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, 2024
Or
☐
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, 2024, based upon the closing sale price of the Common Stock on June 30, 2024, was $6,006,400,931. 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 13, 2025 was 91,764,132.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2025 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
16
Item 1B.
Unresolved Staff Comments
24
Item 1C.
Cybersecurity
25
Item 2.
Properties
Item 3.
Legal Proceedings
26
Item 4.
Mine Safety Disclosures
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Reserved
27
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
50
Item 8.
Financial Statements and Supplementary Data
53
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
92
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
93
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
95
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2024
On January 15, 2025, RLI Corp. effected a two-for-one split of its commons stock and a proportionate increase in the number of authorized shares. All share and per share information throughout this report has been retroactively adjusted to reflect the stock split.
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, regulatory or contractual 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 2024, our specialty admitted operations produced gross premiums written of $1.1 billion, representing approximately 57 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, 2024, according to AM Best and as measured by direct premiums written. Our excess and surplus operations wrote gross premiums of $848 million, or 42 percent, of our total gross premiums written in 2024.
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 2024, our specialty reinsurance operations wrote gross premiums of $27 million, representing approximately 1 percent of our total gross premiums written for the year.
BUSINESS SEGMENT OVERVIEW
Our insurance operations consist of three segments: property, casualty and surety. For additional information, see note 11 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)
2024
2023
2022
CASUALTY
Commercial excess and personal umbrella
$
354,847
23
%
286,178
22
253,921
Commercial transportation
120,650
8
103,719
96,992
General liability
104,423
7
103,066
100,374
9
Professional services
103,794
99,596
95,187
Small commercial
78,308
5
72,920
6
67,673
Executive products
23,555
2
24,687
26,606
Other casualty
67,260
4
68,180
71,079
Total
852,837
56
758,346
59
711,832
62
PROPERTY
Commercial property
345,554
244,798
19
163,078
14
Marine
145,706
10
129,428
113,208
Other property
40,124
27,304
31,600
531,384
35
401,530
31
307,886
SURETY
Transactional
49,460
47,983
45,826
Commercial
48,533
49,707
47,652
Contract
44,192
36,740
31,240
142,185
134,430
124,718
11
Grand total
1,526,406
100
1,294,306
1,144,436
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.
General Liability
Our general liability business consists primarily of third-party liability coverage for commercial insureds including manufacturers, contractors, apartments and mercantile. We also offer coverages for security guards and environmental liability coverages 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.
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 include some inland marine coverages, as well as commercial automobile, property and excess liability coverage.
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 binding authority group, a program in which select surplus lines producers are granted limited underwriting authority through our online 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 and certain industrial and mercantile structures.
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 in Hawaii, as well as property coverages packaged through our binding authority group.
SURETY SEGMENT
Our transactional surety coverage includes small bonds for businesses and individuals. Examples of these bond types are license and permit, notary and court bonds. The underwriting and delivery of these bonds is highly automated.
We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare, energy and renewable energy industries.
We 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. 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
Our commercial property, general liability, commercial surety, executive products, commercial excess, marine and commercial transportation coverages are sold through independent wholesale and retail brokers.
INDEPENDENT AGENTS
We distribute products such as homeowners’ and dwelling fire, home business, surety, commercial transportation, professional services, small commercial and personal umbrella through independent agents. Several of these products require detailed eligibility criteria, which are incorporated into strict underwriting guidelines, and each risk is prequalified through a system that is accessible to the independent agent. The independent agent cannot bind the risk unless they receive approval from either our underwriters or automated systems.
CARRIER PARTNERS
We partner with other insurance carriers for home business and personal umbrella coverage. The carriers place this business with us through their associated agencies when the underlying risk does not meet their underwriting appetite.
UNDERWRITING AGENTS
We contract with select underwriting agencies that have limited authority to bind or underwrite business on our behalf. The underwriting agreements include strict guidelines, and the agents are subject to regular audits.
DIRECT
We utilize digital platforms to efficiently produce, process and service select business, including home business, binding authority, small commercial, personal umbrella and surety.
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, Allianz, Arch, Aspen, AXA/IL, Beazley, Berkley, Berkshire/National Indemnity, Chubb, CNA, Great American, Great West, Hartford, Hudson, James River, Kinsale, Lancer, Liberty, Markel, Nationwide, Progressive, RSUI, Sompo, Tokio Marine/HCC, Travelers, USLI, Westchester and Zurich.
Our 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.
Our 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.
Capacity from managing general agents also increases competition in the property and casualty markets. The combination of coverages, service, pricing and other methods of competition vary from line to line. Our principal methods of winning business are innovative coverages, quality and consistent service to the agents and policyholders, and fair pricing. We compete favorably, in part, because of the value we add in relationships, the level of service we provide, the quality of our associate-owners, our sound financial condition and reputation, as well as our geographic footprint. 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 history 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, 2024, 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
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 4 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
Year Ended December 31,
PREMIUMS WRITTEN
Direct and Assumed
2,013,048
1,806,660
1,565,486
Reinsurance ceded
(407,527)
(378,913)
(323,950)
Net
1,605,521
1,427,747
1,241,536
PREMIUMS EARNED
1,921,235
1,699,419
1,460,845
(394,829)
(405,113)
(316,409)
Reinsurance is subject to certain risks, including market risk, which affects the cost and ability to secure reinsurance contracts. Reinsurance is also subject to 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 balances recoverable 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. Facultative coverage is applied to individual risks at the company’s discretion to supplement the limits provided by our treaty coverage or cover risks 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 *
Excess of Loss
1/1
1.0
9.0
2.8
Commercial excess
Personal umbrella
Package - liability and workers' compensation
10.0
4.2
Workers' compensation catastrophe
11.0
14.0
—
**
Professional services - professional liability
4/1
3.3
Quota Share
7/1
N/A
25.0
6.3
Property - risk cover
2.0
23.0
4.9
6/1
3.0
27.0
Surety
5.0
70.0
12.0
***
*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 regularly.
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.
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 coverages for 2023 through 2025 are shown in the table below. Amounts for 2023 reflect additional catastrophe reinsurance protection that was purchased mid-year to support growth in our catastrophe-exposed business.
Catastrophe Coverages
2025
First-Dollar
Retention
California earthquake
850
Non-California earthquake
Other perils, including hurricane
750
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 various layers in certain years. Our participation has varied over time based on price and the amount of risk transferred by each layer. For 2025, the program was 100 percent placed, with a portion of the first layer expiring on May 31, 2025. All layers of the treaty include one reinstatement, some being prepaid reinstatements, while others require the payment of additional reinstatement premium. With the renewal effective January 1, 2025, the number of layers with prepaid reinstatement premium increased, which reduces the net loss impact on catastrophe events. Additionally, we have coverages that may reduce first-dollar retentions for multiple events within an established period of time.
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, 2024, utilizing the reinsurance treaty structure in place as of January 1, 2025. The loss amounts are pre-tax and include the impact of additional reinsurance reinstatement premium, if any.
(Losses in millions)
Hurricane
California Earthquake
Non-California Earthquake
Probability
Return Period
Gross Loss
Net Loss
90.0%
10 Year
94
42
96.0%
25 Year
209
47
78
15
98.0%
50 Year
331
49
186
99.0%
100 Year
484
332
33
128
32
99.6%
250 Year
740
581
243
39
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.
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, 2025, there is a 99.6 percent likelihood that the net loss will be less than 2.6 percent of policyholders’ statutory surplus as of December 31, 2024. The exposure levels continue to be within our tolerances for this risk. Comparatively, based on the catastrophe reinsurance treaty purchased on January 1, 2024, there was a 99.6 percent likelihood that the net loss would have been less than 8.0 percent of policyholders’ statutory surplus as of December 31, 2023. The comparable metric over the past five years, as measured at the beginning of each of those treaty years, has ranged from 2.6 percent of surplus to 10.8 percent of surplus.
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.
(dollars in thousands)
2021
2020
Statutory net premiums written
1,057,533
892,088
Policyholders’ surplus
1,787,312
1,520,135
1,407,925
1,240,649
1,121,592
Ratio
0.90 to 1
0.94 to 1
0.88 to 1
0.85 to 1
0.80 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.
Loss ratio
48.4
46.7
44.9
46.5
51.2
Expense ratio
37.8
39.9
39.5
40.3
40.8
Combined ratio
86.2
86.6
84.4
86.8
92.0
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).
Statutory
Statutory loss ratio
51.0
Statutory expense ratio
37.5
37.7
38.3
38.8
Statutory combined ratio
85.9
83.2
85.3
91.8
P&C industry combined ratio
98.3
*
101.5
102.7
99.7
98.8
Source: Conning (2024). Property-Casualty Forecast & Analysis: By Line of Business, Fourth Quarter 2024. Estimated for the year ended December 31, 2024.
**Source: AM Best (2024). Aggregate & Averages – Property/Casualty, United States & Canada. 2020 – 2023.
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, the same as the prior year, while the equity allocation was 18 percent of the overall portfolio, up 2 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 3 percent was made up of cash and short-term investments. As of December 31, 2024, 79 percent of the fixed income portfolio was rated A or better and 57 percent was rated AA or better.
We classify all 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, 2024, were as follows:
Amortized Cost
Fair Value
Due in one year or less
256,711
255,017
Due after one year through five years
742,187
723,476
Due after five years through 10 years
948,340
914,770
Due after 10 years
574,403
476,062
ABS/CMBS/MBS*
869,518
806,471
Total available-for-sale
3,391,159
3,175,796
Asset-backed, commercial mortgage-backed and mortgage-backed securities
We had cash and fixed income securities maturing within one year of $372 million at year-end 2024. This total represented 9 percent of cash and investments, which was the same as 2023.
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
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, 2024, 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 $296 million compared to actual statutory capital and surplus of $1.8 billion as of December 31, 2024, resulting in statutory capital that is more than six 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. Many states also operate an insurance plan, often referred to as the “insurer of last resort” to provide property insurance to state residents who are unable to obtain that insurance in the private market. 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 fund its guaranty association or insurer of last resort plan. 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. These regulations are revised from time-to-time, such as New York’s second amendment to its cybersecurity act, requiring us to periodically revise our cybersecurity governance, processes and controls to comply with the revised regulations.
A number of states have issued regulatory guidance to insurance companies authorized to do business in those respective states on the use of artificial intelligence (AI). A number of states have adopted the NAIC Model Bulletin on the Use of Artificial Intelligence, while the New York Department of Financial Services issued its circular letter. Such state guidance on the use of AI sets forth expectations that companies have governance and risk management practices in place to ensure the use of AI complies with various state laws governing the business of insurance.
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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 2024 survey response, for calendar year 2023, 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 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 1,147 associates throughout the United States as of December 31, 2024, compared to 1,099 as of December 31, 2023, and the average employee tenure was 8.6 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 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, 2024, 7 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:
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 2024, 46 percent of our gross premiums written were produced through eight 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 2024: Florida – 20 percent; California – 18 percent; Texas – 11 percent; and New York – 8 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.
New, proposed or potential legislative or industry developments could further increase competition in our industry, including:
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 our current ratings.
All our ratings were reviewed during 2024. 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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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 an 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.
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As part of the reserving process, we review historical data and consider the impact of various factors such as:
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 hurricanes and tropical storms affecting coastal regions of the United States and earthquakes, primarily on the West Coast. Weather-related catastrophes may include events such as hurricanes, severe convective storms, winter weather, drought and heatwaves. In addition, catastrophe losses can occur from events such as wildfires, 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 certain 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:
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. Some 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. Additionally, the potential exists for losses to exceed our reinsurance limits when we believe we have adequate reinsurance coverage in place, which would adversely impact our net earnings.
