation Committee Report,” “Compensation Discussion & Analysis,” “How the HCC Operates,” “Overview of RLI Executive Compensation,” “Annual Compensation,” “Long-Term Compensation,” “Executive Compensation,” “Ratio of CEO to Median Employee Total Compensation,” “Pay for Performance” and “Safeguards Against Unnecessary or Excessive Compensation Risk.”

Items 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required for Item 12 is incorporated by reference to the sections of the proxy statement entitled: “Share Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

Items 13. Certain Relationships and Related Transactions and Director Independence

Information required for Item 13 is incorporated by reference to the section of the proxy statement entitled: “Corporate Governance and Board Matters.”

Items 14. Principal Accountant Fees and Services

Information required for Item 14 is incorporated by reference to the section of the proxy statement entitled: “Fees Paid to the Independent Registered Public Accounting Firm.”

PART IV

Item 15. Exhibits and Financial Statement Schedules

Item 15. (a)(1) Financial Statements

The following consolidated financial statements, notes thereto and related information of RLI Corp. are included in Item 8.


	Page
Consolidated Balance Sheets	53
Consolidated Statements of Earnings and Comprehensive Earnings	54
Consolidated Statements of Shareholders’ Equity	55
Consolidated Statements of Cash Flows	56
Notes to Consolidated Financial Statements	57
Reports of Independent Registered Public Accounting Firms	90

Item 15. (a)(2) Financial Statement Schedules


	Page
I. Summary of Investments - Other than Investments in Related Parties at December 31, 2023.	96
II. Condensed Financial Information of Registrant, as of and for the three years ended December 31, 2023.	97-99
III. Supplementary Insurance Information, as of and for the three years ended December 31, 2023.	100-101
IV. Reinsurance for the three years ended December 31, 2023.	102
V. Valuation and Qualifying Accounts for the three years ended December 31, 2023.	103
VI. Supplementary Information Concerning Property-Casualty Insurance Operations for the three years ended December 31, 2023.	104

Schedules other than those listed are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein.

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Item 15. (a) (3) Exhibits

The following is a list of the exhibits filed as part of this Form 10-K. The exhibit numbers followed by an asterisk (*) indicate exhibits that are management contracts or compensatory plans or arrangements.

Exhibit		Incorporated by Reference		Filed or Furnished
Number	Description of Document	Form	Filing Date	Herewith

3.1	Amended and Restated Certificate of Incorporation	10-Q	July 26, 2023

3.2	By-Laws	8-K	May 8, 2018

4.1	Description of Securities			X

10.1	RLI Corp. Nonqualified Agreement*	10-K	February 21, 2020

10.2	RLI Corp. Nonemployee Directors’ Deferred Compensation Plan, as amended*	10-Q	July 26, 2023

10.3	RLI Corp. Executive Deferred Compensation Plan, as amended*	10-Q	July 26, 2023

10.4	RLI Corp. 2015 Long-Term Incentive Plan, as amended*	10-Q	July 24, 2020

10.5	RLI Corp. 2023 Long-Term Incentive Plan, as amended*	10-Q	July 26, 2023

10.6	RLI Corp. Annual Incentive Compensation Plan, as amended*	10-Q	July 24, 2020

10.7	Management Incentive Program Guideline*	10-K	February 24, 2023

10.8	RLI Underwriting Profit Program Guideline*	10-K	February 24, 2023

10.9	Market Value Potential (MVP), Executive Incentive Program Guideline*	10-K	February 24, 2023

10.10	RLI Corp. Director and Officer Indemnification Agreement	10-Q	October 24, 2018

10.11	Advances, Collateral Pledge, and Security Agreement (Federal Home Loan Bank of Chicago)	8-K	September 26, 2014

10.12	Credit Agreement (PNC Bank, National Association)	8-K	March 30, 2023

21.1	Subsidiaries of the Registrant			X

23.1	Consent of Deloitte & Touche LLP			X

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002			X

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002			X

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002			X

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002			X

97.1	RLI Corp. Policy on Recoupment of Incentive Compensation (Clawback Policy)			X

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Exhibit		Incorporated by Reference		Filed or Furnished
Number	Description of Document	Form	Filing Date	Herewith

101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document			X

101.SCH	Inline XBRL Taxonomy Extension Schema			X

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase			X

101.DEF	Inline XBRL Taxonomy Definition Linkbase			X

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase			X

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase			X

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)			X

Item 15. (b)

The exhibits are listed in Item 15. (a)(3) above.

Item 15. (c)

The financial statement schedules are listed in Item 15. (a)(2) above.

