Underwriting Income
RECOVERABILITY OF REINSURANCE BALANCES Underwriting income or profit represents one measure of the pretax profitability of our insurance operationsCeded unearned premiums and is derived by subtractingreinsurance 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 insurance operatingsettlement 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 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 premiums earned, which are all GAAP financial measures. Eachearnings and the deferred tax asset in that period. In addition, management must make estimates of these captions is presentedthe 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 earnings but is not subtotaled. However, this information is available in total and by segmentother significant accounting policies may be found in note 121 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. IMPACT OF COVID-19 Our processes and controls continue to operate effectively and we have been able to maintain high service and support levels for our customers throughout the COVID-19 pandemic. Overall, our premium production was not materially affected by the direct impacts of the pandemic. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The nearest comparable GAAP measure isindustry experienced new issues throughout the pandemic, including the postponement of civil court cases, the extension of various statutes of limitations, claim uncertainty due to supply shortages and changes in settlement trends. Our booked reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings before income taxes which, in additionfuture periods. We continue to underwriting income, includes net investment income, net realized gains or losses, netevaluate all aspects of our operations and are making necessary adjustments to manage our business as the economic environment evolves. RESULTS OF OPERATIONS This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021, incorporated herein by reference. Consolidated revenue for 2022 increased $518.7 million from 2021 to $1.7 billion. Net premiums earned for the Group increased 17 percent, driven by growth from our property and casualty segments. Overall market declines resulted in $121.0 million of unrealized gains or losses on equity securities in 2019 and 2018, general corporate expenses, debt costs and our portion2022, while positive market performance resulted in $65.3 million of earnings from unconsolidated investees.
Combined Ratio
The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presentedunrealized gains in our GAAP consolidated financial statements.equity portfolio in 2021. Net investment income increased by 25 percent in 2022, primarily due to a larger average asset base and higher interest rates relative to the prior year. The sumsale of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rateour equity method investment in Maui Jim, Inc. (Maui Jim) resulted in $571.0 million of underwriting income or loss. For example, a combined ratio of 90 implies that for every $100 of premiumrealized gains in 2022. Additionally, we earn, we record $10 of underwriting income.
Net Unpaid Loss and Settlement Expenses
Unpaid losses and settlement expenses, as shownrecorded net realized gains in the liabilities sectionnormal course of rebalancing our consolidated balance sheets, represents the total obligations to claimantsinvestment portfolio for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The related asset item, reinsurance balances recoverable on unpaid losses and settlement expenses, is the estimate of known claims and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.
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 and other-than-temporary impairment (OTTI), 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 occurred but have not yet been reported 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 claims frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In establishing reserves, we also take into account estimated recoveries from reinsurance, salvage and subrogation. The reserves are reviewed regularly by a team of actuaries we employ.
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 claims 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.
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. Therefore, actual paid losses in the future may yield a significantly different amount than currently reserved — favorable or unfavorable.
The amount by which currently 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 developments of loss reserves in the results of operations in the period the estimates are changed.
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.
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. These three processes are discussed in more detail in the following sections.
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 or case. 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.
Our best estimate of ultimate loss and LAE reserves are proposed by our lead reserving actuary and approved by our Loss Reserve Committee (LRC). The LRC is made up of various members of the management team including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer, chief legal officer and other selected executives. We do not use discounting (recognition of the time value of money) in reporting our estimated reserves for losses and settlement expenses. Based on current assumptions used in calculating reserves, we believe that our reserve levels at December 31, 2019, make a reasonable provision to meet our future obligations.
Initial IBNR Generation Process
Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve.
For certain property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are determined by IBNR percentages applied to premium earned. The percentages are determined based on expected loss ratios and loss development assumptions. The loss development assumptions are typically based on historical reporting patterns but could consider alternative sources of information. The IBNR percentages are reviewed and updated periodically. No deductions for paid or case reserves are made. This alternative method of determining initial IBNR allows incurred losses and ALAE to react more rapidly to the actual emergence and is more appropriate for our property products where final claim resolution occurs over a shorter period of time.
We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we review insured locations exposed to the event and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. These reserves are reviewed frequently to consider actual losses reported and appropriate changes to our estimates are made to reflect the new information.
The initial loss and ALAE ratios that are applied to earned premium are reviewed at least semi-annually. Prospective estimates are made based on historical loss experience adjusted for exposure mix, price change and loss cost trends. The initial loss and ALAE ratios also reflect our judgment as to estimation risk. We consider estimation risk by product and coverage within product, if applicable. A product with greater volatility and uncertainty has greater estimation risk. Products or coverages with higher estimation risk include, but are not limited to, the following characteristics:
| ● | Significant changes in underlying policy terms and conditions, |
| ● | A new business or one experiencing significant growth and/or high turnover, |
| ● | Small volume or lacking internal data requiring significant utilization of external data, |
| ● | Unique reinsurance features including those with aggregate stop-loss, reinstatement clauses, commutation provisions or clash protection, |
| ● | Longer emergence patterns with exposures to latent unforeseen mass tort, |
| ● | Assumed reinsurance businesses where there is an extended reporting lag and/or a heavier utilization of ceding company data and claims and product expertise, |
| ● | High severity and/or low frequency, |
| ● | Operational processes undergoing significant change and/or |
| ● | High sensitivity to significant swings in loss trends, economic change or judicial change. |
The historical and prospective loss and ALAE estimates, along with the risks listed, are the basis for determining our initial and subsequent carried reserves. Adjustments in the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors. The LRC approves changes in the initial loss and ALAE ratios.
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 cohort 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 business 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, workers’ compensation and medical errors and omissions exposures, we utilize external data extensively.
In addition to the review of historical claim reporting and payment patterns, 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.
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.years.
| | | | | | | CONSOLIDATED REVENUE | | Year ended December 31, | (in thousands) | | 2022 | | 2021 | Net premiums earned | | $ | 1,144,436 | | $ | 980,903 | Net investment income | | | 86,078 | | | 68,862 | Net realized gains | | | 588,515 | | | 64,222 | Net unrealized gains (losses) on equity securities | | | (121,037) | | | 65,258 | Total consolidated revenue | | $ | 1,697,992 | | $ | 1,179,245 |
There is uncertainty
Net earnings for 2022 totaled $583.4 million, up from $279.4 million in 2021. Improved underwriting income was bolstered by an increase in investment income and the estimatesgain recognized on the sale of ultimate losses. Significant risk factors to the reserve estimate include, but are not limited to, unforeseen or unquantifiable changes in:our interest in Maui Jim. | ● | Loss reporting patterns, |
| ● | Frequency and severity trends, |
| ● | Underlying policy terms and conditions, |
| ● | Business or exposure mix, |
| ● | Operational or internal processes affecting the timing of loss and LAE transactions, |
| ● | Regulatory and legal environment and/or |
| | | | | | | NET EARNINGS | | Year ended December 31, | (in thousands) | | 2022 | | 2021 | Underwriting income | | $ | 178,216 | | $ | 129,926 | Net investment income | | | 86,078 | | | 68,862 | Net realized gains | | | 588,515 | | | 64,222 | Net unrealized gains (losses) on equity securities | | | (121,037) | | | 65,258 | Interest expense on debt | | | (8,047) | | | (7,677) | General corporate expenses | | | (12,900) | | | (13,330) | Equity in earnings of unconsolidated investees | | | 9,853 | | | 37,060 | Earnings before income taxes | | $ | 720,678 | | $ | 344,321 | Income tax expense | | | (137,267) | | | (64,967) | Net earnings | | $ | 583,411 | | $ | 279,354 |
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.UNDERWRITING RESULTS
A considerable degreeWe achieved our 27th consecutive year of judgmentunderwriting profit in 2022. Our ability to continue to produce underwriting income, and do so at margins which have consistently outperformed the evaluation of all these factorsbroader industry, is involved ina testament to our underwriters’ discipline throughout the analysis of reserves. The human element ininsurance cycle and our continued commitment to underwriting for a profit. We believe our underwriting discipline can differentiate the application of judgment is unavoidable when faced with uncertainty. Different experts will choose different assumptions based on their individual backgrounds, professional experiencesCompany from the broader insurance market by ensuring sound risk selection 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.appropriate pricing.
Given the substantial impactGross premiums written increased $218.1 million, or 16 percent, in 2022 when compared to 2021. Growth was achieved in all three segments. Positive rate movement across most of the reserve estimates on our financial statements,casualty and property portfolio and expanded distribution provided for growth opportunities across most lines. Net premiums earned increased $163.5 million, or 17 percent, in 2022 when compared to 2021. Assuming the competitive environment responds rationally to current trends, we subject the reserving process to significant diagnostic testinganticipate continued rate increases 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 incorporatedfurther disruption that should create new opportunities for profitable growth into the reserving processes.2023.
DeterminationUnderwriting results for 2022 included $38.0 million of Our Best Estimatepretax losses from Hurricane Ian, as well as $13.0 million of other storm losses. Comparatively, 2021 included $33.6 million of pretax losses and $0.4 million of reinstatement premium from hurricanes, as well as $25.0 million of other storm losses. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $122.6 million in 2022, compared to $125.5 million in 2021. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
Upon completionBonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital. Favorable development and other drivers of our lossgrowth in book value would increase bonus and LAE estimation analysis, the results are discussed with the LRC. As part of this discussion, the analysis supporting the actuarial central estimate of the IBNR reserve by product is reviewed. The actuaries also present explanations supporting any changesprofit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to the underlying assumptions used to calculate the indicated central estimate. A review of the resulting variance between the indicated reservesexpense reductions. These performance-related expenses impact policy acquisition, insurance operating and the carried reserves takes place. Our actuaries make a recommendation to management in regards 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, the LRC determines whether the reserve balances require adjustment. Resulting reserve balances have always fallen within our actuaries’ reasonable range of estimates.general corporate expenses.
As a predominantly excess and surplus lines and specialty admitted insurer serving niche markets, we believe there are several reasons to carry,In total, underwriting income was $178.2 million on an overall basis, reserves above the actuarial central estimate. We believe we are subject84.4 combined ratio in 2022, compared 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 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 at the point coverage is initiated and, often, many years subsequent. 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 are issued$129.9 million on an “all risk”86.8 combined ratio in 2021. The loss ratio was 44.9 in 2022, compared to 46.5 in 2021. In addition to lower storm losses in 2022, the current accident year improved modestly due to lower attritional, non-catastrophe losses and occurrence basis. Claimants have at times sought coverage beyondmix changes. The expense ratio decreased to 39.5 in 2022, from 40.3 in 2021. The decrease was reflective of improved leveraging of our expense base, as net premiums earned continued to grow, and lower levels of bonus and profit-sharing expenses, resulting from negative investment returns during the insurer’s original intent, including seeking to void or limit exclusionary language.year.
We believe that becauseremain optimistic about the expected underlying profitability of our portfolio. However, the January 1, 2023 reinsurance renewals did result in changes to the reinsurance structures in place for 2023. In the past, we have been able to access low attaching earnings protection from high-quality reinsurers at favorable prices. We evaluate the risk-reward equation carefully at each reinsurance renewal and our strong capital base provides the option to take more net exposure where the expected reinsurance ceded margins exceed a fair return. As a result of the inherent variationcurrent property reinsurance market, we increased our retentions, changed from prepaid to paid reinstatements on most layers and took mid-double-digit rate increases, on a risk-adjusted basis, on our property and catastrophe treaties. For our casualty treaties, co-participations increased and risk-adjusted rate change will be flat to up low double digits, depending on the likelihood that there are unforeseen and under-quantified liabilities absent from the actuarial estimate, it is prudent to carry loss reserves above the actuarial central estimate. Mostline of business. Given increased reinsurance prices, we believe retaining more of our variance between the carried reservegross portfolio is an efficient use of our capital. We expect our reinsurance strategy going forward to primarily focus on buying traditional reinsurance from financially secure partners who support concurrent terms and the actuarial central estimate is in the most recent accident yearshave high regard for our casualty segment, where the most significant estimation risks reside. These estimation risks are considered when setting the initial loss ratios. In the cases where these risks fail to materialize, favorable loss development will likely occur over subsequent accounting periods. It is also possible that the risks materialize above the amount we considered when booking our initial loss reserves. In this case, unfavorable loss development is likely to occur over subsequent accounting periods.business model of disciplined underwriting. Our best estimateThe 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 | | (in thousands) | | 2022 | | 2021 | | % Change | | | 2022 | | 2021 | | % Change | | CASUALTY | | | | | | | | | | | | | | | | | | | Commercial excess and personal umbrella | | $ | 325,218 | | $ | 283,242 | | 15 | % | | $ | 253,921 | | $ | 219,437 | | 16 | % | General liability | | | 110,659 | | | 99,017 | | 12 | % | | | 100,374 | | | 90,853 | | 10 | % | Commercial transportation | | | 123,099 | | | 106,432 | | 16 | % | | | 96,992 | | | 83,352 | | 16 | % | Professional services | | | 103,922 | | | 96,735 | | 7 | % | | | 95,187 | | | 88,855 | | 7 | % | Small commercial | | | 72,347 | | | 68,475 | | 6 | % | | | 67,673 | | | 64,660 | | 5 | % | Executive products | | | 103,742 | | | 136,078 | | (24) | % | | | 26,606 | | | 21,873 | | 22 | % | Other casualty | | | 87,244 | | | 81,605 | | 7 | % | | | 71,079 | | | 64,609 | | 10 | % | Total casualty | | $ | 926,231 | | $ | 871,584 | | 6 | % | | $ | 711,832 | | $ | 633,639 | | 12 | % | | | | | | | | | | | | | | | | | | | | PROPERTY | | | | | | | | | | | | | | | | | | | Commercial property | | $ | 326,609 | | $ | 202,855 | | 61 | % | | $ | 163,078 | | $ | 107,941 | | 51 | % | Marine | | | 133,539 | | | 112,721 | | 18 | % | | | 113,208 | | | 97,745 | | 16 | % | Other property | | | 39,313 | | | 32,290 | | 22 | % | | | 31,600 | | | 26,151 | | 21 | % | Total property | | $ | 499,461 | | $ | 347,866 | | 44 | % | | $ | 307,886 | | $ | 231,837 | | 33 | % | | | | | | | | | | | | | | | | | | | | SURETY | | | | | | | | | | | | | | | | | | | Commercial | | $ | 55,026 | | $ | 51,529 | | 7 | % | | $ | 47,652 | | $ | 43,738 | | 9 | % | Miscellaneous | | | 48,926 | | | 46,599 | | 5 | % | | | 45,826 | | | 43,982 | | 4 | % | Contract | | | 35,842 | | | 29,776 | | 20 | % | | | 31,240 | | | 27,707 | | 13 | % | Total surety | | $ | 139,794 | | $ | 127,904 | | 9 | % | | $ | 124,718 | | $ | 115,427 | | 8 | % | | | | | | | | | | | | | | | | | | | | Grand total | | $ | 1,565,486 | | $ | 1,347,354 | | 16 | % | | $ | 1,144,436 | | $ | 980,903 | | 17 | % |
Casualty Gross premiums written for the casualty segment were up $54.6 million in 2022. Gross premiums from commercial excess and personal umbrella increased $42.0 million, due to rate increases and an expanded distribution base. The personal umbrella market continues to be disrupted, as many of loss and LAE reserves may changeour competitors for standalone umbrella have reduced their appetite or left the space altogether. Within the commercial excess category, we wrote $13.8 million of excess energy liability business, which we have decided to run off throughout 2023. Increases in new construction projects, outside of the competitive New York City construction market, led to the increase in general liability premium. Commercial transportation premium increased by $16.7 million, driven by our public transportation line, where customers put vehicles back in service on policies that were suspended throughout the first two years of the pandemic. Executive products premium decreased as a result of a revision inmore competitive market and the actuarial central estimate, the actuary’s certainty in the estimatesexit from our large account cyber and processesrepresentations 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.warranties programs. 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, 2019.
INVESTMENT VALUATION AND OTTI
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 in 2019 and 2018. Prior to 2018, unrealized gains and losses on equity securities were recognized through other comprehensive 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 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.
We regularly evaluate our fixed income securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are some of the key factors we consider for determining if a security is other-than-temporarily impaired:
| ● | The length of time and the extent to which the fair value has been less than amortized cost, |
| ● | The probability of significant adverse changes to the cash flows, |
| ● | The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer seeking protection from creditors under the bankruptcy laws, or the issuer proposing a voluntary reorganization under which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims or |
| ● | The probability that we will recover the entire amortized cost basis of our fixed income securities prior to maturity. |
Quantitative criteria considered during this process include, but are not limited to: the degree and duration of current fair value as compared to the amortized cost of the security, degree and duration of the security’s fair value being below cost and whether the issuer is in compliance with the terms and covenants of the security. Qualitative criteria include the credit quality, current economic conditions, the anticipated speed of cost recovery, the financial health of and specific prospects for the issuer,
as well as the absence of intent to sell or requirement to sell securities prior to recovery. In addition, we consider price declines in our OTTI analysis when they provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration as opposed to rising interest rates.Property
Key factorsGross premiums written for the property segment were up $151.6 million in 2022. Our commercial property business was up $123.8 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to grow while strengthening terms and conditions. We believe the trend of increasing hurricane rate will continue given the disorderly market conditions that we consider in the evaluation of credit quality include:
| ● | Changes in technology that may impair the earnings potential of the investment, |
| ● | The discontinuance of a segment of business that may affect future earnings potential, |
| ● | Reduction or elimination of dividends, |
| ● | Specific concerns related to the issuer’s industry or geographic area of operation, |
| ● | Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and |
| ● | A downgrade in credit quality by a major rating agency. |
For mortgage-backed securities and asset-backed securities that have significant unrealized loss positions and major rating agency downgrades, credit impairment is assessed using a cash flow model that estimates likely payments using security-specific collateral and transaction structure. All of our mortgage-backed and asset-backed securities remain AAA-ratedare further supported by one of the major rating agencies and the fair value is not significantly less than amortized cost.increased reinsurance costs.
Under current accounting standards, an OTTI write-downRate increases, improved retention and new opportunities in the inland marine space led to $20.8 million of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sellpremium growth for our marine product. Other property premium grew as a security, (2) it is more likely than not that the entity will be required to sell the security before recoveryresult of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized costlocal underwriting efforts for our Hawaii homeowners product, which helped us obtain new accounts, and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.rate increases on property-exposed GBA business.
Part of our evaluation of whether particular securities are other-than-temporarily impaired involves assessing whether we have both the intent and ability to continue to hold equity securities in an unrealized loss position. For fixed income securities, we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than not we will be required to sell the security before the recovery of our amortized cost basis. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis.Surety
Gross premiums written for the surety segment were up $11.9 million in 2022. Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices and increased public spending on infrastructure projects. The expansion of existing accounts and new business resulted in increased premium for commercial surety. The growth in miscellaneous surety was broad based and has been supported by our focus on customer experience and technology. We continue to carefully pursue growth opportunities, while monitoring the financial results of our principals closely, given the evolving economic environment. UNDERWRITING INCOME | | | | | | | 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. Additionally, the same uncertainties associated with estimating unpaid losses and settlement expenses impact the estimates for the ceded portion of such liabilities. We continually monitor the financial condition of our reinsurers.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, AM Best and S&P rating developments andtraded. We also review insurance industry developments that may impact the financial condition of our reinsurers. In addition, we subjectWe analyze the credit risk associated with our reinsurance recoverablesbalances 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 detailed recoverability tests, including one based on average default by S&P rating. Based uponthe renewal of our reviewreinsurance 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 testing, our policy is to chargeunpaid 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 estimate ofadditional 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.premium and unrealized losses on our fixed income portfolio. We also have a significant amount of deferred tax liabilities from unrealized gains on the investmentequity 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-planningtax 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. IMPACT OF COVID-19 Our processes and controls continue to operate effectively and we have been able to maintain high service and support levels for our customers throughout the COVID-19 pandemic. Overall, our premium production was not materially affected by the direct impacts of the pandemic. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The industry experienced new issues throughout the pandemic, including the postponement of civil court cases, the extension of various statutes of limitations, claim uncertainty due to supply shortages and changes in settlement trends. Our booked reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods. We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business as the economic environment evolves. RESULTS OF OPERATIONS This section of this Form 10-K generally discusses 20192022 and 20182021 items and year-to-year comparisons between 20192022 and 2018.2021. Discussions of 20172020 items and year-to-year comparisons between 20182021 and 20172020 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, 2018,2021, incorporated herein by reference. Consolidated revenue totaled $1.0 billionfor 2022 increased $518.7 million from 2021 to $1.7 billion. Net premiums earned for the Group increased 17 percent, driven by growth from our property and casualty segments. Overall market declines resulted in 2019, compared to $0.8 billion in 2018. Increased levels$121.0 million of earned premium and net investment income, as well as unrealized gainslosses on equity securities led to increased consolidated revenue in 2019. Net premiums earned increased 6 percent, as growth from products within our casualty and property segments more than offset the impact2022, while positive market performance resulted in $65.3 million of our exit from certain underperforming products and the reductionunrealized gains in our participation on a quota share reinsurance agreement with Prime Holdings Insurance Services, Inc. (Prime).equity portfolio in 2021. Net investment income increased by 1125 percent in 2019,2022, primarily due to a larger average asset base and higher interest rates relative to the prior year. WeThe sale of our equity method investment in Maui Jim, Inc. (Maui Jim) resulted in $571.0 million of realized gains in 2022. Additionally, we recorded net realized gains onin the normal course of rebalancing our investment portfolio infor both 2019 and 2018, due to portfolio rebalancing. Additionally, net unrealized gains on equity securities were recorded in 2019, as the overall equity market experienced positive returns. In contrast, equity markets experienced negative returns in 2018, resulting in net unrealized losses on equity securities.years. | | | | | | | | | | | | | | CONSOLIDATED REVENUE | | Year ended December 31, | | | Year ended December 31, | (in thousands) | | 2019 | | 2018 | | | 2022 | | 2021 | Net premiums earned | | $ | 839,111 | | $ | 791,366 | | | $ | 1,144,436 | | $ | 980,903 | Net investment income | | | 68,870 | | | 62,085 | | | | 86,078 | | | 68,862 | Net realized gains | | | 17,520 | | | 63,407 | | | | 588,515 | | | 64,222 | Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | | | | (121,037) | | | 65,258 | Total consolidated revenue | | $ | 1,003,591 | | $ | 818,123 | | | $ | 1,697,992 | | $ | 1,179,245 |
Net earnings for 20192022 totaled $191.6$583.4 million, up from $64.2$279.4 million in 2018.2021. Improved underwriting income netwas bolstered by an increase in investment income and equitythe gain recognized on the sale of our interest in earnings of unconsolidated investees contributed to the overall increase. Additionally, 2019 experienced a larger benefit from increased gains on equity securities.Maui Jim. | | | | | | | | | | | | | | NET EARNINGS | | Year ended December 31, | | | Year ended December 31, | (in thousands) | | 2019 | | 2018 | | | 2022 | | 2021 | Underwriting income | | $ | 67,568 | | $ | 41,632 | | | $ | 178,216 | | $ | 129,926 | Net investment income | | | 68,870 | | | 62,085 | | | | 86,078 | | | 68,862 | Net realized gains | | | 17,520 | | | 63,407 | | | | 588,515 | | | 64,222 | Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | | | | (121,037) | | | 65,258 | Interest expense on debt | | | (7,588) | | | (7,437) | | | | (8,047) | | | (7,677) | General corporate expenses | | | (12,686) | | | (9,427) | | | | (12,900) | | | (13,330) | Equity in earnings of unconsolidated investees | | | 20,960 | | | 16,056 | | | | 9,853 | | | 37,060 | Earnings before income taxes | | $ | 232,734 | | $ | 67,581 | | | $ | 720,678 | | $ | 344,321 | Income tax expense | | | (41,092) | | | (3,402) | | | | (137,267) | | | (64,967) | Net earnings | | $ | 191,642 | | $ | 64,179 | | | $ | 583,411 | | $ | 279,354 |
UNDERWRITING RESULTS Gross premiums written increased by 8 percent in 2019 to a record $1.1 billion. Excluding exited lines, such as the medical professional liability product and the reduction in our quota share reinsurance agreement with Prime, written premium increased by 15 percent. Positive rate movement across most of the casualty and property portfolio and market disruption provided for growth opportunities in established lines. Newer product initiatives within our casualty segment have also continued to gain scale.
The 2019 fiscal year benefited from a reduced level of catastrophe activity compared to 2018. In 2019, we incurred $9.5 million of losses from storms, which added 1.1 points to the combined ratio. Catastrophe losses totaled $40.5 million in 2018, adding 5.1 points to the combined ratio, with Hurricane Michael responsible for $23.0 million, Hurricane Florence responsible for $7.5 million and other storms and volcanic activity in Hawaii composing the balance. Apart from the impact of catastrophes, results for both years reflected a combination of positive underwriting results for the current accident year and favorable loss reserve development on prior accident years. Favorable development in prior accident years’ reserves was $75.3 million in 2019 and $50.0 million in 2018. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.
Incentive and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including 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 capital. MVP is the primary measure of executive bonus achievement and a significant component of manager and associate incentive targets. Incentive and profit sharing-related expenses attributable to the favorable reserve developments totaled $11.1 million and $7.8 million for 2019 and 2018, respectively. These performance-related expenses impact policy acquisition, insurance operating and general corporate expenses line items in the financial statements. Partially offsetting the 2019 and 2018 increases were $1.4 million and $6.1 million, respectively, in reductions to incentive and profit-sharing amounts earned due to losses associated with catastrophe activity.
In total, underwriting income was $67.6 million on a 91.9 combined ratio in 2019, compared to $41.6 million on a 94.7 combined ratio in 2018. We achieved our 24th27th consecutive year of underwriting profit in 2019, with all three segments contributing to the positive performance.2022. Our ability to continue to produce underwriting income, and to do so at margins which have consistently outperformed the broader industry, is a testament to our underwriters’ discipline throughout the insurance cycle and our continued commitment to underwriting for a profit. We believe our underwriting discipline can
differentiate the Company from the broader insurance market by ensuring sound risk selection and appropriate pricing,pricing. Gross premiums written increased $218.1 million, or 16 percent, in 2022 when compared to 2021. Growth was achieved in all three segments. Positive rate movement across most of the casualty and property portfolio and expanded distribution provided for growth opportunities across most lines. Net premiums earned increased $163.5 million, or 17 percent, in 2022 when compared to 2021. Assuming the competitive environment responds rationally to current trends, we anticipate continued rate increases and further disruption that should create new opportunities for profitable growth into 2023. Underwriting results for 2022 included $38.0 million of pretax losses from Hurricane Ian, as well as $13.0 million of other storm losses. Comparatively, 2021 included $33.6 million of pretax losses and $0.4 million of reinstatement premium from hurricanes, as well as $25.0 million of other storm losses. Results for each period benefited from favorable development on prior years’ loss reserves, which helps slowprovided additional pretax earnings of $122.6 million in 2022, compared to $125.5 million in 2021. Further discussion of reserve development can be found in note 6 to the paceconsolidated financial statements within Item 8, Financial Statements and Supplementary Data. Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital. Favorable development and other drivers of deteriorationgrowth in book value would increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses impact policy acquisition, insurance operating and general corporate expenses. In total, underwriting income was $178.2 million on an 84.4 combined ratio in 2022, compared to $129.9 million on an 86.8 combined ratio in 2021. The loss ratio was 44.9 in 2022, compared to 46.5 in 2021. In addition to lower storm losses in 2022, the current accident year improved modestly due to lower attritional, non-catastrophe losses and mix changes. The expense ratio decreased to 39.5 in 2022, from 40.3 in 2021. The decrease was reflective of improved leveraging of our underwriting results.expense base, as net premiums earned continued to grow, and lower levels of bonus and profit-sharing expenses, resulting from negative investment returns during the year. We remain optimistic about the expected underlying profitability of our portfolio. However, the January 1, 2023 reinsurance renewals did result in changes to the reinsurance structures in place for 2023. In the past, we have been able to access low attaching earnings protection from high-quality reinsurers at favorable prices. We evaluate the risk-reward equation carefully at each reinsurance renewal and our strong capital base provides the option to take more net exposure where the expected reinsurance ceded margins exceed a fair return. As a result of the current property reinsurance market, we increased our retentions, changed from prepaid to paid reinstatements on most layers and took mid-double-digit rate increases, on a risk-adjusted basis, on our property and catastrophe treaties. For our casualty treaties, co-participations increased and risk-adjusted rate change will be flat to up low double digits, depending on the line of business. Given increased reinsurance prices, we believe retaining more of our gross portfolio is an efficient use of our capital. We expect our reinsurance strategy going forward to primarily focus on buying traditional reinsurance from financially secure partners who support concurrent terms and have high regard for our business model of disciplined underwriting. 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 | | (in thousands) | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | | CASUALTY | | | | | | | | | | | | | | | | | | | | Commercial excess and personal umbrella | | $ | 183,098 | | $ | 153,540 | | 19 | % | | $ | 140,483 | | $ | 124,350 | | 13 | % | | General liability | | | 99,345 | | | 100,997 | | (2) | % | | | 98,880 | | | 93,928 | | 5 | % | | Commercial transportation | | | 105,592 | | | 101,267 | | 4 | % | | | 83,213 | | | 81,053 | | 3 | % | | Professional services | | | 89,347 | | | 87,243 | | 2 | % | | | 81,329 | | | 79,951 | | 2 | % | | Small commercial | | | 63,925 | | | 53,432 | | 20 | % | | | 55,701 | | | 51,519 | | 8 | % | | Executive products | | | 96,828 | | | 68,501 | | 41 | % | | | 27,088 | | | 21,326 | | 27 | % | | Other casualty | | | 66,057 | | | 89,214 | | (26) | % | | | 71,764 | | | 71,345 | | 1 | % | | Total | | $ | 704,192 | | $ | 654,194 | | 8 | % | | $ | 558,458 | | $ | 523,472 | | 7 | % | | | | | | | | | | | | | | | | | | | | | | PROPERTY | | | | | | | | | | | | | | | | | | | | Marine | | $ | 91,315 | | $ | 71,784 | | 27 | % | | $ | 74,887 | | $ | 59,795 | | 25 | % | | | | | | | | | | | | | | | | | | | | | | Specialty personal | | | 21,190 | | | 18,789 | | 13 | % | | | 19,316 | | | 16,901 | | 14 | % | | Other property | | | 2,562 | | | 1,370 | | 87 | % | | | 1,509 | | | 1,064 | | 42 | % | | Total | | $ | 241,425 | | $ | 202,917 | | 19 | % | | $ | 164,022 | | $ | 149,261 | | 10 | % | | | | | | | | | | | | | | | | | | | | | | SURETY | | | | | | | | | | | | | | | | | | | | Miscellaneous | | $ | 42,614 | | $ | 47,461 | | (10) | % | | $ | 44,721 | | $ | 46,968 | | (5) | % | | Commercial | | | 47,436 | | | 48,505 | | (2) | % | | | 43,553 | | | 43,469 | | 0 | % | | Contract | | | 29,335 | | | 30,139 | | (3) | % | | | 28,357 | | | 28,196 | | 1 | % | | Total | | $ | 119,385 | | $ | 126,105 | | (5) | % | | $ | 116,631 | | $ | 118,633 | | (2) | % | | Grand total | | $ | 1,065,002 | | $ | 983,216 | | 8 | % | | $ | 839,111 | | $ | 791,366 | | 6 | % | |
GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED | | | | | | | | | | | | | | | | | | | | | Gross Premiums Written | | | Net Premiums Earned | | (in thousands) | | 2022 | | 2021 | | % Change | | | 2022 | | 2021 | | % Change | | CASUALTY | | | | | | | | | | | | | | | | | | | Commercial excess and personal umbrella | | $ | 325,218 | | $ | 283,242 | | 15 | % | | $ | 253,921 | | $ | 219,437 | | 16 | % | General liability | | | 110,659 | | | 99,017 | | 12 | % | | | 100,374 | | | 90,853 | | 10 | % | Commercial transportation | | | 123,099 | | | 106,432 | | 16 | % | | | 96,992 | | | 83,352 | | 16 | % | Professional services | | | 103,922 | | | 96,735 | | 7 | % | | | 95,187 | | | 88,855 | | 7 | % | Small commercial | | | 72,347 | | | 68,475 | | 6 | % | | | 67,673 | | | 64,660 | | 5 | % | Executive products | | | 103,742 | | | 136,078 | | (24) | % | | | 26,606 | | | 21,873 | | 22 | % | Other casualty | | | 87,244 | | | 81,605 | | 7 | % | | | 71,079 | | | 64,609 | | 10 | % | Total casualty | | $ | 926,231 | | $ | 871,584 | | 6 | % | | $ | 711,832 | | $ | 633,639 | | 12 | % | | | | | | | | | | | | | | | | | | | | PROPERTY | | | | | | | | | | | | | | | | | | | Commercial property | | $ | 326,609 | | $ | 202,855 | | 61 | % | | $ | 163,078 | | $ | 107,941 | | 51 | % | Marine | | | 133,539 | | | 112,721 | | 18 | % | | | 113,208 | | | 97,745 | | 16 | % | Other property | | | 39,313 | | | 32,290 | | 22 | % | | | 31,600 | | | 26,151 | | 21 | % | Total property | | $ | 499,461 | | $ | 347,866 | | 44 | % | | $ | 307,886 | | $ | 231,837 | | 33 | % | | | | | | | | | | | | | | | | | | | | SURETY | | | | | | | | | | | | | | | | | | | Commercial | | $ | 55,026 | | $ | 51,529 | | 7 | % | | $ | 47,652 | | $ | 43,738 | | 9 | % | Miscellaneous | | | 48,926 | | | 46,599 | | 5 | % | | | 45,826 | | | 43,982 | | 4 | % | Contract | | | 35,842 | | | 29,776 | | 20 | % | | | 31,240 | | | 27,707 | | 13 | % | Total surety | | $ | 139,794 | | $ | 127,904 | | 9 | % | | $ | 124,718 | | $ | 115,427 | | 8 | % | | | | | | | | | | | | | | | | | | | | Grand total | | $ | 1,565,486 | | $ | 1,347,354 | | 16 | % | | $ | 1,144,436 | | $ | 980,903 | | 17 | % |
Casualty Gross premiums written fromfor the casualty segment totaled $704.2were up $54.6 million up 8 percent from 2018. Excluding certain exits and repositioning on Prime, a majority of products within this segment posted top line growth. Premiumsin 2022. Gross premiums from commercial excess and personal umbrella increased $29.6$42.0 million, due in part to rate increases and an expanded distribution base inbase. The personal umbrella larger scale inmarket continues to be disrupted, as many of our competitors for standalone umbrella have reduced their appetite or left the space altogether. Within the commercial excess category, we wrote $13.8 million of excess energy casualty space and overall exposure growth. Our executive products group grew $28.3 million as substantial rate increases were achieved, submissions were up and newer initiatives gained traction. Production from small commercial increased $10.5 million as opportunities arose from market disruption and certain offerings expanded geographically. The third consecutive year of double digit rate increases ledliability business, which we have decided to growth within commercial transportation.run off throughout 2023. As previously announced, we reducedIncreases in new construction projects, outside of the competitive New York City construction market, led to the increase in general liability premium. Commercial transportation premium increased by $16.7 million, driven by our quota share reinsurance agreement with Prime from 25 percent to 6 percent atpublic transportation line, where customers put vehicles back in service on policies that were suspended throughout the beginningfirst two years of 2019 to better manage our exposure to their growth relative to our overall product portfolio. In addition, we exitedthe pandemic. Executive products premium decreased as a result of a more competitive market and the exit from our medical professional liability lines due to unfavorable market conditionslarge account cyber and poor underwriting performance. These actions account for the decline in other casualtyrepresentations and offset continued growth in our general binding authority (GBA) and mortgage reinsurance lines.warranties programs.
Property
Gross premiums written from our property segment totaled $241.4 million in 2019, up 19 percent from 2018. Market disruption created new business opportunities for our marine product and, along with rate increases, led to a 27 percent increase in premiums. Our commercial property business grew 14 percent in 2019, as an improving market has allowed our underwriters to find more opportunities with acceptable rate levels. Rates on wind-prone exposures increased for the second
consecutive year, while rates on earthquake exposures increased after consecutive years of decreases. Specialty personal lines, which is primarily composed of homeowners’ insurance in Hawaii, grew 13 percent as a result of continued investment in relationships and distribution. Other property premium increased as a result of property exposed GBA business that continues to gain scale.
SuretyProperty
Gross premiums written from our suretyfor the property segment totaled $119.4were up $151.6 million in 2019, down 5 percent from 2018. Competitive2022. Our commercial property business was up $123.8 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to grow while strengthening terms and conditions. We believe the trend of increasing hurricane rate will continue given the disorderly market conditions and selectively reducing exposures on high risk accounts, given the current stage in the credit cycle, led to the overall reduction. Exiting one program in the miscellaneous surety book and decreasing offshore energy activity within commercial surety also resulted in a decline in premium from 2018.that are further supported by increased reinsurance costs. | | | | | | | | UNDERWRITING INCOME | | | | | | (in thousands) | | 2019 | | 2018 | | Casualty | | $ | 20,601 | | $ | 11,140 | | Property | | | 18,143 | | | 884 | | Surety | | | 28,824 | | | 29,608 | | Total | | $ | 67,568 | | $ | 41,632 | |
Rate increases, improved retention and new opportunities in the inland marine space led to $20.8 million of premium growth for our marine product. Other property premium grew as a result of local underwriting efforts for our Hawaii homeowners product, which helped us obtain new accounts, and rate increases on property-exposed GBA business. | | | | | | COMBINED RATIO | | 2019 | | 2018 | | Casualty | | 96.3 | | 97.9 | | Property | | 88.9 | | 99.4 | | Surety | | 75.3 | | 75.0 | | Total | | 91.9 | | 94.7 | |
Surety Gross premiums written for the surety segment were up $11.9 million in 2022. Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices and increased public spending on infrastructure projects. The expansion of existing accounts and new business resulted in increased premium for commercial surety. The growth in miscellaneous surety was broad based and has been supported by our focus on customer experience and technology. We continue to carefully pursue growth opportunities, while monitoring the financial results of our principals closely, given the evolving economic environment. UNDERWRITING INCOME | | | | | | | Underwriting Income | | | | | | | (in thousands) | | 2022 | | 2021 | Casualty | | $ | 73,789 | | $ | 95,519 | Property | | | 72,522 | | | 11,300 | Surety | | | 31,905 | | | 23,107 | Total | | $ | 178,216 | | $ | 129,926 |
| | | | | Combined Ratio | | 2022 | | 2021 | Casualty | | 89.6 | | 84.9 | Property | | 76.4 | | 95.1 | Surety | | 74.4 | | 80.0 | Total | | 84.4 | | 86.8 |
Casualty Underwriting income for the casualty segment was $20.6$73.8 million on a 96.3an 89.6 combined ratio in 2019,2022, compared to $11.1$95.5 million on a 97.9an 84.9 combined ratio in 2018.2021. The improvement isdecline was the result of increaseddecreased favorable development on prior accident years’ reserves. However, thereserves, which was partially offset by improved current accident year combined ratio was modestly higher in 2019 due to a shift in business mix, our cautious approach to reserving for new initiatives and products with larger growth, along with increased bonus and profit sharing expenses, based on strong growth in overall earnings and book value.performance. Favorable development on prior accident years’ loss reserves benefitedcontributed to underwriting earnings in each of the past two years. The total benefit from favorable development on prior years’ reserves was $62.5$87.2 million for 2019, with the largest amounts of the development coming from2022, which was experienced across accident years 2016 and 2018 through 2018. Products which generated the majority of the favorable2021. Favorable development include transportation,was widespread, with notable amounts from general liability, professional services, commercial excess, personal umbrellatransportation, small commercial and small commercial. Partially offsetting these favorable impacts wasexecutive products. No product experienced significant adverse development on executive products and medical professional liability.development. Comparatively, overall results for the casualty segment in 20182021 included favorable development of $33.3$108.6 million, with the bulk of the development attributable to general liability, transportation, professional services, commercial excess and personal umbrella professional services, general liability and small commercial across accident years 20152014 through 2017. Executive products2020. Hurricane and medical professional liability developed adverselystorm losses on casualty-oriented package policies that include property coverage resulted in 2018. Increased favorable development on transportation was responsible for a significant amount$8.3 million of the difference between the releaselosses in 2019 and 2018.2022, compared to $4.1 million in 2021. The segment’s loss ratio was 59.153.6 in 2019,2022, compared to 63.049.2 in 2018.2021. The lowerhigher loss ratio in 20192022 was due to the higherlower amounts of favorable development on prior years’ reserves.reserves and increased current year hurricane and storm losses on casualty-oriented package policies. The expense ratio for the casualty segment was 37.236.0 in 2019,2022, compared to 34.935.7 in 2018. The increase in expense ratio in 2019 was due to investments in technology and a larger amount of bonus and profit-sharing expenses.2021. Property Underwriting income from the property segment was $18.1$72.5 million on an 88.9a 76.4 combined ratio in 2019,2022, compared to $0.9$11.3 million on a 99.495.1 combined ratio in 2018. Catastrophe losses2021. Underwriting results for the property segment consisted of $8.82022 included $24.9 million of storm losses in 2019, compared to total catastrophe losses of $38.3 million in 2018, which included $28.9 million from Hurricanes Michael and Florence and $6.1 million from volcanic activity in Hawaii. Partially offsetting the impact of catastrophes, favorable development in prior years’ reserves benefited underwriting results in each of the past two years. Results for 2019 included $4.5 million of net favorable development on prior years’ reserves. Marine experienced $2.4 million of the favorable development, primarily on accident years 2017 and 2018. Specialty personal and commercial property also contributed to theloss favorable development. Resultsand catastrophe reserves, largely from the marine business, $31.2 million of hurricane losses and $11.5 million of other storm losses. Comparatively, results for 20182021 included $10.8$11.0 million of favorable development inon prior years’ loss and catastrophe reserves, largelyprimarily from the marine but commercial property products also contributed.business, $32.2 million of hurricane losses and $22.3 million of other storm losses.