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.
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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.
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
21
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 our employees will operate within the ERM framework cannot be 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). 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, such as the use of artificial intelligence systems, 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 generally result in significant disruptions in economic activity and financial markets. The cumulative effects on the Company could include, without limitation:
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.
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:
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 six core functions contained within the NIST Framework organizing structure: identify, protect, detect, respond, recover and govern.
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 IT security department is responsible for the 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 IT security department operates under general oversight of the Company’s chief information officer (CIO), who also serves as the Company’s chief information security officer (CISO). The Company’s CIO has 27 years of technology and technology leadership experience, including 14 years serving as a CISO, in the insurance industry. The head of the Company’s IT security department, who reports to the CIO, holds a Certified Information Systems Security Professional designation from the Information Security Certification Consortium, has 20 years of experience in the insurance industry and has served in IT security-related roles for 24 years.
Management oversight of cybersecurity risks is provided primarily through the Company’s Technology Committee, which is chaired by the Company’s CIO and comprised of members of senior management. The Technology Committee’s responsibilities include general oversight of cybersecurity-related matters, maintenance of the cybersecurity and data privacy programs and oversight of the Company’s cybersecurity incident response plan. Technology risk, including cybersecurity risk, is also integrated into the Company’s enterprise risk management process. The Company’s Risk Committee, chaired by the CEO and comprised of members of executive management, 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 Technology Committee’s current assessment of cybersecurity risks.
Through 2024, the RLI Corp. Board of Directors provided oversight for cybersecurity risks primarily through its Audit Committee. In February 2025, the charter of the Finance & Investments Committee was revised to include overall enterprise risk management oversight, including oversight of cybersecurity risk. The committee was renamed the Finance & Risk Committee (FRC). The Company’s CIO, along with the head of the Company’s IT security department, presents quarterly to the designated committee on cybersecurity risks and the Company’s strategies 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 and the Company’s head of IT security on select cybersecurity topics, and periodic “table top” simulations of a cybersecurity event.
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; the Company’s Technology Committee; 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 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 our office buildings in Peoria.
Item 3. Legal Proceedings
Information on our legal proceedings is set forth in note 9 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 194 consecutive quarters and increased quarterly dividends in each of the last 49 years. In December 2024 and 2023, RLI Corp. paid special cash dividends of $2.00 and $1.00 per share to shareholders, respectively. As of February 13, 2025, there were 1,103 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.
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:
2019
--------------
118
131
163
169
216
S&P 500
••••••••••••••••
152
125
157
197
S&P 500 P&C Index
— — —
106
149
164
222
Assumes $100 invested on December 31, 2019, in RLI, S&P 500 and S&P 500 P&C Index, with reinvestment of dividends. Comparison of five-year annualized total return — RLI: 16.6%, S&P 500: 14.5% and S&P 500 P&C Index: 17.3%.
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 - Not applicable.
Item 6. [Reserved] - Not applicable.
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 three 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 2024, we achieved our 29th consecutive year of underwriting profitability. Over the 29-year period, we averaged an 88.1 combined ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.
On December 15, 2025, RLI Corp. effected a two-for-one split of its common stock and a proportionate increase in the number of authorized shares. All share and per share information throughout this report has been retroactively adjusted to reflect the stock split.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: property, casualty and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through underwriting income and combined ratios.
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 are not subtotaled. However, this information is available in total and by segment in note 11 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:
Net earnings
345,779
304,611
Income tax expense
81,772
72,654
Earnings before income taxes
427,551
377,265
Equity in earnings of unconsolidated investees
4,869
(9,610)
General corporate expenses
15,880
15,917
Interest expense on debt
6,331
7,301
Net unrealized gains on equity securities
(81,734)
(64,787)
Net realized gains
(19,966)
(32,518)
Net investment income
(142,278)
(120,383)
Underwriting income
210,653
173,185
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. The loss ratio is loss and settlement expenses divided by net premiums earned. 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 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 commercial and 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
Long
Internal
Low frequency
High
High severity
Loss trend volatility
Exposure growth
Unforeseen tort potential
Medium
Exposure changes/mix
Highly varied exposures
Exposure change/mix
Small volume
Internal & external
Economic volatility
Exposure growth/mix
Heavily reinsured
Aggregation exposure
Commercial and other property
Short
Unique exposures
Runoff including asbestos & environmental
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. We also consider our knowledge of frequency and severity from early claim reports and onsite reviews of damage 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:
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.
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.
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.
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:
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 claim 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
34
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 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, 2024.
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 calendar year emergence on prior accident years has ranged from 17 percent to 27 percent favorable and our transportation emergence has ranged from 30 percent adverse to 40 percent favorable over the last three calendar years, while our overall emergence for all products combined has ranged from 13 percent to 25 percent favorable. The numbers below are the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2024, resulting from the change in the parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance, which was $209 million at December 31, 2024.
Result from favorable
Result from unfavorable
change in parameter
+/- 5 point change in expected loss ratio for all accident years
(18)
+/- 10% change in expected emergence patterns
(5)
+/- 30% change in actual loss emergence over a calendar year
(7)
Simultaneous change in expected loss ratio (5pts), expected emergence patterns (10%) and actual loss emergence (30%).
(30)
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 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
36
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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023, incorporated herein by reference.
Consolidated revenue for 2024 totaled $1.8 billion, up $258 million from 2023. Net premiums earned for the Group increased 18 percent, driven primarily by growth from our property and casualty segments. Positive equity market returns during 2024 resulted in $82 million of unrealized gains on equity securities, building on a rally that led to $65 million of unrealized gains in our equity portfolio during 2023. Net investment income increased by 18 percent in 2024, primarily due to higher reinvestment rates and a larger average asset base relative to the prior year.
CONSOLIDATED REVENUE
Net premiums earned
142,278
120,383
19,966
32,518
81,734
64,787
Total consolidated revenue
1,770,384
1,511,994
Net earnings for 2024 totaled $346 million, up from $305 million in 2023. Improved underwriting income was bolstered by an increase in investment income and larger unrealized gains on equity securities.
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NET EARNINGS
(6,331)
(7,301)
(15,880)
(15,917)
(4,869)
9,610
(81,772)
(72,654)
UNDERWRITING RESULTS
We surpassed $2 billion in gross premiums written for the first time and achieved our 29th consecutive year of underwriting profitability in 2024. Our track record of success is built on underwriting discipline and our diversified product portfolio, which allow us to navigate various markets.
Gross premiums written increased $206 million, or 11 percent, in 2024 when compared to 2023, with all three segments contributing. Despite competitive conditions, a relatively strong economy and positive rate movement benefited much of the insurance portfolio. Net premiums earned were up 18 percent in 2024.
Underwriting income was $211 million on an 86.2 combined ratio in 2024, compared to $173 million on an 86.6 combined ratio in 2023. Underwriting results for 2024 included $76 million of pretax losses from Hurricanes Beryl, Helene and Milton, as well as $30 million of other storm losses. Comparatively, 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. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $95 million in 2024, compared to $109 million in 2023. Further discussion of reserve development can be found in note 5 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
The loss ratio was 48.4 in 2024, compared to 46.7 in 2023. The increase reflects higher net retained catastrophe losses in 2024, lower prior period reserve releases and the strengthening of current accident year casualty reserves, primarily on auto exposures. An offsetting loss ratio benefit was a modest improvement in the property segment’s current accident year attritional, non-catastrophe loss ratio. The expense ratio decreased to 37.8 in 2024, from 39.9 in 2023. Growth of net premiums earned allowed for improved leveraging of our expense base, despite continued investments in our people and technology, as well as higher levels of bonus and profit-sharing expense that resulted from improved operating performance.
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 loss development and other drivers of growth in book value would increase bonus and profit-sharing expenses, while catastrophe losses, adverse loss development and negative equity portfolio returns would lead to expense reductions. These performance-related expenses impact policy acquisition, insurance operating and general corporate expenses.
A large portion of our reinsurance placements renewed on January 1, 2025. For our property treaties, the risk-adjusted rate change was down 10 percent to 20 percent, with greater decreases in the higher layers. Prepaid reinstatements were added back to the bottom half of the catastrophe tower, which reduces the net loss impact on catastrophe events. The risk-adjusted rate change for our casualty treaties was plus or minus 5 percent, depending on the underlying coverage.
Like most of the industry, we are closely monitoring the severity of auto losses, which adversely impacted our current and prior accident year losses in 2024. The goal of our business model has always been to underwrite for profit and our underwriters are incentivized to walk away from underpriced risks. We obtained rate increases across most of our insurance portfolio in 2024. However, we are not solely reliant on rate to pursue profitable underwriting. We utilize our in-house loss control team to encourage our commercial auto insureds to follow safe practices, work with producers to balance growth and exit classes of business or individual accounts that are driving loss severity. We have a strong feedback loop between our underwriting, claim and analytical teams that address new or prevailing topics, like legal system abuse. Overall, we remain optimistic about the potential underlying profitability of our product portfolio. Our investments in technology and specialized underwriting staff should put us in a position to take advantage of opportunities as we move forward.
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The following tables and narrative provide a more detailed look at individual segment performance over the last two years.
GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED
Gross Premiums Written
Net Premiums Earned
% Change
478,144
370,571
146,733
125,434
110,984
106,032
1
114,163
108,503
84,637
76,644
90,815
95,356
82,880
79,125
(1)
Total casualty
1,108,356
961,665
519,991
505,413
41
170,188
148,829
53,307
43,130
Total property
743,486
697,372
52,299
49,624
59,008
57,704
(2)
49,899
40,295
Total surety
161,206
147,623
Casualty
Gross premiums written for casualty were up $147 million in 2024. We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth within our personal umbrella and small commercial distribution channels. The commercial excess product grew as new project work resulted in more business opportunities and renewal retention improved. Commercial transportation benefited from an increase in new business submissions and new products, including moving and storage as well as an excess and surplus lines offering. Our executive products premium decreased, largely due to a continued soft management liability marketplace.
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. Rate filings for personal umbrella were approved in the second half of 2024, and where increases can be justified, we will be pursuing further rate increases for auto-exposed lines. With the broader industry experiencing higher loss severity trends, we see potential for ongoing market disruption. As with all our segments, our investments in underwriting talent and strong relationships with producers should put us in position to take advantage of market opportunities as they arise. However, our underwriters are incentivized and empowered to shrink our top line revenue to protect our bottom-line profitability when necessary.
Property
Gross premiums written for the property segment were up $46 million in 2024, with commercial property contributing $15 million of that growth. Property lines within the excess and surplus market are in transition and conditions began to change mid-year. Rates for wind coverages were down in the second half of the year after multiple years of double-digit rate increases. We have started to see more competition and the deterioration of terms and conditions, but are willing to forgo opportunities that do not meet our underwriting standards. The earthquake market has also been affected by intense competition and some businesses deciding not to procure coverage.
We leverage our underwriting expertise by acting as a Lloyd’s coverholder and write coastal wind and earthquake exposures on a syndicated policy. While allowing us to diversify risk through a mechanism outside of reinsurance, this approach also allows us to generate fee income that offsets underwriting expense. Combined with the challenging property market, an increased percentage of premium being written by our syndicated partner resulted in a decline in earthquake and wind exposures for the Company. However, our fire and other peril coverage offerings experienced growth, resulting in overall premium expansion for commercial property. All coverages remain well priced and we believe there is opportunity to continue writing profitable business in these spaces.
