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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022

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 Number)

9025 North Lindbergh Drive, Peoria, IL

61615

(Address of principal executive offices)

(Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock $0.01 par value

RLI

New York Stock Exchange

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of October 12, 2022, the number of shares outstanding of the registrant’s Common Stock was 45,378,171.

Table of Contents

Page

Part I - Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Statements of Earnings and Comprehensive Earnings for the Three and Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)

3

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)

4

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2022 and 2021 (unaudited)

6

Notes to Unaudited Condensed Consolidated Interim Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

Controls and Procedures

37

Part II - Other Information

38

Item 1.

Legal Proceedings

38

Item 1a.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

38

Signatures

39

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

(in thousands, except per share data)

 

2022

 

2021

 

2022

 

2021

Net premiums earned

$

291,468

$

253,389

$

843,430

$

722,984

Net investment income

21,270

17,844

57,625

50,929

Net realized gains

573,170

1,829

591,562

52,442

Net unrealized gains (losses) on equity securities

(26,414)

(2,592)

(155,218)

29,526

Consolidated revenue

$

859,494

$

270,470

$

1,337,399

$

855,881

Losses and settlement expenses

165,089

143,656

388,527

355,574

Policy acquisition costs

96,977

80,449

271,879

232,674

Insurance operating expenses

20,606

15,560

58,794

54,504

Interest expense on debt

2,013

1,906

6,034

5,711

General corporate expenses

2,755

2,505

8,553

9,533

Total expenses

$

287,440

$

244,076

$

733,787

$

657,996

Equity in earnings (loss) of unconsolidated investees

(17,352)

9,043

3,061

29,407

Earnings before income taxes

$

554,702

$

35,437

$

606,673

$

227,292

Income tax expense

114,809

6,194

121,096

43,222

Net earnings

$

439,893

$

29,243

$

485,577

$

184,070

Other comprehensive earnings (loss), net of tax

(81,248)

(12,240)

(294,392)

(41,810)

Comprehensive earnings

$

358,645

$

17,003

$

191,185

$

142,260

Basic net earnings per share

$

9.69

$

0.65

$

10.71

$

4.07

Diluted net earnings per share

$

9.61

$

0.64

$

10.61

$

4.03

Weighted average number of common shares outstanding:

Basic

45,379

45,243

45,347

45,216

Diluted

45,775

45,689

45,775

45,714

See accompanying notes to the unaudited condensed consolidated interim financial statements.

3

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,

December 31,

(in thousands, except share and per share data)

 

2022

 

2021

ASSETS

Investments and cash:

Fixed income:

Available-for-sale, at fair value

$

2,452,039

$

2,409,887

(amortized cost of $2,753,631 and allowance for credit losses of $327 at 9/30/22)

(amortized cost of $2,346,267 and allowance for credit losses of $441 at 12/31/21)

Equity securities, at fair value (cost - $327,964 at 9/30/22 and $324,501 at 12/31/21)

462,988

613,776

Other invested assets

48,837

50,501

Cash

723,511

88,804

Total investments and cash

$

3,687,375

$

3,162,968

Accrued investment income

19,355

17,505

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,478 at 9/30/22 and $18,067 at 12/31/21

201,781

167,279

Ceded unearned premium

137,346

130,916

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $11,400 at 9/30/22 and $11,188 at 12/31/21

770,858

608,086

Deferred policy acquisition costs

128,979

103,553

Property and equipment, at cost, net of accumulated depreciation of $67,911 at 9/30/22 and $75,236 at 12/31/21

50,385

52,161

Investment in unconsolidated investees

58,105

171,311

Goodwill and intangibles

53,562

53,562

Income taxes-deferred

51,791

Other assets

52,128

40,961

TOTAL ASSETS

$

5,211,665

$

4,508,302

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Unpaid losses and settlement expenses

$

2,322,737

$

2,043,555

Unearned premiums

786,485

680,444

Reinsurance balances payable

50,349

42,851

Funds held

100,547

89,773

Income taxes-current

132,446

3,092

Income taxes-deferred

83,509

Current portion of long-term debt

149,816

Long-term debt

50,000

199,676

Accrued expenses

81,066

98,274

Other liabilities

144,226

37,767

TOTAL LIABILITIES

$

3,817,672

$

3,278,941

Shareholders’ Equity

Common stock ($0.01 par value)