A larger earned premium base resulted in higher levels of underwriting income as well as lower loss and expense ratios. The segment’s loss ratio was 44.939.2 in 2019,2022, compared to 56.256.0 in 2018.2021. Catastrophe losses added 514 points to the loss ratio in 2019,2022, compared to 2624 points of impact from catastrophein 2021. Lower attritional losses in 2018. Partially offsetting this reduction were higherthe current accident year non-catastrophe losses from our commercial property and specialty personal lines, a shiftalso led to an improved loss ratio in mix of business and lower favorable development on prior years’ reserves.2022. The expense ratio for the property segment was 44.0declined to 37.2 in 2019, compared to 43.22022, from 39.1 in 2018. Strong growth in overall earnings and book value led to an increase in bonus and profit-sharing expenses and a higher expense ratio, the impact of which was partially offset by a larger premium base.2021. Surety Underwriting income for the surety segment totaled $28.8$31.9 million on a 75.374.4 combined ratio in 2019,2022, compared to $29.6$23.1 million on a 75.0an 80.0 combined ratio in 2018.2021. Underwriting performance for each year reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. The current accident year combined ratio for each period has been in the low 80s, with each product line contributing to underwriting profit.mid 80s. Results for 20192022 included $8.3 million of favorable development inon prior accident years’ reserves, compared towhich decreased loss and settlement expenses for the segment by $10.4 million. Comparatively, 2021 results included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $5.9 million in 2018.million. The segment’s loss ratio was 8.39.8 in 2019,2022, compared to 12.313.0 in 2018. A larger2021. An increased amount of favorable development on prior years’ reserves resulted in the2022 led to a lower loss ratio in 2019.ratio. The expense ratio for the surety segment was 64.6 in 2022, down from 67.0 in 2019, compared to 62.7 in 2018. The increase in 2019 was due to increased investments in technology and2021, as 2022 had a higher bonus and profit-sharing expenses onearned premium base that allowed for a slightly lower premium base.better leveraging of expenses. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS During 2019,2022, net investment income increased by 1125 percent. The increase was primarily due to a largeran increased asset base and higher interest rates relative to the prior year. The average annual yields on our investments were as follows for 20192022 and 2018:2021: | | | | | | | | | | | | | 2019 | | 2018 | | | 2022 | | 2021 | | PRETAX YIELD | | | | | | | | | | | Taxable (on book value) | | 3.39 | % | 3.31 | % | | 2.94 | % | 2.76 | % | Tax-exempt (on book value) | | 2.77 | % | 2.71 | % | | 2.71 | % | 2.63 | % | Equities (on fair value) | | 2.41 | % | 2.54 | % | | 2.20 | % | 2.07 | % | | | | | | | | | | | | AFTER-TAX YIELD | | | | | | | | | | | Taxable (on book value) | | 2.68 | % | 2.61 | % | | 2.32 | % | 2.18 | % | Tax-exempt (on book value) | | 2.62 | % | 2.57 | % | | 2.57 | % | 2.49 | % | Equities (on fair value) | | 2.09 | % | 2.21 | % | | 1.91 | % | 1.80 | % |
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 21.0 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 2019,2022, the average after-tax yield on the taxable fixed income portfolio was 2.72.3 percent, an increase from 2.62.2 percent in the prior year. The average after-tax yield on the tax-exempt portfolio remained atincreased slightly to 2.6 percent. The fixed income portfolio increased by $222.6$257.1 million during the year, as the majority of operating cash flows were allocated to the fixed income portfolio and a decline in interest rates was experienced during the year, increasing the fair value of fixed income securities.portfolio. The tax-adjusted total return on a mark-to-market basis was 8.3-11.1 percent. Our equity portfolio increaseddecreased by $120.1$115.4 million to $460.6$498.4 million in 20192022 as a result of the stronga decline in equity market returns during the year. The total return for the year on the equity portfolio was 28.7-13.8 percent. Our investment results for the last five years are shown in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tax | | | | | | | | | | | | | | | | | Tax | | | | | | | | | | | | Pre-tax | | Equivalent | | | | | | | | | | | | | | | Pre-tax | | Equivalent | | | | | | | | | | | | Annualized | | Annualized | | | | | | | | | | | | | | | Annualized | | Annualized | | | | | | | | | | | | | | | | | | | | | | | | | | Change in | | Return on | | Return on | | | | Average | | Net | | | | Unrealized | | Avg. | | Avg. | | | Average | | Net | | | | | Unrealized | | Avg. | | Avg. | | | | Invested | | Investment | | Net Realized | | Appreciation | | Invested | | Invested | | | Invested | | Investment | | Net Realized | | Appreciation | | Invested | | Invested | | (in thousands) | | Assets (1) | | Income (2)(3) | | Gains (3) | | (3)(4) | | Assets | | Assets | | | Assets (1) | | Income (2)(3) | | Gains (3)(4) | | (3)(5) | | Assets | | Assets | | 2015 | | $ | 1,957,914 | | $ | 54,644 | | $ | 39,829 | | $ | (71,049) | | 1.2 | % | 1.5 | % | | 2016 | | | 1,986,685 | | | 53,075 | | | 34,645 | | | (2,313) | | 4.3 | % | 4.6 | % | | 2017 | | | 2,081,309 | | | 54,876 | | | 4,411 | | | 53,719 | | 5.4 | % | 5.8 | % | | 2018 | | | 2,167,510 | | | 62,085 | | | 63,407 | | | (140,513) | | (0.7) | % | (0.6) | % | | $ | 2,167,510 | | $ | 62,085 | | $ | 63,407 | | $ | (140,513) | | (0.7) | % | (0.6) | % | 2019 | | | 2,377,295 | | | 68,870 | | | 17,520 | | | 161,848 | | 10.4 | % | 10.5 | % | | | 2,377,295 | | | 68,870 | | | 17,520 | | | 161,848 | | 10.4 | % | 10.5 | % | 2020 | | | | 2,698,721 | | | 67,893 | | | 17,885 | | | 99,451 | | 6.9 | % | 6.9 | % | 2021 | | | | 3,000,025 | | | 68,862 | | | 64,222 | | | (6,280) | | 4.2 | % | 4.3 | % | 2022 | | | | 3,217,635 | | | 86,078 | | | 588,515 | | | (462,981) | | 6.6 | % | 6.6 | % | 5-yr Avg. | | $ | 2,114,143 | | $ | 58,710 | | $ | 31,962 | | $ | 338 | | 4.1 | % | 4.4 | % | | $ | 2,692,237 | | $ | 70,758 | | $ | 150,310 | | $ | (69,695) | | 5.5 | % | 5.5 | % |
| (1) | Average amounts at beginning and end of year (inclusive of cash and short-term investments). |
| (2) | Investment income, net of investment expenses. |
| (4) | Net realized gains for 2022 include $571.0 million of gain from the sale of our equity method investment in Maui Jim. |
| (5) | Relates to available-for-sale fixed income and equity securities. |
We realized a total of $17.5 million in net gains in 2019. Included in this number is $14.4In 2022, we recognized $20.3 million in net realized gains in the equity portfolio, $3.2$3.0 million in net realized losses in the fixed income portfolio and $571.2 million in other net realized gains, primarily from our sale of Maui Jim. In 2021, we recognized $62.5 million in net realized gains in the equity portfolio, $1.9 million in net realized gains in the fixed income portfolio and $0.1$0.2 million in other net realized losses. In 2018, we realized $63.4 million in net gains. Included in this number is $69.9 million in net realized gains in the equity portfolio, $2.2 million in net realized losses in the fixed income portfolio and $4.2 million in other net realized losses, $4.4 million of which related to a non-cash impairment charge on goodwill and definite-lived intangibles.
We regularly evaluateInvestment income was aided by higher interest rates in 2022, as the qualityFederal Reserve raised the Fed Funds target to fight inflation. As we enter 2023, the path of ourrates remains uncertain as policy makers try to cap inflation without sending the economy into recession. Should current yields increase or simply hold for most of the year, investment portfolio. When we determine that a fixed income security has suffered an other-than-temporarywill likely increase in 2023. However, if shorter term rates decline, in value, the investment’s value is adjusted by reclassifying the decline from unrealized to realized losses. This has no impact on shareholders’ equity. We did not recognize any impairment losses in 2019. During 2018, we recognized $0.2 million in impairment losses on fixedinvestment income securities we no longer had the intent to hold until recovery.growth may be limited.
The fixed income portfolio contained 154 positions at an unrealized loss as of December 31, 2019. Of these 154 securities, 65have been in an unrealized loss position for 12 consecutive months or longer and represent $0.9 million in unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Based on our analysis, our fixed income portfolio is of a high credit quality and we believe we will recover the amortized cost basis.
Key components to our OTTI procedures are discussed in our critical accounting policy on investment valuation and OTTI and in note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. Based on our analysis, we have concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2019.
INVESTMENTS We maintain a diversified investment portfolio with a prudent mix of fixed income and risk assets. We continually monitor economic conditions, our capital position and the insurance market to determine our tactical allocation. As of December 31, 2019,2022, the portfolio had a fair value of $2.6$3.3 billion, an increase of $366.1$109.3 million from the end of 2018.2021. 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, 2019,2022, our investment portfolio had the following asset allocation breakdown: | | | | | | | | | | | | | | | | | | | | | | | | | | | | PORTFOLIO ALLOCATION | | | | | | | | | | | | | | | | | | Cost or | | | | | Unrealized | | % of Total | | | (in thousands) | | | | | | | | | | | | | | | | Amortized Cost | | Fair Value | | Gain/(Loss) | | Fair Value | | Quality* | | | Cost or | | | | | Unrealized | | % of Total | | | | | Asset Class | | Amortized Cost | | Fair Value | | Gain/(Loss) | | Fair Value | | Quality* | | | U. S. government | | $ | 186,699 | | $ | 193,661 | | $ | 6,962 | | 7.6 | % | AAA | | | U.S. government | | | $ | 462,884 | | $ | 454,021 | | $ | (8,863) | | 13.9 | % | AAA | U.S. agency | | | 36,535 | | | 38,855 | | | 2,320 | | 1.5 | % | AAA | | | | 75,074 | | | 73,063 | | | (2,011) | | 2.2 | % | AA+ | Non-U.S. government & agency | | | 7,333 | | | 7,628 | | | 295 | | 0.3 | % | BBB+ | | | | 6,798 | | | 5,847 | | | (951) | | 0.2 | % | BBB+ | Agency MBS | | | 411,808 | | | 420,165 | | | 8,357 | | 16.4 | % | AAA | | | | 373,687 | | | 331,806 | | | (41,881) | | 10.1 | % | AAA | ABS/CMBS/MBS** | | | 222,832 | | | 224,870 | | | 2,038 | | 8.8 | % | AAA | | | | 276,126 | | | 240,736 | | | (35,390) | | 7.4 | % | AA+ | Corporate | | | 659,640 | | | 692,067 | | | 32,427 | | 27.0 | % | BBB+ | | | | 1,122,097 | | | 1,034,330 | | | (87,767) | | 31.6 | % | A- | Municipal | | | 390,431 | | | 405,840 | | | 15,409 | | 15.8 | % | AA | | | | 628,607 | | | 527,147 | | | (101,460) | | 16.1 | % | AA | Total fixed income | | $ | 1,915,278 | | $ | 1,983,086 | | $ | 67,808 | | 77.4 | % | AA- | | | $ | 2,945,273 | | $ | 2,666,950 | | $ | (278,323) | | 81.5 | % | AA- | Equities | | | 262,131 | | | 460,630 | | | 198,499 | | 18.0 | % | | | | | 328,019 | | | 498,382 | | | 170,363 | | 15.2 | % | | Short-term investments | | | | 36,229 | | | 36,229 | | | — | | 1.1 | % | | Other invested assets | | | 70,725 | | | 70,441 | | | (284) | | 2.8 | % | | | | | 43,980 | | | 47,922 | | | 3,942 | | 1.5 | % | | Cash | | | 46,203 | | | 46,203 | | | — | | 1.8 | % | | | | | 22,818 | | | 22,818 | | | — | | 0.7 | % | | Total portfolio | | $ | 2,294,337 | | $ | 2,560,360 | | $ | 266,023 | | 100.0 | % | | | | $ | 3,376,319 | | $ | 3,272,301 | | $ | (104,018) | | 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. Fixed income represented 7782 percent of our total 20192022 portfolio, down 3up from 76 percent from 2018.in 2021. As of December 31, 2019,2022, the fair value of our fixed income portfolio consisted of 4942 percent AAA-rated securities, 1719 percent AA-rated securities, 1920 percent A-rated securities, 911 percent BBB-rated securities and 68 percent non-investment grade or non-rated securities. This compares to 4836 percent AAA-rated securities, 1623 percent AA-rated securities, 20 percent A-rated securities, 1013 percent BBB-rated securities and 68 percent non-investment grade or non-rated securities in 2018.2021. 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, 2019,2022, our fixed income portfolio’s duration was 4.84.2 years. Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk asset classes. Our equity portfolio had a fair value of $460.6 million at December 31, 2019. Equities comprised 1815 percent of our total 20192022 portfolio, up 2down from 19 percent at the end of 2021, as we reduced our risk asset profile and equity markets declined over 2018.the course of the year. Securities within the equity portfolio are well diversified and are primarily invested in large-cap issues withbroad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income. Our strategy has a value tiltincome and value-oriented security selection takes precedence over market timing. Likewise,with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon minimizes transaction costs and taxes.horizon. FIXED INCOME PORTFOLIO As of December 31, 2019,2022, our fixed income portfolio had the following rating distributions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FAIR VALUE | | | | | | | | | | Below | | | | | | | | | | | | | | | | | | | Below | | | | | | | | | | | | | | | | | | | | | Investment | | | | | | | | | | | | | | | | | | | | | Investment | | | | | | | (in thousands) | | AAA | | AA | | A | | BBB | | Grade | | No Rating | | Fair Value | | | AAA | | AA | | A | | BBB | | Grade | | No Rating | | Fair Value | Bonds: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government & agency (GSE) | | $ | 222,993 | | $ | 9,523 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 232,516 | | | $ | 475,159 | | $ | 51,925 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 527,084 | Non-U.S. government & agency | | | — | | | — | | | 1,897 | | | 5,731 | | | — | | | — | | | 7,628 | | | | — | | | — | | | 1,677 | | | 4,170 | | | — | | | — | | | 5,847 | Corporate - industrial | | | | 19,840 | | | 49,528 | | | 170,110 | | | 197,396 | | | 36,438 | | | 3,027 | | | 476,339 | Corporate - financial | | | — | | | 26,380 | | | 140,523 | | | 37,364 | | | 5,136 | | | — | | | 209,403 | | | | 9,628 | | | 43,221 | | | 223,638 | | | 72,586 | | | 12,202 | | | — | | | 361,275 | All other corporate | | | 20,809 | | | 22,912 | | | 115,242 | | | 102,632 | | | 20,211 | | | — | | | 281,806 | | | Corporate - utilities | | | | 1,036 | | | 928 | | | 28,502 | | | 25,231 | | | 4,419 | | | — | | | 60,116 | Corporate industrial - private placements | | | | — | | | — | | | — | | | 3,291 | | | 70,377 | | | 20,729 | | | 94,397 | Corporate financial - private placements | | | 3,121 | | | 14,180 | | | 16,564 | | | 8,011 | | | 7,915 | | | 1,023 | | | 50,814 | | | | — | | | — | | | — | | | — | | | 8,791 | | | 31,915 | | | 40,706 | All other corporate - private placements | | | — | | | 6,887 | | | 37,823 | | | 22,466 | | | 82,120 | | | 748 | | | 150,044 | | | Corporate utilities - private placements | | | | — | | | — | | | — | | | — | | | 485 | | | 1,012 | | | 1,497 | Municipal | | | 102,064 | | | 247,433 | | | 53,938 | | | — | | | — | | | 2,405 | | | 405,840 | | | | 126,973 | | | 334,961 | | | 64,768 | | | — | | | — | | | 445 | | | 527,147 | Structured: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GSE - RMBS | | $ | 311,247 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 311,247 | | | | 274,032 | | | — | | | — | | | — | | | — | | | — | | | 274,032 | Non-GSE RMBS | | | 26,657 | | | — | | | — | | | — | | | — | | | — | | | 26,657 | | | | 76,626 | | | 14,249 | | | 1,446 | | | — | | | — | | | — | | | 92,321 | CLO | | | 26,022 | | | 5,998 | | | — | | | — | | | — | | | — | | | 32,020 | | | | 24,251 | | | 3,820 | | | — | | | — | | | — | | | 2,336 | | | 30,407 | ABS - credit cards | | | 33,116 | | | — | | | — | | | — | | | — | | | — | | | 33,116 | | | ABS - auto loans | | | 52,895 | | | — | | | — | | | — | | | — | | | — | | | 52,895 | | | | 5,207 | | | 10,991 | | | — | | | — | | | — | | | — | | | 16,198 | ABS - railcars | | | | — | | | — | | | 13,923 | | | — | | | — | | | — | | | 13,923 | All other ABS/MBS | | | 23,005 | | | 2,125 | | | 10,326 | | | — | | | — | | | — | | | 35,456 | | | | 11,370 | | | 1,873 | | | 21,919 | | | — | | | — | | | 11,132 | | | 46,294 | GSE - CMBS | | | 108,918 | | | — | | | — | | | — | | | — | | | — | | | 108,918 | | | | 57,774 | | | — | | | — | | | — | | | — | | | — | | | 57,774 | CMBS | | | 44,726 | | | — | | | — | | | — | | | — | | | — | | | 44,726 | | | | 26,997 | | | 3,273 | | | 11,323 | | | — | | | — | | | — | | | 41,593 | Total | | $ | 975,573 | | $ | 335,438 | | $ | 376,313 | | $ | 176,204 | | $ | 115,382 | | $ | 4,176 | | $ | 1,983,086 | | | $ | 1,108,893 | | $ | 514,769 | | $ | 537,306 | | $ | 302,674 | | $ | 132,712 | | $ | 70,596 | | $ | 2,666,950 |
Mortgage-Backed, Asset-Backed and Commercial Mortgage-Backed and Asset-Backed Securities We believe mortgage-backed securities (MBS), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) add diversification, liquidity, credit quality and additional yield to our portfolio. The following table summarizes the distribution of our mortgage-backed securities (MBS) portfolio by investment type, as of December 31,:31: | | | | | | | | | | | | | | | | | | AGENCY MBS | | | | | | | | | | (in thousands) | | Amortized Cost | | Fair Value | | % of Total | | | Amortized Cost | | Fair Value | | % of Total | | 2019 | | | | | | | | | | | 2022 | | | | | | | | | | | Pass-throughs | | $ | 276,423 | | $ | 282,594 | | 67.3 | % | | $ | 238,259 | | $ | 214,226 | | 64.6 | % | Planned amortization class | | | | 71,051 | | | 59,806 | | 18.0 | % | Sequential | | | 107,045 | | | 108,918 | | 25.9 | % | | | 64,377 | | | 57,774 | | 17.4 | % | Planned amortization class | | | 28,340 | | | 28,653 | | 6.8 | % | | Total | | $ | 411,808 | | $ | 420,165 | | 100.0 | % | | $ | 373,687 | | $ | 331,806 | | 100.0 | % | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | 2021 | | | | | | | | | | | Pass-throughs | | $ | 262,752 | | $ | 259,728 | | 65.7 | % | | $ | 187,456 | | $ | 190,512 | | 51.9 | % | Planned amortization class | | | | 95,182 | | | 93,095 | | 25.3 | % | Sequential | | | 107,951 | | | 103,975 | | 26.3 | % | | | 80,223 | | | 83,580 | | 22.8 | % | Planned amortization class | | | 32,289 | | | 31,550 | | 8.0 | % | | Total | | $ | 402,992 | | $ | 395,253 | | 100.0 | % | | $ | 362,861 | | $ | 367,187 | | 100.0 | % |
Our allocation to agency mortgage-backed securities totaled $420.2 million as of December 31, 2019. Agency MBS represented 2112 percent of the fixed income portfolio, compared to $395.3 million or 2215 percent of that portfolio as of December 31, 2018.
We believe agency MBS investments add diversification, liquidity, credit quality and additional yield to our portfolio.2021. 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 refinancing. The agency MBS portfolio includes mortgage-backed pass-through securities and collateralized mortgage obligations (CMO), which include planned amortization classes (PACs) and sequential pay structures. Our agency MBS portfolio does not include interest-only securities or principal-only securities. As of December 31, 2019,2022, all of the securities in our agency MBS portfolio were rated AAA and issued by Government Sponsored Enterprises (GSEs) such as the Governmental National Mortgage Association, (GNMA), Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).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 flows. As of December 31, 2019,2022, the agency MBS portfolio contained 6765 percent of pure pass-throughs, compared to 6652 percent as of December 31, 2018.2021. An additional 2617 percent of the MBS portfolio was invested in sequential payer, the same as 2018.down from 23 percent in 2021. The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of December 31,:31: | | | | | | | | | | | | | | | | | | ABS/CMBS | | | | | | | | | | | | | Amortized | | | | | | | | Amortized | | | | | | | (in thousands) | | Cost | | Fair Value | | % of Total | | | Cost | | Fair Value | | % of Total | | 2019 | | | | | | | | | | | 2022 | | | | | | | | | | | Non-GSE RMBS | | | $ | 109,852 | | $ | 92,321 | | 38.4 | % | CMBS | | | | 49,333 | | | 41,593 | | 17.3 | % | CLO | | | | 31,393 | | | 30,407 | | 12.6 | % | Auto | | $ | 52,488 | | $ | 52,895 | | 23.5 | % | | | 17,194 | | | 16,198 | | 6.7 | % | CMBS | | | 43,435 | | | 44,726 | | 19.9 | % | | Credit card | | | 32,622 | | | 33,116 | | 14.7 | % | | CLO | | | 32,066 | | | 32,020 | | 14.2 | % | | Non-GSE RMBS | | | 26,770 | | | 26,657 | | 11.9 | % | | Equipment | | | 6,974 | | | 7,018 | | 3.1 | % | | Railcars | | | | 16,072 | | | 13,923 | | 5.8 | % | Consumers | | | | 12,241 | | | 10,904 | | 4.5 | % | Marine | | | | 8,554 | | | 7,319 | | 3.0 | % | Other | | | 28,477 | | | 28,438 | | 12.7 | % | | | 31,487 | | | 28,071 | | 11.7 | % | Total | | $ | 222,832 | | $ | 224,870 | | 100.0 | % | | $ | 276,126 | | $ | 240,736 | | 100.0 | % | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | 2021 | | | | | | | | | | | Non-GSE RMBS | | | $ | 79,281 | | $ | 78,497 | | 29.7 | % | CMBS | | | | 55,293 | | | 55,592 | | 21.1 | % | CLO | | | | 34,305 | | | 34,362 | | 13.0 | % | Auto | | $ | 50,062 | | $ | 49,990 | | 36.6 | % | | | 17,401 | | | 17,491 | | 6.6 | % | CMBS | | | 26,490 | | | 26,048 | | 19.1 | % | | Credit card | | | 31,058 | | | 31,100 | | 22.7 | % | | CLO | | | 15,582 | | | 15,508 | | 11.3 | % | | Non-GSE RMBS | | | — | | | — | | — | | | Equipment | | | 5,870 | | | 5,878 | | 4.3 | % | | Railcars | | | | 15,383 | | | 15,245 | | 5.8 | % | Consumers | | | | 12,242 | | | 12,442 | | 4.7 | % | Marine | | | | 9,353 | | | 9,253 | | 3.5 | % | Other | | | 8,162 | | | 8,199 | | 6.0 | % | | | 41,015 | | | 41,172 | | 15.6 | % | Total | | $ | 137,224 | | $ | 136,723 | | 100.0 | % | | $ | 264,273 | | $ | 264,054 | | 100.0 | % |
An asset-backed security (ABS), commercial mortgage-backed security (CMBS)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, 2019,2022, ABS/CMBS/RMBS investments were $224.9 million (11 percent)9 percent of the fixed income portfolio, compared to $136.7 million (8 percent)11 percent as of December 31, 2018. Ninety-seven2021. Sixty percent of the securities in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2019.2022, while 94 percent were rated A or better. We believe that ABS/CMBS investments add diversification and additional yield to the portfolio while often addingadd 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 $1.0$77.3 million in unrealized losses in these asset classes as of December 31, 2019.2022. Municipal Fixed Income Securities As of December 31, 2019,2022, municipal bonds totaled $405.8 million (21 percent)composed 20 percent of our fixed income portfolio, compared to $320.1 million (18 percent)27 percent as of December 31, 2018.2021. 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, 2019,2022, approximately 4246 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining 5854 percent were revenue based. The municipal portfolio is diversified amongst 324 issues. Eighty-sixEighty-eight percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better. The municipal portfolio includes 7452 percent tax-exempttaxable and 2648 percent taxabletax-exempt securities.
Corporate Debt Securities As of December 31, 2019,2022, our corporate debt portfolio totaled $692.1 million (35 percent)comprised 39 percent of the fixed income portfolio, compared to $668.7 million (38 percent)40 percent as of December 31, 2018.2021. 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 $115.4$132.7 million while non-rated Regulation D securities totaled $53.7 million at the end of 2019.2022. While these Regulation D securities are not rated by a traditional nationally recognized statistical rating organization, they all carry an equivalent investment-grade rating from the Securities Valuation Office of the NAIC. The corporate debt portfolio has an overall quality rating of BBB+A- diversified among 552830 issues. Private placements in theThe table below includes both Rule 144A and Regulation D securities. The table illustrates our corporate debt exposure to the financial and non-financial sectors as of December 31, 2019, including fair value, cost basis2022. Private placements include bank loan and unrealized gains and losses:Regulation D securities.
| | | | | | | | | | | | | | | CORPORATES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortized | | | | | Unrealized | | Unrealized | | | Amortized | | | | | | | (in thousands) | | Cost | | Fair Value | | Gains | | Losses | | | Cost | | Fair Value | | % of Total | | Bonds: | | | | | | | | | | | | | | | | | | | | | | | Corporate - industrial | | | $ | 516,841 | | $ | 476,339 | | 46.1 | % | Corporate - financial | | $ | 197,952 | | $ | 209,403 | | $ | 11,502 | | $ | (51) | | | | 393,330 | | | 361,275 | | 34.9 | % | All other corporate | | | 265,895 | | | 281,806 | | | 15,970 | | | (59) | | | Corporate - utilities | | | | 65,636 | | | 60,116 | | 5.8 | % | Corporate industrial - private placements | | | | 99,696 | | | 94,397 | | 9.1 | % | Corporate financial - private placements | | | 48,661 | | | 50,814 | | | 2,157 | | | (4) | | | | 45,005 | | | 40,706 | | 4.0 | % | All other corporate - private placements | | | 147,132 | | | 150,044 | | | 3,616 | | | (704) | | | Corporate utilities - private placements | | | | 1,589 | | | 1,497 | | 0.1 | % | Total | | $ | 659,640 | | $ | 692,067 | | $ | 33,245 | | $ | (818) | | | $ | 1,122,097 | | $ | 1,034,330 | | 100.0 | % |
We believe corporate debt investments add diversification and additional yield to our portfolio. Because corporates make up a large portion of the fixed income opportunity set, the corporate debt investments will continue to be a significant part of our investment program. EQUITY SECURITIES As of December 31, 2019,2022, our equity portfolio totaled $460.6 million (18 percent)comprised 15 percent of the investment portfolio, compared to $340.5 million (16 percent) asdown from 19 percent at the end of December 31, 2018.the previous year. The securities within the equity portfolio remainare well diversified and are primarily invested in large-cap issues with a focus on dividend income. In addition, we have investments in three broadly diversified, exchange traded funds (ETFs)broad index ETFs that represent market indexes similar to the Russell 1000 Index, Russell 3000 Index, S&P 500 Index and S&P 600 Index. The ETF portfolio is congruent with the actively managed equity portfolios and solves for exposures that line up with our overall benchmark index, the Russell 3000. In total, the equity portfolio is comprised of 90 securities. INTEREST AND GENERAL CORPORATE EXPENSE We incurred $7.6$8.0 million of interest expense on outstanding debt during 20192022 and $7.4$7.7 million in 2018.2021. At December 31, 20192022 and 2018,2021, our long-term debt consisted of $150.0 million in senior notes maturing September 15, 2023 and paying interest semi-annually at thea rate of 4.875 percent. Additionally, RLI Ins. borrowed $50.0 million from the Federal Home Loan Bank of Chicago that matures on November 10, 2023 and pays interest monthly at an annualized rate of 0.84 percent. We incurred $12.9 million of general corporate expense during 2022 and $13.3 million in 2021. As discussed previously, general corporate expenses tend to fluctuate relative to our incentive compensation plans. Our compensation model measures components of comprehensive earnings against a minimum required return on our capital. Bonuses are earned as we generate earnings in excess of this required return. In 20192022 and 2018,2021, we exceeded the required return, resulting in the accrual of executive bonuses. Increased levels of comprehensive earningsMarket declines in 20192022 resulted in higherlower variable compensation earned than in 2018.2021. INVESTEE EARNINGS We maintainowned a 40 percent equity interest in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses. Maui Jim’s chief executive officer owns a controlling majority ofsunglasses, but sold our interest in 2022. For more information on the outstanding shares of Maui Jim. Maui Jim is a private companysale, see note 13 to the consolidated financial statements within Item 8, Financial Statements and as such, the market for its stock is limited.Supplementary Data. Our investment in Maui Jim iswas carried at the RLI Corp. holding company level, as it iswas not core to our insurance operations. While we have certain rights under our shareholder agreement with Maui Jim as a minority shareholder, we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In 2019,2022, we recorded $13.6$0.4 million in earnings from this investment, compared to $12.5$22.8 million in 2018. Sunglass sales were up 5 percent2021. The decrease in 2019, after increasing 1 percent in 2018.
In 2019 and 2018, we received a dividend from Maui Jim. Dividends from Maui Jim have been irregular in nature and while they provide added liquidity when received, we do not rely on those dividends2022 was attributable to meet our liquidity needs. While these dividends do not flow throughtransaction costs associated with the investee earnings line, they do result in the recognition of a tax benefit, which is discussed in the income tax section that follows.sale.
As of December 31, 2019,2022, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services, Inc. (Prime).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. Prime isAs a private company, and, as such, the market for itsPrime’s stock is limited. While we have certain rights under our shareholder agreement, with Prime as a minority shareholder, we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In 2019,2022, we recorded $7.4$13.0 million in investee earnings for Prime, compared to $3.6$17.0 million in 2018, reflective of significant growth in revenue and net earnings.2021. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $13.1$20.6 million of gross premiums written and $28.7$22.6 million of net premiums earned during 2019,2022, compared to $41.1$22.2 million of gross premiums written and $34.2$19.1 million of net premiums earned during 2018. The decrease2021. We did not receive a dividend from our equity method investments in gross written premium is reflective of2022 or 2021. Dividends from our decreased quota share participation with Prime.equity method investees have been irregular in nature, and while they provide added liquidity when received, we do not rely on those dividends to meet our liquidity needs. INCOME TAXES Our effective tax rates were 17.719.0 percent and 5.018.9 percent for 20192022 and 2018,2021, respectively. Effective rates are dependent upon components of pretax earnings, which is impacted by the volatility of unrealized gains and losses, and the related tax effects. The effective rate was higher in 2019 primarily2022 due to higher levels of pretax earnings, which causeddecreased the impact of tax-favored adjustments, to be smaller on a percentage basis in 2019 compared to 2018. Additionally, the Internal Revenue Service (IRS) and Treasury Department provided additional guidance on aspects of the Tax Cuts and Jobs Act of 2017 and we were able to finalize the accounting in 2018, resulting in a $2.3 million deferred tax benefit.
Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. 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 recently revised 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 $13.2 million dividend from Maui Jim in 2019investment tax credits and recognized a $1.8 millionexcess tax benefit from applying the lower tax rate applicable to affiliated dividends (7.4 percent in 2019), as compared to the corporate capital gains ratebenefits on which the deferred tax liabilities were based. Standing alone, the dividend resulted in a 0.8 percent reduction to the 2019 effective tax rate. In the fourth quarter of 2017, Maui Jim gave notification that a $9.9 million dividend would be paid in January 2018. Even though no dividend was received in 2017, we were aware that the lower tax rate applicable to affiliated dividends would be applied when the dividend was paid in 2018 and we therefore recorded a $1.4 million tax benefit in 2017. As no additional dividends were declared from unconsolidated investees in 2018, there was no impact to the 2018 effective tax rate.share-based compensation.
Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 20192022 and 20182021 resulted in tax benefits of $1.1$4.2 million and $1.2$1.6 million, respectively. These tax benefits reduced the effective tax rate for 20192022 and 20182021 by 0.6 percent and 0.5 percent, and 1.8 percent, respectively.
In addition, our pretax earnings in 2019 included $18.0 million of investment income that is partially exempt from federal income tax, compared to $21.1 million in 2018.
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 $1.2$1.6 billion at December 31, 2019,2022, from $1.1$1.4 billion as of December 31, 2018.2021. This reflects incurred losses of $413.4$514.4 million in 20192022 offset by paid losses of $319.9$374.3 million, compared to incurred losses of $428.2$456.6 million offset by $301.4$327.5 million paid in 2018.2021. For more information on the changes in loss and LAE reserves by segment, see note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. Gross reserves (liability) and the reinsurance balances recoverable (asset) are generally subject to the same influences that affect net reserves, though changes to our reinsurance agreements can cause reinsurance balances recoverable to behave differently. Total gross loss and LAE reserves increased to $1.6$2.3 billion at December 31, 2019,2022, from $1.5$2.0 billion at December 31, 2018,2021, while ceded loss and LAE reserves increased to $384.5$740.1 million from $365.0$608.1 million over the same period. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) investing cash flows related to the purchase, sale and maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt, issuance of common stock and shares outstanding.dividend payments. The following table summarizes these three cash flows over the last two years: | | | | | | | | (in thousands) | | 2019 | | 2018 | | Operating cash flows | | $ | 276,917 | | $ | 217,102 | | Investing cash flows (uses) | | | (184,753) | | | (134,209) | | Financing cash flows (uses) | | | (76,101) | | | (77,024) | |
| | | | | | | (in thousands) | | 2022 | | 2021 | Net cash provided by operating activities | | $ | 250,448 | | $ | 384,905 | Net cash provided by (used in) investing activities | | | 48,879 | | | (274,826) | Net cash used in financing activities | | | (365,313) | | | (83,492) |
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 2019,2022, we received $686.6 million of cash proceeds from the sale of our equity method investment in Maui Jim, which were classified as investing cash flows. However, tax payments associated with Maui Jim were classified as operating activities and totaled $141.5 million. Excluding the tax payments related to Maui Jim, operating cash flows in 2022 would have been similar to 2021. During 2022, the majority of cash flow usesoutflows were related to financing andassociated with the net purchase of fixed income securities, classified as investing activities, and associated with the paymentspayment of our regular quarterly dividends and net purchases of investments, respectively.$7.00 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, 2019:2022: | | | | | | | | | | | | | | | | | | CONTRACTUAL OBLIGATIONS | | | | | | | | | | | | | | | | | | | | Payments due by period | | | | | | | | | | | | | | | | | | | | | | Less than 1 | | | | | | | | More than | | | | | | Payments due by period | | | | (in thousands) | | yr. | | 1-3 yrs. | | 3-5 yrs. | | 5 yrs. | | Total | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | Loss and settlement expense reserves | | $ | 405,262 | | $ | 589,460 | | $ | 311,902 | | $ | 267,728 | | $ | 1,574,352 | | | $ | 680,563 | | $ | 811,265 | | $ | 433,770 | | $ | 390,039 | | $ | 2,315,637 | Long-term debt | | | — | | | — | | | 150,000 | | | — | | | 150,000 | | | Interest on long-term debt | | | 7,313 | | | 14,625 | | | 5,179 | | | — | | | 27,117 | | | Current portion of long-term debt | | | | 200,000 | | | — | | | — | | | — | | | 200,000 | Interest on debt | | | | 7,735 | | | | | | — | | | — | | | 7,735 | Operating leases | | | 5,983 | | | 11,872 | | | 6,720 | | | 1,366 | | | 25,941 | | | | 5,578 | | | 5,844 | | | 2,137 | | | 1,587 | | | 15,146 | Other invested assets | | | 17,129 | | | 6,541 | | | 152 | | | 233 | | | 24,055 | | | Other invested assets and equity method investees | | | | 10,493 | | | 2,894 | | | 38 | | | 71 | | | 13,496 | Total | | $ | 435,687 | | $ | 622,498 | | $ | 473,953 | | $ | 269,327 | | $ | 1,801,465 | | | $ | 904,369 | | $ | 820,003 | | $ | 435,945 | | $ | 391,697 | | $ | 2,552,014 |
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 ourits liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $384.5$740.1 million at December 31, 2019,2022, compared to $365.0$608.1 million in 2018.2021. The next largest contractual obligation relates to long-term debt outstanding. On October 2, 2013, we completed a public debt offering of $150.0 million in senior notes maturing September 15, 2023, (a 10-year maturity) and paying interest semi-annually at the rate of 4.875 percent. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. Additionally, RLI Ins. borrowed $50.0 million from the Federal Home Loan Bank of Chicago on November 10, 2021. The borrowing matures on November 10, 2023 and has an option to pay off the debt early beginning on November 10, 2022. Interest is paid monthly at an annualized rate of 0.84 percent. We are not party to any off-balance sheet arrangements. See note 4 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data for more information on our long-term 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. 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 shareholders’ equity and/or policyholders’ surplustotal 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. At December 31, 2019,2022, we had cash, short-term investments and other investments maturing within one year of approximately $96.4$390.9 million and an additional $407.0$908.5 million of investments maturing between 1 to 5 years. We maintain a revolving line of credit with JP Morgan Chase Bank N.A.,of Montreal, Chicago Branch, which permits the Companyus to borrow up to an aggregate principal amount of $50.0$60.0 million. Under certain conditions, the line may be increased up to an aggregate principal amount of $75.0$120.0 million. The facility has a two-yearthree-year term that expires on March 27, 2023. This facility replaced the previous $50.0 million facility with JP Morgan Chase Bank N.A., which was set to expire on May 24, 2020. We anticipate reinitiating this line of credit in 2020. As of and during the year ended December 31, 2019,2022, no amounts were outstanding on this facility.these facilities. Additionally, two of our insurance companies, RLI Ins. and Mt. Hawley, are members of the Federal Home Loan Bank of Chicago (FHLBC). Membership in the Federal Home Loan Bank system provides both companies with access to an additional source of liquidity via a secured lending facility. Based on qualifying assets and the $50.0 million borrowing outstanding at year-end, additional aggregate borrowing capacity is approximately $25$14.9 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. As of and during the year ended December 31, 2019, there were no outstanding borrowings with the FHLBC. 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 2427 consecutive years. OPERATING ACTIVITIES The following list highlights some of the major sources and uses of cash flow from operating activities: | | | Sources | | Uses | Premiums received | | Claims | Loss payments from reinsurers | | Ceded premium to reinsurers | Investment income (interest and dividends) | | Commissions paid | Unconsolidated investee dividends from affiliatesFunds held
| | Operating expenses | Funds held
| | Interest expense | | | Income taxes | | | Funds held |
Our largest source of cash is from premiums received from our customers, which we receive at the beginning of the coverage period for most policies. Our largest cash outflow is for claims that arise when a policyholder incurs an insured loss. Because the payment of claims occurs after the receipt of the premium, often years later, we invest the cash in various investment securities that earn interest and dividends. We use cash to pay commissions to brokers and agents, as well as to pay for ongoing operating expenses such as salaries, rent, taxes and interest expense. We also utilize reinsurance to manage the risk that we take on our policies. We cede, or pay out, part of the premiums we receive to our reinsurers and collect cash back when losses subject to our reinsurance coverage are paid. The timing of our cash flows from operating activities can vary among periods due to the timing by which payments are made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant, so their timing can influence cash flows from operating activities in any given period. We are subject to the risk of incurring significant losses on catastrophes, both natural (such as earthquakes and hurricanes) and man-made (such as terrorism). If we were to incur such losses, we would have to make significant claims payments in a relatively concentrated period of time. INVESTING ACTIVITIES The following list highlights some of the major sources and uses of cash flow from investing activities: | | | Sources |
| Uses | Proceeds from sale, call or maturity of bonds | | Purchase of bonds | Proceeds from sale of stocks | | Purchase of stocks | Proceeds from sale of other invested assets | | Purchase of other invested assets | | | Acquisitions | | | Purchase of property and equipment |
We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. As of December 31, 2019,2022, our portfolio had a carrying value of $2.6$3.3 billion. Portfolio assets at December 31, 2019,2022, increased by $366.1$109.3 million, or 173 percent, from December 31, 2018.2021. 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, 2019, 462022, 42 percent of our shareholders’ equity was invested in equities, compared to 42a decrease from 50 percent at December 31, 2018.2021. The fixed income portfolio is structured to meet policyholder obligations and optimize the generation of after-tax investment income and total return. FINANCING ACTIVITIES In addition to the previously discussed operating and investing activities, we also engage in financing activities to manage our capital structure. The following list highlights some of the major sources and uses of cash flow from financing activities: | | | Sources |
| Uses | Proceeds from stock offerings | | Shareholder dividends | Proceeds from debt offerings | | Debt repayment | Short-term borrowing | | Share buy-backs | Shares issued under stock option plans | | |
Our capital structure is comprised of equity and debt obligations. As of December 31, 2019,2022, our capital structure consisted of $149.3$199.9 million in 10-year maturity senior notes (long-term debt)debt and $995.4 million$1.2 billion of shareholders’ equity. Debt outstanding comprised 1315 percent of total capital as of December 31, 2019.2022. 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, 2019,2022, our holding company had $995.4 million$1.2 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 $45.9$240.6 million in liquid investment assets, which would coverwas elevated by the majoritycash proceeds received from the sale of our annual holding company expenditures.Maui Jim. 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 20192022 and 2018,2021, our principal insurance subsidiary paid ordinary dividends totaling $59.0$13.0 million and $13.0$70.0 million, respectively, to RLI Corp. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the IDOI. In 2018,2021, our principal insurance subsidiary sought and received regulatory approval prior to the payment of extraordinary dividends totaling $110.0 million. No extraordinary dividends were paid in 2019.2022. As of December 31, 2019, $65.32022, $136.9 million of the net assets of our principal insurance subsidiary arewere not restricted and could be distributed to RLI Corp. as ordinary dividends. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution. Our 175th187th consecutive dividend payment was declared in February 20202023 and will be paid on March 20, 2020,2023, in the amount of $0.23$0.26 per share. Since the inception of cash dividends in 1976, we have increased our annual dividend every year. OUTLOOK FOR 2020
In 2019, we achieved several notable milestones in a year when much of the industry was refining its risk appetite. Despite exiting several underperforming products, top line premium exceeded $1 billion for the first time in our company’s history. Premium growth was broad based over the course of the last twelve months and the majority of our products saw opportunities in the market. Additionally, we surpassed $1 billion in statutory surplus as underwriting profit contributed to the bottom line for the 24th consecutive year. We expect a continued strong economy to provide further growth opportunities in 2020.
Rate increases and tightening underwriting standards are providing additional submission opportunities, especially in casualty products where social influences are affecting claim activity and severity. Participant’s capital deployment has been more conservative and selective, including the tapering of capacity from reinsurers, particularly for underperforming insurers. Producers have been challenged to find additional carriers to fill out larger programs and some competitors are seeing their reserve adequacy deteriorate as claim severity increases across multiple lines.