A strong construction market and an expansion of newer offerings led to increased submissions and $21 million of premium growth for our marine product. Additionally, some competitors have reduced their appetite for select Hawaii homeowner coverages, which, along with rate increases that became effective during the fourth quarter, has allowed our other property premium to grow.
Gross premiums written for the surety segment were up $14 million in 2024 and we continue to invest in infrastructure to support long-term growth. Contract surety benefited from new agency relationships, new construction projects and elevated material costs, while transactional surety grew organically by leveraging existing relationships from complementary products. Despite a highly competitive commercial surety market, the expansion of existing accounts and new business also allowed for premium growth. Industry loss ratios have increased, particularly in the contract surety space. However, our underwriters monitor the financial condition of principals and partner with them to support achievable projects, which has helped us avoid material losses in the past. We believe this collaborative approach will help us write profitable business going forward.
UNDERWRITING INCOME
17,788
59,479
167,536
86,316
25,329
27,390
97.9
92.2
68.5
78.5
82.2
79.6
Underwriting income for the casualty segment was $18 million on a 97.9 combined ratio in 2024, compared to $59 million on a 92.2 combined ratio in 2023. The decline was the result of decreased favorable development on prior accident years’ reserves and an increase in current accident year losses, primarily on auto related exposures.
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 $53 million for 2024, which was largely attributable to accident years 2019 through 2023. Favorable development was widespread, with notable amounts from commercial excess, general liability, executive products, professional services and our mortgage reinsurance program within other casualty. Commercial transportation and small commercial experienced adverse prior accident year development, largely related to auto exposures. Comparatively, results for the casualty segment in 2023 included favorable development of $78 million, with the majority attributable to commercial excess, general liability, personal umbrella, executive products and professional services across accident years 2015 through 2022. Hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $5 million of losses in 2024, compared to $2 million of storm losses in 2023.
The segment’s loss ratio was 61.5 in 2024, compared to 55.1 in 2023. The higher loss ratio in 2024 was due to lower amounts of favorable development on prior years’ reserves and strengthening our current accident year reserves for our personal umbrella, transportation and professional services products. The expense ratio for the casualty segment was 36.4 in 2024, compared to 37.1 in 2023.
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Underwriting income from the property segment was $168 million on a 68.5 combined ratio in 2024, compared to $86 million on a 78.5 combined ratio in 2023. Underwriting results for 2024 included $33 million of favorable development on prior years’ attritional and catastrophe loss reserves, largely from the marine and commercial property businesses; $73 million of losses from Hurricanes Beryl, Helene and Milton; as well as $28 million of other storm losses. Results for 2023 included $21 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the commercial property business; $49 million of losses and $12 million of reinsurance reinstatement premium from Hawaiian wildfires; as well as $29 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 37.4 in 2024, compared to 42.9 in 2023. Catastrophe losses added 19 points to the loss ratio in 2024, compared to 20 points of impact in 2023. Additionally, the current accident year attritional loss ratio improved in 2024. The expense ratio for the property segment declined to 31.1 in 2024, from 35.6 in 2023, as the growth in the earned premium base exceeded the growth in expense. Furthermore, the expense ratio benefited from an increase in fee income, which was the result of producing more premium for our syndicated partner.
Underwriting income for the surety segment totaled $25 million on an 82.2 combined ratio in 2024, compared to $27 million on a 79.6 combined ratio in 2023. Underwriting performance for each year reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. Favorable development on prior accident years’ reserves decreased loss and settlement expenses for the segment by $9 million for 2024 and 2023.
The segment’s loss ratio was 11.2 in 2024, compared to 10.7 in 2023. An increase in the current accident year loss ratio led to the slightly higher overall loss ratio for the segment. The expense ratio for the surety segment was 71.0 in 2024, up from 68.9 in 2023, due to increases in select policy acquisition costs, as well as continued investments in technology and people to support growth and improve the customer experience.
NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS
During 2024, net investment income increased by 18 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 2024 and 2023:
PRETAX YIELD
Taxable (on book value)
3.82
3.51
Tax-exempt (on book value)
2.87
2.80
Equities (on fair value)
1.97
2.27
AFTER-TAX YIELD
3.02
2.77
2.72
2.65
1.71
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 2024, the average after-tax yield on the taxable fixed income portfolio was 3.0 percent, an increase from 2.8 percent in the prior year. The average after-tax yield on the tax-exempt portfolio was 2.7 percent for both 2024 and 2023.
The fixed income portfolio increased by $320 million during the year, as we allocated the majority of available cash flow to investment grade bonds and experienced positive market performance throughout the year. The tax-adjusted total return on a mark-to-market basis was 3.4 percent. Our equity portfolio increased by $146 million to $736 million in 2024 as a result of strong equity market returns during the year. The total return for the year on the equity portfolio was 21.1 percent.
Our investment results for the last five years are shown in the following table:
Tax
Pre-tax
Equivalent
Annualized
Change in
Return on
Average
Unrealized
Avg.
Invested
Investment
Net Realized
Appreciation
Assets (1)
Income (2)(3)
Gains (3)(4)
(3)(5)
Assets
2,698,721
67,893
17,885
99,451
6.9
3,000,025
68,862
64,222
(6,280)
4.3
3,217,635
86,078
588,515
(462,981)
6.6
3,474,310
144,569
8.6
3,880,475
64,912
5.9
5-yr Avg.
3,254,233
97,099
144,621
(32,066)
6.4
6.5
In 2024, we recognized $31 million of net realized gains in the equity portfolio, $5 million of net realized losses in the fixed income portfolio and $6 million of other net realized losses. 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.
Investment income was aided by higher interest rates in 2024, as the Federal Reserve kept the Fed Funds target high relative to recent history. Entering 2025, consensus is the Federal Reserve’s current policy will continue balancing price stability against maximum employment, and result in two to three rate cuts over the coming year. 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.
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, 2024, the portfolio had a fair value of $4.1 billion, an increase of $408 million from the end of 2023. 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.
As of December 31, 2024, our investment portfolio had the following asset allocation breakdown:
Cost or
% of Total
Gain/(Loss)
Quality*
U.S. government
525,608
515,635
(9,973)
12.6
AA+
U.S. agency
55,921
54,338
(1,583)
1.3
Non-U.S. government & agency
8,959
7,871
(1,088)
0.2
A
Agency MBS
438,545
396,223
(42,322)
9.7
ABS/CMBS/MBS**
430,973
410,248
(20,725)
10.1
AA
Corporate
1,397,676
1,346,521
(51,155)
33.0
A-
Municipal
533,477
444,960
(88,517)
10.9
Total fixed income
(215,363)
77.8
AA-
Equities
417,897
736,191
318,294
18.0
Short-term investments
74,915
1.8
Other invested assets
55,408
57,939
2,531
1.4
Cash
39,790
Total portfolio
3,979,169
4,084,631
105,462
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, 2024, our fixed income portfolio’s duration was 4.9 years.
Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk asset classes. Equities comprised 18 percent of our total 2024 portfolio, up from 16 percent at the end of 2023, 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, 2024, our fixed income portfolio had the following rating distributions:
FAIR VALUE
Below
AAA
BBB
Grade
No Rating
Bonds:
U.S. government & agency (GSE)
569,973
1,351
3,450
2,097
973
Corporate - industrial
21,544
80,880
284,092
232,755
119,868
739,139
Corporate - financial
10,838
56,878
229,982
95,147
23,165
416,010
Corporate - utilities
1,069
10,413
55,107
30,290
4,963
101,842
Corporate industrial - private placements
38,532
Corporate financial - private placements
48,497
Corporate utilities - private placements
2,501
131,318
281,356
31,493
793
Structured:
GSE - RMBS
356,956
Non-GSE RMBS
124,186
3,744
127,930
CLO
15,020
18,059
27,971
6,000
67,050
ABS
18,582
13,172
57,523
46,032
135,309
GSE - CMBS
39,267
CMBS
67,702
1,130
2,231
8,896
79,959
390,259
1,433,179
691,849
369,185
147,996
143,328
Percent of total fair value
12.3%
45.1%
21.8%
11.6%
4.7%
4.5%
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 MBS portfolio by investment type, as of December 31:
Pass-throughs
298,351
270,921
68.4
Planned amortization class
94,586
86,035
21.7
Sequential
45,608
9.9
295,060
275,113
64.7
102,726
94,188
22.1
62,765
55,984
13.2
460,551
425,285
Agency MBS represented 12 percent of the fixed income portfolio, compared to 15 percent as of December 31, 2023. 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, 2024, all 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.
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
44
flows. As of December 31, 2024, the agency MBS portfolio contained 68 percent of pure pass-throughs, up from 65 percent as of December 31, 2023. An additional 10 percent of the MBS portfolio was invested in sequential payer, down from 13 percent in 2023.
The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of December 31:
Amortized
Cost
137,353
141,784
31.2
84,927
19.5
66,909
16.3
96,586
91,137
32.5
119,374
104,887
37.3
61,878
54,689
19.4
30,620
30,469
10.8
308,458
281,182
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, 2024, ABS/CMBS/RMBS investments were 13 percent of the fixed income portfolio, compared to 10 percent as of December 31, 2023. Fifty-five percent of the securities in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2024, while 85 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, 2024.
Municipal Fixed Income Securities
As of December 31, 2024, municipal bonds comprised 14 percent of our fixed income portfolio, compared to 19 percent as of December 31, 2023. 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, 2024, approximately 50 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining 50 percent were revenue based. The municipal portfolio is diversified amongst 282 issues.
Ninety-three percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better. The municipal portfolio includes 66 percent taxable and 34 percent tax-exempt securities.
Corporate Debt Securities
As of December 31, 2024, our corporate debt portfolio comprised 42 percent of the fixed income portfolio, compared to 43 percent as of December 31, 2023. 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 $148 million while non-rated Regulation D securities totaled $90 million at the end of 2024. While these Regulation D securities are not rated by a traditional nationally recognized statistical rating organization, all but one carry an equivalent investment-grade rating from
45
the Securities Valuation Office of the NAIC. The corporate debt portfolio has an overall quality rating of A- diversified among 954 issues.
The table below illustrates our corporate debt exposure as of December 31, 2024. Private placements include bank loan and Regulation D securities.
767,987
54.9
431,079
30.9
104,975
7.6
40,474
50,635
3.6
2,526
We believe corporate debt investments add diversification and additional yield to our portfolio.
EQUITY SECURITIES
As of December 31, 2024, our equity portfolio comprised 18 percent of the investment portfolio, up from 16 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 and S&P 500 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 89 securities.
INTEREST AND GENERAL CORPORATE EXPENSE
We incurred $6 million of interest expense on outstanding debt during 2024 and $7 million in 2023. At December 31, 2024, our debt included $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries an adjustable interest rate of 5.98 percent as of the end of 2024. Additionally, we borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) that matures on November 12, 2025 and pays interest monthly at an annualized rate of 4.44 percent. Comparatively, at December 31, 2023, our debt consisted of $50 million from our revolving line of credit with PNC and carried a floating interest rate of 7.07 percent, as well as $50 million of borrowings from the FHLBC that matured on November 10, 2024 and paid interest monthly at an annualized rate of 5.44 percent.
We incurred $16 million of general corporate expense during 2024 and 2023. General corporate expenses include director and shareholder relation costs and other compensation-related expenses incurred for the benefit of the corporation.
