as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, ~~the~~all paid and unpaid balances recoverable for the reinsurer are specifically identified and ~~written off through the use of~~expensed into our allowance for estimated unrecoverable amounts from reinsurers. ~~When we write-off such a~~We then re-evaluate the remaining allowance and determine whether the balance it is ~~done in full.~~sufficient as detailed above and if needed, an additional allowance is recognized and income charged.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were ~~$15.7~~$15.9 million and ~~$8.5~~$9.0 million, respectively, at March 31, ~~2020.~~2021. At December 31, ~~2019,~~2020, the amounts were ~~$15.7~~$15.9 million and ~~$9.4~~$8.6 million, respectively. ~~Adoption of ASU 2016-03 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other changes~~Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. NoNaN write-offs or ~~recoveries~~ were applied to the allowances in the first ~~quarter~~three months of ~~2020.~~2021 and less than $0.1 million was recovered. We have 0 receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

D.7

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E. INTANGIBLE ASSETS

~~Goodwill~~The composition of goodwill and intangible assets ~~totaled $54.0 million and $54.1 million~~ at March 31, ~~2020~~2021 and December 31, ~~2019, respectively, as~~2020 is detailed in the following table:

Goodwill and Intangible Assets

March 31,

December 31,
(in thousands)

2020

2019
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

Indefinite-lived intangibles - state insurance licenses

7,500

7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19

463

565
Total intangibles

$
7,963

$
8,065

Total goodwill and intangibles

$
54,025

$
54,127

	March 31,		December 31,
(in thousands)	2021		2020
Goodwill
Surety	$	40,816	$	40,816
Casualty		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,980 at 3/31/21 and $3,878 at 12/31/20		55		157
Total intangibles	$	7,555	$	7,657
Total goodwill and intangibles	$	53,617	$	53,719

All definite-lived intangible assets are amortized based on their estimated useful lives. Amortization of intangible assets was $0.1 million for the first quarter of ~~2020~~2021 and ~~2019.~~2020.

Annual impairment ~~assessment was~~assessments were performed on our ~~energy surety~~ goodwill ~~miscellaneous and contract surety~~ ~~goodwill, small commercial~~ ~~goodwill~~ and state insurance license indefinite-lived intangible asset during ~~2019.~~2020. Based upon these reviews, NaN of the assets were impaired. In addition, there were no triggering events as of March 31, ~~2020~~2021 that would suggest an updated impairment test would be needed for our goodwill and intangible ~~assets should be tested for impairment.~~assets.

E.F. EARNINGS PER SHARE

Basic earnings per share (EPS) ~~excludes dilution and~~ 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 ~~common stock equivalents~~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 ~~the common stock equivalents.~~these items. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:

	For the Three Months						For the Three Months
	Ended March 31, 2021						Ended March 31, 2020
	Income		Shares		Per Share		Income			Shares		Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)		Amount		(Numerator)			(Denominator)		Amount
Basic EPS
Earnings (loss) available to common shareholders	$	73,012		45,178	$	1.62	$	(61,267	)		44,920	$	(1.36	)
Effect of Dilutive Securities
Stock options and restricted stock units		—		496				—			—
Diluted EPS
Earnings (loss) available to common shareholders	$	73,012		45,674	$	1.60	$	(61,267	)		44,920	$	(1.36	)
Anti-dilutive options excluded from diluted EPS				—							94

~~Table of Contents~~

For the Three-Month Period

For the Three-Month Period

Ended March 31, 2020

Ended March 31, 2019

Income

Shares

Per Share

Income

Shares

Per Share
(in thousands, except per share data)

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic EPS

Earnings (loss) available to common shareholders

$
(61,267)

44,920

$
(1.36)

$
65,473

44,536

$
1.47
Effect of Dilutive Securities

Stock options

-

-

-

351

Diluted EPS

Earnings (loss) available to common shareholders

$
(61,267)

44,920

$
(1.36)

$
65,473

44,887

$
1.46

F.G. COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio. In reporting ~~other~~the components of comprehensive ~~earnings on a net basis in the statement of~~ earnings, we used the federal statutory tax rate of 21 percent. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax ~~expense (benefit)~~benefit of ~~$(3.5)~~$11.9 million and ~~$7.8~~$3.5 million for the first quarter of ~~2020~~2021 and ~~2019,~~2020, respectively.

Unrealized ~~gains (losses),~~losses, net of tax, ~~on the fixed income portfolio~~recognized in other comprehensive earnings (loss) were ~~$(13.0)~~$44.7 million for the first three months of ~~2020,~~2021, compared to ~~$29.3~~$13.0 million during the same period last year. ~~Unrealized~~The unrealized losses ~~in the first three months of 2020~~ were attributable to ~~widening credit spreads, which more than offset declines in~~increased interest rates ~~and~~in both periods, which decreased the fair value of securities held in the fixed income portfolio. ~~In contrast, declining interest rates increased the fair value~~

Table of ~~securities held in the fixed income portfolio in the first three months of 2019.~~Contents

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings ~~(loss)~~ for each period presented in the unaudited condensed consolidated interim financial statements:


(in thousands)	For the Three-Month Periods				For the Three Months
	Ended March 31,
					Ended March 31,
Unrealized Gains/Losses on Available-for-Sale Securities	2020		2019		2021			2020