CASUALTY
The casualty industry has experienced some turbulence in the last 18 months as deteriorating loss trends in multiple market segments have resulted in attractive conditions for well-positioned carriers. Specifically, the market is seeing greater primary liability losses, as well as excess and umbrella liability claims. Securities class action suits remain at an elevated level in the management liability space. All of these trends have caused some participants to reconsider their approach, including reducing policy limits, requiring increased retentions by insureds, or exiting certain classes altogether. This disruption creates opportunity as producers seek out new capacity.
Our casualty portfolio experienced premium headwinds in 2019, due to the reduction in our assumed reinsurance treaty with Prime and several product exits. Although we recognized adverse loss development from some of these runoff products in 2019, we believe our bottom line will benefit over the long term. A majority of our mature products grew during the year and newer products have started to gain scale. Our diverse portfolio will continue to evolve over time.
We have a lot of momentum coming out of 2019. Broad growth in the casualty segment has been positively impacted by rate increases. Competitors, particularly in the primary and excess liability, transportation and management liability spaces, continue to tighten terms while we have remained a consistent market in our chosen niches. Investments in technology and marketing should continue to strengthen our producer partnerships and offer additional reasons for them to grow with us.
With systemic uncertainty impacting industry results, we will continue to maintain underwriting discipline and monitor loss trends. Growth in longer tail liability lines, along with adverse auto-related losses in the industry support a cautious approach to reserving along with continued investment in our claim team to ensure fair outcomes. While rate increases attempt to address loss trends, we will maintain discipline as our newer businesses mature. Overall our casualty product portfolio is healthy and our outlook on the business continues to be positive.
PROPERTY
Property carriers are still recovering from active catastrophe seasons over the last three years. Despite a benign 2019 in the United States, international catastrophe events were sizable and there has been ongoing re-underwriting across the industry. The Lloyd’s market has reduced capacity and pulled back from select property lines to address their worst performing risks. Other carriers have adjusted their risk profile by reducing limits offered or exiting certain classes. As this disruption has taken several years to evolve, price momentum will likely continue into 2020. A focus on selective underwriting will leverage current conditions with the support of a durable capital base. While prudent risk management will influence the amount of exposures insured, rate improvement on catastrophe and marine business will support top line growth.
Selecting diversified exposures is an important component of our property segment and our recent investment in marketing and technology will support growth in our Hawaii homeowners business. While our underwriting results will continue to be influenced by the level of catastrophe activity in U.S., we have seen first-hand that taking care of customers in the wake of an event bolsters the intangibles that define strong relationships. Deep understanding of catastrophe risks has long been a part of our DNA and we expect this to be beneficial in the current environment.
SURETY
Surety remains the most competitive segment in our portfolio. Infrequent loss activity has attracted a number of new entrants to the space, however, this is not a risk free business. Some noticeably large commercial surety losses have emerged recently, which we expect will result in the tightening of terms and conditions. That said, overall surety industry results remain very profitable.
Our surety top line will continue to be challenged. Over the last couple of years, we exited select programs in our miscellaneous book that no longer meet our risk appetite. In the larger commercial account driven business, we have also exited select accounts where the credit quality of our principal had deteriorated. This represents a continuous process of underwriting our accounts to determine if we should continue extending credit. Although new business is difficult to win in this competitive market, our successes stem from nurturing strong relationships with current accounts. Opportunities are brighter in the small contractor’s space as the construction market continues to expand.
The surety segment has been a sizeable contributor to our underwriting results and we are hopeful that premium will stabilize over the course of 2020.
INVESTMENTS
Capital markets posted one of the strongest years in recent memory in 2019. The Federal Reserve’s accommodative support led to positive returns in nearly every asset class. With a more positive backdrop, Wall Street has changed its tune and is now forecasting modest growth with low recession risk. That sentiment will hopefully sustain the economic recovery, where the United States just completed an entire calendar decade without a recession. Although we believe fundamentals will remain sound over the next twelve months, the abundance of commentary stating there is no recession in sight offers some reason for skepticism.
Wages continue to climb higher, adding to consumer confidence and household wealth. These trends have yet to manifest themselves into higher inflation, which remains below the Fed’s target. We do not expect the Fed to change policy much in the coming year, unless circumstances require defensive actions. Our allocation among asset classes will likely remain fairly steady, with a preference for high quality bonds and slight overweight to duration.
In equity markets, expanding increased earnings multiples dominated in 2019, pushing indices to new records. Increased earnings will need to be the driver for equities to see further improvement in the year ahead. We remain committed to our equity allocation but are mindful that we are near the top end of our allocation.
We are in a world where outside influences, namely domestic elections and global trade uncertainties, have the opportunity to drive volatility. Macroeconomic factors, including continued low inflation, modest wage gains, global tariffs, low unemployment and a strong consumer will continue to bias policy and impact performance in 2020.
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: | ● | Monitoring the fair value of all financial assets on a constant basis, |
| ● | Changing the character of future investment purchases as needed and |
| ● | Maintaining a balance between existing asset and liability portfolios. |
FIXED INCOME AND INTEREST RATE RISK The most significant short-term influence on our fixed income portfolio is a change in interest rates. Because there is intrinsic difficulty predicting the direction and magnitude of interest rate moves, we attempt to minimize the impact of interest rate risk on the balance sheet by matching the duration of assets to that of our liabilities. Furthermore, the diversification of sectors and given issuers is core to our risk management process, increasing the granularity of individual credit risk. Liquidity and call risk are elements of fixed income that we regularly evaluate to ensure we are receiving adequate compensation. Our fixed income portfolio has a meaningful impact on financial results and is a key component in our enterprise risk simulations. Interest rate risk at the time of debt refinancing can also affect our consolidated statement of earnings due to its impact on interest expense. AsWe monitor the interest rate environment and evaluate refinancing opportunities as debt maturity dates approach. Changes in interest rates do affect the fair value of December 31, 2019our debt. However, our debt is reported at amortized cost on the consolidated balance sheet and 2018, we had no short-term debt obligations. We maintain a debt obligation that is long-term in nature and carries a fixed interest rate. As such, our interest expense on this obligation is not subject toadjusted for changes in interest rates. As this debt is not due until 2023, we will not assume additional interest rate risk in our ability to refinance this debt for more than three years.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 0.9in 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, 2019.2022. Listed on each table is the December 31, 20192022 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-sensitivemarket 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, 2019,2022, our fixed income portfolio had a fair value of $2.0$2.7 billion. The sensitivity analysis uses scenarios of interest rates increasing 100 and 200 basis-pointsbasis points from their December 31, 2019,2022, levels with all other variables held constant. Such scenarios would result in modeled decreases in the fair value of the fixed income portfolio of $97.9$111.1 million and $190.0$215.2 million, respectively. Comparatively, our fixed income portfolio had a fair value of $2.4 billion as of December 31, 2021 and scenarios of interest rates increasing 100 and 200 basis points would have resulted in modeled decreases of $126.9 million and $246.8 million, respectively. As of December 31, 2019,2022, our equity portfolio had a fair value of $460.6$498.4 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 $39.4$46.3 million and $78.8$92.7 million, respectively. Comparatively, our equity portfolio had a fair value of $613.8 million as of December 31, 2021 and scenarios of the S&P 500 Index declining by 10 percent and 20 percent would have resulted in approximate decreases of $56.4 million and $112.9 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. Effect of a 100 basis-point increase in interest rates and a 10 percent decline in the S&P 500: | | | | | | | | | | | | | | | | | | | | 12/31/19 Fair | | Interest | | Equity | | | 12/31/22 Fair | | Interest | | Equity | (in thousands) | | Value | | Rate Risk | | Risk | | | Value | | Rate Risk | | Risk | Held for non-trading purposes: | | | | | | | | | | | | | | | | | | | | Fixed income securities | | $ | 1,983,086 | | $ | (97,851) | | $ | — | | | $ | 2,666,950 | | $ | (111,136) | | $ | — | Equity securities | | | 460,630 | | | — | | | (39,389) | | | | 498,382 | | | — | | | (46,333) | Total | | $ | 2,443,716 | | $ | (97,851) | | $ | (39,389) | | | $ | 3,165,332 | | $ | (111,136) | | $ | (46,333) |
Effect of a 200 basis-point increase in interest rates and a 20 percent decline in the S&P 500: | | | | | | | | | | | | | | | | | | | | 12/31/19 Fair | | Interest | | Equity | | | 12/31/22 Fair | | Interest | | Equity | (in thousands) | | Value | | Rate Risk | | Risk | | | Value | | Rate Risk | | Risk | Held for non-trading purposes: | | | | | | | | | | | | | | | | | | | | Fixed income securities | | $ | 1,983,086 | | $ | (189,930) | | $ | — | | | $ | 2,666,950 | | $ | (215,239) | | $ | — | Equity securities | | | 460,630 | | | — | | | (78,778) | | | | 498,382 | | | — | | | (92,667) | Total | | $ | 2,443,716 | | $ | (189,930) | | $ | (78,778) | | | $ | 3,165,332 | | $ | (215,239) | | $ | (92,667) |
Comparatively, under the assumptions of falling interest rates and an increasing S&P 500 Index, the fair value of our assets will increase from their present levels by the indicated amounts. Effect of a 100 basis-point decrease in interest rates and a 10 percent increase in the S&P 500: | | | | | | | | | | | | | | | | | | | | 12/31/19 Fair | | Interest | | Equity | | | 12/31/22 Fair | | Interest | | Equity | (in thousands) | | Value | | Rate Risk | | Risk | | | Value | | Rate Risk | | Risk | Held for non-trading purposes: | | | | | | | | | | | | | | | | | | | | Fixed income securities | | $ | 1,983,086 | | $ | 106,235 | | $ | — | | | $ | 2,666,950 | | $ | 118,526 | | $ | — | Equity securities | | | 460,630 | | | — | | | 39,389 | | | | 498,382 | | | — | | | 46,333 | Total | | $ | 2,443,716 | | $ | 106,235 | | $ | 39,389 | | | $ | 3,165,332 | | $ | 118,526 | | $ | 46,333 |
Effect of a 200 basis-point decrease in interest rates and 20 percent increase in the S&P 500: | | | | | | | | | | | | | | | | | | | | 12/31/19 Fair | | Interest | | Equity | | | 12/31/22 Fair | | Interest | | Equity | (in thousands) | | Value | | Rate Risk | | Risk | | | Value | | Rate Risk | | Risk | Held for non-trading purposes: | | | | | | | | | | | | | | | | | | | | Fixed income securities | | $ | 1,983,086 | | $ | 221,615 | | $ | — | | | $ | 2,666,950 | | $ | 244,958 | | $ | — | Equity securities | | | 460,630 | | | — | | | 78,778 | | | | 498,382 | | | — | | | 92,667 | Total | | $ | 2,443,716 | | $ | 221,615 | | $ | 78,778 | | | $ | 3,165,332 | | $ | 244,958 | | $ | 92,667 |
Item 8.Financial Statements and Supplementary Data
RLI Corp. Consolidated Balance Sheets | | | | | | | | | | December 31, | | (in thousands, except per share data) | | 2019 | | 2018 | | Assets | | | | | | | | Investments and cash: | | | | | | | | Fixed income: | | | | | | | | Available-for-sale, at fair value (amortized cost - $1,915,278 in 2019 and $1,776,465 in 2018) | | $ | 1,983,086 | | $ | 1,760,515 | | Equity securities, at fair value (cost - $262,131 in 2019 and $220,373 in 2018) | | | 460,630 | | | 340,483 | | Short-term investments, at cost which approximates fair value | | | — | | | 11,550 | | Other invested assets | | | 70,441 | | | 51,542 | | Cash | | | 46,203 | | | 30,140 | | Total investments and cash | | $ | 2,560,360 | | $ | 2,194,230 | | Accrued investment income | | | 14,587 | | | 14,033 | | Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,682 in 2019 and $16,967 in 2018 | | | 160,369 | | | 152,576 | | Ceded unearned premiums | | | 93,656 | | | 71,174 | | Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,402 in 2019 and $9,793 in 2018 | | | 384,517 | | | 364,999 | | Deferred policy acquisition costs, net | | | 85,044 | | | 84,934 | | Property and equipment, at cost, net of accumulated depreciation of $62,703 in 2019 and $54,275 in 2018 | | | 53,121 | | | 54,692 | | Investment in unconsolidated investees | | | 103,836 | | | 94,967 | | Goodwill and intangibles | | | 54,127 | | | 54,534 | | Other assets | | | 36,104 | | | 18,926 | | Total assets | | $ | 3,545,721 | | $ | 3,105,065 | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | Liabilities: | | | | | | | | Unpaid losses and settlement expenses | | $ | 1,574,352 | | $ | 1,461,348 | | Unearned premiums | | | 540,213 | | | 496,505 | | Reinsurance balances payable | | | 25,691 | | | 22,591 | | Funds held | | | 83,358 | | | 72,309 | | Income taxes - deferred | | | 56,727 | | | 24,238 | | Bonds payable, long-term debt | | | 149,302 | | | 149,115 | | Accrued expenses | | | 66,626 | | | 45,124 | | Other liabilities | | | 54,064 | | | 26,993 | | Total liabilities | | $ | 2,550,333 | | $ | 2,298,223 | | | | | | | | | | Shareholders’ equity: | | | | | | | | Common stock ($0.01 par value 100,000,000 share authorized) | | | | | | | | (67,799,229 shares issued and 44,869,015 shares outstanding in 2019) | | | | | | | | (67,434,257 shares issued and 44,504,043 shares outstanding in 2018) | | $ | 678 | | $ | 674 | | Paid-in capital | | | 321,190 | | | 305,660 | | Accumulated other comprehensive earnings, net of tax | | | 52,473 | | | (14,572) | | Retained earnings | | | 1,014,046 | | | 908,079 | | Deferred compensation | | | 7,980 | | | 8,354 | | Treasury stock, at cost (22,930,214 shares in 2019 and 2018) | | | (400,979) | | | (401,353) | | Total shareholders’ equity | | $ | 995,388 | | $ | 806,842 | | Total liabilities and shareholders’ equity | | $ | 3,545,721 | | $ | 3,105,065 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings and Comprehensive Earnings
| | | | | | | | | | | | | Years ended December 31, | | (in thousands, except per share data) | | 2019 | | 2018 | | 2017 | | Net premiums earned | | $ | 839,111 | | $ | 791,366 | | $ | 737,937 | | Net investment income | | | 68,870 | | | 62,085 | | | 54,876 | | Net realized gains | | | 17,520 | | | 63,624 | | | 6,970 | | Other-than-temporary-impairment losses on investments | | | — | | | (217) | | | (2,559) | | Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | | | — | | Consolidated revenue | | $ | 1,003,591 | | $ | 818,123 | | $ | 797,224 | | Losses and settlement expenses | | | 413,416 | | | 428,193 | | | 401,584 | | Policy acquisition costs | | | 288,697 | | | 267,738 | | | 252,515 | | Insurance operating expenses | | | 69,430 | | | 53,803 | | | 56,994 | | Interest expense on debt | | | 7,588 | | | 7,437 | | | 7,426 | | General corporate expenses | | | 12,686 | | | 9,427 | | | 11,340 | | Total expenses | | $ | 791,817 | | $ | 766,598 | | $ | 729,859 | | Equity in earnings of unconsolidated investees | | | 20,960 | | | 16,056 | | | 17,224 | | Earnings before income taxes | | $ | 232,734 | | $ | 67,581 | | $ | 84,589 | | Income tax expense (benefit): | | | | | | | | | | | Current | | | 26,426 | | | 23,917 | | | 9,302 | | Deferred | | | 14,666 | | | (20,515) | | | (29,741) | | Income tax expense (benefit) | | $ | 41,092 | | $ | 3,402 | | $ | (20,439) | | Net earnings | | $ | 191,642 | | $ | 64,179 | | $ | 105,028 | | | | | | | | | | | | | Other comprehensive earnings (loss), net of tax | | | 67,045 | | | (33,997) | | | 35,309 | | Comprehensive earnings | | $ | 258,687 | | $ | 30,182 | | $ | 140,337 | | | | | | | | | | | | | Basic: | | | | | | | | | | | Net earnings per share | | $ | 4.28 | | $ | 1.45 | | $ | 2.39 | | Comprehensive earnings per share | | $ | 5.78 | | $ | 0.68 | | $ | 3.19 | | | | | | | | | | | | | Diluted: | | | | | | | | | | | Net earnings per share | | $ | 4.23 | | $ | 1.43 | | $ | 2.36 | | Comprehensive earnings per share | | $ | 5.72 | | $ | 0.67 | | $ | 3.15 | | | | | | | | | | | | | Weighted average number of common shares outstanding: | | | | | | | | | | | Basic | | | 44,734 | | | 44,358 | | | 44,033 | | Diluted | | | 45,257 | | | 44,835 | | | 44,500 | |
| | | | | | | | | December 31, | (in thousands, except per share data) | | 2022 | | 2021 | ASSETS | | | | | | | Investments and cash: | | | | | | | Fixed income: | | | | | | | Available-for-sale, at fair value | | $ | 2,666,950 | | $ | 2,409,887 | (amortized cost of $2,945,273 and allowance for credit losses of $339 in 2022) | | | | | | | (amortized cost of $2,346,267 and allowance for credit losses of $441 in 2021) | | | | | | | Equity securities, at fair value (cost - $328,019 in 2022 and $324,501 in 2021) | | | 498,382 | | | 613,776 | Short-term investments, at cost which approximates fair value | | | 36,229 | | | — | Other invested assets | | | 47,922 | | | 50,501 | Cash | | | 22,818 | | | 88,804 | Total investments and cash | | $ | 3,272,301 | | $ | 3,162,968 | Accrued investment income | | | 21,259 | | | 17,505 | Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,696 in 2022 and $18,067 in 2021 | | | 189,501 | | | 167,279 | Ceded unearned premiums | | | 138,457 | | | 130,916 | Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $11,250 in 2022 and $11,188 in 2021 | | | 740,089 | | | 608,086 | Deferred policy acquisition costs | | | 127,859 | | | 103,553 | Property and equipment, at cost, net of accumulated depreciation of $68,633 in 2022 and $75,236 in 2021 | | | 49,573 | | | 52,161 | Investment in unconsolidated investees | | | 58,275 | | | 171,311 | Goodwill and intangibles | | | 53,562 | | | 53,562 | Income taxes - deferred | | | 40,269 | | | — | Other assets | | | 75,923 | | | 40,961 | TOTAL ASSETS | | $ | 4,767,068 | | $ | 4,508,302 | | | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | LIABILITIES | | | | | | | Unpaid losses and settlement expenses | | $ | 2,315,637 | | $ | 2,043,555 | Unearned premiums | | | 785,085 | | | 680,444 | Reinsurance balances payable | | | 61,100 | | | 42,851 | Funds held | | | 101,144 | | | 89,773 | Income taxes - deferred | | | — | | | 83,509 | Current portion of long-term debt | | | 199,863 | | | — | Long-term debt | | | — | | | 199,676 | Accrued expenses | | | 94,869 | | | 98,274 | Other liabilities | | | 32,029 | | | 40,859 | TOTAL LIABILITIES | | $ | 3,589,727 | | $ | 3,278,941 | | | | | | | | SHAREHOLDERS' EQUITY | | | | | | | Common stock ($0.01 par value) | | | | | | | (Shares authorized - 200,000,000) | | | | | | | (68,399,966 shares issued and 45,469,752 shares outstanding in 2022) | | | | | | | (68,219,551 shares issued and 45,289,337 shares outstanding in 2021) | | $ | 684 | | $ | 682 | Paid-in capital | | | 352,391 | | | 343,742 | Accumulated other comprehensive earnings | | | (229,076) | | | 49,826 | Retained earnings | | | 1,446,341 | | | 1,228,110 | Deferred compensation | | | 12,015 | | | 9,642 | Treasury stock, at cost (22,930,214 shares in 2022 and 2021) | | | (405,014) | | | (402,641) | TOTAL SHAREHOLDERS' EQUITY | | $ | 1,177,341 | | $ | 1,229,361 | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 4,767,068 | | $ | 4,508,302 |
See accompanying notes to consolidated financial statements.
RLI Corp. Consolidated Statements of Earnings and Comprehensive Earnings | | | | | | | | | | | | | Years ended December 31, | (in thousands, except per share data) | | 2022 | | 2021 | | 2020 | Net premiums earned | | $ | 1,144,436 | | $ | 980,903 | | $ | 865,747 | Net investment income | | | 86,078 | | | 68,862 | | | 67,893 | Net realized gains | | | 588,515 | | | 64,222 | | | 17,885 | Net unrealized gains (losses) on equity securities | | | (121,037) | | | 65,258 | | | 32,101 | Consolidated revenue | | $ | 1,697,992 | | $ | 1,179,245 | | $ | 983,626 | Losses and settlement expenses | | | 514,376 | | | 456,602 | | | 442,884 | Policy acquisition costs | | | 369,632 | | | 317,468 | | | 286,438 | Insurance operating expenses | | | 82,212 | | | 76,907 | | | 66,828 | Interest expense on debt | | | 8,047 | | | 7,677 | | | 7,603 | General corporate expenses | | | 12,900 | | | 13,330 | | | 10,265 | Total expenses | | $ | 987,167 | | $ | 871,984 | | $ | 814,018 | Equity in earnings of unconsolidated investees | | | 9,853 | | | 37,060 | | | 20,233 | Earnings before income taxes | | $ | 720,678 | | $ | 344,321 | | $ | 189,841 | Income tax expense (benefit): | | | | | | | | | | Current | | | 186,906 | | | 46,040 | | | 24,174 | Deferred | | | (49,639) | | | 18,927 | | | 8,576 | Income tax expense | | $ | 137,267 | | $ | 64,967 | | $ | 32,750 | Net earnings | | $ | 583,411 | | $ | 279,354 | | $ | 157,091 | | | | | | | | | | | Other comprehensive earnings (loss), net of tax | | | (278,902) | | | (58,888) | | | 56,219 | Comprehensive earnings | | $ | 304,509 | | $ | 220,466 | | $ | 213,310 | | | | | | | | | | | Basic net earnings per share | | $ | 12.86 | | $ | 6.18 | | $ | 3.49 | Diluted net earnings per share | | $ | 12.74 | | $ | 6.11 | | $ | 3.46 | | | | | | | | | | | Weighted average number of common shares outstanding: | | | | | | | | | | Basic | | | 45,368 | | | 45,230 | | | 45,000 | Diluted | | | 45,794 | | | 45,712 | | | 45,376 |
See accompanying notes to consolidated financial statements. RLI Corp. Consolidated Statements of Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | Other | | | | | | | | | | | | | | Total | | | | | | | | Accumulated Other | | | | | | | | | | | | Common | | Shareholders’ | | Common | | Paid-in | | Comprehensive | | Retained | | Deferred | | Treasury Stock | | | Common | | Shareholders’ | | Common | | Paid-in | | Comprehensive | | Retained | | Deferred | | Treasury Stock | (in thousands, except per share data) | | Shares | | Equity | | Stock | | Capital | | Earnings (Loss) | | Earnings | | Compensation | | at Cost | | | Shares | | Equity | | Stock | | Capital | | Earnings (Loss) | | Earnings | | Compensation | | at Cost | Balance, January 1, 2017 | | 43,944,697 | | $ | 823,572 | | $ | 66,875 | | $ | 229,779 | | $ | 122,610 | | $ | 797,307 | | $ | 11,496 | | $ | (404,495) | | | Balance, January 1, 2020 | | | 44,869,015 | | $ | 995,388 | | $ | 678 | | $ | 321,190 | | $ | 52,473 | | $ | 1,014,046 | | $ | 7,980 | | $ | (400,979) | Cumulative-effect adjustment from ASU 2016-13 | | | — | | | 1,095 | | | — | | | — | | | 22 | | | 1,073 | | | — | | | — | Net earnings | | — | | | 105,028 | | | — | | | — | | | — | | | 105,028 | | | — | | | — | | | — | | | 157,091 | | | — | | | — | | | — | | | 157,091 | | | — | | | — | Other comprehensive earnings (loss), net of tax | | — | | | 35,309 | | | — | | | — | | | 35,309 | | | — | | | — | | | — | | | — | | | 56,219 | | | — | | | — | | | 56,219 | | | — | | | — | | | — | Deferred compensation under rabbi trust plans | | — | | | — | | | — | | | — | | | — | | | — | | | (2,856) | | | 2,856 | | | Deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 312 | | | (312) | Share-based compensation | | 203,658 | | | 3,502 | | | 204 | | | 3,298 | | | — | | | — | | | — | | | — | | | 273,565 | | | 14,178 | | | 3 | | | 14,175 | | | — | | | — | | | — | | | — | Dividends and dividend equivalents ($2.58 per share) | | — | | | (113,813) | | | — | | | — | | | — | | | (113,813) | | | — | | | — | | | Balance, December 31, 2017 | | 44,148,355 | | $ | 853,598 | | $ | 67,079 | | $ | 233,077 | | $ | 157,919 | | $ | 788,522 | | $ | 8,640 | | $ | (401,639) | | | Cumulative-effect adjustment from ASU 2016-01 and 2018-02 | | — | | | 86 | | | — | | | — | | | (138,494) | | | 138,580 | | | — | | | — | | | Par value conversion from $1.00 per share to $0.01 per share | | — | | | — | | | (66,409) | | | 66,409 | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Dividends and dividend equivalents ($1.95 per share) | | | — | | | (87,993) | | | — | | | — | | | — | | | (87,993) | | | — | | | — | Balance, December 31, 2020 | | | 45,142,580 | | $ | 1,135,978 | | $ | 681 | | $ | 335,365 | | $ | 108,714 | | $ | 1,084,217 | | $ | 8,292 | | $ | (401,291) | Net earnings | | — | | | 64,179 | | | — | | | — | | | — | | | 64,179 | | | — | | | — | | | — | | | 279,354 | | | — | | | — | | | — | | | 279,354 | | | — | | | — | Other comprehensive earnings (loss), net of tax | | — | | | (33,997) | | | — | | | — | | | (33,997) | | | — | | | — | | | — | | | — | | | (58,888) | | | — | | | — | | | (58,888) | | | — | | | — | | | — | Deferred compensation under rabbi trust plans | | — | | | — | | | — | | | — | | | — | | | — | | | (286) | | | 286 | | | Deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,350 | | | (1,350) | Share-based compensation | | 355,688 | | | 6,178 | | | 4 | | | 6,174 | | | — | | | — | | | — | | | — | | | 146,757 | | | 8,378 | | | 1 | | | 8,377 | | | — | | | — | | | — | | | — | Dividends and dividend equivalents ($1.87 per share) | | — | | | (83,202) | | | — | | | — | | | — | | | (83,202) | | | — | | | — | | | Balance, December 31, 2018 | | 44,504,043 | | $ | 806,842 | | $ | 674 | | $ | 305,660 | | $ | (14,572) | | $ | 908,079 | | $ | 8,354 | | $ | (401,353) | | | Dividends and dividend equivalents ($2.99 per share) | | | — | | | (135,461) | | | — | | | — | | | — | | | (135,461) | | | — | | | — | Balance, December 31, 2021 | | | 45,289,337 | | $ | 1,229,361 | | $ | 682 | | $ | 343,742 | | $ | 49,826 | | $ | 1,228,110 | | $ | 9,642 | | $ | (402,641) | Net earnings | | — | | | 191,642 | | | — | | | — | | | — | | | 191,642 | | | — | | | — | | | — | | | 583,411 | | | — | | | — | | | — | | | 583,411 | | | — | | | — | Other comprehensive earnings (loss), net of tax | | — | | | 67,045 | | | — | | | — | | | 67,045 | | | — | | | — | | | — | | | — | | | (278,902) | | | — | | | — | | | (278,902) | | | — | | | — | | | — | Deferred compensation under rabbi trust plans | | — | | | — | | | — | | | — | | | — | | | — | | | (374) | | | 374 | | | Deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,373 | | | (2,373) | Share-based compensation | | 364,972 | | | 15,534 | | | 4 | | | 15,530 | | | — | | | — | | | — | | | — | | | 180,415 | | | 8,651 | | | 2 | | | 8,649 | | | — | | | — | | | — | | | — | Dividends and dividend equivalents ($1.91 per share) | | — | | | (85,675) | | | — | | | — | | | — | | | (85,675) | | | — | | | — | | | Balance, December 31, 2019 | | 44,869,015 | | $ | 995,388 | | $ | 678 | | $ | 321,190 | | $ | 52,473 | | $ | 1,014,046 | | $ | 7,980 | | $ | (400,979) | | | Dividends and dividend equivalents ($8.03 per share) | | | — | | | (365,180) | | | — | | | — | | | — | | | (365,180) | | | — | | | — | Balance, December 31, 2022 | | | 45,469,752 | | $ | 1,177,341 | | $ | 684 | | $ | 352,391 | | $ | (229,076) | | $ | 1,446,341 | | $ | 12,015 | | $ | (405,014) |
See accompanying notes to consolidated financial statements. RLI Corp. Consolidated Statements of Cash Flows | | | | | | | | | | | | | Years ended December 31, | | (in thousands) | | 2019 | | 2018 | | 2017 | | Cash flows from operating activities: | | | | | | | | | | | Net earnings | | $ | 191,642 | | $ | 64,179 | | $ | 105,028 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | Net realized gains | | | (17,520) | | | (63,407) | | | (4,411) | | Net unrealized (gains) losses on equity securities | | | (78,090) | | | 98,735 | | | — | | Depreciation | | | 8,164 | | | 7,042 | | | 6,944 | | Deferred income tax expense (benefit) | | | 14,666 | | | (20,515) | | | (29,741) | | Other items, net | | | 25,341 | | | 6,171 | | | 16,368 | | Change in: | | | | | | | | | | | Accrued investment income | | | (552) | | | 1,132 | | | (573) | | Premiums and reinsurance balances receivable (net of direct write-offs and commutations) | | | (7,793) | | | (18,225) | | | (7,964) | | Reinsurance balances payable | | | 3,100 | | | 967 | | | 3,696 | | Funds held | | | 11,049 | | | (2,251) | | | 1,818 | | Ceded unearned premiums | | | (22,482) | | | (13,246) | | | (5,755) | | Reinsurance balances recoverable on unpaid losses and settlement expenses | | | (19,518) | | | (63,008) | | | (13,767) | | Deferred policy acquisition costs | | | (110) | | | (7,218) | | | (4,569) | | Accrued expenses | | | 21,502 | | | (7,724) | | | 856 | | Unpaid losses and settlement expenses | | | 113,004 | | | 189,845 | | | 132,166 | | Unearned premiums | | | 43,708 | | | 45,056 | | | 17,672 | | Current income taxes payable | | | (1,434) | | | 5,725 | | | (3,019) | | Changes in investment in unconsolidated investees: | | | | | | | | | | | Undistributed earnings | | | (20,960) | | | (16,056) | | | (17,224) | | Dividends received | | | 13,200 | | | 9,900 | | | — | | Net cash provided by operating activities | | $ | 276,917 | | $ | 217,102 | | $ | 197,525 | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | Purchase of: | | | | | | | | | | | Fixed income, available-for-sale | | $ | (539,726) | | $ | (725,675) | | $ | (430,727) | | Equity securities | | | (89,486) | | | (115,921) | | | (20,719) | | Property and equipment | | | (6,955) | | | (6,087) | | | (9,238) | | Other | | | (22,751) | | | (18,754) | | | (19,112) | | Proceeds from sale of: | | | | | | | | | | | Fixed income, available-for-sale | | | 196,558 | | | 395,019 | | | 168,760 | | Equity securities | | | 62,172 | | | 147,838 | | | 36,573 | | Property and equipment | | | — | | | 167 | | | 128 | | Subsidiary or agency | | | — | | | — | | | 408 | | Other | | | 2,502 | | | 3,394 | | | 2,063 | | Proceeds from call or maturity of: | | | | | | | | | | | Fixed income, available-for-sale | | | 201,383 | | | 187,380 | | | 195,617 | | Net proceeds from sale (purchase) of short-term investments | | | 11,550 | | | (1,570) | | | (4,965) | | Net cash used in investing activities | | $ | (184,753) | | $ | (134,209) | | $ | (81,212) | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from stock option exercises | | | 9,490 | | | 6,076 | | | 3,502 | | Cash dividends paid | | | (85,591) | | | (83,100) | | | (113,813) | | Net cash used in financing activities | | $ | (76,101) | | $ | (77,024) | | $ | (110,311) | | | | | | | | | | | | | Net increase in cash | | $ | 16,063 | | $ | 5,869 | | $ | 6,002 | | | | | | | | | | | | | Cash at beginning of year | | $ | 30,140 | | $ | 24,271 | | $ | 18,269 | | | | | | | | | | | | | Cash at end of year | | $ | 46,203 | | $ | 30,140 | | $ | 24,271 | |
| | | | | | | | | | | | Years ended December 31, | (in thousands) | | 2022 | | 2021 | | 2020 | Cash flows from operating activities: | | | | | | | | | | Net earnings | | $ | 583,411 | | $ | 279,354 | | $ | 157,091 | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | Net realized gains | | | (588,515) | | | (64,222) | | | (17,885) | Net unrealized (gains) losses on equity securities | | | 121,037 | | | (65,258) | | | (32,101) | Depreciation | | | 7,981 | | | 7,394 | | | 7,432 | Deferred income tax expense (benefit) | | | (49,639) | | | 18,927 | | | 8,576 | Other items, net | | | (20,467) | | | 14,141 | | | 10,460 | Change in: | | | | | | | | | | Accrued investment income | | | (3,754) | | | (1,379) | | | (1,539) | Premiums and reinsurance balances receivable (net of direct write-offs and commutations) | | | (22,222) | | | 7,349 | | | (14,259) | Reinsurance balances payable | | | 18,249 | | | 586 | | | 16,574 | Funds held | | | 11,371 | | | 8,026 | | | (1,611) | Ceded unearned premiums | | | (7,541) | | | (17,428) | | | (19,832) | Reinsurance balances recoverable on unpaid losses and settlement expenses | | | (132,003) | | | (164,357) | | | (59,212) | Deferred policy acquisition costs | | | (24,306) | | | (15,128) | | | (3,381) | Accrued expenses | | | (3,405) | | | 22,349 | | | 9,299 | Unpaid losses and settlement expenses | | | 272,082 | | | 293,506 | | | 175,697 | Unearned premiums | | | 104,641 | | | 94,058 | | | 46,173 | Current income taxes payable | | | (6,619) | | | 4,047 | | | (2,665) | Changes in investment in unconsolidated investees: | | | | | | | | | | Undistributed earnings | | | (9,853) | | | (37,060) | | | (20,233) | Dividends received | | | — | | | — | | | 4,675 | Net cash provided by operating activities | | $ | 250,448 | | $ | 384,905 | | $ | 263,259 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | Purchase of: | | | | | | | | | | Fixed income securities, available-for-sale | | $ | (2,053,359) | | $ | (733,811) | | $ | (518,362) | Equity securities | | | (45,007) | | | (140,721) | | | (77,863) | Property and equipment | | | (5,889) | | | (8,310) | | | (5,768) | Equity method investee | | | (3,819) | | | (8,978) | | | (4,533) | Other | | | (5,704) | | | (11,428) | | | (12,851) | Proceeds from sale of: | | | | | | | | | | Fixed income securities, available-for-sale | | | 53,300 | | | 63,811 | | | 84,587 | Equity securities | | | 62,212 | | | 180,256 | | | 79,368 | Equity method investee | | | 686,666 | | | — | | | — | Property and equipment | | | 375 | | | — | | | — | Other | | | 2,659 | | | 7,605 | | | 4,328 | Proceeds from call or maturity of: | | | | | | | | | | Fixed income, available-for-sale | | | 1,393,674 | | | 376,750 | | | 283,107 | Net purchase of short-term investments | | | (36,229) | | | — | | | — | Net cash provided by (used in) investing activities | | $ | 48,879 | | $ | (274,826) | | $ | (167,987) | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | Proceeds from issuance of long-term debt | | $ | — | | $ | 50,000 | | $ | — | Proceeds from stock option exercises | | | (465) | | | 1,838 | | | 8,648 | Cash dividends paid | | | (364,848) | | | (135,330) | | | (87,906) | Net cash used in financing activities | | $ | (365,313) | | $ | (83,492) | | $ | (79,258) | | | | | | | | | | | Net increase (decrease) in cash | | $ | (65,986) | | $ | 26,587 | | $ | 16,014 | Cash at beginning of year | | | 88,804 | | | 62,217 | | | 46,203 | Cash at end of year | | $ | 22,818 | | $ | 88,804 | | $ | 62,217 |
See accompanying notes to consolidated financial statements.
NotesNotes to Consolidated Financial Statements
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A. | DESCRIPTION OF BUSINESS |
RLI Corp. is an insurance holding company. References to “the Company,” “we,” “our,” “us” or like terms refer to the business of RLI Corp. and its subsidiaries. We underwrite select property and casualty insurance coverages through major subsidiaries collectively known as RLI Insurance Group. We conduct operations principally through 3three 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. On May 4, 2018, RLI Corp. changed its state of incorporation from the State of Illinois to the State of Delaware (the Reincorporation). The Reincorporation was effected by merging RLI Corp., an Illinois corporation (RLI Illinois), into RLI Corp., a Delaware corporation (RLI Delaware). The separate corporate existence of RLI Illinois ceased and RLI Delaware continues in existence as the surviving corporation and possesses all rights, privileges, powers and franchises of RLI Illinois. The Reincorporation did not result in any change in the name, business, management, fiscal year, location of the principal executive offices, assets or liabilities of the Company. Each outstanding share of RLI Illinois common stock, which had a par value of $1.00 per share, was automatically converted into one outstanding share of RLI Delaware common stock, with a par value of $0.01 per share. In order to reflect the new par value of common stock on the balance sheet, a $66.4 million reclassification from common stock to paid-in-capital was made.
B. | PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION |
The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States of America (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. The consolidated financial statements include the accounts of our holding company and our subsidiaries. Intercompany balances and transactions have been eliminated. Certain reclassifications were made to 20182021 and 20172020 to conform to the classifications used in the current year. The Company has evaluated subsequent events through the date these consolidated financial statements were issued. There were no subsequent events requiring adjustment to the financial statements or disclosure. C. | ADOPTED ACCOUNTING STANDARDS |
ASU 2016-02, Leases (Topic 842)No new accounting standards applicable in 2022 materially impacted our financial statements.
ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under previous guidance for lessees, leases were only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, were met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability are expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the statement of earnings and the repayment of the principal portion of the lease liability is classified as a financing activity while the interest component is included in the operating section of the statement of cash flows.
D. | PROSPECTIVE ACCOUNTING STANDARDS |
We adopted ASU 2016-02, ASU 2018-10 Codification Improvements to Topic 842: Leases and ASU 2018-11 Leases (Topic 842): Targeted Improvements on January 1, 2019. We applied the standards using the alternative transition method provided by ASU 2018-11 under which leases were recognized at the date of adoption and a cumulative-effect adjustment to the opening balance of retained earnings would have been recognized in the period of adoption. As the standard did not have an impact on our net earnings, 0 adjustment to the opening balance of retained earnings was required. As of December 31, 2019, $22.3 million of right-of-use assets and $24.5 million of lease liabilities were included in the other assets and other liabilities line items of the consolidated balance sheet, respectively, as a result of the adoption of these updates. We implemented controls for the adoption of the standard and the ongoing monitoring of the right-of-use asset and lease liability, but they did not materially affect our internal control over financial reporting.
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
Under previous guidance, the amortization period for callable debt securities held at a premium was generally the contractual life of the instrument. However, if an entity had a large number of similar loans, it could consider estimates of future principal prepayments. For those who chose not to incorporate an estimate of future prepayments, ASU 2017-08 shortens the amortization period for premium on debt securities to the earliest call date, rather than the maturity date, to align the amortization method with how the securities are quoted, priced and traded. After the earliest call date, if the call option is not exercised, the entity shall reset the effective yield using the payment terms of the debt security. Any excess of the amortized cost basis over the amount payable will be amortized to the next call date or to maturity if thereThere are no other call dates. The method ofprospective accounting for a discount does not change and will continue to be amortized over the life of the bond.
We adopted ASU 2017-08 on January 1, 2019 using a modified-retrospective approach. As we had been incorporating estimates of future principal prepayments when calculating the effective yield for bonds carrying a premium under the old guidance, the adoption of this update did notstandards which would have a material impact on our financial statements.
ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
ASU 2018-07 was issued to simplify the accounting for share-based transactions by expanding the scopestatements as of Topic 718 from only being applicable to share-based payments to employees to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. We adopted ASU 2018-07 on January 1, 2019. Our long-term incentive plan limits the awards of share-based payments to employees and directors of the Company. As our share-based compensation expense to nonemployee directors was $0.6 million in 2019, the standard did not have a material impact on our financial statements.December 31, 2022.
D.E.
| PROSPECTIVE ACCOUNTING STANDARDS
|
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This update will have the most impact on our available-for-sale fixed income portfolio and reinsurance balances recoverable. However, as our fixed income portfolio is weighted towards higher rated bonds (85 percent rated A or better at December 31, 2019) and we purchase reinsurance from financially strong reinsurers for which we already have an allowance for uncollectible reinsurance amounts, the effect of adoption will not have a material impact on our financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more
reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. As the amendments are only disclosure related, the effect of adoption will not have a material impact on our financial statements.
Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings in 2019 and 2018. Prior to 2018, unrealized gains and losses on equity securities were recognized through other comprehensive 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.
Other-than-Temporary Impairment
We regularly evaluate our fixed income securities using quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired:
| ● | The length of time and the extent to which the fair value has been less than amortized cost, |
| ● | The probability of significant adverse changes to the cash flows, |
| ● | The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer seeking protection from creditors under the bankruptcy laws, the issuer proposing a voluntary reorganization under which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims or |
| ● | The probability that we will recover the entire amortized cost basis of our fixed income securities prior to maturity. |
Quantitative criteria considered during this process include, but are not limited to: the degree and duration of current fair value as compared to the amortized cost of the security, degree and duration of the security’s fair value being below cost and whether the issuer is in compliance with terms and covenants of the security. Qualitative criteria include the credit quality, current economic conditions, the anticipated speed of cost recovery, the financial health of and specific prospects for the issuer, as well as our absence of intent to sell or requirement to sell fixed income securities prior to recovery. In addition, we consider price declines in our other-than-temporary impairment (OTTI) analysis when they provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration, as opposed to rising interest rates. See note 2 for further discussion of OTTI.