INVESTEE EARNINGS
As of December 31, 2024, 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 and maintain a position on Prime’s board of directors, we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In 2024, we recorded $5 million in investee losses for Prime, compared to $10 million of investee earnings in 2023. The loss in 2024 is reflective of Prime strengthening loss reserves on a number of prior accident years. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $9 million of gross premiums written and $8 million of net premiums earned during 2024, compared to $7 million of gross premiums written and $13 million of net premiums earned during 2023. The decrease in premiums earned is attributable to a reduction of our participation in the quota share reinsurance treaty, as well as the competitive market in which Prime operates.
We received dividends of $3 million from Prime in 2024, while no dividends were received from Prime in 2023. 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.
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INCOME TAXES
Our effective tax rates were 19.1 percent and 19.3 percent for 2024 and 2023, 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 slightly lower in 2024 due to higher levels of tax-favored adjustments, such as excess tax benefits on share-based compensation.
Dividends paid to our ESOP result in a tax deduction. Dividends paid to the ESOP in 2024 and 2023 resulted in tax benefits of $3 million and $2 million, respectively. These tax benefits reduced the effective tax rate for 2024 and 2023 by 0.6 percent and 0.4 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 $1.9 billion at December 31, 2024, from $1.7 billion as of December 31, 2023. This reflects net incurred losses of $739 million in 2024 offset by paid losses of $490 million, compared to net incurred losses of $604 million offset by $491 million paid in 2023. For more information on the changes in loss and LAE reserves by segment, see note 5 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 $2.7 billion at December 31, 2024, from $2.4 billion at December 31, 2023, while ceded loss and LAE reserves decreased to $755 million from $757 million over the same period.
LIQUIDITY AND CAPITAL RESOURCES
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:
Net cash provided by operating activities
560,219
464,257
Net cash used in investing activities
(318,870)
(211,803)
Net cash used in financing activities
(237,983)
(238,848)
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 2024, 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.
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, 2024:
Payments due by period
Less than 1 year
1-3 years
3-5 years
More than 5 years
Loss and settlement expense reserves
811,855
938,144
510,232
433,239
2,693,470
Debt
100,000
Interest on debt
2,242
Operating leases
4,373
6,001
3,060
4,489
17,923
1,373
5,765
948
60
8,146
919,843
949,910
514,240
437,788
2,821,781
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 $755 million at December 31, 2024, compared to $757 million in 2023.
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 an adjustable interest rate of 5.98 percent as of the end of 2024, interest on this $50 million borrowing is excluded from the table above. Additionally, on November 12, 2024 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2025 and monthly interest is paid at an annualized rate of 4.44 percent. We are not party to any off-balance sheet arrangements. See note 3 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, 2024, we had cash, short-term investments and other investments maturing within one year of approximately $372 million and an additional $739 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, 2024, $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 immediate 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 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 29 consecutive years.
48
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
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:
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, 2024, our portfolio had a carrying value of $4.1 billion. Portfolio assets at December 31, 2024 increased by $408 million, or 11 percent, from December 31, 2023.
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, 2024, 48 percent of our shareholders’ equity was invested in equities versus 42 percent at year-end 2023.
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:
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, 2024, our capital structure consisted of $100 million in debt and $1.5 billion of shareholders’ equity. Debt outstanding comprised 6 percent of total capital as of December 31, 2024.
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, 2024, our holding company had $1.5 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 $39 million in liquid investment assets, which approximates two-thirds of 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 2024 and 2023, RLI Ins. paid ordinary dividends totaling $152 million and $145 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 2024 or 2023. Although RLI Ins. was restricted from distributing ordinary dividends to RLI Corp. as of December 31, 2024, the rolling 12-month limitations reset as of January 1st. A total of $241 million in ordinary dividend capacity will be available over the course of 2025. 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 195th consecutive dividend payment was declared in February 2025 and will be paid on March 20, 2025, in the amount of $0.15 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.
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:
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, 2024. Listed on each table is the December 31, 2024 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, 2024, our fixed income portfolio had a fair value of $3.2 billion. The sensitivity analysis uses scenarios of interest rates increasing 100 and 200 basis points from their December 31, 2024, levels with all other variables held constant. Such scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $158 million and $303 million, respectively. Comparatively, our fixed income portfolio had a fair value of $2.9 billion as of December 31, 2023 and scenarios of interest rates increasing 100 and 200 basis points would have resulted in modeled decreases of $132 million and $255 million, respectively.
As of December 31, 2024, our equity portfolio had a fair value of $736 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 $69 million and $137 million, respectively. Comparatively, our equity portfolio had a fair value of $590 million as of December 31, 2023 and scenarios of the S&P 500 Index declining by 10 percent and 20 percent would have resulted in approximate decreases of $55 million and $110 million, respectively.
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.
51
Effect of a 100 basis-point increase in interest rates and a 10 percent decline in the S&P 500:
12/31/24 Fair
Interest
Equity
Value
Rate Risk
Risk
Held for non-trading purposes:
Fixed income securities
(157,600)
Equity securities
(68,726)
3,911,987
Effect of a 200 basis-point increase in interest rates and a 20 percent decline in the S&P 500:
(303,414)
(137,453)
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:
171,741
68,726
Effect of a 200 basis-point decrease in interest rates and 20 percent increase in the S&P 500:
356,926
137,453
52
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Consolidated Balance Sheets
54
Consolidated Statements of Earnings and Comprehensive Earnings
55
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
57
Notes to Consolidated Financial Statements
58
Reports of Independent Registered Public Accounting Firms
90
December 31,
(in thousands, except per share data)
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value
2,855,849
(amortized cost of $3,391,159 and allowance for credit losses of $197 in 2024)
(amortized cost of $3,054,391 and allowance for credit losses of $306 in 2023)
Equity securities, at fair value (cost - $417,897 in 2024 and $354,022 in 2023)
590,041
Short-term investments, at cost which approximates fair value
134,923
59,081
36,424
Total investments and cash
3,676,318
Accrued investment income
28,319
24,062
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $22,932 in 2024 and $21,438 in 2023
230,534
221,206
Ceded unearned premiums
124,955
112,257
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,580 in 2024 and $10,608 in 2023
755,425
757,349
Deferred policy acquisition costs
166,214
146,566
Property and equipment, at cost, net of accumulated depreciation of $76,330 in 2024 and $74,279 in 2023
43,172
46,715
Investment in unconsolidated investees
56,477
56,966
Goodwill and intangibles
53,562
Income taxes - deferred
7,793
15,872
Other assets
77,720
69,348
TOTAL ASSETS
5,628,802
5,180,221
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and settlement expenses
2,446,025
Unearned premiums
984,140
892,326
Reinsurance balances payable
44,681
71,507
97,380
101,446
Income taxes - current
749
3,757
Short-term debt
Accrued expenses
124,242
108,880
Other liabilities
62,173
42,766
TOTAL LIABILITIES
4,106,835
3,766,707
SHAREHOLDERS' EQUITY
Common stock ($0.01 par value)
(Shares authorized - 400,000,000)
(137,598,560 shares issued and 91,738,132 shares outstanding in 2024)
(137,140,522 shares issued and 91,280,094 shares outstanding in 2023)
1,376
1,371
Paid-in capital
367,645
361,660
Accumulated other comprehensive earnings
(173,723)
(166,303)
Retained earnings
1,719,668
1,609,785
Deferred compensation
13,498
13,539
Treasury stock, at cost (45,860,428 shares in 2024 and 2023)
(406,497)
(406,538)
TOTAL SHAREHOLDERS' EQUITY
1,521,967
1,413,514
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
Years ended December 31,
Net unrealized gains (losses) on equity securities
(121,037)
Consolidated revenue
1,697,992
Losses and settlement expenses
739,253
604,413
514,376
Policy acquisition costs
464,040
418,325
369,632
Insurance operating expenses
112,460
98,383
82,212
8,047
12,900
Total expenses
1,337,964
1,144,339
987,167
9,853
720,678
Income tax expense (benefit):
Current
71,720
64,944
186,906
Deferred
10,052
7,710
(49,639)
137,267
583,411
Other comprehensive earnings (loss), net of tax
(7,420)
62,773
(278,902)
Comprehensive earnings
338,359
367,384
304,509
Basic net earnings per share
3.78
3.34
6.43
Diluted net earnings per share
3.74
3.31
6.37
Weighted average number of common shares outstanding:
Basic
91,529
91,191
90,735
Diluted
92,451
92,155
91,589
Accumulated Other
Common
Shareholders’
Paid-in
Comprehensive
Retained
Treasury Stock
Shares
Stock
Capital
Earnings (Loss)
Earnings
Compensation
at Cost
Balance, January 1, 2022
90,578,674
1,229,361
1,364
343,060
49,826
1,228,110
9,642
(402,641)
2,373
(2,373)
Share-based compensation
360,830
8,651
8,647
Dividends and dividend equivalents ($4.02 per share)
(365,180)
Balance, December 31, 2022
90,939,504
1,177,341
1,368
351,707
(229,076)
1,446,341
12,015
(405,014)
Cumulative-effect adjustment from ASU 2023-02
(951)
1,524
(1,524)
340,590
9,956
9,953
Dividends and dividend equivalents ($1.54 per share)
(140,216)
Balance, December 31, 2023
91,280,094
(41)
458,038
5,990
5,985
Dividends and dividend equivalents ($2.57 per share)
(235,896)
Balance, December 31, 2024
91,738,132
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
(588,515)
Net unrealized (gains) losses on equity securities
121,037
Depreciation
7,664
8,545
7,981
Deferred income tax expense (benefit)
Other items, net
13,725
24,947
(20,467)
Change in:
(4,257)
(2,803)
(3,754)
Premiums and reinsurance balances receivable (net of direct write-offs and commutations)
(9,328)
(31,705)
(22,222)
(26,826)
10,407
18,249
(4,066)
302
11,371
(12,698)
26,200
(7,541)
Reinsurance balances recoverable on unpaid losses and settlement expenses
1,924
(17,260)
(132,003)
(19,648)
(18,707)
(24,306)
15,362
14,011
(3,405)
247,445
130,388
272,082
91,814
107,241
104,641
Current income taxes payable
(3,008)
7,285
(6,619)
Changes in investment in unconsolidated investees:
Undistributed earnings
(9,853)
Dividends received
3,116
250,448
Cash flows from investing activities:
Purchase of:
Fixed income securities, available-for-sale
(811,926)
(662,070)
(2,053,359)
(97,922)
(55,652)
(45,007)
Property and equipment
(4,710)
(5,913)
(5,889)
Equity method investee
(3,819)
Other
(10,956)
(10,786)
(5,704)
Proceeds from sale of:
149,939
50,135
53,300
64,839
51,881
62,212
14,284
686,666
375
5,548
817
2,659
Proceeds from call or maturity of:
Fixed income, available-for-sale
326,297
504,168
1,393,674
Net sale (purchase) of short-term investments
60,008
(98,694)
(36,229)
Net cash provided by (used in) investing activities
48,879
Cash flows from financing activities:
Proceeds from issuance of debt
73,000
Repayment of debt
(73,000)
(200,000)
Proceeds from stock option exercises
(2,327)
1,245
(465)
Cash dividends paid
(235,656)
(140,093)
(364,848)
(365,313)
Net increase (decrease) in cash
3,366
13,606
(65,986)
Cash at beginning of year
22,818
88,804
Cash at end of year
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, casualty and surety products 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.
On January 15, 2025, RLI Corp. effected a two-for-one split of its common stock and a proportionate increase in the number of authorized shares. All share and per share information throughout this report has been retroactively adjusted to reflect the stock split. The shares of common stock retain a par value of $0.01 per share. Accordingly, an amount equal to the par value of the increased shares resulting from the stock split was reclassified from paid-in capital to common stock.