Item 16. Form 10-K Summary

None.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS

IN RELATED PARTIES

December 31, 2023


Column A	Column B		Column C		Column D
					Amount at
(in thousands)					which shown in
Type of Investment	Cost (1)		Fair Value		the balance sheet
Fixed maturities:
Bonds:
Available-for-sale:
U.S. government	$	312,632	$	308,031	$	308,031
U.S. agency		60,763		59,826		59,826
Non-U.S. government & agency		4,800		3,882		3,882
Agency MBS		460,551		425,285		425,285
ABS/CMBS/MBS*		308,458		281,182		281,182
Corporate		1,273,187		1,225,019		1,225,019
Municipal		634,000		552,624		552,624
Total available-for-sale	$	3,054,391	$	2,855,849	$	2,855,849
Total fixed maturities	$	3,054,391	$	2,855,849	$	2,855,849

Equity securities:
Common stock:
Ind Misc and all other	$	117,448	$	196,202	$	196,202
ETFs (Ind/misc)		236,574		393,839		393,839
Total equity securities	$	354,022	$	590,041	$	590,041
Cash and short-term investments		171,347		171,347		171,347
Other invested assets		56,009		59,081		59,081
Total investments and cash	$	3,635,769	$	3,676,318	$	3,676,318

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

Note: See notes 1E and 2 of Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

(1)	Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY)

CONDENSED BALANCE SHEETS

December 31,


(in thousands, except share data)	2023		2022
ASSETS
Cash	$	1,048	$	1,051
Short-term investments, at cost which approximates fair value		76,926		2,229
Accounts receivable, affiliates		2,393		1,572
Investments in subsidiaries		1,312,323		1,084,055
Fixed income:
Available-for-sale, at fair value		67,029		237,282
(amortized cost of $78,431 and allowance for credit losses of $0 in 2023)
(amortized cost of $250,904 and allowance for credit losses of $0 in 2022)
Property and equipment, at cost, net of accumulated depreciation of $1,375 in 2023 and $1,340 in 2022		1,375		1,410
Income taxes - deferred		3,101		3,204
Other assets		6,170		3,840
TOTAL ASSETS	$	1,470,365	$	1,334,643

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Income taxes payable - current	$	778	$	1,823
Debt		50,000		149,863
Interest payable on debt		157		2,153
Other liabilities		5,916		3,463
TOTAL LIABILITIES	$	56,851	$	157,302

SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 200,000,000)
(68,570,261 shares issued and 45,640,047 shares outstanding in 2023)
(68,399,966 shares issued and 45,469,752 shares outstanding in 2022)	$	686	$	684
Paid-in capital		362,345		352,391
Accumulated other comprehensive earnings		(166,303)		(229,076)
Retained earnings		1,609,785		1,446,341
Deferred compensation		13,539		12,015
Treasury stock, at cost (22,930,214 shares in 2023 and 2022)		(406,538)		(405,014)
TOTAL SHAREHOLDERS’ EQUITY	$	1,413,514	$	1,177,341
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,470,365	$	1,334,643

See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY)—(continued)

CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS

Years ended December 31,


(in thousands)	2023		2022		2021
Net investment income	$	10,351	$	6,245	$	2,102
Net realized gains (losses)		14,134		570,888		(625)
Equity in earnings of unconsolidated investee		—		372		22,786
Selling, general and administrative expenses		(15,917)		(12,900)		(13,330)
Interest expense on debt		(6,543)		(7,622)		(7,616)
Earnings before income taxes	$	2,025	$	556,983	$	3,317
Income tax expense (benefit)		(1,802)		108,699		(1,585)
Net earnings before equity in net earnings of subsidiaries	$	3,827	$	448,284	$	4,902
Equity in net earnings of subsidiaries		300,784		135,127		274,452
Net earnings	$	304,611	$	583,411	$	279,354
Other comprehensive earnings (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	1,754	$	(12,188)	$	(1,996)
Less: reclassification adjustment for (gains) losses included in net earnings		—		115		500
Other comprehensive earnings (loss) - parent only	$	1,754	$	(12,073)	$	(1,496)
Equity in other comprehensive earnings (loss) of subsidiaries/investees		61,019		(266,829)		(57,392)
Other comprehensive earnings (loss)	$	62,773	$	(278,902)	$	(58,888)
Comprehensive earnings	$	367,384	$	304,509	$	220,466

See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY)—(continued)