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 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 prime and government money market funds. Short-term investments are carried at cost. We have not experienced losses on these instruments. Other invested assets include investments in low incomelow-income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC investments are carried at amortized cost, and our investment in FHLBC stock is carried at cost. Due to the nature of cash, short-term investments, the LIHTCLIHTCs 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. Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, instead ofan asset, rather than being netted with the related liabilities,liability, since reinsurance does not relieve the Company of our legal liability to our policyholders.
Such balances are subject to the credit risk associated with the individual reinsurer. We continuouslycontinually monitor the financial condition of our reinsurers.reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review theirreinsurers’ annual financial statements quarterly disclosures and Securities and Exchange Commission (SEC)SEC filings for reinsurersthose 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)S&P ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverablerecoverability tests, including one based ona segment-based analysis using the average default rating percentage by S&P rating. Based uponrating, 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 review and testing, ourreinsurance 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. Property and equipment are presented at cost less accumulated depreciation and are depreciated on a straight-line basis for financial statement purposes over periods ranging from 3 to 10 years for equipment and up to 30 years for buildings and improvements. J. | INVESTMENTS IN UNCONSOLIDATED INVESTEES |
Our investments accounted for under the equity method are primarily related to Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime). We maintain aowned 40 percent interest in the equity and earnings of Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, which is accountedbut sold our interest in 2022. See note 13 for undermore information on the equity method.sale. We also maintain a similar minority representation on their board of directors. Maui Jim’s chief executive officer owns a controlling majority of the outstanding shares of Maui Jim. We carrycarried this investment at the holding company level as it iswas not core to our insurance operations. Our investment in Maui Jim was $79.6$113.1 million at December 31, 2019 and $79.5 million at December 31, 2018.2021. In 2019,2022, we recorded $13.6$0.4 million in investee earnings for Maui Jim, compared to $12.5$22.8 million in 20182021 and $14.4$10.4 million in 2017. Maui Jim recorded net income of $35.6 million in 2019, $30.3 million in 2018 and $34.4 million in 2017. Additional summarized financial information for Maui Jim for 2019 and 2018 is outlined in the following table:
| | | | | | | | (in millions) | | 2019 | | 2018 | | Total assets | | $ | 282.2 | | $ | 265.6 | | Total liabilities | | | 104.8 | | | 90.4 | | Total equity | | | 177.4 | | | 175.2 | |
Approximately $69.3 million of undistributed earnings from Maui Jim are included in our retained earnings as of December 31, 2019. We received dividends of $13.2 million and $9.9 million from Maui Jim in 2019 and 2018, respectively. NaN dividends were received in 2017.2020.
As of December 31, 2019,2022, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services, Inc. (Prime), which is accounted for under the equity method.Prime. Prime writes business through 2two 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 $24.2$46.9 million at December 31, 20192022 and $15.4$47.2 million at December 31, 2021. The decrease was due to the recognition of our share of Prime’s other comprehensive losses, brought on by the impact of rising interest rates on Prime’s fixed income portfolio. In 2022, we recorded $13.0 million in investee earnings for Prime, compared to $17.0 million in 2021 and $10.8 million in 2020. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $20.6 million of gross premiums written and $22.6 million of net premiums earned during 2022, compared to $22.2 million of gross premiums written and $19.1 million of net premiums earned during 2021 and $15.7 million of gross premiums written and $14.3 million of net premiums earned during 2020. The increase in net premiums earned reflected growth in written premium from Prime. ��� 31, 2018. In 2019, weOur equity method investments recorded $7.4net income of $58.8 million in investee earnings for Prime, compared to $3.62022, $125.3 million in 20182021 and $2.8$70.4 million in 2017. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $13.12020. Additional summarized financial information for our equity method investments as of 2022 and 2021 is outlined in the following table:
| | | | | | | (in millions) | | 2022 | | 2021 | Total assets | | $ | 906.4 | | $ | 1,172.6 | Total liabilities | | | 689.9 | | | 687.8 | Total equity | | | 216.5 | | | 484.8 |
Approximately $51.6 million of gross premiums written and $28.7undistributed earnings from our equity method investees were included in our retained earnings as of December 31, 2022. We did not receive any dividends from our equity method investees during 2022 or 2021, while $4.7 million of net premiums earned during 2019, compared to $41.1 million of gross premiums written and $34.2 million of net premiums earned during 2018 and $29.6 million of gross premiums written and $21.0 million of net premiums earned during 2017. The decreasedividends were received in gross written premium is reflective of our decreased quota share participation with Prime.2020. 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 |
GoodwillThe composition of goodwill and intangibles totaled $54.1 million and $54.5 million at December 31, 20192022 and 2018, respectively, as2021, is detailed in the following table:
| | | | | | | Goodwill and Intangible Assets | | | | | | | (in thousands) | | | 2019 | | | 2018 | Goodwill | | | | | | | Energy surety | | $ | 25,706 | | $ | 25,706 | Miscellaneous and contract surety | | | 15,110 | | | 15,110 | Small commercial | | | 5,246 | | | 5,246 | Total goodwill | | $ | 46,062 | | $ | 46,062 | | | | | | | | Intangibles | | | | | | | State insurance licenses | | $ | 7,500 | | $ | 7,500 | Definite-lived intangibles, net of accumulated amortization of $3,470
at 12/31/19 and $3,062 at 12/31/18 | | | 565 | | | 972 | Total intangibles | | $ | 8,065 | | $ | 8,472 | | | | | | | | Total goodwill and intangibles | | $ | 54,127 | | $ | 54,534 |
| | | | | | | (in thousands) | | 2022 | | 2021 | Goodwill | | | | | | | Surety | | $ | 40,816 | | $ | 40,816 | Casualty | | | 5,246 | | | 5,246 | Total goodwill | | $ | 46,062 | | $ | 46,062 | Indefinite-lived intangibles | | $ | 7,500 | | $ | 7,500 | Total goodwill and intangibles | | $ | 53,562 | | $ | 53,562 |
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 2019.2022. Based upon these reviews, our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and state insurance license indefinite-lived intangible asset were not impaired. In addition, as of December 31, 2019,2022, there were no triggering events on the above-mentioned goodwill and intangible assets that would suggest an updated review was necessary. During the first quarter of 2018 and the second quarter of 2017, adverse loss experience triggered the need to test the medical professional liability reporting unit. The testing resulted in a $4.4 million non-cash impairment charge on goodwill and intangible assets in 2018 and a $3.4 million non-cash impairment charge on goodwill and intangible assets in 2017. In each instance, the fair value for the medical professional liability reporting unit’s agency relationships, carried as a definite-lived intangible asset, was determined by using a discounted cash flow valuation. In 2018, the carrying value exceeded the fair value, resulting in a $0.8 million non-cash impairment charge. In 2017, the resulting non-cash impairment charge on definite-lived intangibles was $1.8 million. The fair value for the medical professional liability reporting unit’s goodwill was determined by using a weighted average of a market approach and discounted cash flow valuation. The carrying value exceeded the fair value in each year, resulting in a $3.6 million non-cash impairment charge in 2018 and a $1.6 million non-cash impairment charge during 2017. Subsequent to the 2018 impairment, the medical professional liability reporting unit had 0 remaining goodwill or intangible assets. All impairment charges were recorded as net realized losses in the respective period’s consolidated statement of earnings.
The definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets was $0.4 million, $0.4 million and $0.7 million for 2019, 2018 and 2017, respectively. We anticipate we will recognize amortization expense of $0.4 million in 2020, $0.1 million in 2021 and less than $0.1 million in 2022.
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. 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. 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. As an insurance company, we are subject to minimal state income tax liabilities. On a state basis, sinceSince 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. 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 | | | | | | | | | Weighted Average | | | | | | Income | | Shares | | Per Share | | | Income | | Shares | | Per Share | (in thousands, except per share data) | | (Numerator) | | (Denominator) | | Amount | | | (Numerator) | | (Denominator) | | Amount | For the year ended December 31, 2019 | | | | | | | | | | | For the year ended December 31, 2022 | | | | | | | | | | Basic EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders | | $ | 191,642 | | 44,734 | | $ | 4.28 | | | $ | 583,411 | | 45,368 | | $ | 12.86 | Stock options | | | — | | 523 | | | | | | | — | | 426 | | | | Diluted EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders and assumed conversions | | $ | 191,642 | | 45,257 | | $ | 4.23 | | | $ | 583,411 | | 45,794 | | $ | 12.74 | Anti-dilutive options excluded from diluted EPS | | | | | | 295 | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2018 | | | | | | | | | | | For the year ended December 31, 2021 | | | | | | | | | | Basic EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders | | $ | 64,179 | | 44,358 | | $ | 1.45 | | | $ | 279,354 | | 45,230 | | $ | 6.18 | Stock options | | | — | | 477 | | | | | | | — | | 482 | | | | Diluted EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders and assumed conversions | | $ | 64,179 | | 44,835 | | $ | 1.43 | | | $ | 279,354 | | 45,712 | | $ | 6.11 | Anti-dilutive options excluded from diluted EPS | | | | | | 214 | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, 2017 | | | | | | | | | | | For the year ended December 31, 2020 | | | | | | | | | | Basic EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders | | $ | 105,028 | | 44,033 | | $ | 2.39 | | | $ | 157,091 | | 45,000 | | $ | 3.49 | Stock options | | | — | | 467 | | | | | | | — | | 376 | | | | Diluted EPS | | | | | | | | | | | | | | | | | | Income available to common shareholders and assumed conversions | | $ | 105,028 | | 44,500 | | $ | 2.36 | | | $ | 157,091 | | 45,376 | | $ | 3.46 | Anti-dilutive options excluded from diluted EPS | | | | | | 384 | | | |
Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio in 2019 and 2018. In 2017, after-tax unrealized gains and losses on our equity portfolio were also included. With the adoption of ASU 2016-01, Financial Instruments – Overall (subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018, we began recognizing unrealized gains and losses on the equity portfolio through net income.portfolio. In reporting the components of comprehensive earnings, we used the federal statutory tax rate of 21 percent in 2019 and 2018 and 35 percent in 2017.percent. Other comprehensive income (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $17.8$(74.1) million, $(9.0)$(15.7) million and $19.0$14.9 million for 2019, 20182022, 2021 and 2017,2020, 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. The 2017 activity and balances include the net unrealized gain and loss activity on both fixed income and equity securities, while the 2019 and 2018 activity and ending balance reflect only the net unrealized gain and loss activity on fixed income securities due to the aforementioned adoption of ASU 2016-01. The changes in accumulated other comprehensive earnings also reflect adjustments from the adoption of two accounting standards. The adoption of ASU 2016-012016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, necessitated a cumulative-effect adjustment in the beginning of 2018, which moved $142.2 million of net unrealized gains and losses on equity securities from accumulated other comprehensive earnings to retained earnings.
ASU 2018-02 addressed issues arising from the enactment of the Tax Cuts and Jobs Act of 2017. Deferred tax items are required to be revalued based on new tax laws with changes included in earnings. Since other comprehensive earnings was not affected by the revaluation of deferred tax items, the accumulated other comprehensive earnings balance was reflective of the historic tax rate instead of the newly enacted rate, which created a stranded tax effect. ASU 2018-02 allowed for the reclassification of our $3.7 million stranded tax effect out of accumulated other comprehensive earnings into retained earnings.
2020,
| | | | | | | | | | | Unrealized Gains/Losses on Available-for-Sale Securities | | For the Year Ended December 31, | | (in thousands) | | 2019 | | 2018 | | 2017 | | | | | | | | | | | | | Beginning balance | | $ | (14,572) | | $ | 157,919 | | $ | 122,610 | | Cumulative effect adjustment of ASU 2016-01 | | | — | | | (142,219) | | | — | | Adjusted beginning balance | | $ | (14,572) | | $ | 15,700 | | $ | 122,610 | | | | | | | | | | | | | Other comprehensive earnings before reclassifications | | | 69,560 | | | (35,763) | | | 40,887 | | Amounts reclassified from accumulated other comprehensive earnings | | | (2,515) | | | 1,766 | | | (5,578) | | Net current-period other comprehensive earnings (loss) | | $ | 67,045 | | $ | (33,997) | | $ | 35,309 | | | | | | | | | | | | | Reclassification of stranded tax effect from implementation of Tax Cuts and Jobs Act of 2017 | | | — | | | 3,725 | | | — | | Ending balance | | $ | 52,473 | | $ | (14,572) | | $ | 157,919 | |
which moved less than $0.1 million of net unrealized losses on fixed income securities from accumulated other comprehensive earnings to retained earnings. | | | | | | | | | | Unrealized Gains/Losses on Available-for-Sale Securities | | For the Year Ended December 31, | (in thousands) | | 2022 | | 2021 | | 2020 | Beginning balance | | $ | 49,826 | | $ | 108,714 | | $ | 52,473 | Cumulative-effect adjustment of ASU 2016-13 | | | — | | | — | | | 22 | Adjusted beginning balance | | $ | 49,826 | | $ | 108,714 | | $ | 52,495 | Other comprehensive earnings before reclassifications | | | (281,189) | | | (57,454) | | | 58,986 | Amounts reclassified from accumulated other comprehensive earnings | | | 2,287 | | | (1,434) | | | (2,767) | Net current period other comprehensive earnings (loss) | | $ | (278,902) | | $ | (58,888) | | $ | 56,219 | Ending balance | | $ | (229,076) | | $ | 49,826 | | $ | 108,714 | Balance of securities for which an allowance for credit losses has not been recognized in net earnings | | $ | 1,693 | | $ | 124 | | $ | 470 |
TheCredit losses or the sale or other-than-temporary impairment of an available-for-sale security resultsresulted 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. As previously mentioned, 2019 and 2018 reflect activity on available-for-sale fixed income securities, while 2017 also includes activity from the equity portfolio.
| | | | | | | | | | | | | | | | | | | | | Amount Reclassified from Accumulated Other Comprehensive Earnings | Amount Reclassified from Accumulated Other Comprehensive Earnings | | Amount Reclassified from Accumulated Other Comprehensive Earnings | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Component of Accumulated | | For the Year Ended December 31, | | Affected line item in the | | | | For the Year Ended December 31, | | Affected line item in the | Other Comprehensive Earnings | | 2019 | | 2018 | | 2017 | | Consolidated Statement of Earnings | | | 2022 | | 2021 | | 2020 | | Consolidated Statement of Earnings | | | | | | | | | | | | | Unrealized gains and losses on available-for-sale securities | | $ | 3,184 | | $ | (2,018) | | $ | 11,141 | | Net realized gains | | | $ | (2,997) | | $ | 1,859 | | $ | 3,872 | | Net realized gains | | | | — | | | (217) | | | (2,559) | | Other-than-temporary impairment losses on investments | | | | 102 | | | (44) | | | (369) | | Credit losses presented within net realized gains | | | $ | 3,184 | | $ | (2,235) | | $ | 8,582 | | Earnings before income taxes | | | $ | (2,895) | | $ | 1,815 | | $ | 3,503 | | Earnings before income taxes | | | | (669) | | | 469 | | | (3,004) | | Income tax expense | | | | 608 | | | (381) | | | (736) | | Income tax expense | | | $ | 2,515 | | $ | (1,766) | | $ | 5,578 | | Net earnings | | | $ | (2,287) | | $ | 1,434 | | $ | 2,767 | | Net earnings |
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. | ● | Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets. |
Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets. | ● | Pricing 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 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. | ● | Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. |
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 Obligations (CMO)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 (non-volatile,(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 CMOMBS 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/CMOCMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMOCMBS and ABS are deemed Level 2. Regulation D Private Placement Securities: All Regulation D privately placed bonds are classified as corporate securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of observable and 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. All Regulation D privately placed bonds are classified as corporate securities and deemed Level 3.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. In our comparisons, ifIf 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. Common Stock:Equity Securities: As of December 31, 2019,2022, nearly all of our common stockequity 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). Pricing for the equity securityEquity securities not traded on an exchange, in 2018 wasfor which pricing is provided by a third-party pricing source and wasusing 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 long-term debt is discussed further in note 4. R. | STOCK-BASEDSHARE-BASED COMPENSATION
|
We expense the estimated fair value of employee stock options and similar awards. We measure compensation cost for awards of equity instruments to employees based on the grant-date fair value of those awards and recognize compensation expense over the service period that the awards are expected to vest. The tax effects related to share-based payments are made through net earnings. See note 8 for further discussion and related disclosures regarding stock options. S. | RISKS AND UNCERTAINTIES |
Certain risks and uncertainties are inherent toin our day-to-day operations and toin 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 currently operating underoften highly competitive, conditions and, as a result, margins in the industry are under pressure. During these times,which can make it is very 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, 2019,2022, we had $1.6$2.3 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. Catastrophe Exposures Our insurance coverages include exposure to catastrophic events. We monitor all 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 through restraining the total policy limits written in each region and by purchasing reinsurance. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. In 2019,Coast, and windstorms to commercial properties throughout the Gulf and East Coast, as well as to homes we hadinsure in Hawaii. Our catastrophe reinsurance treaty renewed on January 1, 2022. We purchased limits of $600 million in excess of $25 million first-dollar retention for earthquakes in California, $625 million in excess of a $25 million first-dollar retention for earthquakes outside of California and $475 million in excess of a $25 million first-dollar retention for all other perils, including wind. These amounts were subject to certain co-participations by the Company on losses in excess of the $25 million retentions. On May 1, 2022, we purchased $150 million of additional catastrophe reinsurance protection on top of $400the previously described coverage, to support growth in our catastrophe-exposed business. This increased the limits to $750 million for earthquakes in California, $775 million for earthquakes outside of California and $625 million for all other perils, including wind, all of which were still subject to $25 million first-dollar retentions and certain co-participations in excess of the retentions. Our catastrophe reinsurance treaty renewed on January 1, 2023. We purchased reinsurance protections of $700 million in excess of $25 million first-dollar retention for earthquakes in California and $425$700 million in excess of a $25$50 million first-dollar retention for earthquakes outside of California. For other catastrophe events, such as hurricanes, we purchased reinsurance protection of $600 million in excess of a $50 million first dollar retention. These amounts are subject to certain co-participations by the Company on losses in excess of the $25 million retentions. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coasts, as well as to homes we insure in Hawaii. In 2019, these coverages were supported by $275 million in excess of a $25 million first-dollar retention in traditional catastrophe reinsurance protection, subject to certain co-participations by the Company in the excess layers. In addition, we have incidental exposure to international catastrophic events.
Our catastrophe reinsurance treaty renewed on January 1, 2020. We purchased the same limits over the same first-dollar retention amounts outlined above, subject to certain retentions by us in the excess layers. We actively manage our catastrophe program to keep our net retention in line with risk tolerances and to optimize the risk/return trade off.
Environmental Exposures We are subject to environmental claims and exposures primarily through our commercial excess, general liability and discontinued assumed casualty reinsurance lines of business. Although exposure to environmental claims exists in these lines of business, we seek to mitigate or control the extent of this exposure on the vast majority of this business through the following methods: (1) ourbusiness. Our policies include pollution exclusions that have been continually updated to further strengthen them (2)and our policies primarily cover moderate hazard risks and (3) we began writing this business after the insurance industry became aware of the potential pollution liability exposure and implemented changes to limit exposure to this hazard.risks. We offer coverage for low to moderate environmental liability exposures for small contractors and asbestos and mold remediation specialists. We also provide limited coverage for individually underwritten underground storage tanks. The overall exposure is mitigated by focusing on smaller risks with low to moderate exposures. Risks that have large-scale exposures are avoided including petrochemical, chemical, mining, manufacturers and other risks that might be exposed to superfund sites. This business is covered under our casualty ceded reinsurance treaties. We made loss and settlement expense payments on environmental liability claims and have loss and settlement expense reserves for others. We include this historical environmental loss experience with the remaining loss experience in the applicable line of business to project ultimate incurred losses and settlement expenses as well as related incurred but not reported (IBNR) loss and settlement expense reserves. Although historical experience on environmental claims may not accurately reflect future environmental exposures, we used this experience to record loss and settlement expense reserves in the exposed lines of business. See further discussion of environmental exposures in note 6. Reinsurance Reinsurance does not discharge the Company from our primary liability to policyholders, and to the extent that a reinsurer is unable to meet its obligations, we would be liable. We continuously monitor the financial condition of prospective and existing reinsurers. As a result, we purchase reinsurance from a number of financially strong reinsurers. We provide an allowance for reinsurance balances deemed uncollectible. See further discussion of reinsurance exposures in note 5. Investment Risk Our investment portfolio is subject to market, credit and interest rate risks. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is positively correlated with movements in domestic stocks. The bond portfolio is affected by interest rate changes and movement in credit spreads. We attempt to mitigate our interest rate and credit risks by constructing a well-diversified portfolio with high-quality securities with varied maturities. Downturns in the financial markets could have a negative effect on our portfolio. However, we attempt to manage this risk through asset allocation, duration and security selection. Liquidity Risk Liquidity is essential to our business and a key component of our concept of asset-liability matching. Our liquidity may be impaired by an inability to collect premium receivable or reinsurance recoverable balances in a timely manner, an inability to sell assets or redeem our investments, an inability to access funds from our insurance subsidiaries, unforeseen outflows of cash or large claim payments or an inability to access debt or equity capital markets. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption, an operational problem that affects third parties or the Company, or even by the perception among market participants that we, or other market participants, are experiencing greater liquidity risk. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position by increasing our borrowing costs or limiting our access to the capital markets. Financial Statements The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. The most significant of these amounts is the liability for unpaid losses and settlement expenses. Other estimates include investment valuation, and OTTIs,the allowance for credit losses on fixed income securities, the collectability of reinsurance balances, recoverability of deferred tax assets and deferred policy acquisition costs. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Although recorded estimates are supported by actuarial computations and other supportive data, the estimates are ultimately based on our expectations of future events. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods. External Factors Our insurance subsidiaries are highly regulated by the state in which they are incorporated and by the states in which they do business. Such regulations, among other things, limit the amount of dividends, impose restrictions on the amount and types of investments and regulate rates and forms insurers may charge for various coverages. We are also subject to insolvency and guaranty fund assessments for various programs designed to ensure policyholder indemnification. We generally accrue an assessment during the period in which it becomes probable that a liability has been incurred from an insolvency and the amount of the related assessment can be reasonably estimated. The National Association of Insurance Commissioners (NAIC) has developed Property/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, 2019,2022, we determined that our capital levels are well in excess of the minimum capital requirements for all RBC action levels and that our capital levels are sufficient to support the level of risk inherent in our operations. See note 9 for further discussion of statutory information and related insurance regulatory restrictions. In addition, ratings are a critical factor in establishing the competitive position of insurance companies. Our insurance companies are rated by AM Best, S&P and Moody’s. Their ratings reflect their opinions of an insurance company’s and an insurance holding company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. 2. INVESTMENTS
Our investments are primarily composed of fixed income debt securities and common stock equity securities. All of our debt securities are classified as available-for-sale, which are carried at fair value. Our equity portfolio consists of common stocks and exchange traded funds (ETF), which are carried at fair value. A summary of net investment income is as follows: | | | | | | | | | | | | | | | | | | | | NET INVESTMENT INCOME | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | Interest on fixed income securities | | $ | 60,364 | | $ | 54,491 | | $ | 48,343 | | | $ | 77,164 | | $ | 60,624 | | $ | 59,755 | Dividends on equity securities | | | 9,950 | | | 9,814 | | | 10,506 | | | | 11,912 | | | 11,787 | | | 9,728 | Interest on cash, short-term investments and other invested assets | | | 3,674 | | | 2,309 | | | 945 | | | | 2,467 | | | 2,639 | | | 3,379 | Gross investment income | | $ | 73,988 | | $ | 66,614 | | $ | 59,794 | | | $ | 91,543 | | $ | 75,050 | | $ | 72,862 | Less investment expenses | | | (5,118) | | | (4,529) | | | (4,918) | | | | (5,465) | | | (6,188) | | | (4,969) | Net investment income | | $ | 68,870 | | $ | 62,085 | | $ | 54,876 | | | $ | 86,078 | | $ | 68,862 | | $ | 67,893 |
Pretax net realized gains (losses) and net changes in unrealized gains (losses) on investments for the years ended December 31 are summarized below. As discussed in note 1.P., unrealized gains and losses on equity securities were recognized in net earnings in 2019 and 2018, after the adoption of ASU 2016-01, and were recognized in other comprehensive earnings in 2017. | | | | | | | | | | | | | | | | | | | | REALIZED/UNREALIZED GAINS (LOSSES) | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | Net realized gains (losses): | | | | | | | | | | | | | | | | | | | | Fixed income: | | | | | | | | | | | | | | | | | | | | Available-for-sale | | $ | 3,184 | | $ | (2,018) | | $ | 859 | | | $ | (2,997) | | $ | 1,859 | | $ | 3,872 | Equity securities | | | 14,445 | | | 69,868 | | | 10,282 | | | | 20,287 | | | 62,512 | | | 15,796 | Investment in unconsolidated investees | | | | 570,952 | | | (61) | | | (187) | Other | | | (109) | | | (4,226) | | | (4,171) | | | | 273 | | | (88) | | | (1,596) | Total net realized gains (losses) | | $ | 17,520 | | $ | 63,624 | | $ | 6,970 | | | $ | 588,515 | | $ | 64,222 | | $ | 17,885 | | | | | | | | | | | | | Other-than-temporary-impairment losses on investments | | $ | — | | $ | (217) | | $ | (2,559) | | | | | | | | | | | | | | | | | | | | | | | Net changes in unrealized gains (losses) on investments: | | | | | | | | | | | | | | | | | | | | Equity securities | | $ | 78,389 | | $ | (98,380) | | $ | — | | | $ | (118,912) | | $ | 58,459 | | $ | 32,317 | Other invested assets | | | (299) | | | (355) | | | — | | | | (2,125) | | | 6,799 | | | (216) | Total unrealized gains (losses) on equity securities recognized in net earnings | | $ | 78,090 | | $ | (98,735) | | $ | — | | | $ | (121,037) | | $ | 65,258 | | $ | 32,101 | | | | | | | | | | | | | | | | | | | | | Fixed income: | | | | | | | | | | | | | | | | | | | | Available-for-sale | | $ | 83,758 | | $ | (41,778) | | $ | 16,846 | | | $ | (341,944) | | $ | (71,538) | | $ | 67,350 | Equity securities | | | — | | | — | | | 36,844 | | | Other invested assets | | | — | | | — | | | 29 | | | Investment in unconsolidated investees | | | 1,109 | | | (1,257) | | | 604 | | | | (10,994) | | | (3,047) | | | 3,444 | Other | | | | (102) | | | 44 | | | 369 | Total unrealized gains (losses) recognized in other comprehensive earnings | | $ | 84,867 | | $ | (43,035) | | $ | 54,323 | | | $ | (353,040) | | $ | (74,541) | | $ | 71,163 | Net realized gains (losses) and changes in unrealized gains (losses) on investments | | $ | 180,477 | | $ | (78,363) | | $ | 58,734 | | | $ | 114,438 | | $ | 54,939 | | $ | 121,149 |
The change in unrealized gain (loss) position was due to an increase in interest rates, decreasing the fair value of fixed income securities, as well as a decline in equity market returns during the year. During 2019, we recorded $17.5 million in net realized gains and $163.0 million of net unrealized gains. The majority of our net realized gains were due to sales of equity securities. The change in unrealized gain (loss) position was due to declining interest rates, increasing the fair value of fixed income securities, as well as strong equity market returns during 2019. For 2019, the net realized gains (losses) and changes in unrealized gains (losses) on investments totaled $180.5 million.
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: | | | | | | | | | | | | | | | | | | | | Net | | | | | | | | | | | | | | SALES | | | | Gross Realized | | Realized | | | | | | Gross Realized | | Net Realized | (in thousands) | | Proceeds | | Gains | | Losses | | Gain (Loss) | | | Proceeds | | Gains | | Losses | | Gain (Loss) | 2019 | | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | Available-for-sale | | $ | 196,799 | | $ | 4,368 | | $ | (2,167) | | $ | 2,201 | | | $ | 51,355 | | $ | 287 | | $ | (2,849) | | $ | (2,562) | Equities | | | 62,172 | | | 16,938 | | | (2,493) | | | 14,445 | | | | 62,212 | | | 21,623 | | | (1,336) | | | 20,287 | 2018 | | | | | | | | | | | | | | | 2021 | | | | | | | | | | | | | | Available-for-sale | | $ | 394,318 | | $ | 3,131 | | $ | (5,349) | | $ | (2,218) | | | $ | 65,262 | | $ | 2,161 | | $ | (815) | | $ | 1,346 | Equities | | | 147,838 | | | 71,065 | | | (1,197) | | | 69,868 | | | | 180,256 | | | 64,298 | | | (1,786) | | | 62,512 | 2017 | | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | Available-for-sale | | $ | 169,002 | | $ | 2,406 | | $ | (1,670) | | $ | 736 | | | $ | 84,697 | | $ | 5,454 | | $ | (1,777) | | $ | 3,677 | Equities | | | 36,573 | | | 13,178 | | | (2,896) | | | 10,282 | | | | 79,368 | | | 25,338 | | | (9,542) | | | 15,796 |
| | | | | | | | | | | | | | | | | | | | | Net | | | | | | | | | | | | | | CALLS/MATURITIES | | | | | Gross Realized | | Realized | | | | | | Gross Realized | | Net Realized | (in thousands) | | Proceeds | | Gains | | Losses | | Gain (Loss) | | | Proceeds | | Gains | | Losses | | Gain (Loss) | 2019 | | | | | | | | | | | | | | | 2022 | | | | | | | | | | | | | | Available-for-sale | | $ | 201,698 | | $ | 1,004 | | $ | (21) | | $ | 983 | | | $ | 1,393,704 | | $ | 196 | | $ | (55) | | $ | 141 | 2018 | | | | | | | | | | | | | | | 2021 | | | | | | | | | | | | | | Available-for-sale | | $ | 187,380 | | $ | 311 | | $ | (111) | | $ | 200 | | | $ | 376,751 | | $ | 638 | | $ | (125) | | $ | 513 | 2017 | | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | Available-for-sale | | $ | 195,617 | | $ | 262 | | $ | (139) | | $ | 123 | | | $ | 283,107 | | $ | 821 | | $ | (27) | | $ | 794 |
FAIR VALUE MEASUREMENTS Assets measured at fair value on a recurring basis as of December 31, 2019,2022 and 2021, are summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | | Quoted in Active | | Significant Other | | Significant | | | | | | Quoted in Active | | Significant Other | | Significant | | | | | | Markets for | | Observable | | Unobservable | | | | | | Markets for | | Observable | | Unobservable | | | | | | Identical Assets | | Inputs | | Inputs | | | | | | Identical Assets | | Inputs | | Inputs | | | | (in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Fixed income securities - available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | $ | 193,661 | | $ | — | | $ | 193,661 | | | $ | — | | $ | 454,021 | | $ | — | | $ | 454,021 | U.S. agency | | | — | | | 38,855 | | | — | | | 38,855 | | | | — | | | 73,063 | | | — | | | 73,063 | Non-U.S. government & agency | | | — | | | 7,628 | | | — | | | 7,628 | | | | — | | | 5,847 | | | — | | | 5,847 | Agency MBS | | | — | | | 420,165 | | | — | | | 420,165 | | | | — | | | 331,806 | | | — | | | 331,806 | ABS/CMBS/MBS* | | | — | | | 224,870 | | | — | | | 224,870 | | | | — | | | 240,736 | | | — | | | 240,736 | Corporate | | | — | | | 690,297 | | | 1,770 | | | 692,067 | | | | — | | | 980,676 | | | 53,654 | | | 1,034,330 | Municipal | | | — | | | 405,840 | | | — | | | 405,840 | | | | — | | | 527,147 | | | — | | | 527,147 | Total fixed income securities - available-for-sale | | $ | — | | $ | 1,981,316 | | $ | 1,770 | | $ | 1,983,086 | | | $ | — | | $ | 2,613,296 | | $ | 53,654 | | $ | 2,666,950 | Equity securities | | | 460,630 | | | — | | | — | | | 460,630 | | | | 496,731 | | | 39 | | | 1,612 | | | 498,382 | Total | | $ | 460,630 | | $ | 1,981,316 | | $ | 1,770 | | $ | 2,443,716 | | | $ | 496,731 | | $ | 2,613,335 | | $ | 55,266 | | $ | 3,165,332 |
*Non-agency asset-backed, commercial mortgage-backed and mortgage-backed | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
Assets measured at fair value on a recurring basis as of December 31, 2018, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | | Quoted in Active | | Significant Other | | Significant | | | | | | Quoted in Active | | Significant Other | | Significant | | | | | | Markets for | | Observable | | Unobservable | | | | | | Markets for | | Observable | | Unobservable | | | | | | Identical Assets | | Inputs | | Inputs | | | | | | Identical Assets | | Inputs | | Inputs | | | | (in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Fixed income securities - available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government | | $ | — | | $ | 200,229 | | $ | — | | $ | 200,229 | | | $ | — | | $ | 134,554 | | $ | — | | $ | 134,554 | U.S. agency | | | — | | | 31,904 | | | — | | | 31,904 | | | | — | | | 32,760 | | | — | | | 32,760 | Non-U.S. government & agency | | | — | | | 7,639 | | | — | | | 7,639 | | | | — | | | 8,481 | | | — | | | 8,481 | Agency MBS | | | — | | | 395,253 | | | — | | | 395,253 | | | | — | | | 367,187 | | | — | | | 367,187 | ABS/CMBS/MBS* | | | — | | | 136,723 | | | — | | | 136,723 | | | | — | | | 264,054 | | | — | | | 264,054 | Corporate | | | — | | | 668,679 | | | — | | | 668,679 | | | | — | | | 913,577 | | | 43,518 | | | 957,095 | Municipal | | | — | | | 320,088 | | | — | | | 320,088 | | | | — | | | 645,756 | | | — | | | 645,756 | Total fixed income securities - available-for-sale | | $ | — | | $ | 1,760,515 | | $ | — | | $ | 1,760,515 | | | $ | — | | $ | 2,366,369 | | $ | 43,518 | | $ | 2,409,887 | Equity securities | | | 339,985 | | | 498 | | | — | | | 340,483 | | | | 613,712 | | | 64 | | | — | | | 613,776 | Total | | $ | 339,985 | | $ | 1,761,013 | | $ | — | | $ | 2,100,998 | | | $ | 613,712 | | $ | 2,366,433 | | $ | 43,518 | | $ | 3,023,663 |
*Non-agency asset-backed, commercial mortgage-backed and mortgage-backed | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
AsThe following table summarizes changes in the balance of December 31, 2019, we had $1.8 million of fixed incomeRegulation D private placement securities whose fair value was measured using significant unobservable inputs (Level 3). We did not own any Level 3 securities during 2018. Additionally, there were 0 securities transferred in or out of Levels 1,
2 or 3 during 2019 or 2018.
| | | | (in thousands) | | Level 3 Securities | Balance as of January 1, 2022 | | $ | 43,518 | Net realized and unrealized gains (losses) | | | | Included in net earnings as a part of: | | | | Net investment income | | | (693) | Net realized gains | | | (432) | Included in other comprehensive earnings | | | (7,291) | Total net realized and unrealized gains (losses) | | $ | (8,416) | Purchases | | | 21,261 | Transfers out of Level 3 | | | (1,097) | Balance as of December 31, 2022 | | $ | 55,266 | Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains | | $ | (432) | Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings | | $ | (7,291) |
The amortized cost and estimated fair value of fixed income securities at December 31, 2019,2022, by contractual maturity, are shown as follows: | | | | | | | | | | | | (in thousands) | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | Available-for-sale | | | | | | | | | Due in one year or less | | $ | 49,951 | | $ | 50,170 | | | $ | 332,951 | | $ | 331,761 | Due after one year through five years | | | 395,056 | | | 407,007 | | | | 916,676 | | | 873,530 | Due after five years through 10 years | | | 580,310 | | | 613,099 | | | | 522,104 | | | 474,025 | Due after 10 years | | | 255,321 | | | 267,775 | | | | 523,729 | | | 415,092 | Mtge/ABS/CMBS* | | | 634,640 | | | 645,035 | | | ABS/CMBS/MBS* | | | | 649,813 | | | 572,542 | Total available-for-sale | | $ | 1,915,278 | | $ | 1,983,086 | | | $ | 2,945,273 | | $ | 2,666,950 |
*Mortgage-backed, asset-backedAsset-backed, commercial mortgage-backed and commercial mortgage-backed securities Expected maturities may differ from contractual maturities due to call provisions on some existing securities. At December 31, 2019, the net unrealized gains of available-for-sale fixed income securities totaled $67.8 million pretax. At December 31, 2018, the net unrealized losses of available-for-sale fixed maturities securities totaled $16.0 million pretax. The following table is a scheduleamortized cost and fair value of amortized costsavailable-for-sale securities at December 31, 2022 and estimated fair values2021 are presented in the tables below. Amortized cost does not include the $20.2 million and $16.4 million of investments in fixed income securitiesaccrued interest receivable as of December 31, 20192022 and 2018:2021, respectively. | | | | | | | | | | | | | | 2019 | | Amortized | | | | | Gross Unrealized | | | | | | | | | | | | Available-for-sale | | | | | | | | | | | | | | U.S. government | | $ | 186,699 | | $ | 193,661 | | $ | 6,994 | | $ | (32) | | U.S. agency | | | 36,535 | | | 38,855 | | | 2,362 | | | (42) | | Non-U.S. government & agency | | | 7,333 | | | 7,628 | | | 295 | | | — | | Agency MBS | | | 411,808 | | | 420,165 | | | 8,920 | | | (563) | | ABS/CMBS/MBS* | | | 222,832 | | | 224,870 | | | 2,514 | | | (476) | | Corporate | | | 659,640 | | | 692,067 | | | 33,245 | | | (818) | | Municipal | | | 390,431 | | | 405,840 | | | 16,131 | | | (722) | | Total fixed income | | $ | 1,915,278 | | $ | 1,983,086 | | $ | 70,461 | | $ | (2,653) | |
*Non-agency asset-backed, commercial mortgage-backed and mortgage-backed
| | | | | | | | | | | | | | | | | | 2022 | | | | | | Allowance | | Gross | | Gross | | | | | | Amortized | | for Credit | | Unrealized | | Unrealized | | | | (in thousands) | | Cost | | Losses | | Gains | | Losses | | Fair Value | U.S. government | | $ | 462,884 | | $ | — | | $ | 8 | | $ | (8,871) | | $ | 454,021 | U.S. agency | | | 75,074 | | | — | | | 26 | | | (2,037) | | | 73,063 | Non-U.S. government & agency | | | 6,798 | | | — | | | — | | | (951) | | | 5,847 | Agency MBS | | | 373,687 | | | — | | | 336 | | | (42,217) | | | 331,806 | ABS/CMBS/MBS* | | | 276,126 | | | (8) | | | 62 | | | (35,444) | | | 240,736 | Corporate | | | 1,122,097 | | | (331) | | | 541 | | | (87,977) | | | 1,034,330 | Municipal | | | 628,607 | | | — | | | 1,265 | | | (102,725) | | | 527,147 | Total fixed income | | $ | 2,945,273 | | $ | (339) | | $ | 2,238 | | $ | (280,222) | | $ | 2,666,950 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | Amortized | | | | | Gross Unrealized | | | | | | 2021 | | | | | | Allowance | | Gross | | Gross | | | | | | | Amortized | | for Credit | | Unrealized | | Unrealized | | | | | | | | | | | | | | | Cost | | Losses | | Gains | | Losses | | Fair Value | Available-for-sale | | | | | | | | | | | | | | | U.S. government | | $ | 199,982 | | $ | 200,229 | | $ | 1,232 | | $ | (985) | | | $ | 127,752 | | $ | — | | $ | 6,846 | | $ | (44) | | $ | 134,554 | U.S. agency | | | 31,716 | | | 31,904 | | | 403 | | | (215) | | | | 30,403 | | | — | | | 2,374 | | | (17) | | | 32,760 | Non-U.S. government & agency | | | 8,170 | | | 7,639 | | | — | | | (531) | | | | 8,297 | | | — | | | 338 | | | (154) | | | 8,481 | Agency MBS | | | 402,992 | | | 395,253 | | | 1,709 | | | (9,448) | | | | 362,861 | | | — | | | 9,277 | | | (4,951) | | | 367,187 | ABS/CMBS/MBS* | | | 137,224 | | | 136,723 | | | 375 | | | (876) | | | | 264,273 | | | — | | | 2,120 | | | (2,339) | | | 264,054 | Corporate | | | 681,909 | | | 668,679 | | | 2,894 | | | (16,124) | | | | 925,394 | | | (441) | | | 37,247 | | | (5,105) | | | 957,095 | Municipal | | | 314,472 | | | 320,088 | | | 6,926 | | | (1,310) | | | | 627,287 | | | — | | | 22,750 | | | (4,281) | | | 645,756 | Total fixed income | | $ | 1,776,465 | | $ | 1,760,515 | | $ | 13,539 | | $ | (29,489) | | | $ | 2,346,267 | | $ | (441) | | $ | 80,952 | | $ | (16,891) | | $ | 2,409,887 |
*Non-agency asset-backed, commercial mortgage-backed and mortgage-backed | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
Asset-Backed, Commercial Mortgage-Backed and Mortgage-Backed Securities Gross unrealized losses in the collateralized securities bond portfolio decreased to $1.0 million in 2019 as interest rates declined during the year. NaNEighty-three percent of our collateralized securities carry the highest credit rating by one or more major rating agencies and continue to pay according to contractual terms.
For all fixed income securities at an unrealized loss at December 31, 2019,2022, we believe it is probable that we will receive all contractual payments in the form of principal and interest. In addition, we are not required to, nor do we intend to, sell these investments prior to recovering the entire amortized cost basis of each security, which may be at maturity. We do not consider these investments to be other-than-temporarily impaired at December 31, 2019. Corporate Bonds
Gross unrealized losses in the corporate bond portfolio fell to $0.8 million in 2019 from $16.1 million at the end of 2018 as interest rates and credit spreads declined during the year. The corporate bond portfolio has an overall rating of BBB+.