The Company has evaluated subsequent events through the date these consolidated financial statements were issued. There were no other subsequent events requiring adjustment to the financial statements or disclosure.
C.
ADOPTED ACCOUNTING STANDARDS
2023-07—Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
The amendments in this Accounting Standards Update (ASU) require the disclosures of significant expenses that are regularly provided to the chief operating decision maker (CODM) and included within each segment’s reported measure of profit or loss. Additionally, the ASU requires the disclosure of the title of the CODM and an explanation of how the CODM uses the reported measure of a segment’s profit or loss in assessing performance and deciding how to allocate resources. We adopted ASU 2023-07 in 2024 using a retrospective approach, providing disclosures for all periods presented in the financial statements. The adoption of this ASU did not have a material impact on our consolidated financial statements.
D.
2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures
The guidance in ASU 2023-09 is designed to increase transparency about income tax information through improvements to the tax rate reconciliation and disclosure of income taxes paid, disaggregated by federal, state and foreign jurisdictions. 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.
2024-03—Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses
The guidance in ASU 2024-03 requires disaggregation of certain expenses into specified categories in the notes to the financial statements. Each relevant expense caption on the face of the statement of earnings that includes specific expenses, such as employee compensation, depreciation and intangible asset amortization, are required to be separately disclosed in a tabular presentation. Additionally, a separate total of selling expenses is required to be disclosed, along with a definition of what is included in selling expenses.
This ASU is effective for fiscal years beginning after December 15, 2026 and interim periods beginning after December 15, 2027. 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.
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.
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 balances recoverable 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
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.
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 investment in Prime Holdings Insurance Services, Inc. (Prime) is accounted for under the equity method. As of December 31, 2024, 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, 2024 and 2023. In 2024, we recorded $5 million in investee losses from Prime, compared to investee earnings of $10 million in 2023 and $13 million in 2022. The loss in 2024 is reflective of Prime strengthening reserves on a number of prior accident years. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $9 million of gross premiums written and $8 million of net premiums earned during 2024, compared to $7 million of gross premiums written and $13 million of net premiums earned during 2023, and $21 million of gross premiums written and $23 million of net premiums earned during 2022. The decrease in gross premiums written and net premiums earned from 2022 was 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.
Prime recorded a net loss of $36 million in 2024, compared to net income of $45 million in 2023 and $59 million in 2022. Additional summarized financial information for Prime as of 2024 and 2023 is outlined in the following table:
Total assets
1,102
944
Total liabilities
844
691
Total equity
258
253
Approximately $54 million of undistributed earnings from our equity method investees were included in our retained earnings as of December 31, 2024. We received $3 million of dividends from Prime in 2024. We did not receive any dividends from our equity method investees during 2023 or 2022.
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, 2024 and 2023, is detailed in the following table:
Goodwill
40,816
5,246
Total goodwill
46,062
Indefinite-lived intangibles
7,500
Total goodwill and intangibles
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 2024. Based upon these reviews, our goodwill and state insurance license indefinite-lived intangible assets were not impaired. In addition, as of December 31, 2024, 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.
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
Per Share
(Numerator)
(Denominator)
Amount
For the year ended December 31, 2024
Basic EPS
Income available to common shareholders
Stock options
922
Diluted EPS
Income available to common shareholders and assumed conversions
Anti-dilutive options excluded from diluted EPS
For the year ended December 31, 2023
964
345
For the year ended December 31, 2022
854
590
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 $(2) million, $17 million and $(74) million for 2024, 2023 and 2022, 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,
Beginning balance
Other comprehensive earnings before reclassifications
(11,501)
59,922
(281,189)
Amounts reclassified from accumulated other comprehensive earnings
4,081
2,851
2,287
Net current period other comprehensive earnings (loss)
Ending balance
Balance of securities for which an allowance for credit losses has not been recognized in net earnings
1,492
1,224
1,693
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
Component of Accumulated
Affected line item in the
Other Comprehensive Earnings
Consolidated Statement of Earnings
Unrealized gains and losses on available-for-sale securities
(5,276)
(3,641)
(2,997)
Net realized gains (losses)
110
102
Credit gains (losses) presented within net realized gains
(5,166)
(3,609)
(2,895)
Earnings (loss) before income taxes
1,085
758
608
Income tax (expense) benefit
(4,081)
(2,851)
(2,287)
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 or non-U.S. government securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of
63
observable and 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, 2024, 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 3 to the consolidated financial statements.
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 7 to the consolidated financial statements 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, 2024, we had $2.7 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.
64
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 windstorms, affecting commercial properties in coastal regions of the United States, and earthquakes, primarily on the West Coast. We are also exposed to convective storms, winter weather, wildfires, lava flows in Hawaii as well as terrorist events in the United States.
In 2024, our property catastrophe reinsurance treaty had limits of $850 million in excess of $25 million first-dollar retention for earthquakes in California, $850 million in excess of a $50 million first-dollar retention for earthquakes outside of California and $750 million in excess of a $50 million first-dollar retention for all other perils, including wind. In addition, we have coverages that may reduce first-dollar retentions for multiple events within an established period of time. All of these amounts were subject to certain co-participations by the Company on losses in excess of the first-dollar retentions.
The majority of our catastrophe reinsurance treaty renewed on January 1, 2025. We purchased the same limits over the same first-dollar retention amounts outlined above. The program was 100 percent placed with a portion of the first layer expiring on May 31, 2025. 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 Liability Exposures
We are subject to environmental liability 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 liability 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 5 to the consolidated financial statements.
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 4 to the consolidated financial statements.
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 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.
65
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 balances recoverable 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, impose regulations on forms and regulate rates 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, 2024, 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 8 to the consolidated financial statements 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.
2.
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.
66
A summary of net investment income for the years ended December 31 are summarized below.
Interest on fixed income securities
120,561
103,446
77,164
Dividends on equity securities
13,276
12,238
11,912
Interest on cash, short-term investments and other invested assets
16,017
10,940
2,467
Gross investment income
149,854
126,624
91,543
Less investment expenses
(7,576)
(6,241)
(5,465)
Pretax net realized gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized below.
Net realized gains (losses):
Available-for-sale
30,792
22,232
20,287
(42)
14,084
570,952
(5,508)
(157)
273
Total net realized gains (losses)
Net changes in unrealized gains (losses) on investments:
82,275
65,655
(118,912)
(541)
(868)
(2,125)
Total unrealized gains (losses) on equity securities recognized in net earnings
(16,822)
79,782
(341,944)
7,539
(290)
(10,994)
(109)
(33)
(102)
Total unrealized gains (losses) recognized in other comprehensive earnings
(9,392)
79,459
(353,040)
Net realized gains (losses) and changes in unrealized gains (losses) on investments
92,308
176,764
114,438
The change in the portfolio’s unrealized gain (loss) position was due to strong equity market returns during the year, which were partially offset by a decrease in the unrealized value of fixed income securities.
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
Proceeds
Gains
Losses
Gain (Loss)
150,884
630
(4,386)
(3,756)
31,148
(356)
49,960
451
(2,174)
(1,723)
23,482
(1,250)
51,355
287
(2,849)
(2,562)
21,623
(1,336)
67
CALLS/MATURITIES
323,533
134
(1,400)
(1,266)
506,910
(162)
(123)
1,393,704
196
(55)
141
FAIR VALUE MEASUREMENTS
Assets measured at fair value on a recurring basis as of December 31, 2024 and 2023, are summarized below:
Quoted in Active
Significant Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Fixed income securities - available-for-sale
6,898
1,256,991
89,530
Total fixed income securities - available-for-sale
3,085,293
90,503
731,569
4,622
95,125
308,031
59,826
3,882
1,164,548
60,471
1,225,019
552,624
2,795,378
588,416
1,625
62,096
3,445,890
Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities
68
The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3).
Level 3 Securities
Balance as of January 1, 2024
Net realized and unrealized gains
Included in other comprehensive earnings
1,075
Purchases
34,859
Sales
(2,905)
Balance as of December 31, 2024
Change in unrealized gains during the period for Level 3 assets held at period-end - included in other comprehensive earnings
The amortized cost and estimated fair value of fixed income securities at December 31, 2024, by contractual maturity, are shown as follows:
*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, 2024 and 2023 are presented in the tables below. Amortized cost does not include the $27 million and $23 million of accrued interest receivable as of December 31, 2024 and 2023, respectively.
Allowance
Gross
for Credit
309
(10,282)
261
(1,844)
927
(43,249)
(8)
2,208
(22,925)
(189)
4,737
(55,703)
1,003
(89,520)
(197)
9,445
(224,611)
69
312,632
1,257
(5,858)
60,763
652
(1,589)
4,800
(918)
2,636
(37,902)
(3)
611
(27,884)
1,273,187
(303)
8,766
(56,631)
634,000
2,238
(83,614)
3,054,391
(306)
16,160
(214,396)
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:
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, 2024, the discounted cash flow analysis resulted in an allowance for credit losses on eight securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:
306
339
Increase to allowance from securities for which credit losses were not previously recorded
71
Reduction from securities sold during the period
(89)
(154)
Reductions from intent to sell securities
(47)
Net increase (decrease) from securities that had an allowance at the beginning of the period
(28)
Net realized gains included less than $1 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 2023, $2 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, 2024, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,333 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $225 million in associated unrealized losses represents 7 percent of the fixed income portfolio’s cost basis and 5 percent of total invested
70
assets. Isolated to these securities, unrealized losses at the end of 2024 increased compared to the previous year due to interest rates, beyond two years to maturity, rising over the course of the year. Of the total 1,333 securities, 1,009 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, 2024 and 2023. We believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.
December 31, 2024
December 31, 2023
12 Mos.
< 12 Mos.
& Greater
Fair value
303,226
157,418
460,644
37,718
204,556
242,274
Amortized cost
309,836
161,090
470,926
37,950
210,182
248,132
Unrealized loss
(6,610)
(3,672)
(232)
(5,626)
24,024
18,330
42,354
8,736
29,632
38,368
24,910
19,288
44,198
8,790
31,167
39,957
(886)
(958)
(54)
(1,535)
4,075
3,796
4,158
4,801
(83)
(1,005)
108,772
233,625
342,397
61,196
275,707
336,903
111,674
273,972
385,646
61,714
313,091
374,805
(2,902)
(40,347)
(518)
(37,384)
43,027
164,433
207,460
12,240
211,436
223,676
43,395
186,990
230,385
12,367
239,193
251,560
(368)
(22,557)
(127)
(27,757)
378,305
700,574
1,078,879
67,402
822,731
890,133
389,299
745,283
1,134,582
68,345
878,419
946,764
(44,709)
(943)
(55,688)
48,514
355,475
403,989
61,218
391,361
452,579
49,491
444,018
493,509
61,697
474,496
536,193
(977)
(88,543)
(479)
(83,135)
909,943
1,633,651
2,543,594
248,510
1,939,305
2,187,815
932,763
1,835,442
2,768,205
250,863
2,151,348
2,402,211
(22,820)
(201,791)
(2,353)
(212,043)
OTHER INVESTED ASSETS
We had $58 million of other invested assets at December 31, 2024, compared to $59 million at the end of 2023. 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 $7 million at December 31, 2024, compared to $10 million at December 31, 2023. Our LIHTC interests recognized amortization of $3 million as a component of income tax expense in 2024, 2023 and 2022 and was included in the net earnings line item of the statement of cash flows. Additionally, our LIHTC recognized a total tax benefit of $3
million during 2024, 2023 and 2022. Our unfunded commitment for our LIHTC investments was less than $1 million at December 31, 2024 and will be paid out in installments through 2035.