(Shares authorized - 200,000,000)

(68,308,385 shares issued, 45,378,171 shares outstanding at 9/30/22)

(68,219,551 shares issued, 45,289,337 shares outstanding at 12/31/21)

$

683

$

682

Paid-in capital

352,129

343,742

Accumulated other comprehensive earnings (loss)

(244,566)

49,826

Retained earnings

1,678,746

1,228,110

Deferred compensation

9,047

9,642

Less: Treasury shares, at cost (22,930,214 shares at 9/30/22 and 12/31/21)

(402,046)

(402,641)

TOTAL SHAREHOLDERS’ EQUITY

$

1,393,993

$

1,229,361

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

5,211,665

$

4,508,302

See accompanying notes to the unaudited condensed consolidated interim financial statements.

4

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

 

 

 

Accumulated

 

 

 

Other

Total

Comprehensive

Treasury

Common

Shareholders’

Common

Paid-in

Earnings

Retained

Deferred

Shares

(in thousands, except share and per share data)

 

Shares

 

Equity

 

Stock

 

Capital

 

(Loss)

 

Earnings

 

Compensation

 

at Cost

Balance, January 1, 2021

 

45,142,580

$

1,135,978

$

681

$

335,365

$

108,714

$

1,084,217

$

8,292

$

(401,291)

Net earnings

 

73,012

73,012

Other comprehensive earnings (loss), net of tax

 

(44,747)

(44,747)

Deferred compensation

 

(366)

366

Share-based compensation

 

60,858

1,392

1,392

Dividends and dividend equivalents ($0.24 per share)

 

(10,849)

(10,849)

Balance, March 31, 2021

 

45,203,438

$

1,154,786

$

681

$

336,757

$

63,967

$

1,146,380

$

7,926

$

(400,925)

Net earnings

 

81,815

81,815

Other comprehensive earnings (loss), net of tax

 

15,177

15,177

Deferred compensation

 

325

(325)

Share-based compensation

 

19,905

1,343

1

1,342

Dividends and dividend equivalents ($0.25 per share)

 

(11,318)

(11,318)

Balance, June 30, 2021

 

45,223,343

$

1,241,803

$

682

$

338,099

$

79,144

$

1,216,877

$

8,251

$

(401,250)

Net earnings

 

29,243

29,243

Other comprehensive earnings (loss), net of tax

 

(12,240)

(12,240)

Deferred compensation

 

79

(79)

Share-based compensation

 

21,162

2,769

2,769

Dividends and dividend equivalents ($0.25 per share)

 

(11,319)

(11,319)

Balance, September 30, 2021

 

45,244,505

$

1,250,256

$

682

$

340,868

$

66,904

$

1,234,801

$

8,330

$

(401,329)

Accumulated

Other

Total

Comprehensive

Treasury

Common

Shareholders’

Common

Paid-in

Earnings

Retained

Deferred

Shares

(in thousands, except share and per share data)

Shares

Equity

Stock

Capital

(Loss)

Earnings

Compensation

at Cost

Balance, January 1, 2022

 

45,289,337

$

1,229,361

$

682

$

343,742

$

49,826

$

1,228,110

$

9,642

$

(402,641)

Net earnings

 

47,923

47,923

Other comprehensive earnings (loss), net of tax

 

(115,581)

(115,581)

Deferred compensation

 

(973)

973

Share-based compensation

 

26,605

3,049

3,049

Dividends and dividend equivalents ($0.25 per share)

 

(11,330)

(11,330)

Balance, March 31, 2022

 

45,315,942

$

1,153,422

$

682

$

346,791

$

(65,755)

$

1,264,703

$

8,669

$

(401,668)

Net earnings

 

(2,239)

(2,239)

Other comprehensive earnings (loss), net of tax

 

(97,563)

(97,563)

Deferred compensation

 

276

(276)

Share-based compensation

 

52,862

2,371

1

2,370

Dividends and dividend equivalents ($0.26 per share)

 

(11,803)

(11,803)