Municipal Bonds As of December 31, 2019, municipal bonds totaled $405.8 million with gross unrealized losses of $0.7 million, down from $1.3 million the previous year. As of December 31, 2019,2022, approximately 4246 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 5854 percent were revenue based. NaNEighty-eight percent of our municipal fixed income securities were rated AA or better while 99 percent were rated A or better. Equity SecuritiesALLOWANCE FOR CREDIT LOSSES AND UNREALIZED LOSSES ON FIXED INCOME SECURITIES
Our equity portfolio consists of common stocks and exchange traded funds (ETF). Gross unrealizedA reversible allowance for credit losses is required to be recognized on available-for-sale fixed income securities. Available-for-sale securities in the equityfixed income portfolio decreased $8.1 millionare subjected to $2.0 millionseveral criteria to determine if those securities should be included in 2019 as equity markets improved during the year.allowance for expected credit loss evaluation, including:
| ● | Changes in technology that may impair the earnings potential of the investment, |
Impairment Analysis
| ● | The discontinuance of a segment of business that may affect future earnings potential, |
| ● | Reduction of or non-payment of interest and/or principal, |
| ● | Specific concerns related to the issuer’s industry or geographic area of operation, |
| ● | Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and |
| ● | Downgrades in credit quality by a major rating agency. |
Under current accounting standards,If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an OTTI write-downavailable-for-sale security, or if any of debtthe 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, wheredefault 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, is triggered by circumstances where: (1)cost. As of December 31, 2022, the discounted cash flow analysis resulted in an entity hasallowance for credit losses on 14 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:
| | | | | | | (in thousands) | | 2022 | | 2021 | Beginning balance | | $ | 441 | | $ | 397 | Increase to allowance from securities for which credit losses were not previously recorded | | | 337 | | | 4 | Reduction from securities sold during the period | | | (671) | | | (4) | Net increase (decrease) from securities that had an allowance at the beginning of the period | | | 232 | | | 44 | Ending balance | | $ | 339 | | $ | 441 |
Net realized gains included $0.1 million of losses on fixed income securities for which we no longer had the intent to sell a security, (2) it is more likely than not thathold until recovery and for which the entity will be required to sell the security before recovery of its amortized cost basis or (3)was written down to fair value. No such losses were recognized in 2021. All fixed income securities continue to pay the entity does not expect toexpected coupon payments. We believe we will recover the entire amortized cost basis of the security. Ifavailable-for-sale securities that remain in an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the creditunrealized loss which is recognized in net earnings, and the amount related to all other factors, which is recognized in other comprehensive income.position. As part of our evaluationDecember 31, 2022, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,473 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $280.2 million in associated unrealized losses represents 9.5 percent of whether particularthe fixed income portfolio’s cost basis and 8.6 percent of total invested assets. Isolated to these securities, are other-than-temporarily impaired,unrealized losses at the end of 2022 increased compared to the previous year due to increasing interest rates which reduce the fair value of fixed income securities. Of the total 1,473 securities, 518 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, 2022 and 2021. All fixed income securities continue to pay the expected coupon payments and we consider our intent to sell a security (which is determined on a security-by-security basis) and whether it is more likely than notbelieve we will be requiredrecover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position. to sell the security before the recovery of our amortized cost basis. Significant changes in these factors could result in a charge to net earnings for impairment losses. Impairment losses result in a reduction of the underlying investment’s cost basis.
The following table is also used as part of our impairment analysis and displays the total value of debt securities that were in an unrealized loss position as of December 31, 2019, and December 31, 2018. The table segregates the securities based on type, noting the fair value, amortized cost and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | December 31, 2022 | | December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | 12 Mos. | | | | | | | | | 12 Mos. | | | | (in thousands) | | < 12 Mos. | | & Greater | | Total | | < 12 Mos. | | & Greater | | Total | | | < 12 Mos. | | & Greater | | Total | | < 12 Mos. | | & Greater | | Total | U.S. government | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 2,505 | | $ | 8,463 | | $ | 10,968 | | $ | 7,249 | | $ | 76,073 | | $ | 83,322 | | | $ | 399,361 | | $ | 8,828 | | $ | 408,189 | | $ | 2,942 | | $ | — | | $ | 2,942 | Amortized cost | | | 2,506 | | | 8,494 | | | 11,000 | | | 7,270 | | | 77,037 | | | 84,307 | | | | 407,340 | | | 9,720 | | | 417,060 | | | 2,986 | | | — | | | 2,986 | Unrealized loss | | $ | (1) | | $ | (31) | | $ | (32) | | $ | (21) | | $ | (964) | | $ | (985) | | | $ | (7,979) | | $ | (892) | | $ | (8,871) | | $ | (44) | | $ | — | | $ | (44) | | | | | | | | | | | | | | | | | | | | | | U.S. agency | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 6,794 | | $ | — | | $ | 6,794 | | $ | — | | $ | 8,843 | | $ | 8,843 | | | $ | 32,987 | | $ | 2,170 | | $ | 35,157 | | $ | 1,498 | | $ | — | | $ | 1,498 | Amortized cost | | | 6,836 | | | — | | | 6,836 | | | — | | | 9,058 | | | 9,058 | | | | 34,627 | | | 2,567 | | | 37,194 | | | 1,515 | | | — | | | 1,515 | Unrealized loss | | $ | (42) | | $ | — | | $ | (42) | | $ | — | | $ | (215) | | $ | (215) | | | $ | (1,640) | | $ | (397) | | $ | (2,037) | | $ | (17) | | $ | — | | $ | (17) | | | | | | | | | | | | | | | | | | | | | | Non-U.S. government & agency | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | — | | $ | — | | $ | — | | $ | 5,432 | | $ | 2,207 | | $ | 7,639 | | | $ | 3,626 | | $ | 2,221 | | $ | 5,847 | | $ | 4,346 | | $ | — | | $ | 4,346 | Amortized cost | | | — | | | — | | | — | | | 5,571 | | | 2,599 | | | 8,170 | | | | 3,798 | | | 3,000 | | | 6,798 | | | 4,500 | | | — | | | 4,500 | Unrealized loss | | $ | — | | $ | — | | $ | — | | $ | (139) | | $ | (392) | | $ | (531) | | | $ | (172) | | $ | (779) | | $ | (951) | | $ | (154) | | $ | — | | $ | (154) | | | | | | | | | | | | | | | | | | | | | | Agency MBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 21,548 | | $ | 41,718 | | $ | 63,266 | | $ | 25,345 | | $ | 261,325 | | $ | 286,670 | | | $ | 197,252 | | $ | 117,851 | | $ | 315,103 | | $ | 102,145 | | $ | 62,669 | | $ | 164,814 | Amortized cost | | | 21,664 | | | 42,165 | | | 63,829 | | | 25,486 | | | 270,632 | | | 296,118 | | | | 212,776 | | | 144,544 | | | 357,320 | | | 104,336 | | | 65,429 | | | 169,765 | Unrealized loss | | $ | (116) | | $ | (447) | | $ | (563) | | $ | (141) | | $ | (9,307) | | $ | (9,448) | | | $ | (15,524) | | $ | (26,693) | | $ | (42,217) | | $ | (2,191) | | $ | (2,760) | | $ | (4,951) | | | | | | | | | | | | | | | | | | | | | | ABS/CMBS/MBS* | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 74,968 | | $ | 18,036 | | $ | 93,004 | | $ | 46,918 | | $ | 32,137 | | $ | 79,055 | | | $ | 96,754 | | $ | 136,149 | | $ | 232,903 | | $ | 150,997 | | $ | 3,935 | | $ | 154,932 | Amortized cost | | | 75,332 | | | 18,148 | | | 93,480 | | | 47,146 | | | 32,785 | | | 79,931 | | | | 104,724 | | | 163,623 | | | 268,347 | | | 153,235 | | | 4,036 | | | 157,271 | Unrealized loss | | $ | (364) | | $ | (112) | | $ | (476) | | $ | (228) | | $ | (648) | | $ | (876) | | | $ | (7,970) | | $ | (27,474) | | $ | (35,444) | | $ | (2,238) | | $ | (101) | | $ | (2,339) | | | | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 16,478 | | $ | 9,348 | | $ | 25,826 | | $ | 306,177 | | $ | 147,751 | | $ | 453,928 | | | $ | 660,830 | | $ | 323,337 | | $ | 984,167 | | $ | 217,791 | | $ | 53,818 | | $ | 271,609 | Amortized cost | | | 16,950 | | | 9,694 | | | 26,644 | | | 315,428 | | | 154,624 | | | 470,052 | | | | 697,437 | | | 374,707 | | | 1,072,144 | | | 221,010 | | | 55,704 | | | 276,714 | Unrealized loss | | $ | (472) | | $ | (346) | | $ | (818) | | $ | (9,251) | | $ | (6,873) | | $ | (16,124) | | | $ | (36,607) | | $ | (51,370) | | $ | (87,977) | | $ | (3,219) | | $ | (1,886) | | $ | (5,105) | | | | | | | | | | | | | | | | | | | | | | Municipal | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 47,018 | | $ | — | | $ | 47,018 | | $ | 6,036 | | $ | 55,681 | | $ | 61,717 | | | $ | 228,827 | | $ | 204,324 | | $ | 433,151 | | $ | 162,998 | | $ | 15,037 | | $ | 178,035 | Amortized cost | | | 47,740 | | | — | | | 47,740 | | | 6,052 | | | 56,975 | | | 63,027 | | | | 255,240 | | | 280,636 | | | 535,876 | | | 166,602 | | | 15,714 | | | 182,316 | Unrealized loss | | $ | (722) | | $ | — | | $ | (722) | | $ | (16) | | $ | (1,294) | | $ | (1,310) | | | $ | (26,413) | | $ | (76,312) | | $ | (102,725) | | $ | (3,604) | | $ | (677) | | $ | (4,281) | | | | | | | | | | | | | | | | | | | | | | Total fixed income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | $ | 169,311 | | $ | 77,565 | | $ | 246,876 | | $ | 397,157 | | $ | 584,017 | | $ | 981,174 | | | $ | 1,619,637 | | $ | 794,880 | | $ | 2,414,517 | | $ | 642,717 | | $ | 135,459 | | $ | 778,176 | Amortized cost | | | 171,028 | | | 78,501 | | | 249,529 | | | 406,953 | | | 603,710 | | | 1,010,663 | | | | 1,715,942 | | | 978,797 | | | 2,694,739 | | | 654,184 | | | 140,883 | | | 795,067 | Unrealized loss | | $ | (1,717) | | $ | (936) | | $ | (2,653) | | $ | (9,796) | | $ | (19,693) | | $ | (29,489) | | | $ | (96,305) | | $ | (183,917) | | $ | (280,222) | | $ | (11,467) | | $ | (5,424) | | $ | (16,891) | | | | | | | | | | | | | | | | | | | | | |
*Non-agency asset-backed and commercial mortgage-backed
The fixed income portfolio contained 154 securities in an unrealized loss position as of December 31, 2019. Of these 154 securities, 65 have been in an unrealized loss position for 12 consecutive months or longer and represent $0.9 million in unrealized losses. All fixed income securities continue to pay the expected coupon payments under the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for which we are not more
likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment is recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of a high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. Key factors that we consider in the evaluation of credit quality include:
* | ● | Changes in technology that may impair the earnings potential of the investment, |
| ● | The discontinuance of a segment of business that may affect future earnings potential, |
| ● | Reduction or elimination of dividends, |
| ● | Specific concerns related to the issuer’s industry or geographic area of operation, |
| ● | Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratiosNon-agency asset-backed, commercial mortgage-backed and |
| ● | Downgrades in credit quality by a major rating agency. mortgage-backed securities |
Based on our analysis, we concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2019 and 2018, but were related to changes in interest rates and other related factors. There were 0 losses associated with OTTI in 2019. There were $0.2 million and $2.6 million in losses associated with OTTI of securities in 2018 and 2017, respectively, that we no longer had the intent to hold.
OTHER INVESTED ASSETS
Unrealized Gains and Losses on Equity Securities
Net unrealized gains recognized during 2019 on equity securities still held as of December 31, 2019 were $92.8 million. Net unrealized losses recognized during 2018 on equity securities still held as of December 31, 2018 were $28.7 million. Net unrealized gains recognized during 2017 on equity securities still held as of December 31, 2017 were $47.2 million.
Other Invested Assets
We had $70.4$47.9 million of other invested assets at December 31, 2019,2022, compared to $51.5$50.5 million at the end of 2018.2021. Other invested assets include investments in low incomelow-income housing tax credit (LIHTC) partnerships, membership stock in the Federal Home Loan Bank of Chicago (FHLBC) and investments in private funds. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC 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 $23.3$13.5 million at December 31, 2019,2022, compared to $20.3$16.6 million at December 31, 2018,2021, and recognized a total tax benefit of $2.5$3.4 million during 2019,2022, compared to $2.2$3.6 million during 20182021 and $2.4$3.5 million during 2017.2020. Our unfunded commitment for our LIHTC investments totaled $8.6$1.3 million at December 31, 20192022 and will be paid out in installments through 2035. Our investments in private funds totaled $46.0$28.4 million at December 31, 2019,2022, compared to $30.3$28.6 million at December 31, 2018,2021, and we had $15.5$4.9 million of associated unfunded commitments at December 31, 2019.2022. Our interest in these investmentsprivate funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities. An initial public offering would allow for the transfer of interest in some situations, whileentities and the timed dissolution of the partnershippartnerships would trigger redemption in others.redemption. Restricted Assets Restricted Assets
As of December 31, 2019, $15.52022, $57.3 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. AsOn November 10, 2021 RLI Insurance Company borrowed $50.0 million from the FHLBC, which was outstanding as of and during year ended December 31, 2019, there were 0 outstanding borrowings with the FHLBC.2022. As of December 31, 2019,2022, fixed income securities with a carrying value of $69.6$88.6 million were on deposit with regulatory authorities as required by law. 3. POLICY ACQUISITION COSTS | POLICY ACQUISITION COSTS |
Policy acquisition costs deferred and amortized to income for the years ended December 31 are summarized as follows: | | | | | | | | | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | Deferred policy acquisition costs (DAC), beginning of year | | $ | 84,934 | | $ | 77,716 | | $ | 73,147 | | | $ | 103,553 | | $ | 88,425 | | $ | 85,044 | Deferred: | | | | | | | | | | | | | | | | | | | | Direct commissions | | $ | 185,164 | | $ | 175,697 | | $ | 157,723 | | | $ | 277,553 | | $ | 236,145 | | $ | 200,917 | Premium taxes | | | 14,395 | | | 12,654 | | | 11,651 | | | | 18,616 | | | 17,012 | | | 14,783 | Ceding commissions | | | (31,140) | | | (22,190) | | | (18,096) | | | | (39,458) | | | (47,592) | | | (42,115) | Net deferred | | $ | 168,419 | | $ | 166,161 | | $ | 151,278 | | | $ | 256,711 | | $ | 205,565 | | $ | 173,585 | Amortized | | | 168,309 | | | 158,943 | | | 146,709 | | | | 232,405 | | | 190,437 | | | 170,204 | DAC, end of year | | $ | 85,044 | | $ | 84,934 | | $ | 77,716 | | | $ | 127,859 | | $ | 103,553 | | $ | 88,425 | | | | | | | | | | | | | | | | | | | | | Policy acquisition costs: | | | | | | | | | | | | | | | | | | | | Amortized to expense - DAC | | $ | 168,309 | | $ | 158,943 | | $ | 146,709 | | | $ | 232,405 | | $ | 190,437 | | $ | 170,204 | Period costs: | | | | | | | | | | | | | | | | | | | | Ceding commission - contingent | | | (3,034) | | | (2,241) | | | (3,575) | | | | (5,882) | | | (4,303) | | | (4,053) | Other underwriting expenses | | | 123,422 | | | 111,036 | | | 109,381 | | | | 143,109 | | | 131,334 | | | 120,287 | Total policy acquisition costs | | $ | 288,697 | | $ | 267,738 | | $ | 252,515 | | | $ | 369,632 | | $ | 317,468 | | $ | 286,438 |
As of December 31, 2019,2022, outstanding debt balances totaled $149.3$199.9 million, net of unamortized discount and debt issuance costs, all of which were our long-term senior notes.costs. On October 2, 2013, we completed a public debt offering, issuing $150.0 million in senior notes maturing September 15, 2023, and paying interest semi-annually at the rate of 4.875 percent. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. The amount of the discount is being charged to income over the life of the debt on an effective-yieldeffective yield basis. The estimated faircarrying value forof the senior note was $161.2$149.9 million and the estimated fair value was $149.9 million as of December 31, 2019.2022. The fair value of our long-term debt is based on the limited observable prices that reflect thinly traded securities and is therefore classified as a Level 2 liability within the fair value hierarchy. On November 10, 2021, RLI Ins. borrowed $50.0 million from the Federal Home Loan Bank of Chicago. The borrowing matures on November 10, 2023 and has an option to pay off the debt early beginning on November 10, 2022. Interest is paid monthly at an annualized rate of 0.84 percent. We paid $7.3$7.7 million of interest on our senior notesdebt in each of the last three years.2022 and $7.3 million in 2021 and 2020. The average rate on debt was 3.89 in 2022, 4.77 percent in 2021 and 4.91 percent in 2019, 2018 and 2017.2020. We maintain a revolving line of credit with JP Morgan Chase Bank N.A.,of Montreal, Chicago Branch, which permits the Company to borrow up to an aggregate principal amount of $60.0 million. This facility was entered into during 2020 and replaced the previous $50.0 million.million facility with JP Morgan Chase Bank N.A. Under certain conditions, the line may be increased up to an aggregate principal amount of $75.0$120.0 million. This facility has a two-yearthree-year term that expires on May 24, 2020.March 27, 2023. As of and during the years ended December 31, 2019, 20182022, 2021 and 2017, 02020, no amounts were outstanding on these facilities. In the ordinary course of business, our insurance subsidiaries assume and cede premiums and selected insured risks with other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk (knownknown as facultative reinsurance).reinsurance. In addition, there are several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. The arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, we monitor the concentration of risks exposed to catastrophic events. Through the purchase of reinsurance, we also generally limit our net loss on any individual risk to a maximum of $3.0$9.7 million, although retentions can vary. Premiums written and earned along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows: | | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | WRITTEN | | | | | | | | | | Direct | | $ | 1,531,656 | | $ | 1,313,093 | | $ | 1,107,303 | Reinsurance assumed | | | 33,830 | | | 34,261 | | | 29,129 | Reinsurance ceded | | | (323,950) | | | (289,821) | | | (244,344) | Net | | $ | 1,241,536 | | $ | 1,057,533 | | $ | 892,088 | | | | | | | | | | | EARNED | | | | | | | | | | Direct | | $ | 1,425,165 | | $ | 1,222,346 | | $ | 1,062,608 | Reinsurance assumed | | | 35,680 | | | 30,950 | | | 27,651 | Reinsurance ceded | | | (316,409) | | | (272,393) | | | (224,512) | Net | | $ | 1,144,436 | | $ | 980,903 | | $ | 865,747 | | | | | | | | | | | LOSSES AND SETTLEMENT EXPENSES INCURRED | | | | | | | | | | Direct | | $ | 776,448 | | $ | 703,903 | | $ | 608,638 | Reinsurance assumed | | | 22,813 | | | 18,087 | | | 18,783 | Reinsurance ceded | | | (284,885) | | | (265,388) | | | (184,537) | Net | | $ | 514,376 | | $ | 456,602 | | $ | 442,884 |
More than 93 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better by AM Best and S&P rating services. The following table displays net reinsurance balances recoverable, after consideration of collateral, from our top reinsurers as of December 31, 2022. 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 2022. | | | | | | | | | | | | | | | | | | | | | | Net Reinsurer | | | | Ceded | | | | | | AM Best | | S&P | | Exposure as of | | Percent of | | Premiums | | Percent of | | (dollars in thousands) | | Rating | | Rating | | 12/31/2022 | | Total | | Written | | Total | | Munich Re / HSB | | A+, Superior | | AA-, Very Strong | | $ | 110,142 | | 13.6 | % | $ | 35,040 | | 10.8 | % | Renaissance Re | | A+, Superior | | A+, Strong | | | 82,929 | | 10.3 | % | | 22,865 | | 7.1 | % | Nationwide Mutual | | A+, Superior | | A+, Strong | | | 45,492 | | 5.6 | % | | 21,493 | | 6.6 | % | Aspen UK Ltd. | | A, Excellent | | A-, Strong | | | 43,632 | | 5.4 | % | | 11,021 | | 3.4 | % | Safety National | | A++, Superior | | A+, Strong | | | 42,218 | | 5.2 | % | | 14,971 | | 4.6 | % | Endurance Re | | A+, Superior | | A+, Strong | | | 40,979 | | 5.1 | % | | 5,570 | | 1.7 | % | Berkley Insurance Co. | | A+, Superior | | A+, Strong | | | 36,105 | | 4.5 | % | | 8,931 | | 2.8 | % | Lloyds of London | | A, Excellent | | A+, Strong | | | 34,737 | | 4.3 | % | | 26,677 | | 8.2 | % | Partner Re | | A+, Superior | | A+, Strong | | | 34,322 | | 4.3 | % | | 15,363 | | 4.7 | % | Hannover Ruckversicherung | | A+, Superior | | AA-, Very Strong | | | 33,507 | | 4.2 | % | | 16,746 | | 5.2 | % | Scor Re | | A+, Superior | | A+, Strong | | | 32,153 | | 4.0 | % | | 6,048 | | 1.9 | % | Toa Re | | A, Excellent | | A+, Strong | | | 27,278 | | 3.4 | % | | 13,092 | | 4.0 | % | Liberty Mutual | | A, Excellent | | A, Strong | | | 24,665 | | 3.1 | % | | 6,140 | | 1.9 | % | Odyssey America Re | | A, Excellent | | A, Strong | | | 23,945 | | 3.0 | % | | 9,049 | | 2.8 | % | All other reinsurers* | | | | | | | 194,683 | | 24.0 | % | | 110,944 | | 34.3 | % | Total ceded exposure | | | | | | $ | 806,787 | | 100.0 | % | $ | 323,950 | | 100.0 | % |
* | All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of shareholders’ equity. |
The allowances for uncollectible amounts on paid and unpaid recoverables were $16.1 million and $11.3 million, respectively, at December 31, 2022. At December 31, 2021, the amounts were $16.1 million and $11.2 million, respectively. Changes in the allowances during 2022 were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs were applied to the allowances in 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. 6. | HISTORICAL LOSS AND LAE DEVELOPMENT |
The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the years 2022, 2021 and 2020: | | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Unpaid losses and LAE at beginning of year: | | | | | | | | | | Gross | | $ | 2,043,555 | | $ | 1,750,049 | | $ | 1,574,352 | Ceded | | | (608,086) | | | (443,729) | | | (384,517) | Net | | $ | 1,435,469 | | $ | 1,306,320 | | $ | 1,189,835 | | | | | | | | | | | Adoption impact of ASU 2016-13 on reinsurance balances recoverable | | $ | — | | $ | — | | $ | (1,345) | | | | | | | | | | | Increase (decrease) in incurred losses and LAE: | | | | | | | | | | Current accident year | | $ | 636,955 | | $ | 582,065 | | $ | 543,937 | Prior accident years | | | (122,579) | | | (125,463) | | | (101,053) | Total incurred | | $ | 514,376 | | $ | 456,602 | | $ | 442,884 | | | | | | | | | | | Loss and LAE payments for claims incurred: | | | | | | | | | | Current accident year | | $ | (97,525) | | $ | (101,590) | | $ | (93,077) | Prior accident year | | | (276,772) | | | (225,863) | | | (231,977) | Total paid | | $ | (374,297) | | $ | (327,453) | | $ | (325,054) | | | | | | | | | | | Net unpaid losses and LAE at end of year | | $ | 1,575,548 | | $ | 1,435,469 | | $ | 1,306,320 | | | | | | | | | | | Unpaid losses and LAE at end of year: | | | | | | | | | | Gross | | $ | 2,315,637 | | $ | 2,043,555 | | $ | 1,750,049 | Ceded | | | (740,089) | | | (608,086) | | | (443,729) | Net | | $ | 1,575,548 | | $ | 1,435,469 | | $ | 1,306,320 |
Premiums writtenWe adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including reinsurance balances recoverable, to be presented at the net amount expected to be collected. We previously maintained an allowance for uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we released $1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes have and earned along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:
| | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | WRITTEN | | | | | | | | | | | Direct | | $ | 1,039,955 | | $ | 934,913 | | $ | 848,153 | | Reinsurance assumed | | | 25,047 | | | 48,303 | | | 37,159 | | Reinsurance ceded | | | (204,665) | | | (160,041) | | | (135,458) | | Net | | $ | 860,337 | | $ | 823,175 | | $ | 749,854 | | | | | | | | | | | | | EARNED | | | | | | | | | | | Direct | | $ | 981,121 | | $ | 896,234 | | $ | 835,118 | | Reinsurance assumed | | | 40,173 | | | 41,926 | | | 32,521 | | Reinsurance ceded | | | (182,183) | | | (146,794) | | | (129,702) | | Net | | $ | 839,111 | | $ | 791,366 | | $ | 737,937 | | | | | | | | | | | | | LOSSES AND SETTLEMENT EXPENSES INCURRED | | | | | | | | | | | Direct | | $ | 521,055 | | $ | 560,421 | | $ | 486,986 | | Reinsurance assumed | | | 21,951 | | | 20,376 | | | 16,072 | | Reinsurance ceded | | | (129,590) | | | (152,604) | | | (101,474) | | Net | | $ | 413,416 | | $ | 428,193 | | $ | 401,584 | |
At December 31, 2019, we had unearned reinsurance premiums and recoverables on paid and unpaid losses and settlement expenses totaling $469.2 million, net of collateral. More than 94 percent of our reinsurance recoverables are due from companies with financial strength ratings of A or better by AM Best and S&P rating services.ongoing modifications will continue to be recorded.
The following table displays net reinsurance balances recoverable, after consideration of collateral, from our top reinsurers as of December 31, 2019. 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 2019.
| | | | | | | | | | | | | | | | | | | | | | | Net Reinsurer | | | | | Ceded | | | | | | AM Best | | S & P | | Exposure as of | | Percent of | | | Premiums | | Percent of | (dollars in thousands) | | Rating | | Rating | | 12/31/2019 | | Total | | | Written | | Total | Munich Re / HSB | | A+, Superior | | AA-, Very Strong | | $ | 68,368 | | 14.6 | % | | $ | 22,536 | | 11.0 | % | Swiss Re / Westport Ins. Corp. | | A+, Superior | | AA-, Very Strong | | | 34,777 | | 7.4 | % | | | 2,801 | | 1.4 | % | Endurance Re | | A+, Superior | | A+, Strong | | | 32,233 | | 6.9 | % | | | 9,173 | | 4.5 | % | Aspen UK Ltd. | | A, Excellent | | A, Strong | | | 31,622 | | 6.7 | % | | | 8,270 | | 4.0 | % | Berkley Insurance Co. | | A+, Superior | | A+, Strong | | | 28,798 | | 6.1 | % | | | 8,667 | | 4.2 | % | Renaissance Re | | A+, Superior | | A+, Strong | | | 25,841 | | 5.5 | % | | | 15,754 | | 7.7 | % | Hannover Ruckversicherung | | A+, Superior | | AA-, Very Strong | | | 24,758 | | 5.3 | % | | | 12,491 | | 6.1 | % | Toa Re | | A, Excellent | | A+, Strong | | | 23,734 | | 5.1 | % | | | 7,757 | | 3.8 | % | Transatlantic Re | | A+, Superior | | A+, Strong | | | 22,873 | | 4.9 | % | | | 6,635 | | 3.2 | % | General Re | | A++, Superior | | AA+, Very Strong | | | 19,736 | | 4.2 | % | | | 6,240 | | 3.0 | % | Liberty Mutual | | A, Excellent | | A, Strong | | | 19,171 | | 4.1 | % | | | 6,696 | | 3.3 | % | All other reinsurers* | | | | | | | 137,240 | | 29.2 | % | | | 97,645 | | 47.8 | % | Total ceded exposure | | | | | | $ | 469,151 | | 100.0 | % | | $ | 204,665 | | 100.0 | % |
*All other reinsurance balances recoverable, when considered by individual reinsurer, are less than 2 percent of shareholders’ equity.
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 their annual financial statements and SEC filings for those 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 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 the existing 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 as detailed above and if needed, an additional allowance is recognized and income charged. The amounts of allowances for uncollectible amounts on paid and unpaid recoverables were $15.7 million and $9.4 million, respectively, at December 31, 2019. At December 31, 2018, the amounts were $16.1 million and $9.8 million, respectively. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.
6.HISTORICAL LOSS AND LAE DEVELOPMENT
The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the years 2019, 2018 and 2017:
| | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Unpaid losses and LAE at beginning of year: | | | | | | | | | | | Gross | | $ | 1,461,348 | | $ | 1,271,503 | | $ | 1,139,337 | | Ceded | | | (364,999) | | | (301,991) | | | (288,224) | | Net | | $ | 1,096,349 | | $ | 969,512 | | $ | 851,113 | | | | | | | | | | | | | Increase (decrease) in incurred losses and LAE: | | | | | | | | | | | Current accident year | | $ | 488,700 | | $ | 478,143 | | $ | 440,452 | | Prior accident years | | | (75,284) | | | (49,950) | | | (38,868) | | Total incurred | | $ | 413,416 | | $ | 428,193 | | $ | 401,584 | | | | | | | | | | | | | Loss and LAE payments for claims incurred: | | | | | | | | | | | Current accident year | | $ | (80,055) | | $ | (76,050) | | $ | (73,392) | | Prior accident year | | | (239,875) | | | (225,306) | | | (209,793) | | Total paid | | $ | (319,930) | | $ | (301,356) | | $ | (283,185) | | | | | | | | | | | | | Net unpaid losses and LAE at end of year | | $ | 1,189,835 | | $ | 1,096,349 | | $ | 969,512 | | | | | | | | | | | | | Unpaid losses and LAE at end of year: | �� | | | | | | | | | | Gross | | $ | 1,574,352 | | $ | 1,461,348 | | $ | 1,271,503 | | Ceded | | | (384,517) | | | (364,999) | | | (301,991) | | Net | | $ | 1,189,835 | | $ | 1,096,349 | | $ | 969,512 | |
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 small 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 systematic 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, 2019,2022, 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, 2019.2022. 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, 20102013 to 20182021 is presented as unaudited required supplementary information. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Primary Occurrence | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2013 | | $ | 80,823 | | $ | 67,297 | | $ | 62,882 | | $ | 60,329 | | $ | 60,162 | | $ | 59,556 | | $ | 59,116 | | $ | 57,106 | | $ | 57,519 | | $ | 58,434 | | $ | 1,690 | | 4,326 | 2014 | | | | | | 88,092 | | | 79,497 | | | 71,592 | | | 67,237 | | | 66,389 | | | 66,702 | | | 65,636 | | | 63,727 | | | 64,449 | | | 2,623 | | 4,298 | 2015 | | | | | | | | | 94,835 | | | 84,975 | | | 83,579 | | | 78,675 | | | 76,398 | | | 75,470 | | | 75,438 | | | 77,110 | | | 4,022 | | 4,408 | 2016 | | | | | | | | | | | | 101,950 | | | 96,753 | | | 90,611 | | | 85,449 | | | 83,374 | | | 79,440 | | | 77,729 | | | 6,700 | | 4,332 | 2017 | | | | | | | | | | | | | | | 119,741 | | | 111,391 | | | 102,583 | | | 95,513 | | | 90,759 | | | 90,344 | | | 10,770 | | 4,529 | 2018 | | | | | | | | | | | | | | | | | | 141,513 | | | 130,281 | | | 125,731 | | | 115,076 | | | 114,414 | | | 21,681 | | 4,873 | 2019 | | | | | | | | | | | | | | | | | | | | | 146,011 | | | 135,209 | | | 120,570 | | | 109,051 | | | 38,075 | | 5,273 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 145,171 | | | 137,439 | | | 122,785 | | | 60,440 | | 4,603 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 142,797 | | | 128,483 | | | 81,085 | | 4,368 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 155,203 | | | 119,846 | | 3,856 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 998,002 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | For the Years Ended December 31, | | | | | | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2013 | | $ | 6,334 | | $ | 13,021 | | $ | 22,366 | | $ | 34,786 | | $ | 40,609 | | $ | 45,753 | | $ | 47,783 | | $ | 49,411 | | $ | 50,597 | | $ | 53,375 | | | | | | 2014 | | | | | | 11,436 | | | 18,771 | | | 29,545 | | | 40,270 | | | 47,343 | | | 52,387 | | | 55,965 | | | 56,784 | | | 58,361 | | | | | | 2015 | | | | | | | | | 10,157 | | | 19,902 | | | 33,020 | | | 45,056 | | | 54,270 | | | 58,866 | | | 62,997 | | | 68,650 | | | | | | 2016 | | | | | | | | | | | | 10,142 | | | 24,186 | | | 35,764 | | | 48,042 | | | 56,152 | | | 60,349 | | | 65,517 | | | | | | 2017 | | | | | | | | | | | | | | | 13,154 | | | 25,933 | | | 38,783 | | | 52,823 | | | 62,236 | | | 71,419 | | | | | | 2018 | | | | | | | | | | | | | | | | | | 15,066 | | | 32,365 | | | 48,424 | | | 63,980 | | | 78,103 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 15,698 | | | 30,673 | | | 41,911 | | | 57,750 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 17,096 | | | 30,596 | | | 45,267 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 14,428 | | | 29,633 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17,714 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 545,789 | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | 9,314 | | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 461,527 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Primary Occurrence | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | 2010 | | $ | 87,875 | $ | 96,582 | $ | 93,589 | $ | 88,820 | $ | 85,034 | $ | 80,289 | $ | 78,685 | $ | 78,991 | $ | 80,216 | $ | 79,656 | | $ | 1,922 | | 6,128 | 2011 | | | | | 91,139 | | 98,428 | | 94,145 | | 89,622 | | 86,342 | | 83,181 | | 82,193 | | 82,248 | | 81,579 | | | 2,546 | | 5,862 | 2012 | | | | | | | 91,807 | | 78,406 | | 65,893 | | 61,072 | | 59,028 | | 59,488 | | 60,328 | | 60,465 | | | 2,922 | | 5,179 | 2013 | | | | | | | | | 80,823 | | 67,297 | | 62,882 | | 60,329 | | 60,162 | | 59,556 | | 59,116 | | | 4,917 | | 4,307 | 2014 | | | | | | | | | | | 88,092 | | 79,497 | | 71,592 | | 67,237 | | 66,389 | | 66,702 | | | 8,251 | | 4,266 | 2015 | | | | | | | | | | | | | 94,835 | | 84,975 | | 83,579 | | 78,675 | | 76,398 | | | 14,891 | | 4,362 | 2016 | | | | | | | | | | | | | | | 101,950 | | 96,753 | | 90,611 | | 85,449 | | | 24,712 | | 4,240 | 2017 | | | | | | | | | | | | | | | | | 119,741 | | 111,391 | | 102,583 | | | 46,557 | | 4,336 | 2018 | | | | | | | | | | | | | | | | | | | 141,513 | | 130,281 | | | 79,489 | | 4,490 | 2019 | | | | | | | | | | | | | | | | | | | | | 146,011 | | | 119,051 | | 4,193 | | | | | | | | | | | | | | | | | | | | Total | $ | 888,240 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | 2010 | | $ | 2,587 | $ | 13,025 | $ | 29,312 | $ | 44,051 | $ | 55,992 | $ | 61,929 | $ | 66,399 | $ | 69,514 | $ | 73,318 | $ | 75,007 | | | | | | 2011 | | | | | 5,924 | | 17,124 | | 32,978 | | 48,822 | | 60,769 | | 67,358 | | 71,413 | | 74,814 | | 76,318 | | | | | | 2012 | | | | | | | 5,897 | | 14,539 | | 23,889 | | 33,822 | | 43,276 | | 47,970 | | 51,611 | | 54,391 | | | | | | 2013 | | | | | | | | | 6,334 | | 13,021 | | 22,366 | | 34,786 | | 40,609 | | 45,753 | | 47,783 | | | | | | 2014 | | | | | | | | | | | 11,436 | | 18,771 | | 29,545 | | 40,270 | | 47,343 | | 52,387 | | | | | | 2015 | | | | | | | | | | | | | 10,157 | | 19,902 | | 33,020 | | 45,056 | | 54,270 | | | | | | 2016 | | | | | | | | | | | | | | | 10,142 | | 24,186 | | 35,764 | | 48,042 | | | | | | 2017 | | | | | | | | | | | | | | | | | 13,154 | | 25,933 | | 38,783 | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 15,066 | | 32,365 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 15,698 | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 495,044 | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 10,714 | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 403,910 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 10.8 | % | 13.2 | % | 16.3 | % | 17.4 | % | 13.0 | % | 7.9 | % | 5.0 | % | 4.2 | % | 3.3 | % | 2.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 13.3% | | | 13.3% | | | 14.4% | | | 16.1% | | | 11.0% | | | 7.6% | | | 5.3% | | | 3.8% | | | 2.2% | | | 4.8% | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Excess Occurrence | Casualty - Excess Occurrence | | | | | | | | Casualty - Excess Occurrence | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except number of claims) | (in thousands, except number of claims) | | | | | | | | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2010 | | $ | 29,314 | $ | 24,244 | $ | 22,111 | $ | 18,932 | $ | 20,044 | $ | 22,044 | $ | 21,018 | $ | 20,530 | $ | 20,527 | $ | 20,579 | | $ | 315 | | 503 | | 2011 | | | | | 26,272 | | 17,148 | | 17,443 | | 18,641 | | 19,160 | | 20,959 | | 21,295 | | 22,032 | | 21,825 | | | 625 | | 581 | | 2012 | | | | | | | 29,042 | | 21,558 | | 21,021 | | 21,885 | | 21,231 | | 22,433 | | 23,020 | | 25,286 | | | 1,016 | | 858 | | 2013 | | | | | | | | | 39,984 | | 34,824 | | 26,857 | | 25,425 | | 25,599 | | 24,922 | | 25,496 | | | 2,220 | | 939 | | $ | 39,984 | | $ | 34,824 | | $ | 26,857 | | $ | 25,425 | | $ | 25,599 | | $ | 24,922 | | $ | 25,496 | | $ | 25,073 | | $ | 24,836 | | $ | 24,306 | | $ | 1,155 | | 950 | 2014 | | | | | | | | | | | 50,889 | | 39,095 | | 35,119 | | 32,274 | | 33,372 | | 33,458 | | | 6,322 | | 887 | | | | | | 50,889 | | | 39,095 | | | 35,119 | | | 32,274 | | | 33,372 | | | 33,458 | | | 35,128 | | | 35,683 | | | 35,918 | | | 2,367 | | 928 | 2015 | | | | | | | | | | | | | 53,672 | | 50,857 | | 47,392 | | 42,840 | | 43,328 | | | 10,833 | | 685 | | | | | | | | | 53,672 | | | 50,857 | | | 47,392 | | | 42,840 | | | 43,328 | | | 42,446 | | | 41,690 | | | 41,471 | | | 3,017 | | 702 | 2016 | | | | | | | | | | | | | | | 56,341 | | 49,385 | | 37,676 | | 33,125 | | | 18,457 | | 624 | | | | | | | | | | | | 56,341 | | | 49,385 | | | 37,676 | | | 33,125 | | | 30,251 | | | 29,671 | | | 29,940 | | | 6,349 | | 651 | 2017 | | | | | | | | | | | | | | | | | 62,863 | | 55,868 | | 48,363 | | | 31,333 | | 563 | | | | | | | | | | | | | | | 62,863 | | | 55,868 | | | 48,363 | | | 44,737 | | | 43,249 | | | 41,620 | | | 13,877 | | 646 | 2018 | | | | | | | | | | | | | | | | | | | 69,362 | | 62,646 | | | 51,501 | | 452 | | | | | | | | | | | | | | | | | | 69,362 | | | 62,646 | | | 54,626 | | | 51,023 | | | 49,861 | | | 22,833 | | 612 | 2019 | | | | | | | | | | | | | | | | | | | | | 88,078 | | | 66,592 | | 293 | | | | | | | | | | | | | | | | | | | | | 88,078 | | | 89,691 | | | 79,083 | | | 80,147 | | | 38,161 | | 659 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | 107,579 | | | 98,409 | | | 90,274 | | | 61,116 | | 558 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 136,433 | | | 136,354 | | | 81,568 | | 656 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 153,895 | | | 107,953 | | 447 | | | | | | | | | | | | | | | | | | | | Total | $ | 402,184 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 683,786 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | | 2010 | | $ | 7 | $ | 6,002 | $ | 10,705 | $ | 13,282 | $ | 15,512 | $ | 17,302 | $ | 19,175 | $ | 19,256 | $ | 19,308 | $ | 19,390 | | | | | | | 2011 | | | | | 2,169 | | 5,145 | | 6,981 | | 8,793 | | 10,772 | | 16,494 | | 17,769 | | 20,214 | | 21,036 | | | | | | | 2012 | | | | | | | 1,315 | | 3,573 | | 8,843 | | 15,380 | | 16,879 | | 17,747 | | 19,310 | | 21,993 | | | | | | | 2013 | | | | | | | | | 1,060 | | 5,701 | | 10,967 | | 14,545 | | 16,967 | | 17,956 | | 18,524 | | | | | | | 2014 | | | | | | | | | | | 1,899 | | 4,006 | | 11,002 | | 18,852 | | 22,541 | | 23,376 | | | | | | | 2015 | | | | | | | | | | | | | 2,048 | | 10,127 | | 19,571 | | 23,184 | | 28,756 | | | | | | | 2016 | | | | | | | | | | | | | | | 1,068 | | 3,396 | | 7,441 | | 10,054 | | | | | | | 2017 | | | | | | | | | | | | | | | | | 17 | | 5,679 | | 9,275 | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 2,506 | | 5,823 | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 4,213 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 162,440 | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 16,409 | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 256,153 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | | 4.2 | % | 13.2 | % | 16.9 | % | 14.3 | % | 9.9 | % | 8.9 | % | 5.8 | % | 7.4 | % | 2.0 | % | 0.4 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Claims Made | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | | For the Years Ended December 31, | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2010 | | $ | 13,690 | $ | 15,556 | $ | 9,776 | $ | 10,429 | $ | 11,689 | $ | 10,581 | $ | 9,175 | $ | 9,024 | $ | 8,735 | $ | 8,680 | | $ | 160 | | 502 | | 2011 | | | | | 17,416 | | 17,454 | | 12,260 | | 10,619 | | 8,510 | | 7,720 | | 7,852 | | 11,506 | | 14,031 | | | 592 | | 682 | | 2012 | | | | | | | 27,576 | | 26,144 | | 20,727 | | 19,590 | | 18,022 | | 17,612 | | 17,569 | | 20,785 | | | 1,781 | | 803 | | 2013 | | | | | | | | | 40,095 | | 41,488 | | 44,054 | | 40,288 | | 38,473 | | 37,959 | | 38,352 | | | 2,255 | | 1,042 | | $ | 1,060 | | $ | 5,701 | | $ | 10,967 | | $ | 14,545 | | $ | 16,967 | | $ | 17,956 | | $ | 18,524 | | $ | 21,229 | | $ | 22,154 | | $ | 22,505 | | | | | | 2014 | | | | | | | | | | | 53,929 | | 55,386 | | 58,152 | | 55,350 | | 51,554 | | 53,841 | | | 4,391 | | 1,305 | | | | | | 1,899 | | | 4,006 | | | 11,002 | | | 18,852 | | | 22,541 | | | 23,376 | | | 26,068 | | | 28,963 | | | 30,484 | | | | | | 2015 | | | | | | | | | | | | | 55,006 | | 47,831 | | 42,206 | | 39,906 | | 39,653 | | | 6,376 | | 1,336 | | | | | | | | | 2,048 | | | 10,127 | | | 19,571 | | | 23,184 | | | 28,756 | | | 31,352 | | | 32,752 | | | 35,958 | | | | | | 2016 | | | | | | | | | | | | | | | 59,992 | | 67,760 | | 69,493 | | 67,728 | | | 16,541 | | 1,506 | | | | | | | | | | | | 1,068 | | | 3,396 | | | 7,441 | | | 10,054 | | | 12,703 | | | 14,400 | | | 17,807 | | | | | | 2017 | | | | | | | | | | | | | | | | | 60,572 | | 62,450 | | 62,714 | | | 24,377 | | 1,633 | | | | | | | | | | | | | | | 17 | | | 5,679 | | | 9,275 | | | 15,441 | | | 18,470 | | | 22,835 | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 66,128 | | 62,416 | | | 37,809 | | 1,381 | | | | | | | | | | | | | | | | | | 2,506 | | | 5,823 | | | 10,801 | | | 17,294 | | | 22,016 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 62,918 | | | 50,178 | | 1,411 | | | | | | | | | | | | | | | | | | | | | 4,213 | | | 19,044 | | | 25,389 | | | 33,375 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | 2,901 | | | 13,856 | | | 20,988 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,317 | | | 23,841 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,479 | | | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 431,118 | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 237,288 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | 21,094 | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 467,592 | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | | 2010 | | $ | 259 | $ | 1,548 | $ | 2,308 | $ | 3,626 | $ | 5,733 | $ | 5,749 | $ | 6,956 | $ | 8,485 | $ | 8,512 | $ | 8,515 | | | | | | | 2011 | | | | | 330 | | 1,949 | | 4,508 | | 5,947 | | 5,637 | | 6,209 | | 6,835 | | 7,132 | | 7,239 | | | | | | | 2012 | | | | | | | 433 | | 4,086 | | 6,898 | | 9,218 | | 10,968 | | 14,378 | | 15,621 | | 16,450 | | | | | | | 2013 | | | | | | | | | 792 | | 7,073 | | 18,425 | | 26,121 | | 29,678 | | 32,789 | | 34,535 | | | | | | | 2014 | | | | | | | | | | | 1,705 | | 9,775 | | 27,923 | | 35,755 | | 40,080 | | 44,127 | | | | | | | 2015 | | | | | | | | | | | | | 2,215 | | 10,738 | | 16,774 | | 20,920 | | 28,795 | | | | | | | 2016 | | | | | | | | | | | | | | | 2,060 | | 14,558 | | 27,465 | | 39,370 | | | | | | | 2017 | | | | | | | | | | | | | | | | | 2,455 | | 11,350 | | 22,728 | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 1,964 | | 11,965 | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 1,839 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 215,563 | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 2,399 | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 217,954 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | | 3.1 | % | 16.2 | % | 19.5 | % | 14.2 | % | 11.3 | % | 7.3 | % | 7.2 | % | 7.9 | % | 0.5 | % | 0.0 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 4.0% | | | 13.0% | | | 14.0% | | | 13.1% | | | 9.9% | | | 5.8% | | | 6.1% | | | 9.0% | | | 4.0% | | | 1.4% | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Claims Made | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2013 | | $ | 40,095 | | $ | 41,488 | | $ | 44,054 | | $ | 40,288 | | $ | 38,473 | | $ | 37,959 | | $ | 38,352 | | $ | 37,974 | | $ | 37,950 | | $ | 37,817 | | $ | 463 | | 1,042 | 2014 | | | | | | 53,929 | | | 55,386 | | | 58,152 | | | 55,350 | | | 51,554 | | | 53,841 | | | 53,783 | | | 52,619 | | | 52,796 | | | 1,584 | | 1,305 | 2015 | | | | | | | | | 55,006 | | | 47,831 | | | 42,206 | | | 39,906 | | | 39,653 | | | 39,619 | | | 38,609 | | | 37,578 | | | 1,248 | | 1,338 | 2016 | | | | | | | | | | | | 59,992 | | | 67,760 | | | 69,493 | | | 67,728 | | | 64,730 | | | 65,078 | | | 61,876 | | | 2,451 | | 1,507 | 2017 | | | | | | | | | | | | | | | 60,572 | | | 62,450 | | | 62,714 | | | 57,450 | | | 59,907 | | | 61,546 | | | 4,455 | | 1,647 | 2018 | | | | | | | | | | | | | | | | | | 66,128 | | | 62,416 | | | 56,468 | | | 48,457 | | | 47,692 | | | 10,412 | | 1,394 | 2019 | | | | | | | | | | | | | | | | | | | | | 62,918 | | | 61,712 | | | 52,224 | | | 46,500 | | | 16,958 | | 1,512 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 60,278 | | | 56,785 | | | 46,853 | | | 29,739 | | 1,294 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,219 | | | 45,854 | | | 32,103 | | 1,216 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 58,289 | | | 43,827 | | 1,005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 496,801 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | For the Years Ended December 31, | | | | | | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2013 | | $ | 792 | | $ | 7,073 | | $ | 18,425 | | $ | 26,121 | | $ | 29,678 | | $ | 32,789 | | $ | 34,535 | | $ | 35,476 | | $ | 36,078 | $ | | 36,800 | | | | | | 2014 | | | | | | 1,705 | | | 9,775 | | | 27,923 | | | 35,755 | | | 40,080 | | | 44,127 | | | 46,122 | | | 50,714 | | | 51,063 | | | | | | 2015 | | | | | | | | | 2,215 | | | 10,738 | | | 16,774 | | | 20,920 | | | 28,795 | | | 32,241 | | | 33,529 | | | 34,671 | | | | | | 2016 | | | | | | | | | | | | 2,060 | | | 14,558 | | | 27,465 | | | 39,370 | | | 47,999 | | | 52,846 | | | 53,737 | | | | | | 2017 | | | | | | | | | | | | | | | 2,455 | | | 11,350 | | | 22,728 | | | 36,522 | | | 42,918 | | | 47,087 | | | | | | 2018 | | | | | | | | | | | | | | | | | | 1,964 | | | 11,965 | | | 18,840 | | | 24,918 | | | 27,351 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 1,839 | | | 8,123 | | | 14,117 | | | 19,930 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 1,488 | | | 5,687 | | | 10,412 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 999 | | | 5,615 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,088 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 288,754 | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | 3,249 | | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 211,296 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 3.6% | | | 15.9% | | | 19.6% | | | 16.2% | | | 11.3% | | | 7.9% | | | 3.3% | | | 4.7% | | | 1.1% | | | 1.9% | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty - Transportation | Casualty - Transportation | | | | | | | | Casualty - Transportation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except number of claims) | (in thousands, except number of claims) | | | | | | | | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2010 | | $ | 27,239 | $ | 23,390 | $ | 24,912 | $ | 25,593 | $ | 23,981 | $ | 23,625 | $ | 23,701 | $ | 23,786 | $ | 23,776 | $ | 23,860 | | $ | 23 | | 2,843 | | 2011 | | | | | 22,957 | | 23,479 | | 25,747 | | 25,272 | | 25,431 | | 25,376 | | 25,167 | | 25,614 | | 25,827 | | | 41 | | 2,469 | | 2012 | | | | | | | 21,452 | | 22,203 | | 22,924 | | 23,511 | | 23,689 | | 23,620 | | 23,305 | | 23,731 | | | 47 | | 2,285 | | 2013 | | | | | | | | | 32,742 | | 32,853 | | 32,989 | | 37,673 | | 38,811 | | 39,974 | | 39,309 | | | 140 | | 2,853 | | $ | 32,742 | | $ | 32,853 | | $ | 32,989 | | $ | 37,673 | | $ | 38,811 | | $ | 39,974 | | $ | 39,309 | | $ | 39,183 | | $ | 39,586 | | $ | 39,598 | | $ | 103 | | 2,853 | 2014 | | | | | | | | | | | 38,361 | | 33,015 | | 36,452 | | 38,590 | | 40,202 | | 40,508 | | | 458 | | 3,099 | | | | | | 38,361 | | | 33,015 | | | 36,452 | | | 38,590 | | | 40,202 | | | 40,508 | | | 41,156 | | | 41,974 | | | 42,067 | | | 412 | | 3,099 | 2015 | | | | | | | | | | | | | 38,561 | | 46,258 | | 47,021 | | 46,395 | | 45,162 | | | 1,574 | | 3,183 | | | | | | | | | 38,561 | | | 46,258 | | | 47,021 | | | 46,395 | | | 45,162 | | | 45,525 | | | 45,807 | | | 46,685 | | | 684 | | 3,187 | 2016 | | | | | | | | | | | | | | | 50,430 | | 53,519 | | 54,105 | | 52,277 | | | 4,241 | | 3,935 | | | | | | | | | | | | 50,430 | | | 53,519 | | | 54,105 | | | 52,277 | | | 52,818 | | | 53,915 | | | 55,718 | | | 1,152 | | 3,943 | 2017 | | | | | | | | | | | | | | | | | 55,640 | | 53,641 | | 45,017 | | | 7,476 | | 3,625 | | | | | | | | | | | | | | | 55,640 | | | 53,641 | | | 45,017 | | | 43,764 | | | 45,351 | | | 46,742 | | | 1,480 | | 3,640 | 2018 | | | | | | | | | | | | | | | | | | | 57,597 | | 54,592 | | | 24,385 | | 3,376 | | | | | | | | | | | | | | | | | | 57,597 | | | 54,592 | | | 38,719 | | | 36,468 | | | 35,442 | | | 2,428 | | 3,404 | 2019 | | | | | | | | | | | | | | | | | | | | | 58,297 | | | 17,932 | | 3,082 | | | | | | | | | | | | | | | | | | | | | 58,297 | | | 56,129 | | | 43,976 | | | 41,925 | | | 4,182 | | 3,317 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | 43,573 | | | 35,524 | | | 27,665 | | | 5,844 | | 1,647 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 51,322 | | | 51,581 | | | 14,902 | | 2,307 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 60,862 | | | 14,645 | | 2,520 | | | | | | | | | | | | | | | | | | | | Total | $ | 408,580 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 448,285 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | | 2010 | | $ | 6,296 | $ | 10,116 | $ | 15,475 | $ | 20,045 | $ | 21,792 | $ | 23,063 | $ | 23,488 | $ | 23,533 | $ | 23,556 | $ | 23,635 | | | | | | | 2011 | | | | | 5,295 | | 9,485 | | 14,477 | | 19,443 | | 22,375 | | 23,537 | | 23,941 | | 24,377 | | 25,052 | | | | | | | 2012 | | | | | | | 4,466 | | 8,533 | | 12,394 | | 17,318 | | 20,931 | | 22,566 | | 22,730 | | 23,180 | | | | | | | 2013 | | | | | | | | | 5,306 | | 11,978 | | 19,761 | | 28,220 | | 33,480 | | 35,923 | | 37,327 | | | | | | | 2014 | | | | | | | | | | | 7,125 | | 13,933 | | 19,676 | | 27,457 | | 33,190 | | 38,282 | | | | | | | 2015 | | | | | | | | | | | | | 6,984 | | 20,709 | | 29,554 | | 37,222 | | 39,339 | | | | | | | 2016 | | | | | | | | | | | | | | | 8,923 | | 18,354 | | 30,354 | | 38,001 | | | | | | | 2017 | | | | | | | | | | | | | | | | | 7,979 | | 17,070 | | 24,090 | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 6,980 | | 12,827 | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 7,148 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 268,881 | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 252 | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 139,951 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | | 17.2 | % | 18.1 | % | 18.8 | % | 18.8 | % | 11.0 | % | 7.1 | % | 1.9 | % | 1.3 | % | 1.4 | % | 0.3 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Property | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | | | For the Years Ended December 31, | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2010 | | $ | 63,194 | $ | 59,145 | $ | 55,427 | $ | 53,937 | $ | 54,153 | $ | 52,927 | $ | 52,964 | $ | 52,952 | $ | 52,903 | $ | 52,548 | | $ | 10 | | 2,850 | | 2011 | | | | | 70,246 | | 66,924 | | 64,976 | | 63,724 | | 62,770 | | 62,570 | | 62,456 | | 62,875 | | 62,799 | | | 65 | | 3,028 | | 2012 | | | | | | | 85,485 | | 80,155 | | 79,181 | | 77,569 | | 79,175 | | 78,125 | | 78,161 | | 78,002 | | | 97 | | 2,640 | | 2013 | | | | | | | | | 63,864 | | 62,090 | | 62,173 | | 62,114 | | 61,914 | | 61,834 | | 61,776 | | | 183 | | 2,995 | | $ | 5,306 | | $ | 11,978 | | $ | 19,761 | | $ | 28,220 | | $ | 33,480 | | $ | 35,923 | | $ | 37,327 | | $ | 37,915 | | $ | 38,172 | | $ | 38,531 | | | | | | 2014 | | | | | | | | | | | 56,587 | | 49,441 | | 48,801 | | 48,761 | | 49,217 | | 49,444 | | | 158 | | 4,561 | | | | | | 7,125 | | | 13,933 | | | 19,676 | | | 27,457 | | | 33,190 | | | 38,282 | | | 40,006 | | | 40,427 | | | 41,528 | | | | | | 2015 | | | | | | | | | | | | | 59,863 | | 56,103 | | 53,958 | | 52,720 | | 53,111 | | | 403 | | 4,075 | | | | | | | | | 6,984 | | | 20,709 | | | 29,554 | | | 37,222 | | | 39,339 | | | 41,345 | | | 42,626 | | | 45,002 | | | | | | 2016 | | | | | | | | | | | | | | | 62,900 | | 55,594 | | 55,384 | | 55,930 | | | 1,418 | | 3,371 | | | | | | | | | | | | 8,923 | | | 18,354 | | | 30,354 | | | 38,001 | | | 43,564 | | | 47,488 | | | 52,555 | | | | | | 2017 | | | | | | | | | | | | | | | | | 90,803 | | 83,273 | | 84,961 | | | 5,861 | | 2,883 | | | | | | | | | | | | | | | 7,979 | | | 17,070 | | | 24,090 | | | 30,260 | | | 36,141 | | | 41,064 | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 89,091 | | 83,457 | | | 10,867 | | 2,321 | | | | | | | | | | | | | | | | | | 6,980 | | | 12,827 | | | 19,216 | | | 24,503 | | | 28,844 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 71,232 | | | 27,090 | | 2,098 | | | | | | | | | | | | | | | | | | | | | 7,148 | | | 15,852 | | | 21,120 | | | 26,422 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | 3,986 | | | 7,876 | | | 12,035 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,341 | | | 15,345 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,442 | | | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 653,260 | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 307,768 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | 1,220 | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 141,737 | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | | 2010 | | $ | 25,274 | $ | 43,091 | $ | 47,743 | $ | 50,055 | $ | 52,729 | $ | 52,426 | $ | 52,719 | $ | 52,851 | $ | 52,855 | $ | 52,538 | | | | | | | 2011 | | | | | 27,676 | | 48,756 | | 55,778 | | 59,099 | | 60,272 | | 61,428 | | 61,834 | | 62,729 | | 62,730 | | | | | | | 2012 | | | | | | | 39,074 | | 66,509 | | 72,057 | | 73,705 | | 75,640 | | 76,152 | | 77,159 | | 77,323 | | | | | | | 2013 | | | | | | | | | 32,208 | | 50,840 | | 57,407 | | 59,259 | | 60,520 | | 61,195 | | 61,325 | | | | | | | 2014 | | | | | | | | | | | 30,550 | | 43,380 | | 46,148 | | 46,528 | | 47,799 | | 49,027 | | | | | | | 2015 | | | | | | | | | | | | | 32,184 | | 49,348 | | 50,197 | | 51,290 | | 52,078 | | | | | | | 2016 | | | | | | | | | | | | | | | 33,134 | | 46,921 | | 51,371 | | 53,006 | | | | | | | 2017 | | | | | | | | | | | | | | | | | 41,314 | | 66,818 | | 74,415 | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 37,048 | | 68,264 | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 30,703 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 581,409 | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 114 | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 71,965 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | | 51.2 | % | 31.5 | % | 7.7 | % | 2.9 | % | 2.6 | % | 1.1 | % | 0.7 | % | 0.6 | % | 0.0 | % | (0.6) | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 15.0% | | | 18.8% | | | 16.8% | | | 15.8% | | | 11.0% | | | 8.0% | | | 4.9% | | | 2.5% | | | 1.6% | | | 0.9% | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Property | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2013 | | $ | 63,864 | | $ | 62,090 | | $ | 62,173 | | $ | 62,114 | | $ | 61,914 | | $ | 61,834 | | $ | 61,776 | | $ | 61,623 | | $ | 61,400 | | $ | 61,371 | | $ | 7 | | 2,996 | 2014 | | | | | | 56,587 | | | 49,441 | | | 48,801 | | | 48,761 | | | 49,217 | | | 49,444 | | | 49,479 | | | 49,520 | | | 49,468 | | | 15 | | 4,564 | 2015 | | | | | | | | | 59,863 | | | 56,103 | | | 53,958 | | | 52,720 | | | 53,111 | | | 52,781 | | | 52,878 | | | 53,359 | | | 25 | | 4,076 | 2016 | | | | | | | | | | | | 62,900 | | | 55,594 | | | 55,384 | | | 55,930 | | | 55,424 | | | 55,383 | | | 55,536 | | | 150 | | 3,377 | 2017 | | | | | | | | | | | | | | | 90,803 | | | 83,273 | | | 84,961 | | | 82,671 | | | 82,319 | | | 81,912 | | | 801 | | 2,893 | 2018 | | | | | | | | | | | | | | | | | | 89,091 | | | 83,457 | | | 79,961 | | | 80,470 | | | 79,093 | | | 1,443 | | 2,337 | 2019 | | | | | | | | | | | | | | | | | | | | | 71,232 | | | 65,189 | | | 61,116 | | | 59,901 | | | 1,141 | | 2,453 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 118,247 | | | 110,466 | | | 108,546 | | | 12,532 | | 2,855 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 135,447 | | | 116,424 | | | 16,900 | | 3,071 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 138,756 | | | 53,549 | | 2,505 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 804,366 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | For the Years Ended December 31, | | | | | | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2013 | | $ | 32,208 | | $ | 50,840 | | $ | 57,407 | | $ | 59,259 | | $ | 60,520 | | $ | 61,195 | | $ | 61,325 | | $ | 61,335 | | $ | 61,188 | | $ | 61,188 | | | | | | 2014 | | | | | | 30,550 | | | 43,380 | | | 46,148 | | | 46,528 | | | 47,799 | | | 49,027 | | | 49,259 | | | 49,317 | | | 49,339 | | | | | | 2015 | | | | | | | | | 32,184 | | | 49,348 | | | 50,197 | | | 51,290 | | | 52,078 | | | 52,342 | | | 52,400 | | | 53,208 | | | | | | 2016 | | | | | | | | | | | | 33,134 | | | 46,921 | | | 51,371 | | | 53,006 | | | 54,328 | | | 54,747 | | | 55,215 | | | | | | 2017 | | | | | | | | | | | | | | | 41,314 | | | 66,818 | | | 74,415 | | | 78,360 | | | 80,581 | | | 80,958 | | | | | | 2018 | | | | | | | | | | | | | | | | | | 37,048 | | | 68,264 | | | 72,357 | | | 75,253 | | | 76,378 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 30,703 | | | 51,740 | | | 55,092 | | | 57,038 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 43,192 | | | 79,660 | | | 88,401 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 57,272 | | | 89,174 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 44,667 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 655,566 | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | 1,101 | | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 149,901 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 50.4% | | | 31.1% | | | 6.7% | | | 2.9% | | | 2.1% | | | 1.1% | | | 0.4% | | | 0.5% | | | (0.1)% | | | 0.0% | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Surety | Surety | | | | | | | | Surety | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands, except number of claims) | (in thousands, except number of claims) | | | | | | | | | | | | | | | | (in thousands, except number of claims) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2019 | | Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance | | As of December 31, 2022 | | | For the Years Ended December 31, | | | | | Cumulative | | For the Years Ended December 31, | | | | | Cumulative | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reported | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | Total IBNR | | Claims | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | Total IBNR | | Claims | 2010 | | $ | 13,961 | $ | 8,205 | $ | 6,630 | $ | 7,076 | $ | 6,810 | $ | 7,136 | $ | 7,645 | $ | 6,244 | $ | 6,580 | $ | 6,743 | | $ | 47 | | 1,543 | | 2011 | | | | | 13,842 | | 17,832 | | 17,792 | | 17,321 | | 16,766 | | 16,695 | | 16,480 | | 18,281 | | 18,293 | | | 35 | | 1,679 | | 2012 | | | | | | | 17,114 | | 11,452 | | 8,667 | | 8,180 | | 7,867 | | 7,471 | | 7,099 | | 7,082 | | | 38 | | 1,474 | | 2013 | | | | | | | | | 16,080 | | 7,516 | | 6,170 | | 5,399 | | 5,271 | | 5,231 | | 5,209 | | | 65 | | 1,406 | | $ | 16,080 | | $ | 7,516 | | $ | 6,170 | | $ | 5,399 | | $ | 5,271 | | $ | 5,231 | | $ | 5,209 | | $ | 5,107 | | $ | 5,046 | | $ | 5,139 | | $ | 3 | | 1,411 | 2014 | | | | | | | | | | | 16,450 | | 8,106 | | 5,225 | | 4,427 | | 4,267 | | 4,319 | | | 67 | | 1,346 | | | | | | 16,450 | | | 8,106 | | | 5,225 | | | 4,427 | | | 4,267 | | | 4,319 | | | 4,266 | | | 4,227 | | | 4,230 | | | 5 | | 1,357 | 2015 | | | | | | | | | | | | | 16,958 | | 12,957 | | 11,113 | | 10,456 | | 9,792 | | | 384 | | 1,217 | | | | | | | | | 16,958 | | | 12,957 | | | 11,113 | | | 10,456 | | | 9,792 | | | 9,521 | | | 9,275 | | | 8,580 | | | 21 | | 1,244 | 2016 | | | | | | | | | | | | | | | 18,928 | | 11,062 | | 9,351 | | 8,895 | | | 742 | | 1,359 | | | | | | | | | | | | 18,928 | | | 11,062 | | | 9,351 | | | 8,895 | | | 8,391 | | | 7,948 | | | 8,134 | | | 81 | | 1,389 | 2017 | | | | | | | | | | | | | | | | | 16,127 | | 8,641 | | 8,798 | | | 1,469 | | 1,645 | | | | | | | | | | | | | | | 16,127 | | | 8,641 | | | 8,798 | | | 8,116 | | | 8,034 | | | 7,769 | | | 158 | | 1,826 | 2018 | | | | | | | | | | | | | | | | | | | 16,765 | | 7,227 | | | 3,965 | | 1,157 | | | | | | | | | | | | | | | | | | 16,765 | | | 7,227 | | | 4,564 | | | 3,947 | | | 3,996 | | | 244 | | 1,362 | 2019 | | | | | | | | | | | | | | | | | | | | | 14,785 | | | 14,035 | | 607 | | | | | | | | | | | | | | | | | | | | | 14,785 | | | 7,205 | | | 5,053 | | | 4,062 | | | 860 | | 1,178 | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | 19,241 | | | 14,840 | | | 12,378 | | | 4,214 | | 895 | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,540 | | | 11,724 | | | 7,826 | | 767 | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,185 | | | 18,683 | | 527 | | | | | | | | | | | | | | | | | | | | Total | $ | 91,143 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 86,197 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | | | | | | | | | | AY | | | 2010* | | 2011* | | 2012* | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019 | | | | | | | 2010 | | $ | 1,724 | $ | 3,205 | $ | 5,702 | $ | 7,092 | $ | 7,151 | $ | 7,285 | $ | 7,822 | $ | 6,663 | $ | 6,637 | $ | 6,733 | | | | | | | 2011 | | | | | 8,160 | | 16,932 | | 17,151 | | 17,403 | | 17,212 | | 17,086 | | 17,086 | | 17,013 | | 18,251 | | | | | | | 2012 | | | | | | | 1,883 | | 6,680 | | 6,726 | | 7,416 | | 7,536 | | 7,406 | | 7,065 | | 6,996 | | | | | | | 2013 | | | | | | | | | 1,116 | | 2,856 | | 4,701 | | 4,911 | | 5,098 | | 5,150 | | 5,128 | | | | | | | 2014 | | | | | | | | | | | 722 | | 4,283 | | 4,166 | | 4,059 | | 4,131 | | 4,234 | | | | | | | 2015 | | | | | | | | | | | | | 3,192 | | 6,719 | | 7,695 | | 9,436 | | 9,183 | | | | | | | 2016 | | | | | | | | | | | | | | | 3,087 | | 5,817 | | 6,299 | | 7,640 | | | | | | | 2017 | | | | | | | | | | | | | | | | | 979 | | 2,862 | | 7,062 | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | 1,835 | | 2,588 | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 336 | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | Total | $ | 68,151 | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2010, net of reinsurance | | 1,996 | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 24,988 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | | Years | | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | | 24.1 | % | 39.1 | % | 16.8 | % | 9.4 | % | 0.7 | % | 0.6 | % | 0.7 | % | (6.2) | % | 3.2 | % | 1.4 | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance | | | | | | | | For the Years Ended December 31, | | | | | | AY | | 2013* | | 2014* | | 2015* | | 2016* | | 2017* | | 2018* | | 2019* | | 2020* | | 2021* | | 2022 | | | | | | 2013 | | $ | 1,116 | | $ | 2,856 | | $ | 4,701 | | $ | 4,911 | | $ | 5,098 | | $ | 5,150 | | $ | 5,128 | | $ | 5,061 | | $ | 5,029 | | $ | 5,131 | | | | | | 2014 | | | | | | 722 | | | 4,283 | | | 4,166 | | | 4,059 | | | 4,131 | | | 4,234 | | | 4,214 | | | 4,197 | | | 4,218 | | | | | | 2015 | | | | | | | | | 3,192 | | | 6,719 | | | 7,695 | | | 9,436 | | | 9,183 | | | 9,186 | | | 9,168 | | | 8,462 | | | | | | 2016 | | | | | | | | | | | | 3,087 | | | 5,817 | | | 6,299 | | | 7,640 | | | 8,086 | | | 7,673 | | | 7,946 | | | | | | 2017 | | | | | | | | | | | | | | | 979 | | | 2,862 | | | 7,062 | | | 7,221 | | | 7,362 | | | 7,372 | | | | | | 2018 | | | | | | | | | | | | | | | | | | 1,835 | | | 2,588 | | | 2,368 | | | 2,536 | | | 3,020 | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | 336 | | | 2,433 | | | 2,765 | | | 3,039 | | | | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | 835 | | | 2,719 | | | 3,828 | | | | | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,197 | | | 3,229 | | | | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (241) | | | | | | | | | * Presented as unaudited required supplementary information. | | | | | | | | | | | | Total | | $ | 46,004 | | | | | | | | | | | | | | | | | | | | | All outstanding liabilities before 2013, net of reinsurance | | | (77) | | | | | | | | | | | | | | | | | | Liabilities for losses and loss adjustment expenses, net of reinsurance | | $ | 40,116 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance* | | | | | | Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 | | | | | | | | | 19.6% | | | 35.6% | | | 14.5% | | | 7.3% | | | 3.6% | | | (0.3)% | | | 0.6% | | | (3.3)% | | | (0.1)% | | | 2.0% | | | | | |
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: | | | | | | | | | | | | Reconciliation of Incurred and Paid Loss Development to the Liability for Unpaid Losses and Settlement Expenses | | (in thousands) | | December 31, 2019 | | December 31, 2018 | | December 31, 2022 | | December 31, 2021 | Net outstanding liabilities: | | | | | | | | | | | | Casualty - Primary Occurrence | | $ | 403,910 | | $ | 372,450 | | $ | 461,527 | | $ | 453,142 | Casualty - Excess Occurrence | | | 256,153 | | 209,683 | | | 467,592 | | | 384,579 | Casualty - Claims Made | | | 217,954 | | 204,501 | | | 211,296 | | | 209,705 | Casualty - Transportation | | | 139,951 | | 133,558 | | | 141,737 | | | 131,531 | Property | | | 71,965 | | 77,238 | | | 149,901 | | | 124,652 | Surety | | | 24,988 | | 28,237 | | | 40,116 | | | 34,244 | Unallocated loss adjustment expenses | | | 52,275 | | 50,891 | | | 61,752 | | | 59,391 | Allowance for uncollectible reinsurance balances recoverable on unpaid losses and settlement expenses | | | 9,402 | | 9,793 | | | 11,250 | | | 11,188 | Other | | | 13,237 | | 9,998 | | | 30,377 | | | 27,037 | Liabilities for unpaid loss and settlement expenses, net of reinsurance | | $ | 1,189,835 | | $ | 1,096,349 | | $ | 1,575,548 | | $ | 1,435,469 | | | | | | | | | | | | | Reinsurance recoverable on unpaid claims: | | | | | | | | | | | | Casualty - Primary Occurrence | | $ | 31,122 | | $ | 34,742 | | $ | 46,674 | | $ | 43,688 | Casualty - Excess Occurrence | | | 98,518 | | 81,072 | | | 138,822 | | | 122,092 | Casualty - Claims Made | | | 176,936 | | 144,921 | | | 298,930 | | | 271,259 | Casualty - Transportation | | | 53,724 | | 50,748 | | | 78,456 | | | 66,283 | Property | | | 21,438 | | 50,495 | | | 137,613 | | | 65,098 | Surety | | | 11,199 | | 11,834 | | | 50,737 | | | 50,743 | Allowance for uncollectible reinsurance balances recoverable on unpaid losses and settlement expenses | | | (9,402) | | (9,793) | | | (11,250) | | | (11,188) | Other | | | 982 | | 980 | | | 107 | | | 111 | Total reinsurance balances recoverable on unpaid losses and settlement expenses | | $ | 384,517 | | $ | 364,999 | | $ | 740,089 | | $ | 608,086 | | | | | | | | | | | | | Total gross liability for unpaid loss and settlement expenses | | $ | 1,574,352 | | $ | 1,461,348 | | $ | 2,315,637 | | $ | 2,043,555 |
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 model losses based on our own exposures and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. Adjustments to the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors. Actuaries perform a ground-up reserve study of the expected value of the unpaid loss and LAE derived using multiple standard actuarial methodologies on a quarterly basis. Each method produces an estimate of ultimate loss by accident year. We review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary. Upon completion of our loss and LAE estimation analysis, a review of the resulting variance between the indicated reserves and the carried reserves takes place. Our actuaries make a recommendation to management in regards to booked reserves that reflect their analytical assessment and view of estimation risk. After discussion of these analyses and all relevant risk factors, the Loss Reserve Committee, a panel of management including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer and other executives, confirms the appropriateness of the reserve balances. Actuarial models base future loss emergence on historical experience, with adjustments for current trends. We expect the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite will be affected as a result of COVID-19 and the related economic impact. The industry is experiencing new issues, including the postponement of civil court cases, the extension of various statutes of limitations, claim uncertainty due to supply shortages and changes in settlement trends. Our recorded reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods. DEVELOPMENT OF IBNR RESERVES The following table summarizes our prior accident years’ loss reserve development by segment for 2019, 20182022, 2021 and 2017:2020: | | | | | | | | | | | | | | | | | | | | (FAVORABLE)/UNFAVORABLE RESERVE DEVELOPMENT BY SEGMENT | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | Casualty | | $ | (62,497) | | $ | (33,252) | | $ | (17,462) | | | $ | (87,225) | | $ | (108,632) | | $ | (75,075) | Property | | | (4,461) | | | (10,813) | | | (12,134) | | | | (24,927) | | | (10,981) | | | (13,019) | Surety | | | (8,326) | | | (5,885) | | | (9,272) | | | | (10,427) | | | (5,850) | | | (12,959) | Total | | $ | (75,284) | | $ | (49,950) | | $ | (38,868) | | | $ | (122,579) | | $ | (125,463) | | $ | (101,053) |
A discussion of significant components of reserve development for the three most recent calendar years follows: 2019.2022. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2019.2022. The casualty segment contributed $62.5$87.2 million in favorable development, inclusive of unallocated loss and adjustment expenses (ULAE), which is excluded from the incurred loss and loss adjustment expense tables above.development. Accident years 20172016 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 $11.8$28.3 million to our favorable development. Small commercial products were favorable by $6.3$4.6 million. Within the excess occurrence grouping, commercial excess was favorable by $6.8$6.3 million and our personal umbrella product developed favorably by $7.8$3.8 million. Within the claims made grouping, professional services coverages developed favorably by $10.2$18.8 million which was offset by adverse development of $7.3 million onand executive products and $2.3 million on medical professional liability coverages.developed favorably by $4.1 million. Transportation experienced favorable development of $16.6 million, primarily on accident years 2016 through 2018.$6.4 million.
Marine contributed $2.4$17.0 million of the $4.5$24.9 million total favorable property development, inclusive of ULAE.development. Accident years 2017 and 20182019 through 2021 contributed to the marine products’ favorable development. HomeownersHawaii homeowners contributed $1.1$2.3 million of favorable development with other commercial property insurance and assumed reinsurance products contributing the balance.development. The surety segment experienced favorable development of $8.3 million, inclusive of ULAE.$10.4 million. The majority of the favorable development was from accident year 2018, while earlier accident years developed slightly adversely. The commercial surety product was the main contributor with favorable development of $5.8 million.2019 through 2021. Contract surety had favorable development of $4.9 million and commercial surety had favorable development of $4.2 million, which offset $1.7 million of adverse development on miscellaneous surety.million. 2018.2021. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2018.2021. Development from the casualty segment totaled $33.3 million, inclusive of ULAE. The$108.6 million. Favorable development was experienced across accident years 2014 through 2020, with the largest amounts of favorable development came fromattributable to accident years 20152018 through 2017.2020. We continued to experience emergence that was generally better than previously estimated. We attribute the favorable emergence to loss trends in most lines outperforming our long-term expectations. Further, we believeexpectations, our underwriters’ ability to select risk selection contributed toand an increasing rate environment. Within the Company experiencing less loss cost inflation than originally anticipated. The primary occurrence grouping, had favorable development of $15.6 million, driven by ourthe general liability product with $6.7contributed $25.3 million to our favorable development and small commercial was favorable by $7.5 million. Within the excess occurrence grouping, commercial excess was favorable by $10.5 million and personal umbrella developed favorably by $10.4 million. Within the claims made grouping, professional services coverages developed favorably by $14.2 million and executive products developed favorably by $5.9 million. Transportation had $20.1 million of favorable development. The excess occurrence grouping had favorable development of $21.4 million, with commercial insureds contributing $10.8 million and personal insureds contributing the remainder. Claims made exposures had adverse development of $3.9 million driven by medical errors and omissions coverages. Transportation had $0.5 million of favorable development.
Our marine product was the predominant driver of the favorable development in the property segment, accounting for $5.0$6.6 million of the $10.8$11.0 million total favorable development for the segment, inclusive of ULAE.segment. Accident years 2015 through 20172019 and 2020 made the largest contribution. Our excess and surplus lines commercialCommercial property product and assumed reinsurance products also contributedwas favorable by $2.0 million and $2.8 million of favorable development, respectively.million. The surety segment experienced $5.9 million of favorable development, inclusive of ULAE.development. The majority of the favorable development came from the 20172019 and 2020 accident year, which served to offsetyears. Contract surety was the unfavorable development from accident years 2011 and 2016. Commercial surety contributedmain contributor with favorable development of $6.3$4.6 million. Miscellaneous surety experienced adverse development totaling $0.8 million. 2017.2020. We experienced favorable emergence relative to prior years’ reserve estimates in all of our segments during 2017.2020. The casualty segment contributed $17.5$75.1 million in favorable development, inclusive of ULAE.development. Accident years 2014, 2015 and
20162017 through 2019 contributed significantly to the favorable development. This was predominantly caused by favorable frequency and severity trends that continued to be better than our long-term expectations. In addition, we believe this to be the result of our underwriters’ ability to select risk selection, which has mostly offset price declines and loss cost inflation.as well as an increasing rate environment within many of our casualty sublines. Nearly all of our casualty products contributed to the favorable development. Transportation contributed $19.1 million for the year. Within the primary occurrence grouping, the general liability
product contributed $4.6$17.9 million to our favorable development with all coverages contributing to the favorable development in 2017. Small commercial products were the second largest contributor with $3.2 million in favorable development. Within the excess occurrence grouping, personal umbrella and commercial excess were favorabledeveloped favorably by $1.1 million and $9.9 million, respectively.$12.5 million. Within the claimsclaims made grouping, our executive products had favorable contributions of $4.4professional services coverages developed favorably by $7.8 million whileand medical professional liability was adverse $3.7 million. Transportation was adverse $7.4had $6.1 million for the year, but postedof favorable experience during the last three quarters of the year.development. The marine product was the primary driver of the favorable development in the property segment. Marine contributed $6.8$6.5 million of the $12.1$13.0 million total favorable property development, inclusive of ULAE. Accidentprimarily in accident years 20152017 and 2016 contributed to the marine products’ favorable development.2018. Commercial property was favorable $3.2by $5.2 million. The surety segment experienced favorable development of $9.3 million, inclusive of ULAE.$13.0 million. The majority of the favorable development was from accident year 2016. Commercial2019. Contract and contractcommercial surety products were the main contributors with favorable development of $5.0$5.9 million and $4.4$3.8 million, respectively. Miscellaneous surety had unfavorable development of $0.1 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, 2019, 20182022, 2021 and 2017:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | Loss and LAE Payments (Cumulative): | | | | | | | | | | | | | | | | | | | | Gross | | $ | 137,485 | | $ | 136,043 | | $ | 132,883 | | | $ | 142,377 | | $ | 141,768 | | $ | 139,804 | Ceded | | | (68,849) | | | (68,638) | | | (67,507) | | | | (69,696) | | | (69,576) | | | (69,219) | Net | | $ | 68,636 | | $ | 67,405 | | $ | 65,376 | | | $ | 72,681 | | $ | 72,192 | | $ | 70,585 | | | | | | | | | | | | | | | | | | | | | Unpaid Losses and LAE at End of Year: | | | | | | | | | | | | | | | | | | | | Gross | | $ | 22,616 | | $ | 24,262 | | $ | 28,042 | | | $ | 26,871 | | $ | 25,747 | | $ | 22,485 | Ceded | | | (5,149) | | | (5,373) | | | (5,715) | | | | (5,786) | | | (5,718) | | | (4,619) | Net | | $ | 17,467 | | $ | 18,889 | | $ | 22,327 | | | $ | 21,085 | | $ | 20,029 | | $ | 17,866 |
Our environmental, asbestos and mass tort exposure is limited, relative to other insurers, as a result of entering the affected liability lines after the insurance industry had already recognized environmental and asbestos exposure as a problem and adopted appropriate coverage exclusions. The majority of our reserves are associated with products that went into runoff at least two decades ago. Some are for assumed reinsurance, some are for excess liability business and some followed from the acquisition of Underwriters Indemnity Company in 1999. During 2019, inception to date incurred2022, we increased our IBNR reserves for asbestos, environmental asbestos and mass tort losses did not develop materially.exposures, as we experienced modest emergence and an increase in open claims. While our environmental exposure is limited, the ultimate liability for this exposure is difficult to assess because of the extensive and complicated litigation involved in the settlement of claims and evolving legislation on issues such as joint and several liability, retroactive liability and standards of cleanup. Additionally, we participate primarily in the excess layers of coverage, where accurate estimates of ultimate loss are more difficult to derive than for primary coverage. 7. INCOME TAXES | INCOME TAXES |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized below. The adoption of ASU 2016-02, as described in note 1.C., required a right-of-use asset and lease liability be recognized for operating leases in 2019, which resulted in a corresponding deferred tax liability and deferred tax asset.
| | | | | | | | (in thousands) | | 2019 | | 2018 | | Deferred tax assets: | | | | | | | | Tax discounting of unpaid losses and settlement expenses | | $ | 19,143 | | $ | 18,327 | | Unearned premium offset | | | 18,755 | | | 17,864 | | Deferred compensation | | | 2,981 | | | 2,700 | | Stock option expense | | | 2,728 | | | 2,702 | | Lease liability | | | 5,140 | | | — | | Other | | | 275 | | | 616 | | Deferred tax assets before allowance | | $ | 49,022 | | $ | 42,209 | | Less valuation allowance | | | — | | | — | | Total deferred tax assets | | $ | 49,022 | | $ | 42,209 | | | | | | | | | | Deferred tax liabilities: | | | | | | | | Net unrealized appreciation of securities | | $ | 56,532 | | $ | 22,177 | | Deferred policy acquisition costs | | | 17,859 | | | 17,836 | | Lease asset | | | 4,690 | | | — | | Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset | | | 3,817 | | | 5,203 | | Book/tax depreciation | | | 3,008 | | | 3,133 | | Intangible assets | | | 1,634 | | | 1,711 | | Undistributed earnings of unconsolidated investees | | | 17,673 | | | 15,811 | | Other | | | 536 | | | 576 | | Total deferred tax liabilities | | $ | 105,749 | | $ | 66,447 | | Net deferred tax liability | | $ | (56,727) | | $ | (24,238) | |
| | | | | | | (in thousands) | | 2022 | | 2021 | Deferred tax assets: | | | | | | | Tax discounting of unpaid losses and settlement expenses | | $ | 23,788 | | $ | 22,637 | Unearned premium offset | | | 27,158 | | | 23,080 | Net unrealized depreciation of securities | | | 19,839 | | | — | Deferred compensation | | | 4,058 | | | 3,469 | Share-based compensation expense | | | 3,202 | | | 3,089 | Capitalized research and development costs | | | 2,544 | | | — | Lease liability | | | 3,026 | | | 3,796 | Other | | | 938 | | | 367 | Deferred tax assets before allowance | | $ | 84,553 | | $ | 56,438 | Less valuation allowance | | | — | | | — | Total deferred tax assets | | $ | 84,553 | | $ | 56,438 | | | | | | | | Deferred tax liabilities: | | | | | | | Net unrealized appreciation of securities | | $ | — | | $ | 76,533 | Deferred policy acquisition costs | | | 26,850 | | | 21,746 | Lease asset | | | 2,681 | | | 3,101 | Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset | | | 1,909 | | | 2,545 | Fixed assets | | | 3,083 | | | 3,518 | Intangible assets | | | 1,543 | | | 1,537 | Undistributed earnings of unconsolidated investees | | | 7,399 | | | 29,515 | Other | | | 819 | | | 1,452 | Total deferred tax liabilities | | $ | 44,284 | | $ | 139,947 | Net deferred tax asset (liability) | | $ | 40,269 | | $ | (83,509) |
Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, differed from the amounts computed by applying the U.S. federal tax rate of 21 percent 21 percent and 35 percent, respectively, to pretax income from continuing operations as demonstrated in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | | Provision for income taxes at the statutory federal tax rates | | $ | 48,874 | | 21.0 | % | | $ | 14,192 | | 21.0 | % | | $ | 29,606 | | 35.0 | % | | | $ | 151,342 | | 21.0 | % | $ | 72,307 | | 21.0 | % | $ | 39,867 | | 21.0 | % | Increase (reduction) in taxes resulting from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Enactment of TCJA | | | — | | — | % | | | (2,268) | | (3.4) | % | | | (32,821) | | (38.8) | % | | | Excess tax benefit on share-based compensation | | | (3,958) | | (1.7) | % | | | (4,533) | | (6.7) | % | | | (5,798) | | (6.9) | % | | | | (4,491) | | (0.6) | % | | (3,090) | | (0.9) | % | | (3,537) | | (1.8) | % | Tax-exempt interest income | | | | (1,143) | | (0.2) | % | | (1,219) | | (0.3) | % | | (1,293) | | (0.7) | % | Dividends received deduction | | | (823) | | (0.4) | % | | | (775) | | (1.1) | % | | | (2,025) | | (2.4) | % | | | | (912) | | (0.1) | % | | (891) | | (0.3) | % | | (883) | | (0.5) | % | Investment tax credit | | | | (5,053) | | (0.7) | % | | (3,491) | | (1.0) | % | | (2,435) | | (1.3) | % | ESOP dividends paid deduction | | | (1,122) | | (0.5) | % | | | (1,184) | | (1.8) | % | | | (2,905) | | (3.4) | % | | | | (4,171) | | (0.6) | % | | (1,566) | | (0.5) | % | | (1,083) | | (0.6) | % | Tax-exempt interest income | | | (1,238) | | (0.5) | % | | | (1,795) | | (2.7) | % | | | (4,671) | | (5.5) | % | | | Unconsolidated investee dividends | | | (1,802) | | (0.8) | % | | | — | | — | % | | | (1,351) | | (1.6) | % | | | | — | | — | % | | — | | — | % | | (479) | | (0.2) | % | Nondeductible expenses | | | 1,649 | | 0.7 | % | | | 389 | | 0.6 | % | | | 276 | | 0.3 | % | | | | 1,263 | | 0.2 | % | | 3,834 | | 1.1 | % | | 1,878 | | 1.0 | % | Other items, net | | | (488) | | (0.1) | % | | | (624) | | (0.9) | % | | | (750) | | (0.9) | % | | | | 432 | | 0.0 | % | | (917) | | (0.2) | % | | 715 | | 0.4 | % | Total | | $ | 41,092 | | 17.7 | % | | $ | 3,402 | | 5.0 | % | | $ | (20,439) | | (24.2) | % | | | $ | 137,267 | | 19.0 | % | $ | 64,967 | | 18.9 | % | $ | 32,750 | | 17.3 | % | | | | | | | | | | | | | | | | | | | | | |
Our effective tax rates were 17.7 percent, 5.0 percent and -24.2 percent for 2019, 2018 and 2017, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in 2019 primarily2022 due to higher levels of pretax earnings,income, which causeddecreased the impact of tax-favored adjustments to be smaller on a percentage basis in 2019 compared to 2018. The effective rate was significantly lower in 2017 as a result of the impact of tax reform.basis.