Our HTC investment had a balance of $15 million at December 31, 2024, compared to $13 million at December 31, 2023. 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 2024, compared to $6 million during 2023 and $5 million during 2022. Our HTC recognized $4 million of amortization as a component of income tax expense during 2024 and 2023 and was included in the net earnings line item of the statement of cash flows.
Our investments in private funds totaled $24 million at December 31, 2024 and $28 million at December 31, 2023. We had $4 million of associated unfunded commitments at December 31, 2024. 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, 2024, $53 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 12, 2024, RLI Insurance Company borrowed $50 million from the FHLBC, which was outstanding as of December 31, 2024.
As of December 31, 2024, fixed income securities with a carrying value of $93 million were on deposit with regulatory authorities as required by law.
3.
DEBT
As of December 31, 2024, outstanding debt balances totaled $100 million.
On September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries an adjustable interest rate of 5.98 percent as of the end 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 12, 2024, we repaid $50 million that was borrowed from the Federal Home Loan Bank of Chicago (FHLBC) in 2023 and paid interest monthly at an annualized rate of 5.44 percent. Additionally, on November 12, 2024 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2025 and monthly interest is paid at an annualized rate of 4.44 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 $6 million of interest on our debt in 2024, compared to $9 million in 2023 and $8 million in 2022. The average rate on debt was 6.05 percent in 2024, 4.07 percent in 2023 and 3.89 percent in 2022. The weighted average interest rate on debt outstanding was 5.21 percent as of December 31, 2024.
4.
In the ordinary course of business, our insurance subsidiaries assume and cede premiums and selected insured risks with other insurance companies, known as reinsurance. 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 $12 million, although retentions can vary.
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Premiums written and earned along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:
WRITTEN
Direct
1,986,046
1,783,862
1,531,656
Reinsurance assumed
27,002
22,798
33,830
EARNED
1,895,065
1,671,044
1,425,165
26,170
28,375
35,680
LOSSES AND SETTLEMENT EXPENSES INCURRED
954,952
840,255
776,448
7,945
10,228
22,813
(223,644)
(246,070)
(284,885)
More than 93 percent of our reinsurance balances recoverable 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, 2024. 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 2024.
Net Reinsurer
Ceded
S&P
Exposure as of
Percent of
Premiums
Rating
12/31/2024
Written
Munich Re / HSB
AA, Very Strong
110,302
31,258
7.7
Renaissance Re
A+, Strong
82,385
31,467
Nationwide Mutual
A, Excellent
62,278
7.5
24,028
Partner Re
60,818
7.3
37,581
9.2
Safety National
A++, Superior
36,475
4.4
6,303
1.6
Everest Re
36,252
29,454
7.2
Odyssey America Re
33,730
4.0
8,916
2.2
Berkley Insurance Co.
32,754
3.9
7,626
1.9
General Re
AA+, Very Strong
32,120
3.8
14,809
Aspen UK Ltd.
A-, Strong
3.7
9,116
Toa Re
30,800
13,882
3.4
All other reinsurers*
287,139
34.3
193,087
47.4
Total ceded exposure
836,293
407,527
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 $17 million and $10 million, respectively, at December 31, 2024 and $16 million and $11 million, respectively, at December 31, 2023. Changes in the allowances during 2024 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. Less than $1 million of write-offs were applied to the allowances in 2024 and less than $1 million was recovered.
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5.
HISTORICAL LOSS AND LAE DEVELOPMENT
The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the years 2024, 2023 and 2022:
Unpaid losses and LAE at beginning of year:
2,315,637
2,043,555
(757,349)
(740,089)
(608,086)
1,688,676
1,575,548
1,435,469
Increase (decrease) in incurred losses and LAE:
Current accident year
834,562
712,960
636,955
Prior accident years
(95,309)
(108,547)
(122,579)
Total incurred
Loss and LAE payments for claims incurred:
(121,314)
(165,364)
(97,525)
Prior accident year
(368,570)
(325,921)
(276,772)
Total paid
(489,884)
(491,285)
(374,297)
Net unpaid losses and LAE at end of year
1,938,045
Unpaid losses and LAE at end of year:
(755,425)
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 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, 2024, 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, 2024. 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, 2015 to 2023 is presented as unaudited required supplementary information.
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Casualty - Primary Occurrence
(in thousands, except number of claims)
Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2024
For the Years Ended December 31,
Cumulative
Number of
Reported
AY
2015*
2016*
2017*
2018*
2019*
2020*
2021*
2022*
2023*
Total IBNR
2015
94,835
84,975
83,579
78,675
76,398
75,470
75,438
77,110
75,958
75,821
2,433
4,425
2016
101,950
96,753
90,611
85,449
83,374
79,440
77,729
78,358
77,669
4,246
4,356
2017
119,741
111,391
102,583
95,513
90,759
90,344
90,744
91,238
5,299
4,572
2018
141,513
130,281
125,731
115,076
114,414
115,793
118,084
10,810
4,923
146,011
135,209
120,570
109,051
111,156
112,638
16,585
5,369
145,171
137,439
122,785
117,962
114,336
27,988
4,749
142,797
128,483
125,672
123,363
39,997
4,683
155,203
144,861
143,518
65,353
4,751
152,443
147,366
89,241
4,483
160,008
123,161
3,561
1,164,041
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
10,157
19,902
33,020
45,056
54,270
58,866
62,997
68,650
69,635
72,138
10,142
24,186
35,764
48,042
56,152
60,349
65,517
69,968
71,519
13,154
25,933
38,783
52,823
62,236
71,419
76,283
79,374
15,066
32,365
48,424
63,980
78,103
93,504
101,748
15,698
30,673
41,911
57,750
74,380
87,092
17,096
30,596
45,267
60,764
76,345
14,428
29,633
43,951
65,454
17,714
38,712
56,998
17,707
35,634
16,950
* Presented as unaudited required supplementary information.
663,252
All outstanding liabilities before 2015, net of reinsurance
10,970
Liabilities for losses and loss adjustment expenses, net of reinsurance
511,759
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance*
Years
12.9%
13.8%
13.4%
15.0%
12.2%
9.2%
6.1%
5.5%
1.6%
3.3%
Casualty - Excess Occurrence
53,672
50,857
47,392
42,840
43,328
42,446
41,690
41,471
40,580
41,268
1,684
709
56,341
49,385
37,676
33,125
30,251
29,671
29,940
27,733
27,015
1,939
659
62,863
55,868
48,363
44,737
43,249
41,620
39,600
37,828
4,173
661
69,362
62,646
54,626
51,023
49,861
47,949
45,580
12,439
635
88,078
89,691
79,083
80,147
77,185
70,850
21,981
711
107,579
98,409
90,274
81,284
75,351
38,495
667
136,433
136,354
125,028
120,830
51,922
904
153,895
156,822
157,626
77,373
1,057
178,887
176,607
98,709
1,067
225,747
136,830
582
978,702
2,048
10,127
19,571
23,184
28,756
31,352
32,752
35,958
36,559
39,194
1,068
3,396
7,441
10,054
12,703
14,400
17,807
20,603
21,176
5,679
9,275
15,441
18,470
22,835
25,328
27,840
2,506
5,823
10,801
17,294
22,016
23,958
28,272
4,213
19,044
25,389
33,375
38,291
41,794
2,901
13,856
20,988
24,657
31,299
5,317
23,841
38,977
59,901
7,479
28,764
57,202
7,091
31,867
6,048
344,593
22,873
656,982
4.0%
14.3%
11.8%
9.6%
6.7%
8.0%
8.3%
1.8%
6.4%
75
Casualty - Claims Made
55,006
47,831
42,206
39,906
39,653
39,619
38,609
37,578
37,332
37,674
617
1,338
59,992
67,760
69,493
67,728
64,730
65,078
61,876
61,881
60,639
1,407
1,507
60,572
62,450
62,714
57,450
59,907
61,546
60,340
60,057
2,321
1,648
66,128
62,416
56,468
48,457
47,692
43,912
45,331
3,971
1,400
62,918
61,712
52,224
46,500
43,969
42,236
7,144
1,516
60,278
56,785
46,853
40,878
41,658
11,640
1,297
51,219
45,854
38,946
35,485
13,192
1,229
58,289
55,316
46,276
21,839
1,156
54,679
47,848
29,547
1,195
58,153
38,622
1,149
475,357
2,215
10,738
16,774
20,920
28,795
32,241
33,529
34,671
35,408
35,779
2,060
14,558
27,465
39,370
47,999
52,846
53,737
56,342
57,976
2,455
11,350
22,728
36,522
42,918
47,087
50,623
55,321
1,964
11,965
18,840
24,918
27,351
31,002
38,188
1,839
8,123
14,117
19,930
27,133
32,622
1,488
5,687
10,412
16,537
26,511
999
5,615
8,661
11,856
2,088
8,836
14,672
1,421
5,336
279,785
4,407
199,979
3.9%
15.6%
14.8%
14.9%
15.4%
9.0%
5.0%
2.3%
1.0%
Casualty - Transportation
38,561
46,258
47,021
46,395
45,162
45,525
45,807
46,685
47,466
47,998
429
3,188
50,430
53,519
54,105
52,277
52,818
53,915
55,718
56,515
56,736
724
3,945
55,640
53,641
45,017
43,764
45,351
46,742
47,619
47,228
786
3,640
57,597
54,592
38,719
36,468
35,442
35,776
36,212
887
3,405
58,297
56,129
43,976
41,925
44,236
47,296
2,035
3,319
43,573
35,524
27,665
28,856
29,532
3,209
51,322
51,581
47,913
54,599
6,396
2,324
60,862
53,680
55,851
11,881
2,725
66,863
60,930
14,259
2,634
86,321
23,003
2,678
522,703
6,984
20,709
29,554
37,222
39,339
41,345
42,626
45,002
46,159
47,452
8,923
18,354
30,354
38,001
43,564
47,488
52,555
54,245
55,250
7,979
17,070
24,090
30,260
36,141
41,064
43,891
45,061
6,980
12,827
19,216
24,503
28,844
30,916
33,296
7,148
15,852
21,120
26,422
35,546
42,409
3,986
7,876
12,035
20,749
23,077
5,341
15,345
25,886
37,702
6,442
18,296
27,146
7,407
18,350
9,431
339,174
1,494
185,023
13.9%
18.9%
16.6%
17.1%
11.0%
8.4%
6.0%
3.5%
2.1%
2.7%
76
59,863
56,103
53,958
52,720
53,111
52,781
52,878
53,359
54,065
54,122
4,077
62,900
55,594
55,384
55,930
55,424
55,383
55,536
55,385
3,379
90,803
83,273
84,961
82,671
82,319
81,912
81,677
81,194
2,893
89,091
83,457
79,961
80,470
79,093
79,234
78,482
184
2,339
71,232
65,189
61,116
61,185
60,549
293
2,458
118,247
110,466
108,546
108,363
110,562
7,466
2,865
135,447
116,424
115,587
114,178
4,587
138,756
119,877
115,228
11,876
2,972
184,252
159,846
20,501
3,250
221,358
90,728
2,750
1,050,835
32,184
49,348
50,197
51,290
52,078
52,342
52,400
53,208
53,369
54,116
33,134
46,921
51,371
53,006
54,328
54,747
55,215
55,247
55,263
41,314
66,818
74,415
78,360
80,581
80,958
80,965
81,132
37,048
68,264
72,357
75,253
76,378
77,696
78,198
30,703
51,740
55,092
57,038
59,015
59,808
43,192
79,660
88,401
96,350
99,809
57,272
89,174
99,671
103,826
44,667
84,235
95,542
111,137
130,919
64,846
823,459
228,230
49.5%
30.0%
7.1%
2.4%
0.9%
0.4%
0.6%
0.2%
1.4%
16,958
12,957
11,113
10,456
9,792
9,521
8,580
8,586
8,275
1,260
18,928
11,062
9,351
8,895
8,391
7,948
8,134
7,963
8,206
1,401
16,127
8,641
8,798
8,116
8,034
7,769
7,644
7,696
1,931
16,765
7,227
4,564
3,947
3,996
3,760
3,894
1,362
14,785
7,205
5,053
4,062
3,453
2,866
156
1,213
19,241
14,840
12,378
11,516
9,935
1,255
987
18,540
11,724
12,127
16,521
9,208
962
20,185
11,490
10,686
2,565
1,080
21,242
9,024
6,886
869
23,284
22,503
572
100,387
3,192
6,719
7,695
9,436
9,183
9,186
9,168
8,462
8,575
8,299
3,087
5,817
6,299
7,640
8,086
7,673
7,946
7,795
7,918
979
2,862
7,062
7,221
7,362
7,372
7,342
1,835
2,588
2,368
2,536
3,020
2,079
3,220
336
2,765
3,039
3,093
3,236
835
2,719
3,828
3,907
7,896
1,197
3,229
3,075
4,264
(241)
4,161
5,737
841
1,883
412
50,365
49,939
17.2%
30.8%
8.8%
9.8%
(4.8)%
(2.8)%
(3.3)%
77
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:
Net outstanding liabilities:
482,569
556,978
207,564
148,226
142,876
46,813
Unallocated loss adjustment expenses
73,613
66,111
Allowance for uncollectible reinsurance balances recoverable on unpaid losses and settlement expenses
9,580
10,608
22,940
26,931
Liabilities for unpaid loss and settlement expenses, net of reinsurance
Reinsurance balances recoverable on unpaid claims:
47,773
53,177
164,721
149,502
283,560
292,803
76,089
68,126
102,120
152,714
90,610
51,526
(9,580)
(10,608)
132
109
Total reinsurance balances recoverable on unpaid losses and settlement expenses
Total gross liability for unpaid loss and settlement expenses
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 exposures. 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.