Balance, June 30, 2022

 

45,368,804

$

1,044,188

$

683

$

349,161

$

(163,318)

$

1,250,661

$

8,945

$

(401,944)

Net earnings

 

439,893

439,893

Other comprehensive earnings (loss), net of tax

 

(81,248)

(81,248)

Deferred compensation

 

102

(102)

Share-based compensation

 

9,367

2,968

2,968

Dividends and dividend equivalents ($0.26 per share)

 

(11,808)

(11,808)

Balance, September 30, 2022

 

45,378,171

$

1,393,993

$

683

$

352,129

$

(244,566)

$

1,678,746

$

9,047

$

(402,046)

See accompanying notes to the unaudited condensed consolidated interim financial statements.

5

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the Nine Months

Ended September 30,

(in thousands)

 

2022

 

2021

Net cash provided by operating activities

$

282,886

$

280,441

Cash Flows from Investing Activities

Purchase of:

Fixed income securities, available-for-sale

$

(531,894)

$

(587,910)

Equity securities

(42,490)

(117,218)

Property and equipment

(4,432)

(5,005)

Other

(7,940)

(11,938)

Proceeds from sale of:

Fixed income securities, available-for-sale

46,448

42,776

Equity securities

59,264

157,973

Equity method investments

686,666

Other

2,298

4,496

Proceeds from call or maturity of:

Fixed income securities, available-for-sale

176,616

296,561

Net cash provided by (used in) investing activities

$

384,536

$

(220,265)

Cash Flows from Financing Activities

Cash dividends paid

$

(34,913)

$

(33,454)

Proceeds from stock option exercises

2,198

679

Net cash used in financing activities

$

(32,715)

$

(32,775)

Net increase in cash

$

634,707

$

27,401

Cash at the beginning of the period

88,804

62,217

Cash at September 30,

$

723,511

$

89,618

See accompanying notes to the unaudited condensed consolidated interim financial statements.

6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2021 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2022 and the results of operations of RLI Corp. (the Company) and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2021 to conform to the classifications used in the current year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

B. ADOPTED ACCOUNTING STANDARDS

No new accounting standards applicable in 2022 materially impact our financial statements.

C. PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would have a material impact on our financial statements as of September 30, 2022.

D. REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review reinsurers’ annual financial statements and Securities and Exchange Commission 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 Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of each 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 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 overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $16.1 million and $11.4 million, respectively, at September 30, 2022. At December 31, 2021, the amounts were $16.1 million and $11.2 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs

7

were applied to the allowances in the first nine months of 2022 and less than $0.1 million was recovered. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

E. INTANGIBLE ASSETS

The composition of goodwill and intangible assets at September 30, 2022 and December 31, 2021 is detailed in the following table:

September 30,

December 31,

(in thousands)

 

2022

 

2021

Goodwill

Surety

$

40,816

$

40,816

Casualty

5,246

5,246

Total goodwill

$

46,062

$

46,062

Intangibles

Indefinite-lived intangibles - state insurance licenses

7,500

7,500

Total goodwill and intangibles

$

53,562

$

53,562

Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible asset during the second quarter of 2022. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of September 30, 2022 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

F. 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 unaudited condensed consolidated interim financial statements:

For the Three Months

For the Three Months

Ended September 30, 2022

Ended September 30, 2021

Income

Shares

Per Share

Income

Shares

Per Share

(in thousands, except per share data)

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic EPS

Earnings available to common shareholders

$

439,893

 

45,379

$

9.69

$

29,243

 

45,243

$

0.65

Effect of Dilutive Securities

Stock options and restricted stock units

 

396

 

446

Diluted EPS

Earnings available to common shareholders

$

439,893

 

45,775

$

9.61

$

29,243

 

45,689

$

0.64

Anti-dilutive securities excluded from diluted EPS

435

191

For the Nine Months

For the Nine Months

Ended September 30, 2022

Ended September 30, 2021

Income

Shares

Per Share

Income

Shares

Per Share

(in thousands, except per share data)

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic EPS

Earnings available to common shareholders

$

485,577

 

45,347

$

10.71

$

184,070

 

45,216

$

4.07

Effect of Dilutive Securities