Among other provisions, the TCJA lowered the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Our deferred tax items were revalued as of year-end 2017 to reflect the lower rate, which reduced our net deferred tax liability and income tax expense by $32.8 million and decreased the effective tax rate by 38.8 percent.
Except for two aspects, the accounting for the tax effects of the enactment of the TCJA were completed as of December 31, 2017. The first provisional item recorded in 2017 was related to an expected disallowance of deductions for certain performance based compensation, including bonuses and stock options. At the time of enactment, there was a lack of clarity on
whether some amounts could be grandfathered in as deductible. The Internal Revenue Service (IRS) and Treasury Department provided additional guidance and we were able to finalize the accounting in 2018 by recording a $2.3 million deferred tax benefit to restore the deferred tax assets related to those performance based compensation amounts. The second provisional item related to discount factors on loss reserves that the IRS had not yet published. The IRS published the factors in the fourth quarter of 2018 and we were able to complete the accounting for the effects of the enactment of the TCJA. While there was no net impact to the deferred tax amount that was recorded at December 31, 2017, we implemented the new discounting methodology and will recognize the adjustment ratably over the allowed eight-year period beginning in 2018.
Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. 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 recently revised 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 $13.2$4.7 million dividend from Maui JimPrime in 20192020 and recognized a $1.8$0.5 million tax benefit from applying the lower tax rate applicable to affiliated dividends (7.4paid to insurance companies (10.8 percent in 2019)2020), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. In the fourth quarter of 2017, Maui Jim gave notification that a $9.9 million dividend would be paid in January 2018. Even though 0 dividend was received in 2017, we were aware that the lower tax rate applicable to affiliated dividends (7.4 percent in 2018) would be applied when the dividend was paid in 2018 and we therefore recorded a $1.4 million tax benefit in 2017. Standing alone, the dividends resulted in a 0.8 percent and 1.60.2 percent reduction to the 2019 and 20172020 effective tax rates, respectively. As no additionalrate. No dividends were declared from unconsolidated investees in 2018, there was2022 or 2021, therefore having no impact to the 20182022 or 2021 effective tax rate.rates. Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 2019, 20182022, 2021 and 20172020 resulted in tax benefits of $1.1$4.2 million, $1.2$1.6 million and $2.9$1.1 million, respectively. These tax benefits reduced the effective tax rate for 2019, 20182022, 2021 and 20172020 by 0.6 percent, 0.5 percent 1.8and 0.6 percent and, 3.4 percent, respectively. We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the projected results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, we believe when these deferred items reverse in future years, our taxable income will be taxed at an effective rate of 21 percent. Federal and state income taxes paid in 2019, 20182022, 2021 and 20172020 amounted to $25.6$190.3 million, $16.4$38.6 million and $10.4$23.7 million, respectively. The increase in 2022 is the result of taxes paid on the sale of our investment in Maui Jim. See note 13 for more information on the sale. Although we are not currently under audit by the IRS, tax years 20162019 through 20192022 remain open and are subject to examination. 8. EMPLOYEE BENEFITS | 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 $15.7$18.4 million, $8.8$18.0 million and $12.5$14.4 million for 2019, 20182022, 2021 and 2017,2020, respectively. During 2019,2022, the ESOP purchased 60,76887,367 shares of RLI Corp. stock on the open market at an average price of $69.99$103.01 ($4.39.0 million) relating to the contribution for plan year 2018.2021. Shares held by the ESOP as of December 31, 2019,2022, totaled 2,758,290 2,534,646 and are treated as outstanding in computing our earnings per share. During 2018,2021, the ESOP purchased 98,71765,815 shares of RLI Corp. stock on the open market at an average price of $62.80$107.95 ($6.27.1 million) relating to the contribution for plan year 2017.2020. During 2017,2020, the ESOP purchased 124,18694,194 shares of RLI Corp. stock on the open market at an average price of $58.02$82.67 ($7.27.8 million) relating to the contribution for plan year 2016.2019. 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 $30.1$23.9 million, $11.9$39.1 million and $19.7$26.6 million for 2019, 20182022, 2021 and 2017,2020, respectively. DEFERRED COMPENSATION We maintain rabbi trusts for deferred compensation plans for directors, key employees and executive officers through which our shares are purchased.contributions can be invested in RLI Corp. stock or mutual funds. The employer stock in the plan cannot be diversified and is classified and accounted for as equity, in a manner consistent with the accounting for treasury stock.
In 2019, the trusts purchased 6,569 shares of our common stock on the open market at an average price of $81.77 ($0.5 million). In 2018, the trusts purchased 7,049 shares of our common stock on the open market at an average price of $68.36 ($0.5 million). In 2017, the trusts purchased 7,464 shares of our common stock on the open market at an average price of $58.66 ($0.4 million). At December 31, 2019,2022, the trusts’ assets were valued at $44.5$55.9 million.
STOCK PLANS Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015. In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have granted 2,282,4603,263,788 awards under the 2015 LTIP, including 378,830363,368 in 2019.2022. Stock OptionsCompensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $8.8 million, $6.4 million and $5.4 million for 2022, 2021 and 2020, respectively. The total income tax benefit was $1.4 million for 2022, $1.0 million for 2021 and $0.9 million for 2020. Total unrecognized compensation expense relating to outstanding and unvested awards was $6.6 million, which will be recognized over the weighted average vesting period of 2.32 years.
Stock Options Under the 2015 LTIP, as under the 2010 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, 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. On November 10, 2022, the board of directors declared a $7.00 special cash dividend to be paid on December 20, 2022, the shareholders of record at the close of business on November 30, 2022. To preserve the intrinsic value of the options, the board also approved, pursuant to the terms of our various stock option plans, a proportional adjustment to the exercise price (equivalent to the special dividend) for all outstanding non-qualified options in relation to the special dividend. These adjustments did not result in any incremental compensation expense as the aggregate fair value, aggregate intrinsic value and the ratio of the exercise price to the market price were approximately equal immediately before and after the adjustments. The following table summarize option activity in 2022: | | | | | | | | | | | | | | | | | | Weighted | | Aggregate | | | | | Weighted | | Average | | Intrinsic | | | | | Average | | Remaining | | Value | | | Options | | Exercise Price | | Contractual Life | | (in 000’s) | Outstanding as of January 1, 2022 | | 1,669,325 | | $ | 78.63 | | | | | | Granted | | 344,100 | | | 109.50 | | | | | | Exercised | | (308,280) | | | 54.42 | | | | | | Cancelled or forfeited | | (9,485) | | | 86.40 | | | | | | Outstanding as of December 31, 2022 | | 1,695,660 | | $ | 82.42 | | 4.90 | | $ | 82,835 | Exercisable at December 31, 2022 | | 782,067 | | $ | 67.54 | | 3.47 | | $ | 49,839 |
The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $21.8 million, $12.2 million and $15.5 million during 2022, 2021 and 2020, respectively. The following tables summarize option activity in 2019, 2018 and 2017:
| | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Weighted | | Average | | Aggregate | | | | Number of | | Average | | Remaining | | Intrinsic | | | | Options | | Exercise | | Contractual | | Value | | | | Outstanding | | Price | | Life | | (in 000’s) | | Outstanding options at January 1, 2019 | | 1,964,880 | | $ | 54.24 | | | | | | | Options granted | | 356,900 | | $ | 82.63 | | | | | | | Options exercised | | (533,940) | | $ | 45.96 | | | | $ | 20,033 | | Options canceled/forfeited | | (120,550) | | $ | 60.48 | | | | | | | Outstanding options at December 31, 2019 | | 1,667,290 | | $ | 62.52 | | 5.20 | | $ | 46,051 | | Exercisable options at December 31, 2019 | | 642,365 | | $ | 53.93 | | 3.80 | | $ | 23,197 | |
| | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Weighted | | Average | | Aggregate | | | | Number of | | Average | | Remaining | | Intrinsic | | | | Options | | Exercise | | Contractual | | Value | | | | Outstanding | | Price | | Life | | (in 000’s) | | Outstanding options at January 1, 2018 | | 2,257,015 | | $ | 46.80 | | | | | | | Options granted | | 432,000 | | $ | 64.91 | | | | | | | Options exercised | | (705,785) | | $ | 36.81 | | | | $ | 24,304 | | Options canceled/forfeited | | (18,350) | | $ | 60.84 | | | | | | | Outstanding options at December 31, 2018 | | 1,964,880 | | $ | 54.24 | | 5.25 | | $ | 29,317 | | Exercisable options at December 31, 2018 | | 724,730 | | $ | 46.62 | | 3.79 | | $ | 16,212 | |
| | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | | Weighted | | Average | | Aggregate | | | | Number of | | Average | | Remaining | | Intrinsic | | | | Options | | Exercise | | Contractual | | Value | | | | Outstanding | | Price | | Life | | (in 000’s) | | Outstanding options at January 1, 2017 | | 2,207,110 | | $ | 40.90 | | | | | | | Options granted | | 482,375 | | $ | 57.12 | | | | | | | Options exercised | | (390,870) | | $ | 26.07 | | | | $ | 12,779 | | Options canceled/forfeited | | (41,600) | | $ | 48.30 | | | | | | | Outstanding options at December 31, 2017 | | 2,257,015 | | $ | 46.80 | | 4.88 | | $ | 32,620 | | Exercisable options at December 31, 2017 | | 975,055 | | $ | 38.66 | | 3.25 | | $ | 21,780 | |
The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when granted, the approach allows for a more even expense distribution throughout the year.
In 2019, 356,900 options were granted with an average exercise price of $82.63 and an average fair value of $13.49. Of these grants, 251,400 were granted at the board meeting in May with a calculated fair value of $13.65. We recognized $4.5 million of expense during 2019 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax benefit of $0.9 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $4.8 million, which will be recognized over the remainder of the vesting period.
In 2018, 432,000 options were granted with an average exercise price of $64.91 and an average fair value of $10.58. Of these grants, 330,750 were granted at the board meeting in May with a calculated fair value of $10.31. We recognized $4.5 million of expense during 2018 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax benefit of $0.9 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $5.6 million, which will be recognized over the remainder of the vesting period.
In 2017, 482,375 options were granted with an average exercise price of $57.12 and an average fair value of $8.00. Of these grants, 384,750 were granted at the board meeting in May with a calculated fair value of $7.91. We recognized $4.4 million of expense during 2017 related to options vesting. Since options granted under our plan are non-qualified, we recorded a deferred tax
benefit of $1.5 million related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $5.7 million, which will be recognized over the remainder of the vesting period.
The fair value 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: | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | | Weighted-average fair value of grants | | $ | 13.49 | | $ | 10.58 | | $ | 8.00 | | | $ | 21.43 | | $ | 17.11 | | $ | 13.24 | | Risk-free interest rates | | | 2.26 | % | | 2.72 | % | | 1.90 | % | | | 2.95 | % | | 0.75 | % | | 0.39 | % | Dividend yield | | | 2.69 | % | | 2.98 | % | | 3.60 | % | | | 2.50 | % | | 2.06 | % | | 2.30 | % | Expected volatility | | | 22.71 | % | | 22.87 | % | | 22.95 | % | | | 22.89 | % | | 22.73 | % | | 22.67 | % | Expected option life | | | 4.96 | years | | 5.07 | years | | 5.05 | years | | | 5.05 | years | | 4.97 | years | | 4.96 | years |
The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise 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. TheseFor 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. 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 $2.5 million, $2.2 million and $1.5 million during 2022, 2021 and 2020, respectively. | | | | | | | | | | Weighted | | | | | Average | | | | | Grant Date | | | RSUs | | Fair Value | Nonvested at January 1, 2022 | | 45,068 | | $ | 97.67 | Granted | | 19,268 | | | 115.71 | Reinvested | | 2,632 | | | 127.48 | Vested | | (21,380) | | | 93.07 | Forfeited | | (1,380) | | | 77.92 | Nonvested at December 31, 2022 | | 44,208 | | $ | 109.51 |
As of December 31, 2019, 45,350 RSUs have been granted to employees under the 2015 LTIP, including 15,275 during 2019, and 43,681 remain outstanding. We recognized $0.9 million, $0.6 million and $0.4 million of expense on these units during 2019, 2018 and 2017, respectively. Total unrecognized compensation expense relating to outstanding and unvested employee RSUs was $0.9 million, which will be recognized over the remainder of the vesting period.
In 2019 and 2018, each outside director received RSUs with a fair value of $50,000 on the date of grant as part of annual director compensation. Director RSUs vest one year from the date of grant. As of December 31, 2019, 15,085 RSUs were granted to directors under the 2015 LTIP, including 6,655 in 2019, and 6,162 director RSUs remain outstanding. We recognized $0.6 million and $0.3 million of compensation expense on these units during 2019 and 2018, respectively. Total unrecognized compensation expense relating to outstanding and unvested director RSUs was $0.2 million, which will be recognized over the remainder of the vesting period.
9.STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS | STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS |
The statutory financial statements of our 3three insurance companies are presented on the basis of accounting practices prescribed or permitted by the Illinois Department of Insurance (IDOI), which has adopted the NAICNAIC’s statutory accounting principles as the basis of its statutory accounting principles.(SAP). We do not use any permitted statutory accounting principlesSAP that differ from NAIC prescribed statutory accounting principles.SAP. In converting from statutorySAP 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 basedrisk-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, 2019,2022, 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 $191.0$249.7 million, $170.9$225.1 million and $157.7$203.9 million as of December 31, 2019, 20182022, 2021 and 2017,2020, respectively, compared to actual statutory capital and surplus of $1,029.7 million, $829.8 million$1.4 billion, $1.2 billion and $864.6 million,$1.1 billion, respectively, for these same periods. Year-end statutory surplus for 2022 presented in the table below includes $327.4 million of RLI Corp. stock (cost basis of $64.6 million) held by Mt. Hawley Insurance Company, compared to $271.2 million and $238.0 million in 2021 and 2020, respectively. The Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our GAAP consolidated financial statements. Year-end statutory surplus for 2019 presented in the table below includes $190.9 million of RLI Corp. stock (cost basis of $64.6 million) held by Mt. Hawley Insurance Company, compared to $132.8 million and $106.9 million in 2018 and 2017, respectively. The Securities Valuation Office provides specific guidance for valuing this investment, which is eliminated in our GAAP consolidated financial statements.
The following table includes selected information for our insurance subsidiaries for the year ended and as of December 31: | | | | | | | | | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | | 2022 | | 2021 | | 2020 | Consolidated net income, statutory basis | | $ | 129,625 | | $ | 135,791 | | $ | 72,889 | | | $ | 229,111 | | $ | 207,550 | | $ | 120,329 | Consolidated surplus, statutory basis | | $ | 1,029,671 | | $ | 829,775 | | $ | 864,554 | | | $ | 1,407,925 | | $ | 1,240,649 | | $ | 1,121,592 |
As discussed in note 1.A., our three insurance companies are subsidiaries of RLI Corp., with RLI Ins. as the first-level, or principal, insurance subsidiary. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of December 31, 2019,2022, our holding company had $995.4 million$1.2 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 $45.9$240.6 million in liquid assets,, which would cover nine monthswas elevated by the cash proceeds received from the sale of our annual holding company expenditures.Maui Jim. 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 2019, 20182022, 2021 and 2017,2020, our principal insurance subsidiary paid ordinary dividends totaling $59.0 million, $13.0 million, $70.0 million and $107.0$110.0 million, respectively, to RLI Corp. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the IDOI. In 2018,2021, our principal insurance subsidiary sought and received regulatory approval prior to the payment of extraordinary dividends totaling $110.0 million. NaNNo extraordinary dividends were paid in 20192022 or 2017.2020. As of December 31, 2019, $65.32022, $136.9 million of the net assets of our principal insurance subsidiary are not restricted and could be distributed to RLI Corp. as ordinary dividends. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution. 10. | COMMITMENTS AND CONTINGENT LIABILITIES |
10.
COMMITMENTS AND CONTINGENT LIABILITIES LITIGATIONAs of December 31, 2022, we had $13.5 million of unfunded commitments related to our investments in private funds, low-income housing tax credit investments and equity method investees. See note 2 for more information on our investments in private funds and low-income housing tax credits.
LITIGATION We are party to numerous claims, lossesloss and litigation matters that arise in the normal course of our business. Many of such claims, lossesloss or litigation matters involve claims under policies that we underwrite as an insurer. We believe that the resolution of these claims and losses willis not reasonably likely to have a material adverse effect on our financial condition, results of operations or cash flows. WeFrom 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. COMMITMENTS
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 of December 31, 2019,our leases do not provide an implicit rate, we had $15.5 million of unfunded commitments related touse our investments in private funds and $8.6 million of unfunded commitments related to our low income housing tax credit investments. See note 2 for moreincremental borrowing rate based on the information on these investments.available at the
11. LEASES
We adopted ASU 2016-02, Leases on January 1, 2019, which resulted in the recognition of operating leases on the balance sheet in 2019 and forward. See note 1.C. for more information on the adoption of the ASU. Right-of-use 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 right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. Collateralized advance rates from an existing borrowing facility are obtained at the commencement date of each lease and serve as our incremental borrowing rate to determinein 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. Lease expenseOperating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease term.
The Company’s operating lease obligations are for branch office facilities. Our leases have remaining terms of one to 15 years. Expenses associated with leases totaled $6.9 million in 2018 and $6.8 million in 2017. The components of lease expense and other lease information as of and during the yearyears ended December 31, 2019 are2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | (in thousands) | | 2019 | | | 2022 | | 2021 | | 2020 | Operating lease cost | | $ | 5,772 | | | $ | 4,957 | | $ | 5,131 | | $ | 5,504 | Variable lease cost | | | | 1,423 | | | 1,433 | | | 1,346 | Sublease income | | | | (555) | | | (508) | | | (262) | Total lease cost | | | $ | 5,825 | | $ | 6,056 | | $ | 6,588 | | | | | | | | | | | | | | | Cash paid for amounts included in measurement of lease liabilities | | | | | | | | | | | | | | Operating cash flows from operating leases | | $ | 5,711 | | | $ | 5,435 | | $ | 5,738 | | $ | 5,963 | | | | | | | | | | | | | | | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 1,388 | | | ROU assets obtained in exchange for new operating lease liabilities | | | $ | 2,694 | | $ | 4,828 | | $ | 81 | | | | | | | | | | | | | | | Reduction to right-of-use assets resulting from reduction to lease liabilities | | $ | 1,279 | | | Reduction to ROU assets resulting from reduction to lease liabilities | | | $ | 2 | | $ | 1,042 | | $ | 18 | | | | | | | | | | | | Other non-cash reductions to ROU assets | | | $ | 73 | | $ | 48 | | $ | 1,192 |
| | | | | | | | | | | (in thousands) | | 2019 | | 2022 | | 2021 | | Operating lease right-of-use assets | | $ | 22,335 | | | | | | | | Operating lease ROU assets | | | $ | 12,766 | | $ | 14,765 | | Operating lease liabilities | | $ | 24,475 | | | $ | 14,499 | | $ | 16,905 | | | | | | | Weighted-average remaining lease term - operating leases | | 4.69 | years | | | 4.21 | years | | 4.52 | years | | | | | | Weighted-average discount rate - operating leases | | 2.33 | % | | | 2.11 | % | | 2.02 | % |
Future minimum lease payments under non-cancellable leases as of December 31, 2019 and 20182022 were as follows: | | | | | | | | | | (in thousands) | | 2019 | | (in thousands) | | 2018 | | 2022 | 2020 | | $ | 5,983 | | 2019 | | $ | 5,911 | | 2021 | | 5,968 | | 2020 | | 6,019 | | 2022 | | 5,904 | | 2021 | | 5,924 | | 2023 | | 4,386 | | 2022 | | 5,884 | | $ | 5,578 | 2024 | | 2,334 | | 2023 | | 4,459 | | | 3,628 | 2025 | | | | 2,216 | 2026 | | | | 1,311 | 2027 | | | | 826 | Thereafter | | 1,366 | | Thereafter | | 3,968 | | | 1,587 | Total future minimum lease payments | | $ | 25,941 | | Total future minimum lease payments | | $ | 32,165 | | $ | 15,146 | Less imputed interest | | (1,466) | | | | | | | (647) | Total operating lease liability | | $ | 24,475 | | | | | | $ | 14,499 | | | | | | | | |
12. | OPERATING SEGMENT INFORMATION |
12. OPERATING SEGMENT INFORMATION
The segments of our insurance operations include casualty, property and surety. The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. We provided medical and healthcare professional liability coverage in the excess and surplus market, but exited these businesses on a runoff basis in 2019. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.
Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind stormsCoast, and windstorms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout marketinsurance 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 large-sized commercial andmedium-sized contract surety coverages, including payment and performance bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare as well as on and offshore energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns. Net investment income consists of the interest and dividend income streams from our investments in fixed income and equity securities. Interest and general corporate expenses include the cost of debt, other director and shareholder relations costs and other compensation-related expenses incurred for the benefit of the corporation, but not attributable to the operations of our insurance segments. Investee earnings represent our share in Maui Jim and Prime earnings. We ownowned 40 percent of Maui Jim, a privately-heldprivately held company which operates in the sunglass and optical goods industries, andwhich we sold in the third quarter of 2022. See note 13 for more information on the sale. Our investment in Maui Jim was carried at the holding company, as it was unrelated to our core insurance operations. Additionally, we own 23 percent of Prime Holdings Insurance Services, Inc., a privately-heldprivately held insurance company which specializes in hard-to-place risks. Our investment in Maui Jim, which is carried at the holding company, is unrelated to our core insurance operations. The following table summarizes our segment data based on the internal structure and reporting of information as it is used by management. The net earnings of each segment are before taxes and include revenues (if applicable), direct product or segment costs (such as commissions and claims costs), as well as allocated support costs from various support departments. While depreciation and amortization charges have been included in these measures via our expense allocation system, the related assetsAssets are not allocated for management usemanaged at the segment level and therefore are not included in this schedule.allocated to segments. | | | | | | | | | | | REVENUES | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Casualty | | $ | 558,458 | | $ | 523,472 | | $ | 478,603 | | Property | | | 164,022 | | | 149,261 | | | 138,346 | | Surety | | | 116,631 | | | 118,633 | | | 120,988 | | Net premiums earned | | $ | 839,111 | | $ | 791,366 | | $ | 737,937 | | Net investment income | | | 68,870 | | | 62,085 | | | 54,876 | | Net realized gains | | | 17,520 | | | 63,407 | | | 4,411 | | Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | | | — | | Total | | $ | 1,003,591 | | $ | 818,123 | | $ | 797,224 | |
REVENUES | | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Casualty | | $ | 711,832 | | $ | 633,639 | | $ | 569,521 | Property | | | 307,886 | | | 231,837 | | | 183,720 | Surety | | | 124,718 | | | 115,427 | | | 112,506 | Net premiums earned | | $ | 1,144,436 | | $ | 980,903 | | $ | 865,747 | Net investment income | | | 86,078 | | | 68,862 | | | 67,893 | Net realized gains | | | 588,515 | | | 64,222 | | | 17,885 | Net unrealized gains (losses) on equity securities | | | (121,037) | | | 65,258 | | | 32,101 | Total | | $ | 1,697,992 | | $ | 1,179,245 | | $ | 983,626 |
| | | | | | | | | | | INSURANCE EXPENSES | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Loss and settlement expenses: | | | | | | | | | | | Casualty | | $ | 330,156 | | $ | 329,763 | | $ | 305,679 | | Property | | | 73,614 | | | 83,822 | | | 85,027 | | Surety | | | 9,646 | | | 14,608 | | | 10,878 | | Total loss and settlement expenses | | $ | 413,416 | | $ | 428,193 | | $ | 401,584 | | | | | | | | | | | | | Policy acquisition costs: | | | | | | | | | | | Casualty | | $ | 166,499 | | $ | 151,007 | | $ | 136,135 | | Property | | | 55,986 | | | 51,830 | | | 51,070 | | Surety | | | 66,212 | | | 64,901 | | | 65,310 | | Total policy acquisition costs | | $ | 288,697 | | $ | 267,738 | | $ | 252,515 | | | | | | | | | | | | | Other insurance expenses: | | | | | | | | | | | Casualty | | $ | 41,202 | | $ | 31,562 | | $ | 32,885 | | Property | | | 16,279 | | | 12,725 | | | 14,108 | | Surety | | | 11,949 | | | 9,516 | | | 10,001 | | Total other insurance expenses | | $ | 69,430 | | $ | 53,803 | | $ | 56,994 | | Total | | $ | 771,543 | | $ | 749,734 | | $ | 711,093 | |
INSURANCE EXPENSES | | | | | | | | | | | NET EARNINGS (LOSSES) | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Casualty | | $ | 20,601 | | $ | 11,140 | | $ | 3,904 | | Property | | | 18,143 | | | 884 | | | (11,859) | | Surety | | | 28,824 | | | 29,608 | | | 34,799 | | Net underwriting income | | $ | 67,568 | | $ | 41,632 | | $ | 26,844 | | Net investment income | | | 68,870 | | | 62,085 | | | 54,876 | | Net realized gains | | | 17,520 | | | 63,407 | | | 4,411 | | Net unrealized gains (losses) on equity securities | | | 78,090 | | | (98,735) | | | — | | General corporate expense and interest on debt | | | (20,274) | | | (16,864) | | | (18,766) | | Equity in earnings of unconsolidated investees | | | 20,960 | | | 16,056 | | | 17,224 | | Total earnings before incomes taxes | | $ | 232,734 | | $ | 67,581 | | $ | 84,589 | | Income tax expense (benefit) | | $ | 41,092 | | $ | 3,402 | | $ | (20,439) | | Total | | $ | 191,642 | | $ | 64,179 | | $ | 105,028 | |
| | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Loss and settlement expenses: | | | | | | | | | | Casualty | | $ | 381,436 | | $ | 311,627 | | $ | 322,099 | Property | | | 120,745 | | | 129,924 | | | 111,356 | Surety | | | 12,195 | | | 15,051 | | | 9,429 | Total loss and settlement expenses | | $ | 514,376 | | $ | 456,602 | | $ | 442,884 | | | | | | | | | | | Policy acquisition costs: | | | | | | | | | | Casualty | | $ | 204,397 | | $ | 179,354 | | $ | 162,058 | Property | | | 95,203 | | | 72,008 | | | 59,926 | Surety | | | 70,032 | | | 66,106 | | | 64,454 | Total policy acquisition costs | | $ | 369,632 | | $ | 317,468 | | $ | 286,438 | | | | | | | | | | | Other insurance expenses: | | | | | | | | | | Casualty | | $ | 52,210 | | $ | 47,139 | | $ | 40,937 | Property | | | 19,416 | | | 18,605 | | | 15,620 | Surety | | | 10,586 | | | 11,163 | | | 10,271 | Total other insurance expenses | | $ | 82,212 | | $ | 76,907 | | $ | 66,828 | Total | | $ | 966,220 | | $ | 850,977 | | $ | 796,150 |
NET EARNINGS | | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Casualty | | $ | 73,789 | | $ | 95,519 | | $ | 44,427 | Property | | | 72,522 | | | 11,300 | | | (3,182) | Surety | | | 31,905 | | | 23,107 | | | 28,352 | Net underwriting income | | $ | 178,216 | | $ | 129,926 | | $ | 69,597 | Net investment income | | | 86,078 | | | 68,862 | | | 67,893 | Net realized gains | | | 588,515 | | | 64,222 | | | 17,885 | Net unrealized gains (losses) on equity securities | | | (121,037) | | | 65,258 | | | 32,101 | Interest on debt | | | (8,047) | | | (7,677) | | | (7,603) | General corporate expense | | | (12,900) | | | (13,330) | | | (10,265) | Equity in earnings of unconsolidated investees | | | 9,853 | | | 37,060 | | | 20,233 | Total earnings before incomes taxes | | $ | 720,678 | | $ | 344,321 | | $ | 189,841 | Income tax expense | | | 137,267 | | | 64,967 | | | 32,750 | Net earnings | | $ | 583,411 | | $ | 279,354 | | $ | 157,091 |
The following table further summarizes revenues by major product type within each segment: | | | | | | | | | | | NET PREMIUMS EARNED | | Year ended December 31, | | (in thousands) | | 2019 | | 2018 | | 2017 | | CASUALTY | | | | | | | | | | | Commercial excess and personal umbrella | | $ | 140,483 | | $ | 124,350 | | $ | 115,543 | | General liability | | | 98,880 | | | 93,928 | | | 90,283 | | Commercial transportation | | | 83,213 | | | 81,053 | | | 78,061 | | Professional services | | | 81,329 | | | 79,951 | | | 78,508 | | Small commercial | | | 55,701 | | | 51,519 | | | 49,601 | | Executive products | | | 27,088 | | | 21,326 | | | 18,086 | | Other casualty | | | 71,764 | | | 71,345 | | | 48,521 | | Total | | $ | 558,458 | | $ | 523,472 | | $ | 478,603 | | | | | | | | | | | | | PROPERTY | | | | | | | | | | | Marine | | $ | 74,887 | | $ | 59,795 | | $ | 50,931 | | | | | | | | | | | | | Specialty personal | | | 19,316 | | | 16,901 | | | 20,793 | | Other property | | | 1,509 | | | 1,064 | | | 3,505 | | Total | | $ | 164,022 | | $ | 149,261 | | $ | 138,346 | | | | | | | | | | | | | SURETY | | | | | | | | | | | Miscellaneous | | $ | 44,721 | | $ | 46,968 | | $ | 47,237 | | Commercial | | | 43,553 | | | 43,469 | | | 45,178 | | Contract | | | 28,357 | | | 28,196 | | | 28,573 | | Total | | $ | 116,631 | | $ | 118,633 | | $ | 120,988 | | Grand total | | $ | 839,111 | | $ | 791,366 | | $ | 737,937 | |
NET PREMIUMS EARNED | | | | | | | | | | | | Year ended December 31, | (in thousands) | | 2022 | | 2021 | | 2020 | CASUALTY | | | | | | | | | | Commercial excess and personal umbrella | | $ | 253,921 | | $ | 219,437 | | $ | 178,214 | General liability | | | 100,374 | | | 90,853 | | | 91,653 | Commercial transportation | | | 96,992 | | | 83,352 | | | 64,624 | Professional services | | | 95,187 | | | 88,855 | | | 85,196 | Small commercial | | | 67,673 | | | 64,660 | | | 63,357 | Executive products | | | 26,606 | | | 21,873 | | | 26,509 | Other casualty | | | 71,079 | | | 64,609 | | | 59,968 | Total | | $ | 711,832 | | $ | 633,639 | | $ | 569,521 | | | | | | | | | | | PROPERTY | | | | | | | | | | Commercial property | | $ | 163,078 | | $ | 107,941 | | $ | 79,406 | Marine | | | 113,208 | | | 97,745 | | | 81,852 | Other property | | | 31,600 | | | 26,151 | | | 22,462 | Total | | $ | 307,886 | | $ | 231,837 | | $ | 183,720 | | | | | | | | | | | SURETY | | | | | | | | | | Commercial | | $ | 47,652 | | $ | 43,738 | | $ | 42,872 | Miscellaneous | | | 45,826 | | | 43,982 | | | 42,292 | Contract | | | 31,240 | | | 27,707 | | | 27,342 | Total | | $ | 124,718 | | $ | 115,427 | | $ | 112,506 | Grand total | | $ | 1,144,436 | | $ | 980,903 | | $ | 865,747 |
13. UNAUDITED INTERIM FINANCIAL INFORMATIONACQUISITONS AND DISPOSITIONS Select unaudited quarterly information isOn September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim to Kering Eyewear for cash proceeds of $686.6 million. The sale was part of a larger transaction whereby Kering Eyewear acquired all of the shares of common stock of Maui Jim, consistent with our prior commitments under the terms of a shareholders agreement between RLI and the majority owner of Maui Jim. We recognized a net realized gain of $571.0 million as follows:a result of the sale, which was recorded in the net realized gain line item of the statement of earnings. In addition, we have the right to receive additional consideration based on customary post-closing working capital and other adjustments. Any gain related to the additional consideration will be recognized when received.
| | | | | | | | | | | | | | | | | (in thousands, except per share data) | | First | | Second | | Third | | Fourth | | Year | | 2019 | | | | | | | | | | | | | | | | | Net premiums earned | | $ | 204,689 | | $ | 207,541 | | $ | 211,255 | | $ | 215,626 | | $ | 839,111 | | Net investment income | | | 16,565 | | | 16,998 | | | 17,532 | | | 17,775 | | | 68,870 | | Net realized gains | | | 9,068 | | | 4,764 | | | 3,211 | | | 477 | | | 17,520 | | Net unrealized gains (losses) on equity securities | | | 33,498 | | | 8,810 | | | 4,906 | | | 30,876 | | | 78,090 | | Earnings (losses) before income taxes | | | 81,741 | | | 48,828 | | | 38,947 | | | 63,218 | | | 232,734 | | Net earnings (loss) | | | 65,473 | | | 40,467 | | | 32,324 | | | 53,378 | | | 191,642 | | Basic earnings per share(1) | | $ | 1.47 | | $ | 0.91 | | $ | 0.72 | | $ | 1.19 | | $ | 4.28 | | Diluted earnings per share(1) | | $ | 1.46 | | $ | 0.89 | | $ | 0.71 | | $ | 1.18 | | $ | 4.23 | | 2018 | | | | | | | | | | | | | | | | | Net premiums earned | | $ | 190,027 | | $ | 196,522 | | $ | 200,815 | | $ | 204,002 | | $ | 791,366 | | Net investment income | | | 14,232 | | | 14,577 | | | 16,314 | | | 16,962 | | | 62,085 | | Net realized gains | | | 8,404 | | | 20,849 | | | 18,647 | | | 15,507 | | | 63,407 | | Net unrealized gains (losses) on equity securities | | | (26,772) | | | (12,611) | | | 4,848 | | | (64,200) | | | (98,735) | | Earnings (losses) before income taxes | | | 14,378 | | | 39,562 | | | 46,349 | | | (32,708) | | | 67,581 | | Net earnings (loss) | | | 12,216 | | | 33,251 | | | 39,372 | | | (20,660) | | | 64,179 | | Basic earnings per share(1) | | $ | 0.28 | | $ | 0.75 | | $ | 0.89 | | $ | (0.46) | | $ | 1.45 | | Diluted earnings per share(1) | | $ | 0.27 | | $ | 0.74 | | $ | 0.88 | | $ | (0.46) | | $ | 1.43 | |
(1) | Since the weighted-average shares for the quarters are calculated independently of the weighted-average shares for the year, quarterly earnings per share may not total to annual earnings per share. |
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersshareholders and the Board of Directors of RLI Corp.: Opinions on the Consolidated Financial Statements and Internal Control Overover Financial Reporting We have audited the accompanying consolidated balance sheets of RLI Corp. and subsidiaries (the Company)"Company") as of December 31, 20192022 and 2018,2021, the related consolidated statements of earnings and comprehensive earnings, shareholders’shareholders' equity, and cash flows, for each of the three years in the three-year period ended December 31, 2019,2022, and the related notes and financial statementthe schedules Ilisted in the Index at Item 15 (collectively referred to VI (collectively,as the consolidated financial statements)"financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control –— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022, and 2018,2021, and the results of its operations and its cash flowsflow for each of the three years in the three-year period ended December 31, 2019,2022, in conformity with U.S.accounting principles generally accepted accounting principles.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, 20192022, based on criteria established in Internal Control –— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.COSO. Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for equity investments with the adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018.
Basis for Opinions The Company’s management is responsible for these consolidated 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 Control overControls Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidatedthese 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 consolidated 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 consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures thatto respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated 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 Overover 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 periodcurrent-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:that (1) relatesrelate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit mattermatters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionopinions on the critical audit matter or on the accounts or disclosures to which it relates.they relate. Assessment of the estimate of unpaidUnpaid losses and settlement expenses
As discussed in — Refer to Notes 1 and 6 to the consolidated financial statements the
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. The unpaid losses and settlement expenses as of December 31, 2019 was $1.6 billion. 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. The primaryHow the Critical Audit Matter Was Addressed in the Audit
Our audit procedures we performedrelated to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate unpaid losses and settlement expenses including methodologies and assumptions used to deriveincluded the actuarial central estimate and the Company’s best estimate of unpaid losses and settlement expenses. We also involved an actuarial professional with specialized skills and knowledge, who assisted in:following, among others: | ● | ComparingWe tested the Company’s actuarial methodologieseffectiveness of controls related to unpaid losses and settlement expenses, including those controls over the inputs, methods, and assumptions used to generally accepted actuarial standards;in the Company’s estimation processes. |
| ● | Evaluating certainWe tested the underlying data, including historical claims, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete. |
| ● | With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by the Company including expected loss ratios, loss development patterns, internalto estimate the unpaid losses and external qualitative factors, and weighting of actuarial methodologies, by comparing to the Company’s trends and data and industry trends and data;settlement expenses by: |
| ●o | PerformingDeveloping a range of independent actuarial analysesestimates of unpaid losses and settlement expenses for certain lines of business;business and comparing our estimates to the recorded reserves. |
| ●o | ExaminingWe compared our prior year estimates of expected incurred losses to actual experience during the Company’s internal actuarial analyses and assumptions for certain other linescurrent year to identify potential management bias in the determination of business; |
| ● | Developing an independent range of unpaid losses and settlement expenses in order to evaluate the Company’s recorded unpaid losses and settlement expenses in comparison to the range; and |
| ● | Assessing the year-over-year movements of the Company’s recorded unpaid losses and settlement expenses within the independently developed range of unpaid losses and settlement expenses. |
/s/ KPMG LLP
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| We have served as the Company’s auditor since 1983.
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| Chicago, Illinois
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| February 21, 2020
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/s/ Deloitte & Touche LLP Chicago, Illinois
February 24, 2023 We have served as the Company’s auditor since 2020.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On August 21, 2019, Deloitte & Touche LLP (Deloitte) was engaged as the new independent registered public accounting firm of RLI Corp. (the Company) to perform independent audit services for the Company for the fiscal year ending December 31, 2020. Deloitte’s engagement was approved by the Audit Committee of the Company’s Board of Directors.
The appointment of Deloitte was the result of a competitive request for proposal process undertaken by the Audit Committee. KPMG LLP (KPMG) continued as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019.
KPMG’s audit reports on the Company’s consolidated financial statements for the fiscal years ended December 31, 2019 and December 31, 2018 did not contain an adverse opinionThere were no changes in accountants or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. KPMG LLP's report on the Company’s consolidated financial statements for the fiscal years ended December 31, 2019 and 2018 contained a separate paragraph stating that "As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for equity investmentsdisagreements with the adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018.”
During the fiscal years ended December 31, 2019 and December 31, 2018, there were (i) no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and KPMGaccountants on any mattermatters of accounting principles or practices or financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of KPMG would have caused KPMG to make reference thereto in its reports on the consolidated financial statements of the Company for such years, and (ii) no reportable events (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
The Company provided KPMG with a copy of the Form 8-K filed on August 21, 2019 and requested that KPMG provide the Company with a letter addressed to the Securities and Exchange Commission stating KPMG agreed with the information contained therein. A copy of KPMG’s letter, dated August 21, 2019, is incorporated by reference as Exhibit 16.1 to this report.