DEVELOPMENT OF IBNR RESERVES
The following table summarizes our prior accident years’ loss reserve development by segment for 2024, 2023 and 2022:
(52,878)
(78,498)
(87,225)
(33,143)
(21,196)
(24,927)
(9,288)
(8,853)
(10,427)
A discussion of significant components of reserve development for the three most recent calendar years follows:
2024. We experienced favorable emergence relative to prior years’ loss reserve estimates in all of our segments during 2024. Development from the casualty segment totaled $53 million. The majority of our favorable development was experienced across accident years 2019 through 2023. We continued to experience emergence that was generally better than previously estimated. We attribute the favorable emergence to loss trends in select 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 $13 million to our favorable development, while small commercial developed adversely by $9 million. Within the excess occurrence grouping, commercial excess was favorable by $18 million and personal umbrella developed favorably by $3 million. Within the claims made grouping, professional services coverages developed favorably by $10 million and executive products developed favorably by $11 million. Transportation had $8 million of adverse development.
Our marine product was the predominant driver of the favorable development in the property segment, accounting for $18 million of the $33 million total favorable development for the segment. Accident years 2021 through 2023 made the largest contribution. Commercial property was favorable by $10 million.
The surety segment experienced $9 million of favorable development. The majority of the favorable development came from the 2020, 2022 and 2023 accident years. Commercial and contract surety were the main contributors with favorable development of $5 million and $5 million, respectively.
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 driven by favorable frequency and severity trends that were better than our long-term expectations. In addition, we believe this was the result of our underwriters’ ability to select risk, as well as the 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.
79
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.
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, 2024, 2023 and 2022:
Loss and LAE Payments (Cumulative):
149,130
144,882
142,377
(70,773)
(70,130)
(69,696)
78,357
74,752
72,681
Unpaid Losses and LAE at End of Year:
22,658
25,180
26,871
(5,899)
(5,490)
(5,786)
16,759
19,690
21,085
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 three decades ago.
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.
6.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized below.
80
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses
29,524
25,491
Unearned premium offset
36,086
32,763
4,630
4,170
Share-based compensation expense
3,685
3,556
Capitalized research and development costs
6,350
4,970
Lease liability
3,288
3,113
3,864
2,949
Deferred tax assets before allowance
87,427
77,012
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Net unrealized appreciation of securities
25,898
10,981
34,905
30,779
Lease asset
2,943
2,870
Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset
636
1,272
Fixed assets
2,908
2,745
Intangible assets
1,561
1,552
Undistributed earnings of unconsolidated investees
10,265
10,351
518
Total deferred tax liabilities
79,634
61,140
Net deferred tax asset
Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2024, 2023 and 2022, 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:
Provision for income taxes at the statutory federal tax rates
89,786
21.0
79,226
151,342
Increase (reduction) in taxes resulting from:
Excess tax benefit on share-based compensation
(5,580)
(1.3)
(3,774)
(1.0)
(4,491)
(0.6)
Tax-exempt interest income
(905)
(0.2)
(1,092)
(0.3)
(1,143)
Dividends received deduction
(1,326)
(938)
(912)
(0.1)
Tax credit
(3,539)
(0.8)
(3,644)
(6,204)
(0.9)
ESOP dividends paid deduction
(2,545)
(1,591)
(0.4)
(4,171)
Nondeductible expenses
3,726
0.9
3,351
1,263
2,155
0.4
1,116
0.3
1,583
19.1
19.3
19.0
Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was slightly lower in 2024 due to higher 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. We received a $3 million dividend from Prime in 2024 and recognized less than $1 million of tax benefit from applying the lower tax rate applicable to affiliated dividends paid to insurance companies (10.8 percent), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. No dividends were declared from Prime in 2023 or 2022, 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 2024, 2023 and 2022 resulted in tax benefits of $3 million, $2 million and $4 million, respectively. These tax benefits reduced the effective tax rate for 2024, 2023 and 2022 by 0.6 percent, 0.4 percent and 0.6 percent, respectively.
81
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 we believe 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 2024, 2023 and 2022 amounted to $68 million, $50 million and $190 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 12 to the consolidated financial statements for more information on the sale.
Although we are not currently under audit by the IRS, tax years 2021 through 2024 remain open and are subject to examination.
7.
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 $25 million, $23 million and $18 million for 2024, 2023 and 2022, respectively.
During 2024, the ESOP purchased 149,696 shares of RLI Corp. stock on the open market at an average price of $73.62 ($11 million) relating to the contribution for plan year 2023. Shares held by the ESOP as of December 31, 2024, totaled 4,749,542 and are treated as outstanding in computing our earnings per share. During 2023, the ESOP purchased 131,546 shares of RLI Corp. stock on the open market at an average price of $68.21 ($9 million) relating to the contribution for plan year 2022. During 2022, the ESOP purchased 174,734 shares of RLI Corp. stock on the open market at an average price of $51.51 ($9 million) relating to the contribution for plan year 2021. 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 $44 million, $38 million and $24 million for 2024, 2023 and 2022, respectively. Incentive-based compensation received by current or former executive officers is subject to clawback in the event of an accounting restatement.
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, 2024, the trusts’ assets were valued at $69 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 8,000,000 shares of common stock
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(subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 6,582,776 stock options under the 2015 LTIP. The 2015 LTIP was replaced in 2023.
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 8,009,782 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted 813,182 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 $8 million, $9 million and $9 million for 2024, 2023 and 2022, respectively. The total income tax benefit was $1 million for 2024, 2023 and 2022. Total unrecognized compensation expense relating to outstanding and unvested awards was $7 million, which will be recognized over the weighted average vesting period of 2.60 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 summarizes option activity in 2024:
Weighted
Aggregate
Intrinsic
Remaining
Options
Exercise Price
Contractual Life
(in 000’s)
Outstanding as of January 1, 2024
3,283,420
46.31
Granted
379,344
72.30
Exercised
(807,026)
35.45
Forfeited or expired
(17,800)
56.64
Outstanding as of December 31, 2024
2,837,938
52.80
4.51
84,046
Exercisable at December 31, 2024
1,522,274
45.49
3.32
57,319
The intrinsic value of options exercised, which is the difference between the fair value and the exercise price, was $35 million, $19 million and $22 million during 2024, 2023 and 2022, 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:
Weighted-average fair value of grants
15.81
13.62
10.71
Risk-free interest rates
4.83
3.59
2.95
Dividend yield
2.30
2.28
2.50
Expected volatility
23.09
22.97
22.89
Expected option life
5.02
years
4.96
5.05
83
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 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 $2 million, $3 million and $2 million during 2024, 2023 and 2022, respectively.
Grant Date
RSUs
Nonvested at January 1, 2024
90,187
62.58
42,762
72.11
Reinvested
3,004
81.53
Vested
(34,396)
61.48
Forfeited
(2,462)
67.18
Nonvested at December 31, 2024
99,095
66.89
8.
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, 2024, 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 $296 million, $273 million and $250 million as of December 31, 2024, 2023 and 2022, respectively, compared to actual statutory capital and surplus of $1.8 billion, $1.5 billion and $1.4 billion, respectively, for these same periods.
Year-end statutory surplus for 2024 presented in the table below includes $352 million of RLI Corp. stock (cost basis of $65 million) held by Mt. Hawley Insurance Company, compared to $294 million and $327 million in 2023 and 2022, 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:
Consolidated net income, statutory basis
295,917
231,321
229,111
Consolidated surplus, statutory basis
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
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Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from RLI Ins. 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, 2024, our holding company had $1.5 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 $39 million in liquid assets, which approximates two-thirds of 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 2024, 2023 and 2022, RLI Ins. paid ordinary dividends totaling $152 million, $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 2024, 2023 or 2022. Although RLI Ins. was restricted from distributing ordinary dividends to RLI Corp. as of December 31, 2024, the rolling 12-month limitations reset as of January 1st. A total of $241 million in ordinary dividend capacity will be available over the course of 2025. 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.
9.
COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
As of December 31, 2024, we had $8 million of unfunded commitments related to our investments in private funds and tax credits. See note 2 to the consolidated financial statements 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.
10.
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, 2024, 2023 and 2022 were as follows:
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Operating lease cost
4,631
4,935
4,957
Variable lease cost
1,103
1,469
1,423
Sublease income
(170)
(469)
(555)
Total lease cost
5,564
5,935
5,825
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases
4,083
5,407
5,435
ROU assets obtained in exchange for new operating lease liabilities
4,392
5,805
2,694
Reduction to ROU assets resulting from reduction to lease liabilities
300
Other non-cash reductions to ROU assets
Operating lease ROU assets
14,016
13,666
Operating lease liabilities
15,711
14,880
Weighted-average remaining lease term - operating leases
6.01
6.08
Weighted-average discount rate - operating leases
3.63
3.21
Future minimum lease payments under non-cancellable leases as of December 31, 2024 were as follows:
2026
3,713
2027
2,288
2028
1,617
2029
1,443
Thereafter
Total future minimum lease payments
Less imputed interest
(2,212)
Total operating lease liability
11.