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31,


(in thousands)	2023		2022		2021
Cash flows from operating activities
Earnings before equity in net earnings of subsidiaries	$	3,827	$	448,284	$	4,902
Adjustments to reconcile net losses to net cash provided by (used in) operating activities:
Net realized (gains) losses		(14,134)		(570,888)		625
Depreciation		35		64		68
Other items, net		1,350		1,403		3,966
Change in:
Affiliate balances receivable/payable		(821)		(724)		(3,404)
Federal income taxes		(1,409)		(19,484)		5,901
Changes in investment in unconsolidated investee:
Undistributed earnings		—		(372)		(22,786)
Net cash used in operating activities	$	(11,152)	$	(141,717)	$	(10,728)

Cash flows from investing activities
Purchase of:
Fixed income, available-for-sale	$	(89,501)	$	(1,356,177)	$	(33,373)
Other		(1,832)		(1,420)		(2,904)
Sale of:
Fixed income, available-for-sale		—		1,373		5,306
Equity method investee		14,134		686,566		—
Other		54		221		1,245
Property and equipment		—		298		—
Call or maturity of:
Fixed income, available-for-sale		263,939		1,192,050		2,878
Net purchase of short-term investments		(74,696)		(2,229)		—
Cash dividends received-subsidiaries		145,000		13,000		180,000
Net cash provided by investing activities	$	257,098	$	533,682	$	153,152

Cash flows from financing activities
Proceeds from stock option exercises	$	1,245	$	(465)	$	1,838
Proceeds from issuance of debt		50,000		—		—
Repayment of debt		(150,000)		—		—
Cash dividends paid		(152,508)		(397,323)		(147,422)
Other		5,314		5,441		4,212
Net cash used in financing activities	$	(245,949)	$	(392,347)	$	(141,372)

Net increase (decrease) in cash	$	(3)	$	(382)	$	1,052
Cash at beginning of year		1,051		1,433		381
Cash at end of year	$	1,048	$	1,051	$	1,433

Interest paid on outstanding debt amounted to $8 million, $7 million and $7 million for 2023, 2022 and 2021, respectively. See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION

As of and for the years ended December 31, 2023, 2022 and 2021


									Incurred losses
	Deferred policy		Unpaid losses		Unearned		Net		and settlement
	acquisition		and settlement		premiums,		premiums		expenses
(in thousands)	costs		expenses, gross		gross		earned		current year
Year ended December 31, 2023
Casualty segment	$	73,334	$	2,043,556	$	491,479	$	758,346	$	496,530
Property segment		46,366		301,907		314,945		401,530		193,258
Surety segment		26,866		100,562		85,902		134,430		23,172
RLI Insurance Group	$	146,566	$	2,446,025	$	892,326	$	1,294,306	$	712,960

Year ended December 31, 2022
Casualty segment	$	66,285	$	1,929,091	$	466,178	$	711,832	$	468,661
Property segment		36,767		293,737		237,369		307,886		145,672
Surety segment		24,807		92,809		81,538		124,718		22,622
RLI Insurance Group	$	127,859	$	2,315,637	$	785,085	$	1,144,436	$	636,955

Year ended December 31, 2021
Casualty segment	$	55,760	$	1,760,469	$	438,248	$	633,639	$	420,259
Property segment		25,764		196,369		168,209		231,837		140,905
Surety segment		22,029		86,717		73,987		115,427		20,901
RLI Insurance Group	$	103,553	$	2,043,555	$	680,444	$	980,903	$	582,065

NOTE 1: Investment income is not allocated to the segments, therefore, net investment income has not been provided.

See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

100

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RLI CORP. AND SUBSIDIARIES

SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION

(continued)

As of and for the years ended December 31, 2023, 2022 and 2021


	Incurred
	losses and
	settlement		Policy		Other		Net
	expenses		acquisition		operating		premiums
(in thousands)	prior year		costs		expenses		written
Year ended December 31, 2023
Casualty segment	$	(78,498)	$	221,589	$	59,246	$	788,982
Property segment		(21,196)		116,344		26,808		500,057
Surety segment		(8,853)		80,392		12,329		138,708
RLI Insurance Group	$	(108,547)	$	418,325	$	98,383	$	1,427,747

Year ended December 31, 2022
Casualty segment	$	(87,225)	$	204,397	$	52,210	$	744,607
Property segment		(24,927)		95,203		19,416		364,644
Surety segment		(10,427)		70,032		10,586		132,285
RLI Insurance Group	$	(122,579)	$	369,632	$	82,212	$	1,241,536

Year ended December 31, 2021
Casualty segment	$	(108,632)	$	179,354	$	47,139	$	674,709
Property segment		(10,981)		72,008		18,605		262,816
Surety segment		(5,850)		66,106		11,163		120,008
RLI Insurance Group	$	(125,463)	$	317,468	$	76,907	$	1,057,533