During the fiscal years ended December 31, 2019 and December 31, 2018, neither the Company, nor any party on behalf of the Company, consulted with Deloitte with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of the audit opinion that might be rendered with respect to the Company’s consolidated financial statements, and no written report or oral advice was provided to the Company by Deloitte that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was subject to any disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).disclosure.
Item 9A.Controls and ProceduresProcedures 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, 2019.2022. 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, 2019.2022. Our internal control over financial reporting as of December 31, 20192022 has been audited by KPMGDeloitte & Touche LLP (PCAOB ID No. 34), an independent registered public accounting firm, as stated in their report on page 10191 of this report. There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 20192022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other Information – None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections – None. PART III Items 10 to 14. Items 10 through 14 (inclusive) of this Part III are not included herein because the Company will file a definitive Proxy Statement with the SEC that will include the information required by such Items, and such information is incorporated herein by reference. The Company’s Proxy Statement will be filed with the SEC and delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 7, 2020, and the information under the following captions is included in such incorporation by reference: “Share Ownership of Certain Beneficial Owners,” “Board Meetings and Compensation,” “Compensation Discussion & Analysis,” “Executive Compensation,” “Equity Compensation Plan Information,” “Executive Management,” “Corporate Governance and Board Matters,” “Audit Committee Report” and “Proposal four: Ratification of Selection of Independent Registered Public Accounting Firm.” PART IV Item 15. Exhibits and Financial Statement Schedules | (a) | (l-2) See Item 8 for Consolidated Financial Statements included in this report. |
| (3) | Exhibits. See Exhibit Index on pages 115-116. 104-105. |
| (b) | Exhibits. See Exhibit Index on pages 115-116.104-105. |
| (c) | Financial Statement Schedules. See Index to Financial Statement Schedules on page 105.94. |
INDEX TO FINANCIAL STATEMENT SCHEDULES
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.
RLI CORP. AND SUBSIDIARIES
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2019
| | | | | | | | | | | Column A | | Column B | | Column C | | Column D | | | | | | | | | | Amount at | | (in thousands) | | | | | | | | which shown in | | Type of Investment | | Cost (1) | | Fair Value | | the balance sheet | | Fixed maturities: | | | | | | | | | | | Bonds: | | | | | | | | | | | Available-for-sale: | | | | | | | | | | | U.S. government | | $ | 186,699 | | $ | 193,661 | | $ | 193,661 | | U.S. agency | | | 36,535 | | | 38,855 | | | 38,855 | | Non-U.S. government & agency | | | 7,333 | | | 7,628 | | | 7,628 | | Agency MBS | | | 411,808 | | | 420,165 | | | 420,165 | | ABS/CMBS/MBS* | | | 222,832 | | | 224,870 | | | 224,870 | | Corporate | | | 659,640 | | | 692,067 | | | 692,067 | | Municipal | | | 390,431 | | | 405,840 | | | 405,840 | | Total available-for-sale | | $ | 1,915,278 | | $ | 1,983,086 | | $ | 1,983,086 | | Total fixed maturities | | $ | 1,915,278 | | $ | 1,983,086 | | $ | 1,983,086 | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | Common stock: | | | | | | | | | | | Ind Misc and all other | | $ | 139,588 | | $ | 250,831 | | $ | 250,831 | | ETFs (Ind/misc) | | | 122,543 | | | 209,799 | | | 209,799 | | Total equity securities | | $ | 262,131 | | $ | 460,630 | | $ | 460,630 | | Cash and short-term investments | | | 46,203 | | | 46,203 | | | 46,203 | | Other invested assets | | | 70,725 | | | 70,441 | | | 70,441 | | Total investments and cash | | $ | 2,294,337 | | $ | 2,560,360 | | $ | 2,560,360 | |
*Non-agency asset-backed and commercial mortgage-backed
Note: See notes 1E and 2 of Notes to Consolidated Financial Statements. See also the accompanying report of independent registered public accounting firm on page 101 of this report.
(1)Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.
RLI CORP. AND SUBSIDIARIES SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2022 SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS | | | | | | | | | | Column A | | Column B | | Column C | | Column D | | | | | | | | | Amount at | (in thousands) | | | | | | | | which shown in | Type of Investment | | Cost (1) | | Fair Value | | the balance sheet | Fixed maturities: | | | | | | | | | | Bonds: | | | | | | | | | | Available-for-sale: | | | | | | | | | | U.S. government | | $ | 462,884 | | $ | 454,021 | | $ | 454,021 | U.S. agency | | | 75,074 | | | 73,063 | | | 73,063 | Non-U.S. government & agency | | | 6,798 | | | 5,847 | | | 5,847 | Agency MBS | | | 373,687 | | | 331,806 | | | 331,806 | ABS/CMBS/MBS* | | | 276,126 | | | 240,736 | | | 240,736 | Corporate | | | 1,122,097 | | | 1,034,330 | | | 1,034,330 | Municipal | | | 628,607 | | | 527,147 | | | 527,147 | Total available-for-sale | | $ | 2,945,273 | | $ | 2,666,950 | | $ | 2,666,950 | Total fixed maturities | | $ | 2,945,273 | | $ | 2,666,950 | | $ | 2,666,950 | | | | | | | | | | | Equity securities: | | | | | | | | | | Common stock: | | | | | | | | | | Ind Misc and all other | | $ | 109,530 | | $ | 179,643 | | $ | 179,643 | ETFs (Ind/misc) | | | 218,489 | | | 318,739 | | | 318,739 | Total equity securities | | $ | 328,019 | | $ | 498,382 | | $ | 498,382 | Cash and short-term investments | | | 59,047 | | | 59,047 | | | 59,047 | Other invested assets | | | 43,980 | | | 47,922 | | | 47,922 | Total investments and cash | | $ | 3,376,319 | | $ | 3,272,301 | | $ | 3,272,301 |
* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
December 31,
| | | | | | | | (in thousands, except share data) | | 2019 | | 2018 | | Assets | | | | | | | | Cash | | $ | 350 | | $ | 3,214 | | Investments in subsidiaries | | | 1,034,679 | | | 828,806 | | Investments in unconsolidated investee | | | 79,597 | | | 79,521 | | Fixed income: | | | | | | | | Available-for-sale, at fair value (amortized cost - $42,747 in 2019 and $58,812 in 2018) | | | 45,538 | | | 59,878 | | Property and equipment, at cost, net of accumulated depreciation of $1,562 in 2019 and $1,494 in 2018 | | | 1,846 | | | 1,914 | | Income taxes receivable - current | | | 842 | | | — | | Other assets | | | 400 | | | 547 | | Total assets | | $ | 1,163,252 | | $ | 973,880 | | | | | | | | | | Liabilities and Shareholders' Equity | | | | | | | | Liabilities: | | | | | | | | Accounts payable, affiliates | | $ | 1,310 | | $ | 130 | | Income taxes payable - current | | | — | | | 32 | | Income taxes - deferred | | | 14,578 | | | 15,081 | | Bonds payable, long-term debt | | | 149,302 | | | 149,115 | | Interest payable, long-term debt | | | 2,153 | | | 2,153 | | Other liabilities | | | 521 | | | 527 | | Total liabilities | | $ | 167,864 | | $ | 167,038 | | | | | | | | | | Shareholders’ equity: | | | | | | | | Common stock ($0.01 par value 100,000,000 share authorized) | | | | | | | | (67,799,229 shares issued and 44,869,015 shares outstanding in 2019) | | | | | | | | (67,434,257 shares issued and 44,504,043 shares outstanding in 2018) | | $ | 678 | | $ | 674 | | Paid-in capital | | | 321,190 | | | 305,660 | | Accumulated other comprehensive earnings, net of tax | | | 52,473 | | | (14,572) | | Retained earnings | | | 1,014,046 | | | 908,079 | | Deferred compensation | | | 7,980 | | | 8,354 | | Treasury stock, at cost (22,930,214 shares in 2019 and 2018) | | | (400,979) | | | (401,353) | | Total shareholders’ equity | | $ | 995,388 | | $ | 806,842 | | Total liabilities and shareholders’ equity | | $ | 1,163,252 | | $ | 973,880 | |
Note: See notes 1E and 2 of Notes to Consolidated Financial Statements. See also the accompanying reportreports of independent registered public accounting firmfirms starting on page 10191 of this report.
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)—(continued)
CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Years ended December 31,
| | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Net investment income | | $ | 1,656 | | $ | 648 | | $ | 647 | | Net realized gains (losses) | | | 463 | | | (142) | | | (36) | | Equity in earnings of unconsolidated investee | | | 13,592 | | | 12,471 | | | 14,436 | | Selling, general and administrative expenses | | | (12,686) | | | (9,427) | | | (11,340) | | Interest expense on debt | | | (7,588) | | | (7,437) | | | (7,426) | | Loss before income taxes | | $ | (4,563) | | $ | (3,887) | | $ | (3,719) | | Income tax benefit | | | (4,989) | | | (2,359) | | | (16,601) | | Net earnings (loss) before equity in net earnings of subsidiaries | | $ | 426 | | $ | (1,528) | | $ | 12,882 | | Equity in net earnings of subsidiaries | | | 191,216 | | | 65,707 | | | 92,146 | | Net earnings | | $ | 191,642 | | $ | 64,179 | | $ | 105,028 | | Other comprehensive earnings (loss), net of tax | | | | | | | | | | | Unrealized gains (losses) on securities: | | | | | | | | | | | Unrealized holding gains arising during the period | | $ | 1,727 | | $ | 710 | | $ | 21 | | Less: reclassification adjustment for (gains) losses included in net earnings | | | (365) | | | 112 | | | 6 | | Other comprehensive earnings - parent only | | $ | 1,362 | | $ | 822 | | $ | 27 | | Equity in other comprehensive earnings (loss) of subsidiaries/investees | | | 65,683 | | | (34,819) | | | 35,282 | | Other comprehensive earnings (loss) | | $ | 67,045 | | $ | (33,997) | | $ | 35,309 | | Comprehensive earnings | | $ | 258,687 | | $ | 30,182 | | $ | 140,337 | |
See Notes to Consolidated Financial Statements. See also the accompanying report of independent registered public accounting firm on page 101 of this report.
| (1) | Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. |
RLI CORP. AND SUBSIDIARIES
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)—(continued) CONDENSED BALANCE SHEETS CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
| | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | Cash flows from operating activities | | | | | | | | | | | Earnings (loss) before equity in net earnings of subsidiaries | | $ | 426 | | $ | (1,528) | | $ | 12,882 | | Adjustments to reconcile net losses to net cash provided by (used in) operating activities: | | | | | | | | | | | Net realized (gains) losses | | | (463) | | | 142 | | | 36 | | Depreciation | | | 68 | | | 68 | | | 77 | | Other items, net | | | 2,487 | | | (471) | | | 595 | | Change in: | | | | | | | | | | | Affiliate balances receivable/payable | | | 1,180 | | | 1,187 | | | (930) | | Federal income taxes | | | (1,673) | | | 3,430 | | | (6,874) | | Changes in investment in unconsolidated investee: | | | | | | | | | | | Undistributed earnings | | | (13,592) | | | (12,471) | | | (14,436) | | Dividends received | | | 13,200 | | | 9,900 | | | — | | Net cash provided by (used in) operating activities | | $ | 1,633 | | $ | 257 | | $ | (8,650) | | Cash flows from investing activities | | | | | | | | | | | Purchase of: | | | | | | | | | | | Fixed income, available-for-sale | | $ | (2,507) | | $ | (73,812) | | $ | (5,773) | | Sale of: | | | | | | | | | | | Fixed income, available-for-sale | | | 14,273 | | | 12,056 | | | 24,771 | | Property and equipment | | | — | | | — | | | 128 | | Call or maturity of: | | | | | | | | | | | Fixed income, available-for-sale | | | 29,501 | | | 75,662 | | | 3,499 | | Net proceeds from sale (purchase) of short-term investments | | | — | | | 70 | | | (47) | | Cash dividends received-subsidiaries | | | 34,003 | | | 73,363 | | | 107,000 | | Net cash provided by investing activities | | $ | 75,270 | | $ | 87,339 | | $ | 129,578 | | Cash flows from financing activities | | | | | | | | | | | Proceeds from stock option exercises | | $ | 9,490 | | $ | 6,076 | | $ | 3,502 | | Cash dividends paid | | | (93,315) | | | (90,662) | | | (124,247) | | Other | | | 4,058 | | | — | | | — | | Net cash used in financing activities | | $ | (79,767) | | $ | (84,586) | | $ | (120,745) | | Net increase (decrease) in cash | | $ | (2,864) | | $ | 3,010 | | $ | 183 | | Cash at beginning of year | | | 3,214 | | | 204 | | | 21 | | Cash at end of year | | $ | 350 | | $ | 3,214 | | $ | 204 | |
| | | | | | | (in thousands, except share data) | | 2022 | | 2021 | ASSETS | | | | | | | Cash | | $ | 1,051 | | $ | 1,433 | Short-term investments, at cost which approximates fair value | | | 2,229 | | | — | Accounts receivable, affiliates | | | 1,572 | | | 848 | Investments in subsidiaries | | | 1,084,055 | | | 1,197,997 | Investments in unconsolidated investee | | | — | | | 113,052 | Fixed income: | | | | | | | Available-for-sale, at fair value | | | 237,282 | | | 86,483 | (amortized cost of $250,904 and allowance for credit losses of $0 in 2022) | | | | | | | (amortized cost of $84,823 and allowance for credit losses of $0 in 2021) | | | | | | | Property and equipment, at cost, net of accumulated depreciation of $1,340 in 2022 and $1,697 in 2021 | | | 1,410 | | | 1,711 | Income taxes receivable - current | | | — | | | 211 | Income taxes - deferred | | | 3,204 | | | — | Other assets | | | 3,840 | | | 2,907 | TOTAL ASSETS | | $ | 1,334,643 | | $ | 1,404,642 | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | LIABILITIES | | | | | | | Income taxes payable - current | | $ | 1,823 | | $ | — | Income taxes - deferred | | | — | | | 21,067 | Current portion of long-term debt | | | 149,863 | | | — | Long-term debt | | | — | | | 149,676 | Interest payable, long-term debt | | | 2,153 | | | 2,153 | Other liabilities | | | 3,463 | | | 2,385 | TOTAL LIABILITIES | | $ | 157,302 | | $ | 175,281 | | | | | | | | SHAREHOLDERS' EQUITY | | | | | | | Common stock ($0.01 par value) | | | | | | | (Shares authorized - 200,000,000) | | | | | | | (68,399,966 shares issued and 45,469,752 shares outstanding in 2022) | | | | | | | (68,219,551 shares issued and 45,289,337 shares outstanding in 2021) | | $ | 684 | | $ | 682 | Paid-in capital | | | 352,391 | | | 343,742 | Accumulated other comprehensive earnings | | | (229,076) | | | 49,826 | Retained earnings | | | 1,446,341 | | | 1,228,110 | Deferred compensation | | | 12,015 | | | 9,642 | Treasury stock, at cost (22,930,214 shares in 2022 and 2021) | | | (405,014) | | | (402,641) | TOTAL SHAREHOLDERS’ EQUITY | | $ | 1,177,341 | | $ | 1,229,361 | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,334,643 | | $ | 1,404,642 |
Interest paid on outstanding debt amounted to $7.3 million for 2019, 2018 and 2017, respectively. See Notes to Consolidated Financial Statements. See also the accompanying reportreports of independent registered public accounting firmfirms starting on page 10191 of this report.
RLI CORP. AND SUBSIDIARIES SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)—(continued) CONDENSED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS Years ended December 31, SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
As of and for the years ended December 31, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred losses | | | | Deferred policy | | Unpaid losses | | Unearned | | Net | | and settlement | | | | acquisition | | and settlement | | premiums, | | premiums | | expenses | | (in thousands) | | costs | | expenses, gross | | gross | | earned | | current year | | Year ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 47,805 | | $ | 1,435,619 | | $ | 354,118 | | $ | 558,458 | | $ | 392,653 | | Property segment | | | 17,057 | | | 100,000 | | | 116,624 | | | 164,022 | | | 78,075 | | Surety segment | | | 20,182 | | | 38,733 | | | 69,471 | | | 116,631 | | | 17,972 | | | | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | 85,044 | | $ | 1,574,352 | | $ | 540,213 | | $ | 839,111 | | $ | 488,700 | | | | | | | | | | | | | | | | | | | Year ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 50,040 | | $ | 1,283,204 | | $ | 330,836 | | $ | 523,472 | | $ | 363,015 | | Property segment | | | 14,090 | | | 134,822 | | | 93,032 | | | 149,261 | | | 94,635 | | Surety segment | | | 20,804 | | | 43,322 | | | 72,637 | | | 118,633 | | | 20,493 | | | | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | 84,934 | | $ | 1,461,348 | | $ | 496,505 | | $ | 791,366 | | $ | 478,143 | | | | | | | | | | | | | | | | | | | Year ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 44,358 | | $ | 1,127,787 | | $ | 296,751 | | $ | 478,603 | | $ | 323,141 | | Property segment | | | 13,029 | | | 107,304 | | | 84,010 | | | 138,346 | | | 97,161 | | Surety segment | | | 20,329 | | | 36,412 | | | 70,688 | | | 120,988 | | | 20,150 | | | | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | 77,716 | | $ | 1,271,503 | | $ | 451,449 | | $ | 737,937 | | $ | 440,452 | |
NOTE 1: Investment income is not allocated to the segments, therefore, net investment income has not been provided.
| | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Net investment income | | $ | 6,245 | | $ | 2,102 | | $ | 1,412 | Net realized gains (losses) | | | 570,888 | | | (625) | | | 501 | Equity in earnings of unconsolidated investee | | | 372 | | | 22,786 | | | 10,368 | Selling, general and administrative expenses | | | (12,900) | | | (13,330) | | | (10,265) | Interest expense on debt | | | (7,622) | | | (7,616) | | | (7,603) | Earnings (loss) before income taxes | | $ | 556,983 | | $ | 3,317 | | $ | (5,587) | Income tax expense (benefit) | | | 108,699 | | | (1,585) | | | (2,885) | Net earnings (loss) before equity in net earnings of subsidiaries | | $ | 448,284 | | $ | 4,902 | | $ | (2,702) | Equity in net earnings of subsidiaries | | | 135,127 | | | 274,452 | | | 159,793 | Net earnings | | $ | 583,411 | | $ | 279,354 | | $ | 157,091 | Other comprehensive earnings (loss), net of tax | | | | | | | | | | Unrealized gains (losses) on securities: | | | | | | | | | | Unrealized holding gains (losses) arising during the period | | $ | (12,188) | | $ | (1,996) | | $ | 994 | Less: reclassification adjustment for (gains) losses included in net earnings | | | 115 | | | 500 | | | (390) | Other comprehensive earnings (loss) - parent only | | $ | (12,073) | | $ | (1,496) | | $ | 604 | Equity in other comprehensive earnings (loss) of subsidiaries/investees | | | (266,829) | | | (57,392) | | | 55,615 | Other comprehensive earnings (loss) | | $ | (278,902) | | $ | (58,888) | | $ | 56,219 | Comprehensive earnings | | $ | 304,509 | | $ | 220,466 | | $ | 213,310 |
See Notes to Consolidated Financial Statements. See also the accompanying reportreports of independent registered public accounting firmfirms starting on page 101 of this report.
RLI CORP. AND SUBSIDIARIES
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(continued)
As of and for the years ended December 31, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | Incurred | | | | | | | | | | | | | losses and | | | | | | | | | | | | | settlement | | Policy | | Other | | Net | | | | expenses | | acquisition | | operating | | premiums | | (in thousands) | | prior year | | costs | | expenses | | written | | Year ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | (62,497) | | $ | 166,499 | | $ | 41,202 | | $ | 564,979 | | Property segment | | | (4,461) | | | 55,986 | | | 16,279 | | | 181,974 | | Surety segment | | | (8,326) | | | 66,212 | | | 11,949 | | | 113,384 | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | (75,284) | | $ | 288,697 | | $ | 69,430 | | $ | 860,337 | | | | | | | | | | | | | | | | Year ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | (33,252) | | $ | 151,007 | | $ | 31,562 | | $ | 547,177 | | Property segment | | | (10,813) | | | 51,830 | | | 12,725 | | | 155,601 | | Surety segment | | | (5,885) | | | 64,901 | | | 9,516 | | | 120,397 | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | (49,950) | | $ | 267,738 | | $ | 53,803 | | $ | 823,175 | | | | | | | | | | | | | | | | Year ended December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | (17,462) | | $ | 136,135 | | $ | 32,885 | | $ | 494,649 | | Property segment | | | (12,134) | | | 51,070 | | | 14,108 | | | 137,031 | | Surety segment | | | (9,272) | | | 65,310 | | | 10,001 | | | 118,174 | | | | | | | | | | | | | | | | RLI Insurance Group | | $ | (38,868) | | $ | 252,515 | | $ | 56,994 | | $ | 749,854 | |
See the accompanying report of independent registered public accounting firm on page 10191 of this report.
RLI CORP. AND SUBSIDIARIES
SCHEDULE IV—REINSURANCE
Years ended December 31, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | Ceded to | | Assumed | | | | | of amount | | | | Direct | | other | | from other | | Net | | assumed | | (in thousands) | | amount | | companies | | companies | | amount | | to net | | 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 641,159 | | $ | 122,452 | | $ | 39,751 | | $ | 558,458 | | 7.1 | % | Property segment | | | 217,657 | | | 53,810 | | | 175 | | | 164,022 | | 0.1 | % | Surety segment | | | 122,305 | | | 5,921 | | | 247 | | | 116,631 | | 0.2 | % | | | | | | | | | | | | | | | | | RLI Insurance Group premiums earned | | $ | 981,121 | | $ | 182,183 | | $ | 40,173 | | $ | 839,111 | | 4.8 | % | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 578,643 | | $ | 96,639 | | $ | 41,468 | | $ | 523,472 | | 7.9 | % | Property segment | | | 193,855 | | | 44,634 | | | 40 | | | 149,261 | | 0.0 | % | Surety segment | | | 123,736 | | | 5,521 | | | 418 | | | 118,633 | | 0.4 | % | | | | | | | | | | | | | | | | | RLI Insurance Group premiums earned | | $ | 896,234 | | $ | 146,794 | | $ | 41,926 | | $ | 791,366 | | 5.3 | % | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casualty segment | | $ | 536,085 | | $ | 86,190 | | $ | 28,708 | | $ | 478,603 | | 6.0 | % | Property segment | | | 172,668 | | | 37,607 | | | 3,285 | | | 138,346 | | 2.4 | % | Surety segment | | | 126,365 | | | 5,905 | | | 528 | | | 120,988 | | 0.4 | % | | | | | | | | | | | | | | | | | RLI Insurance Group premiums earned | | $ | 835,118 | | $ | 129,702 | | $ | 32,521 | | $ | 737,937 | | 4.4 | % |
See the accompanying report of independent registered public accounting firm on page 101 of this report.
RLI CORP. AND SUBSIDIARIES
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | Balance | | Amounts | | Amounts | | Balance | | | | at beginning | | charged | | recovered | | at end of | | (in thousands) | | of period | | to expense | | (written off) | | period | | | | | | | | | | | | | | | | 2019 Allowance for uncollectible reinsurance | | $ | 25,911 | | $ | (647) | | $ | (198) | | $ | 25,066 | | | | | | | | | | | | | | | | 2018 Allowance for uncollectible reinsurance | | $ | 25,911 | | $ | — | | $ | — | | $ | 25,911 | | | | | | | | | | | | | | | | 2017 Allowance for uncollectible reinsurance | | $ | 25,911 | | $ | — | | $ | — | | $ | 25,911 | |
See the accompanying report of independent registered public accounting firm on page 101 of this report.
RLI CORP. AND SUBSIDIARIES SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)—(continued)
SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019, 2018 and 2017 | | | | | | | | | | | | | | | | | (in thousands) | | Deferred policy | | Claims and | | Unearned | | Net | | Net | | Affiliation with | | acquisition | | claim adjustment | | premiums, | | premiums | | investment | | Registrant (1) | | costs | | expense reserves | | gross | | earned | | income | | | | | | | | | | | | | | | | | | | 2019 | | $ | 85,044 | | $ | 1,574,352 | | $ | 540,213 | | $ | 839,111 | | $ | 68,870 | | 2018 | | $ | 84,934 | | $ | 1,461,348 | | $ | 496,505 | | $ | 791,366 | | $ | 62,085 | | 2017 | | $ | 77,716 | | $ | 1,271,503 | | $ | 451,449 | | $ | 737,937 | | $ | 54,876 | |
| | | | | | | | | | (in thousands) | | 2022 | | 2021 | | 2020 | Cash flows from operating activities | | | | | | | | | | Earnings (loss) before equity in net earnings of subsidiaries | | $ | 448,284 | | $ | 4,902 | | $ | (2,702) | Adjustments to reconcile net losses to net cash provided by (used in) operating activities: | | | | | | | | | | Net realized (gains) losses | | | (570,888) | | | 625 | | | (501) | Depreciation | | | 64 | | | 68 | | | 67 | Other items, net | | | 1,403 | | | 3,966 | | | 2,270 | Change in: | | | | | | | | | | Affiliate balances receivable/payable | | | (724) | | | (3,404) | | | 1,246 | Federal income taxes | | | (19,484) | | | 5,901 | | | 1,399 | Changes in investment in unconsolidated investee: | | | | | | | | | | Undistributed earnings | | | (372) | | | (22,786) | | | (10,368) | Net cash used in operating activities | | $ | (141,717) | | $ | (10,728) | | $ | (8,589) | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | Purchase of: | | | | | | | | | | Fixed income, available-for-sale | | $ | (1,356,177) | | $ | (33,373) | | $ | (24,950) | Other | | | (1,420) | | | (2,904) | | | (346) | Sale of: | | | | | | | | | | Fixed income, available-for-sale | | | 1,373 | | | 5,306 | | | 3,767 | Equity method investee | | | 686,566 | | | — | | | — | Other | | | 221 | | | 1,245 | | | — | Property and equipment | | | 298 | | | — | | | — | Call or maturity of: | | | | | | | | | | Fixed income, available-for-sale | | | 1,192,050 | | | 2,878 | | | 3,492 | Net purchase of short-term investments | | | (2,229) | | | — | | | — | Cash dividends received-subsidiaries | | | 13,000 | | | 180,000 | | | 110,000 | Net cash provided by investing activities | | $ | 533,682 | | $ | 153,152 | | $ | 91,963 | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | Proceeds from stock option exercises | | $ | (465) | | $ | 1,838 | | $ | 8,648 | Cash dividends paid | | | (397,323) | | | (147,422) | | | (95,793) | Other | | | 5,441 | | | 4,212 | | | 3,802 | Net cash used in financing activities | | $ | (392,347) | | $ | (141,372) | | $ | (83,343) | | | | | | | | | | | Net increase (decrease) in cash | | $ | (382) | | $ | 1,052 | | $ | 31 | Cash at beginning of year | | | 1,433 | | | 381 | | | 350 | Cash at end of year | | $ | 1,051 | | $ | 1,433 | | $ | 381 |
Interest paid on outstanding debt amounted to $7.3 million for 2022, 2021 and 2020, respectively. See Notes to Consolidated Financial Statements. See also the accompanying reports of independent registered public accounting firms starting on page 91 of this report. RLI CORP. AND SUBSIDIARIES SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION As of and for the years ended December 31, 2022, 2021 and 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred losses | | | Deferred policy | | Unpaid losses | | Unearned | | Net | | and settlement | | | acquisition | | and settlement | | premiums, | | premiums | | expenses | (in thousands) | | costs | | expenses, gross | | gross | | earned | | current year | Year ended December 31, 2022 | | | | | | | | | | | | | | | | Casualty segment | | $ | 66,285 | | $ | 1,929,091 | | $ | 466,178 | | $ | 711,832 | | $ | 468,661 | Property segment | | | 36,767 | | | 293,737 | | | 237,369 | | | 307,886 | | | 145,672 | Surety segment | | | 24,807 | | | 92,809 | | | 81,538 | | | 124,718 | | | 22,622 | RLI Insurance Group | | $ | 127,859 | | $ | 2,315,637 | | $ | 785,085 | | $ | 1,144,436 | | $ | 636,955 | | | | | | | | | | | | | | | | | Year ended December 31, 2021 | | | | | | | | | | | | | | | | Casualty segment | | $ | 55,760 | | $ | 1,760,469 | | $ | 438,248 | | $ | 633,639 | | $ | 420,259 | Property segment | | | 25,764 | | | 196,369 | | | 168,209 | | | 231,837 | | | 140,905 | Surety segment | | | 22,029 | | | 86,717 | | | 73,987 | | | 115,427 | | | 20,901 | RLI Insurance Group | | $ | 103,553 | | $ | 2,043,555 | | $ | 680,444 | | $ | 980,903 | | $ | 582,065 | | | | | | | | | | | | | | | | | Year ended December 31, 2020 | | | | | | | | | | | | | | | | Casualty segment | | $ | 48,255 | | $ | 1,567,544 | | $ | 385,736 | | $ | 569,521 | | $ | 397,174 | Property segment | | | 19,655 | | | 150,008 | | | 131,274 | | | 183,720 | | | 124,375 | Surety segment | | | 20,515 | | | 32,497 | | | 69,376 | | | 112,506 | | | 22,388 | RLI Insurance Group | | $ | 88,425 | | $ | 1,750,049 | | $ | 586,386 | | $ | 865,747 | | $ | 543,937 |
NOTE 1: Investment income is not allocated to the segments, therefore, net investment income has not been provided.
| | | | | | | | | | | | | | | | | | | Claims and claim adjustment | | | | | | | | | | | | | expenses incurred related to: | | Amortization | | Paid claims and | | Net | | | | Current | | Prior | | of deferred | | claim adjustment | | premiums | | | | year | | year | | acquisition costs | | expenses | | written | | | | | | | | | | | | | | | | | | | 2019 | | $ | 488,700 | | $ | (75,284) | | $ | 288,697 | | $ | 319,930 | | $ | 860,337 | | 2018 | | $ | 478,143 | | $ | (49,950) | | $ | 267,738 | | $ | 301,356 | | $ | 823,175 | | 2017 | | $ | 440,452 | | $ | (38,868) | | $ | 252,515 | | $ | 283,185 | | $ | 749,854 | |
(1)Consolidated property-casualty insurance operations.
See the accompanying reportreports of independent registered public accounting firmfirms starting on page 10191 of this report. RLI CORP. AND SUBSIDIARIES SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION (continued) As of and for the years ended December 31, 2022, 2021 and 2020 | | | | | | | | | | | | | | | Incurred | | | | | | | | | | | | losses and | | | | | | | | | | | | settlement | | Policy | | Other | | Net | | | expenses | | acquisition | | operating | | premiums | (in thousands) | | prior year | | costs | | expenses | | written | Year ended December 31, 2022 | | | | | | | | | | | | | Casualty segment | | $ | (87,225) | | $ | 204,397 | | $ | 52,210 | | $ | 744,607 | Property segment | | | (24,927) | | | 95,203 | | | 19,416 | | | 364,644 | Surety segment | | | (10,427) | | | 70,032 | | | 10,586 | | | 132,285 | RLI Insurance Group | | $ | (122,579) | | $ | 369,632 | | $ | 82,212 | | $ | 1,241,536 | | | | | | | | | | | | | | Year ended December 31, 2021 | | | | | | | | | | | | | Casualty segment | | $ | (108,632) | | $ | 179,354 | | $ | 47,139 | | $ | 674,709 | Property segment | | | (10,981) | | | 72,008 | | | 18,605 | | | 262,816 | Surety segment | | | (5,850) | | | 66,106 | | | 11,163 | | | 120,008 | RLI Insurance Group | | $ | (125,463) | | $ | 317,468 | | $ | 76,907 | | $ | 1,057,533 | | | | | | | | | | | | | | Year ended December 31, 2020 | | | | | | | | | | | | | Casualty segment | | $ | (75,075) | | $ | 162,058 | | $ | 40,937 | | $ | 583,244 | Property segment | | | (13,019) | | | 59,926 | | | 15,620 | | | 196,603 | Surety segment | | | (12,959) | | | 64,454 | | | 10,271 | | | 112,241 | RLI Insurance Group | | $ | (101,053) | | $ | 286,438 | | $ | 66,828 | | $ | 892,088 |
See the accompanying reports of independent registered public accounting firms starting on page 91 of this report. RLI CORP. AND SUBSIDIARIES SCHEDULE IV—REINSURANCE Years ended December 31, 2022, 2021 and 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage | | | | | | | Ceded to | | Assumed | | | | | of amount | | | | Direct | | other | | from other | | Net | | assumed | | (in thousands) | | amount | | companies | | companies | | amount | | to net | | 2022 | | | | | | | | | | | | | | | | Casualty segment | | $ | 863,530 | | $ | 186,469 | | $ | 34,771 | | $ | 711,832 | | 4.9 | % | Property segment | | | 430,010 | | | 122,415 | | | 291 | | | 307,886 | | 0.1 | % | Surety segment | | | 131,625 | | | 7,525 | | | 618 | | | 124,718 | | 0.5 | % | RLI Insurance Group premiums earned | | $ | 1,425,165 | | $ | 316,409 | | $ | 35,680 | | $ | 1,144,436 | | 3.1 | % | | | | | | | | | | | | | | | | | 2021 | | | | | | | | | | | | | | | | Casualty segment | | $ | 788,741 | | $ | 185,433 | | $ | 30,331 | | $ | 633,639 | | 4.8 | % | Property segment | | | 310,630 | | | 79,094 | | | 301 | | | 231,837 | | 0.1 | % | Surety segment | | | 122,975 | | | 7,866 | | | 318 | | | 115,427 | | 0.3 | % | RLI Insurance Group premiums earned | | $ | 1,222,346 | | $ | 272,393 | | $ | 30,950 | | $ | 980,903 | | 3.2 | % | | | | | | | | | | | | | | | | | 2020 | | | | | | | | | | | | | | | | Casualty segment | | $ | 690,718 | | $ | 148,271 | | $ | 27,074 | | $ | 569,521 | | 4.8 | % | Property segment | | | 253,781 | | | 70,398 | | | 337 | | | 183,720 | | 0.2 | % | Surety segment | | | 118,109 | | | 5,843 | | | 240 | | | 112,506 | | 0.2 | % | RLI Insurance Group premiums earned | | $ | 1,062,608 | | $ | 224,512 | | $ | 27,651 | | $ | 865,747 | | 3.2 | % |
See the accompanying reports of independent registered public accounting firms starting on page 91 of this report. RLI CORP. AND SUBSIDIARIES SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2022, 2021 and 2020 | | | | | | | | | | | | | | | Balance | | Amounts | | Amounts | | Balance | | | at beginning | | charged | | recovered | | at end of | (in thousands) | | of period | | to expense | | (written off) | | period | 2022 Allowance for uncollectible reinsurance | | $ | 27,243 | | $ | 130 | | $ | (50) | | $ | 27,323 | | | | | | | | | | | | | | 2021 Allowance for uncollectible reinsurance | | $ | 24,539 | | $ | 2,863 | | $ | (159) | | $ | 27,243 | | | | | | | | | | | | | | 2020 Allowance for uncollectible reinsurance | | $ | 25,066 | | $ | (522) | | $ | (5) | | $ | 24,539 |
See the accompanying reports of independent registered public accounting firms starting on page 91 of this report. RLI CORP. AND SUBSIDIARIES SCHEDULE VI—SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS Years ended December 31, 2022, 2021 and 2020 | | | | | | | | | | | | | | | | (in thousands) | | Deferred policy | | Claims and | | Unearned | | Net | | Net | | | acquisition | | claim adjustment | | premiums, | | premiums | | investment | Affiliation with Registrant (1) | | costs | | expense reserves | | gross | | earned | | income | 2022 | | $ | 127,859 | | $ | 2,315,637 | | $ | 785,085 | | $ | 1,144,436 | | $ | 86,078 | 2021 | | $ | 103,553 | | $ | 2,043,555 | | $ | 680,444 | | $ | 980,903 | | $ | 68,862 | 2020 | | $ | 88,425 | | $ | 1,750,049 | | $ | 586,386 | | $ | 865,747 | | $ | 67,893 |
| | | | | | | | | | | | | | | | | | Claims and claim adjustment | | | | | | | | | | | | expenses incurred related to: | | Amortization | | Paid claims and | | Net | | | Current | | Prior | | of deferred | | claim adjustment | | premiums | | | year | | year | | acquisition costs | | expenses | | written | 2022 | | $ | 636,955 | | $ | (122,579) | | $ | 369,632 | | $ | 374,297 | | $ | 1,241,536 | 2021 | | $ | 582,065 | | $ | (125,463) | | $ | 317,468 | | $ | 327,453 | | $ | 1,057,533 | 2020 | | $ | 543,937 | | $ | (101,053) | | $ | 286,438 | | $ | 325,054 | | $ | 892,088 |
| (1) | Consolidated property-casualty insurance operations. |
| (2) | See the accompanying reports of independent registered public accounting firms starting on page 91 of this report. |
EXHIBIT INDEX | | | | | | Exhibit No. | | Description of Document | | Reference (page) | | | | | | 3.1 | | Amended and Restated Certificate of Incorporation | | Incorporated by reference to the Company’s Form 8-K filed May 8, 2018.2020. | | | | | | 3.2 | | By-Laws | | Incorporated by reference to the Company’s Form 8-K filed May 8, 2018. | | | | | | 4.1 | | Senior Indenture | | Incorporated by reference to the Company’s Form 8-K filed October 2, 2013. | | | | | | 4.2 | | Supplemental Indenture | | Incorporated by reference to the Company’s Form 8-K filed May 8, 2018. | | | | | | 4.3 | | Description of Securities | | Attached as Exhibit 4.3. | | | | | | 10.1 | | RLI Corp. Nonqualified Agreement* | | Attached as Exhibit 10.1.Incorporated by reference to the Company’s Form 10-K filed on February 21, 2020.
| | | | | | 10.2 | | RLI Corp. Nonemployee Directors’ Deferred Compensation Plan, as amended* | | Attached as Exhibit 10.2.Incorporated by reference to the Company’s Form 10-K filed on February 21, 2020.
| | | | | | 10.3 | | RLI Corp. Executive Deferred Compensation Plan, as amended* | | Attached as Exhibit 10.3.
| 10.4
|
| Key Employee Excess Benefit Plan, as amended*
|
| Incorporated by reference to the Company’s Form 10-K filed on February 25, 2009.18, 2022. | 10.5
| | | | | 10.4 | | RLI Corp. 2010 Long-Term Incentive Plan* | | Incorporated by reference to the Company’s Form 8-K filed on May 6, 2010. | 10.6
| | | | | 10.5 | | RLI Corp. Annual Incentive Compensation Plan*Plan, as amended* | | Incorporated by reference to the Company’s Form 10-K10-Q filed February 23, 2018.July 24, 2020. | 10.7
| | | | | 10.6 | | 2023 Market Value Potential (MVP), Executive Incentive Program Guideline* | | Attached as Exhibit 10.7.10.6. | | | | | | 10.7 | | RLI Corp. 2015 Long-Term Incentive Plan, as amended* | | Incorporated by reference to the Company’s Form 10-Q filed on July 24, 2020. | | | | | | 10.8 | | Management Incentive Program Guideline* | | Attached as Exhibit 10.8. | | | | | | 10.9 | | RLI Underwriting Profit Program Guideline* | | Attached as Exhibit 10.9. | | | | | | 10.10 | | Advances, Collateral Pledge, and Security Agreement (Federal Home Loan Bank of Chicago) | | Incorporated by reference to the Company’s Form 8-K filed September 26, 2014. | 10.9
| | | | | 10.11 | | Credit Agreement (JPMorgan Chase Bank, N.A.(Bank of Montreal, Chicago Branch.) | | Incorporated by reference to the Company’s Form 8-K filed May 30, 2018.March 31, 2020. | 10.10
| | RLI Corp. 2015 Long-Term Incentive Plan*
| | Incorporated by reference to the Company’s Form 8-K filed on May 7, 2015.
| 10.1110.12
| | RLI Corp. Director and Officer Indemnification Agreement | | Incorporated by reference to the Company’s Form 10-Q filed October 24, 2018. | 10.12
| | | | | 10.13 | | Shareholders Agreement by and among RLI Corp., Walter F. Hester III, and the Walter F. Hester III Revocable TrustAmended 2022 MVP Executive Incentive Program Guideline*
| | Incorporated by reference to the Company’s Form 8-K filed on August 21, 2018.Attached as Exhibit 10.13.
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*Management contract or compensatory plan.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RLI Corp. (Registrant) | | | By: | /s/ Todd W. Bryant | | | Todd W. Bryant, |
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| Vice President, Chief Financial Officer
| | | | | Date: | February 21, 202024, 2023 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | By: | /s/ Jonathan E. MichaelCraig W. Kliethermes | | By: | /s/ Todd W. Bryant | | Jonathan E. Michael, ChairmanCraig W. Kliethermes, President & CEO
| | | Todd W. Bryant, Vice President,Chief Financial Officer | | (Principal Executive Officer) | | | Chief(Principal Financial Officer (Principal Financial
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| Officer and Principal Accounting Officer)
| | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 202024, 2023 | | | | | | By: | /s/ Kaj Ahlmann | | By: | /s/ JordanCraig W. GrahamKliethermes | | Kaj Ahlmann, Director | | | JordanCraig W. Graham,Kliethermes, Director
| | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 202024, 2023 | | | | | | By: | /s/ Michael E. Angelina | | By: | /s/ Paul B. Medini | | Michael E. Angelina, Director | | | Paul B. Medini, Director | | | | | | Date: | February 24, 2023 | | Date: | February 24, 2023 | | | | | | By: | /s/ John T. Baily | | By: | /s/ Jonathan E. Michael | | Michael E. Angelina,John T. Baily, Director
| | | Jonathan E. Michael, Director | | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 202024, 2023 | | | | | | By: | /s/ John T. BailyDavid B. Duclos | | By: | /s/ Robert P. Restrepo, Jr. | | John T. Baily,David B. Duclos, Director
| | | Robert P. Restrepo, Jr., Director | | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 202024, 2023 | | | | | | By: | /s/ Calvin G. Butler, Jr.Susan S. Fleming | | By: | /s/ Debbie S. Roberts | | Calvin G. Butler, Jr.,Susan S. Fleming, Director
| | | Debbie S. Roberts, Director | | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 202024, 2023 | | | | | | By: | /s/ David B. DuclosJordan W. Graham | | By: | /s/ Michael J. Stone | | David B. Duclos,Jordan W. Graham, Director
| | | Michael J. Stone, Director | | | | | | Date: | February 21, 202024, 2023 | | Date: | February 21, 2020 |
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| By:
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| Susan S. Fleming, Director
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| 24, 2023
| | | | | | Date:
| February 21, 2020
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