OPERATING SEGMENT INFORMATION
The Company’s insurance operations are managed and reported in three operating segments: property, casualty 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 risks through quota share and excess of loss reinsurance agreements. The casualty business is subject to a higher level of risk when estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop.
Our property segment is comprised primarily of commercial fire, hurricane, earthquake, difference in conditions and marine coverages. We also offer homeowners’ coverages in Hawaii. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and other storms. Our major catastrophe exposure is to losses caused by windstorms, affecting commercial properties in coastal regions of the United States, and earthquakes, primarily on the West Coast. We limit our net aggregate exposure to a catastrophic event by managing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout all insurance cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.
The surety segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare, energy and renewable energy industries. We also offer a variety of transactional bonds including, but not limited to license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the
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financial viability of our insureds. The contract surety product guarantees commercial contractors’ contractual obligations for a specific construction project. Generally, losses occur due to the deterioration of a contractor’s financial condition.
The Company’s chief operating decision maker (CODM) is the chief executive officer. The Company’s CODM assesses the segments’ performance by using earnings before income taxes (underwriting income) and the combined ratio. Underwriting income and combined ratio are analyzed at the segment level and influence how resources are allocated. Decisions are made based on what is likely to provide the best long-term return to the Company.
The accounting policies of the reporting segments are the same as those described in note 1 to the consolidated financial statements. Expense allocations are based on assumptions primarily related to direct costs, net premiums earned, as well as the level of support required for the products within each segment. Amortization of deferred acquisition costs represents the recognition of commission and premium taxes over the life of insurance polices, in proportion to premium revenue recognized. The other policy acquisition costs line item includes other expenses associated with underwriting, but that cannot be specifically associated with the successful acquisition of a policy, including, but not limited to, employment costs for underwriters and underwriting support as well as costs for policy acquisition systems. Insurance operating expenses reflect allocated costs from various support departments, such as corporate technology, accounting, human resources and facilities, among others.
Net investment income consists of the interest and dividend income streams from our investments in fixed income and equity securities. Interest expense represents the cost of debt and lines of credit. General corporate expenses include director and shareholder relation 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 primarily represents our 23 percent share in earnings of Prime Holdings Insurance Services, Inc., a privately held insurance company which specializes in hard-to-place risks. Assets, and the revenues and expenses associated with investing and financing activities, are not managed at the segment level and therefore are not allocated to segments.
All segment revenues are from external customers and all long-lived assets are held domestically. We have no material foreign operations or customer concentrations and have no intersegment revenues.
The following tables presents our operating results by segment, as evaluated by the CODM.
Year ended December 31, 2024
Revenue
-
Less: Expenses
524,490
198,806
15,957
Amortization of deferred acquisition costs
161,532
108,235
48,254
Other policy acquisition costs
83,987
22,936
39,096
65,040
33,871
13,549
Segment earnings before income taxes
Reconciliation of earnings before income taxes
Depreciation and amortization expense
5,705
991
87
Year ended December 31, 2023
418,032
172,062
14,319
138,968
94,173
42,754
82,621
22,171
37,638
59,246
26,808
12,329
5,991
1,807
Year ended December 31, 2022
Less Expenses
381,436
120,745
12,195
126,048
67,450
38,907
78,349
27,753
31,125
52,210
19,416
10,586
73,789
72,522
31,905
178,216
(8,047)
(12,900)
4,961
1,653
1,705
88
The following table further summarizes revenues by major product type within each segment:
NET PREMIUMS EARNED
12. 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, 2024 and 2023, 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, 2024, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, 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, 2024, 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.
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) relates 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 5 to the financial statements
Critical Audit Matter Description
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.
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:
/s/ Deloitte & Touche LLP
Chicago, IllinoisFebruary 21, 2025
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, 2024.
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, 2024.
Our internal control over financial reporting as of December 31, 2024 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, 2024 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, 2024, 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
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.”
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.
Item 15. (a)(2) Financial Statement Schedules
I. Summary of Investments - Other than Investments in Related Parties at December 31, 2024.
96
II. Condensed Financial Information of Registrant, as of and for the three years ended December 31, 2024.
97-99
III. Supplementary Insurance Information, as of and for the three years ended December 31, 2024.
100-101
IV. Reinsurance for the three years ended December 31, 2024.
V. Valuation and Qualifying Accounts for the three years ended December 31, 2024.
103
VI. Supplementary Information Concerning Property-Casualty Insurance Operations for the three years ended December 31, 2024.
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.
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
X
3.2
By-Laws
8-K
November 7, 2024
4.1
Description of Securities
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*
10.4
RLI Corp. 2015 Long-Term Incentive Plan, as amended*
July 24, 2020
10.5
RLI Corp. 2023 Long-Term Incentive Plan, as amended*
10.6
RLI Corp. Annual Incentive Compensation Plan, as amended*
10.7
Management Incentive Program Guideline*
February 24, 2023
RLI Underwriting Profit Program Guideline*
Market Value Potential (MVP), Executive Incentive Program Guideline*
10.10
RLI Corp. Director and Officer Indemnification Agreement
October 24, 2018
10.11
Advances, Collateral Pledge, and Security Agreement (Federal Home Loan Bank of Chicago)
September 26, 2014
10.12
Credit Agreement (PNC Bank, National Association)
March 30, 2023
Insider Trading Policy
21.1
Subsidiaries of the Registrant
23.1
Consent of Deloitte & Touche LLP
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
97.1
RLI Corp. Policy on Recoupment of Incentive Compensation (Clawback Policy)
February 23, 2024
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
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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
RLI CORP. AND SUBSIDIARIES
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
Column A
Column B
Column C
Column D
Amount at
which shown in
Type of Investment
Cost (1)
the balance sheet
Fixed maturities:
Available-for-sale:
Total fixed maturities
Equity securities:
Common stock:
Ind Misc and all other
125,827
219,832
ETFs (Ind/misc)
292,070
516,359
Total equity securities
Cash and short-term investments
114,705
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.
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(in thousands, except share data)
121
1,048
76,926
Accounts receivable, affiliates
2,365
2,393
Investments in subsidiaries
1,525,833
1,312,323
37,372
67,029
(amortized cost of $47,655 and allowance for credit losses of $0 in 2024)
(amortized cost of $78,431 and allowance for credit losses of $0 in 2023)
Property and equipment, at cost, net of accumulated depreciation of $913 in 2024 and $1,375 in 2023
1,375
Income taxes receivable - current
349
3,104
3,101
9,824
6,170
1,581,743
1,470,365
LIABILITIES AND SHAREHOLDERS’ EQUITY
Income taxes payable - current
778
50,000
Interest payable on debt
108
9,668
5,916
59,776
56,851
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 90 of this report.
97
(PARENT COMPANY)—(continued)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
7,470
6,245
(1,542)
14,134
570,888
Equity in earnings of unconsolidated investee
372
Selling, general and administrative expenses
(3,617)
(6,543)
(7,622)
(13,569)
2,025
556,983
Income tax expense (benefit)
(6,321)
(1,802)
108,699
Net earnings (loss) before equity in net earnings of subsidiaries
(7,248)
3,827
448,284
Equity in net earnings of subsidiaries
353,027
300,784
135,127
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period
(334)
1,754
(12,188)
Less: reclassification adjustment for (gains) losses included in net earnings
1,218
115
Other comprehensive earnings (loss) - parent only
884
(12,073)
Equity in other comprehensive earnings (loss) of subsidiaries/investees
(8,304)
61,019
(266,829)
Other comprehensive earnings (loss)
98
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Earnings (loss) before equity in net earnings of subsidiaries
Adjustments to reconcile net losses to net cash provided by (used in) operating activities:
Net realized (gains) losses
1,542
(14,134)
(570,888)
6,553
1,350
1,403
Affiliate balances receivable/payable
(821)
(724)
Federal income taxes
(1,364)
(1,409)
(19,484)
Changes in investment in unconsolidated investee:
(372)
Net cash used in operating activities
(489)
(11,152)
(141,717)
Cash flows from investing activities
(89,501)
(1,356,177)
(3,993)
(1,832)
(1,420)
Sale of:
26,921
686,566
1,024
221
298
Call or maturity of:
1,968
263,939
1,192,050
75,526
(74,696)
(2,229)
Cash dividends received-subsidiaries
152,000
145,000
13,000
Net cash provided by investing activities
253,446
257,098
533,682
Cash flows from financing activities
(150,000)
(256,443)
(152,508)
(397,323)
4,886
5,314
5,441
(253,884)
(245,949)
(392,347)
(927)
(382)
1,051
1,433
Interest paid on outstanding debt amounted to $4 million, $8 million and $7 million for 2024, 2023 and 2022, 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.
99
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 2024, 2023 and 2022
Incurred losses
Deferred policy
Unpaid losses
Unearned
and settlement
acquisition
premiums,
premiums
expenses
costs
expenses, gross
gross
earned
current year
Casualty segment
88,616
2,212,648
564,772
577,368
Property segment
48,302
337,787
328,842
231,949
Surety segment
29,296
143,035
90,526
25,245
RLI Insurance Group
73,334
2,043,556
491,479
496,530
46,366
301,907
314,945
193,258
26,866
100,562
85,902
23,172
66,285
1,929,091
466,178
468,661
36,767
293,737
237,369
145,672
24,807
92,809
81,538
22,622
127,859
785,085
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.
(continued)
Incurred
losses and
settlement
Policy
operating
prior year
written
245,519
915,625
131,171
542,997
87,350
146,899
221,589
788,982
116,344
500,057
80,392
138,708
204,397
744,607
95,203
364,644
70,032
132,285
101
SCHEDULE IV—REINSURANCE
Years ended December 31, 2024, 2023 and 2022
Percentage
Ceded to
Assumed
of amount
other
from other
assumed
amount
companies
to net
1,009,937
182,226
25,126
2.9
729,018
198,206
0.1
156,110
14,397
472
RLI Insurance Group premiums earned
394,829
1.7
909,081
178,018
27,283
619,250
218,265
545
142,713
8,830
547
405,113
863,530
186,469
34,771
430,010
122,415
291
131,625
7,525
618
0.5
316,409
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
Balance
Amounts
at beginning
charged
recovered
at end of
of period
to expense
(written off)
period
2024 Allowance for uncollectible reinsurance
26,974
(21)
(177)
26,776
2023 Allowance for uncollectible reinsurance
27,323
(50)
(299)
2022 Allowance for uncollectible reinsurance
27,243
130
SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Claims and
claim adjustment
investment
Affiliation with Registrant (1)
expense reserves
income
Claims and claim adjustment
expenses incurred related to:
Amortization
Paid claims and
Prior
of deferred
year
acquisition costs
318,021
489,884
491,285
374,297
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.
(Registrant)
By:
/s/ Todd W. Bryant
Todd W. Bryant, Chief Financial Officer
Date:
February 21, 2025
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.
/s/ Craig W. Kliethermes
Craig W. Kliethermes, President & CEO
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
/s/ Michael E. Angelina
Michael E. Angelina, Director
Craig W. Kliethermes, Director
/s/ David B. Duclos
/s/ Paul B. Medini
David B. Duclos, Director
Paul B. Medini, Director
/s/ Susan S. Fleming
/s/ Robert P. Restrepo, Jr.
Susan S. Fleming, Director
Robert P. Restrepo, Jr., Director
/s/ Jordan W. Graham
/s/ Debbie S. Roberts
Jordan W. Graham, Director
Debbie S. Roberts, Director
/s/ Clark C. Kellogg
/s/ Michael J. Stone
Clark C. Kellogg, Director
Michael J. Stone, Director
105