See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

101

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RLI CORP. AND SUBSIDIARIES

SCHEDULE IV—REINSURANCE

Years ended December 31, 2023, 2022 and 2021


									Percentage
			Ceded to		Assumed				of amount
	Direct		other		from other		Net		assumed
(in thousands)	amount		companies		companies		amount		to net
2023
Casualty segment	$	909,081	$	178,018	$	27,283	$	758,346	3.6	%
Property segment		619,250		218,265		545		401,530	0.1	%
Surety segment		142,713		8,830		547		134,430	0.4	%
RLI Insurance Group premiums earned	$	1,671,044	$	405,113	$	28,375	$	1,294,306	2.2	%

2022
Casualty segment	$	863,530	$	186,469	$	34,771	$	711,832	4.9	%
Property segment		430,010		122,415		291		307,886	0.1	%
Surety segment		131,625		7,525		618		124,718	0.5	%
RLI Insurance Group premiums earned	$	1,425,165	$	316,409	$	35,680	$	1,144,436	3.1	%

2021
Casualty segment	$	788,741	$	185,433	$	30,331	$	633,639	4.8	%
Property segment		310,630		79,094		301		231,837	0.1	%
Surety segment		122,975		7,866		318		115,427	0.3	%
RLI Insurance Group premiums earned	$	1,222,346	$	272,393	$	30,950	$	980,903	3.2	%

See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS

Years ended December 31, 2023, 2022 and 2021


	Balance		Amounts		Amounts		Balance
	at beginning		charged		recovered		at end of
(in thousands)	of period		to expense		(written off)		period
2023 Allowance for uncollectible reinsurance	$	27,323	$	(50)	$	(299)	$	26,974

2022 Allowance for uncollectible reinsurance	$	27,243	$	130	$	(50)	$	27,323

2021 Allowance for uncollectible reinsurance	$	24,539	$	2,863	$	(159)	$	27,243

See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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RLI CORP. AND SUBSIDIARIES

SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING

PROPERTY-CASUALTY INSURANCE OPERATIONS

Years ended December 31, 2023, 2022 and 2021


(in thousands)	Deferred policy		Claims and		Unearned		Net		Net
	acquisition		claim adjustment		premiums,		premiums		investment
Affiliation with Registrant (1)	costs		expense reserves		gross		earned		income
2023	$	146,566	$	2,446,025	$	892,326	$	1,294,306	$	120,383
2022	$	127,859	$	2,315,637	$	785,085	$	1,144,436	$	86,078
2021	$	103,553	$	2,043,555	$	680,444	$	980,903	$	68,862


	Claims and claim adjustment
	expenses incurred related to:				Amortization		Paid claims and		Net
	Current		Prior		of deferred		claim adjustment		premiums
	year		year		acquisition costs		expenses		written
2023	$	712,960	$	(108,547)	$	418,325	$	491,285	$	1,427,747
2022	$	636,955	$	(122,579)	$	369,632	$	374,297	$	1,241,536
2021	$	582,065	$	(125,463)	$	317,468	$	327,453	$	1,057,533

(1)	Consolidated property-casualty insurance operations.

(2)	See the accompanying reports of independent registered public accounting firms starting on page 90 of this report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RLI Corp.

(Registrant)


By:	/s/ Todd W. Bryant
	Todd W. Bryant, Chief Financial Officer

Date:	February 23, 2024

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:	/s/ Craig W. Kliethermes	By:	/s/ Todd W. Bryant
	Craig W. Kliethermes, President & CEO		Todd W. Bryant, Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ Kaj Ahlmann	By:	/s/ Craig W. Kliethermes
	Kaj Ahlmann, Director		Craig W. Kliethermes, Director

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ Michael E. Angelina	By:	/s/ Paul B. Medini
	Michael E. Angelina, Director		Paul B. Medini, Director

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ David B. Duclos	By:	/s/ Jonathan E. Michael
	David B. Duclos, Director		Jonathan E. Michael, Director

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ Susan S. Fleming	By:	/s/ Robert P. Restrepo, Jr.
	Susan S. Fleming, Director		Robert P. Restrepo, Jr., Director

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ Jordan W. Graham	By:	/s/ Debbie S. Roberts
	Jordan W. Graham, Director		Debbie S. Roberts, Director

Date:	February 23, 2024	Date:	February 23, 2024

By:	/s/ Clark C. Kellogg	By:	/s/ Michael J. Stone
	Clark C. Kellogg, Director		Michael J. Stone, Director

Date:	February 23, 2024	Date:	February 23, 2024

105

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RLI (RLI) 10-K2023 FY Annual report

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