Beginning balance	$	52,473	$	(14,572)	$	108,714		$	52,473
Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.)		22		-
Cumulative-effect adjustment of ASU 2016-13						—			22
Adjusted beginning balance	$	52,495	$	(14,572)	$	108,714		$	52,495
Other comprehensive earnings before reclassifications		(11,880)		29,795
Other comprehensive loss before reclassifications						(43,795	)		(11,880	)
Amounts reclassified from accumulated other comprehensive earnings		(1,151)		(494)		(952	)		(1,151	)
Net current-period other comprehensive earnings (loss)	$	(13,031)	$	29,301
Net current-period other comprehensive loss					$	(44,747	)	$	(13,031	)
Ending balance	$	39,464	$	14,729	$	63,967		$	39,464
Balance of securities for which an allowance for credit losses has been recognized in net earnings	$	5,727	$	-	$	463		$	5,727

Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. During the first quarter of 2020, $0.8 million of credit loss expense was recognized on available-for sale securities, increasing the allowance for credit losses on fixed income securities to $0.9 million. No ~~write-offs or~~ ~~recoveries~~ ~~were applied to the allowances in the first quarter of 2020.~~ The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table:

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three Months
Component of Accumulated	Ended March 31,						Affected line item in the
Other Comprehensive Earnings	2021			2020			Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	1,183		$	2,306		Net realized gains
		22			(849	)	Credit losses presented within net realized gains
	$	1,205		$	1,457		Earnings (loss) before income taxes
		(253	)		(306	)	Income tax benefit (expense)
	$	952		$	1,151		Net earnings (loss)

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Amount Reclassified from Accumulated Other

(in thousands)

Comprehensive Earnings

For the Three-Month

Component of Accumulated

Periods Ended March 31,

Affected line item in the
Other Comprehensive Earnings

2020

2019

Statement of Earnings

Unrealized gains and losses on available-for-sale securities

$
2,306

$
625

Net realized gains

(849)

-

Credit losses presented within net realized gains

$
1,457

$
625

Earnings (loss) before income taxes

(306)

(131)

Income tax benefit (expense)

$
1,151

$
494

Net earnings (loss)

G.H. FAIR VALUE MEASUREMENTS

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.

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.

Pricing 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.

Table of Contents

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, agency, government and municipal securities ~~were~~are deemed Level 2.

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

Regulation D Private Placement Securities: All Regulation D ~~privately placed~~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

~~Table of Contents~~

average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company. An increase to the credit spread assumptions would result in a lower fair ~~value measurement.~~value.

For all of our fixed income securities classified as Level 2, ~~as described above,~~ 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 both comparisons, if~~If discrepancies are found in our comparisons, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing services are reasonable.

Common Stock: As of March 31, ~~2020,~~2021, nearly all of our common stock holdings ~~are~~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 securities not traded on an exchange is provided by a third-party pricing source and is classified as Level 2.

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.

H.I. RISKS AND UNCERTAINTIES

Certain risks and uncertainties are inherent to our day-to-day operations. Adverse changes in the economy could lower demand for our insurance products or negatively impact our investment results, both of which could have an adverse effect on the revenue and profitability of our operations. The ~~global~~ COVID-19 pandemic ~~has resulted in and is expected to~~may continue to result in significant disruptions in economic activity and financial markets. The cumulative effects of ~~COVID-19 on the Company, and the effect of~~ any ~~other~~ public health outbreak ~~cannot be predicted at this time, but~~ could reduce demand for our insurance policies, result in increased level of losses, settlement expenses or other operating costs, reduce the market value of invested assets held by the Company or negatively impact the fair value of our goodwill.

~~Catastrophe Exposures~~

Our catastrophe reinsurance treaty renewed on January 1, 2020. We purchased limits of $400 million in excess of $25 million first-dollar retention for earthquakes in California, $425 million in excess of $25 million first-dollar retention for earthquakes outside of California and $275 million in excess of $25 million first-dollar retention for all other perils. These amounts are subject to certain co-participations by the Company on losses in excess of the $25 million retentions. On March 1, 2020, we purchased $100 million of additional catastrophe reinsurance protection on top of the previously described coverage. This increases the limits to $500 million for earthquakes in California, $525 million for earthquakes outside of California and $375 for all other perils, all of which are still subject to $25 million first-dollar retentions and certain co-participations in excess of the retentions.

2. INVESTMENTS

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value.

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the three-month periods ended March 31, ~~2020~~2021 and ~~2019:~~2020:

1110

Table of Contents

Sales	Proceeds		Gross Realized					Net Realized
(in thousands)	From Sales		Gains		Losses			Gain (Loss)
2021
Available-for-sale	$	21,273	$	1,003	$	(27	)	$	976
Equities		47,638		14,233		(1,150	)		13,083
2020
Available-for-sale	$	19,858	$	2,270	$	(102	)	$	2,168
Equities		38,042		17,792		(2,633	)		15,159

SALES

Proceeds

Gross Realized

Net Realized
(in thousands)

From Sales

Gains

Losses

Gain (Loss)
2020

Available-for-sale

$
19,858

$
2,270

$
(102)

$
2,168
Equities

38,042

17,792

(2,633)

15,159
2019

Available-for-sale

$
92,277

$
1,356

$
(723)

$
633
Equities

26,347

9,034

(592)

8,442

Calls/Maturities			Gross Realized					Net Realized
(in thousands)	Proceeds		Gains		Losses			Gain (Loss)
2021
Available-for-sale	$	96,285	$	255	$	(48	)	$	207
2020
Available-for-sale	$	54,890	$	145	$	(7	)	$	138

CALLS/MATURITIES

Gross Realized

Net Realized
(in thousands)

Proceeds

Gains

Losses

Gain (Loss)
2020

Available-for-sale

$
54,890

$
145

$
(7)

$
138
2019

Available-for-sale

$
24,745

$
1

$
(9)

$
(8)

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized below:

As of March 31, 2020

Fair Value Measurements Using


Quoted Prices in

Significant Other

Significant



Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Fixed income securities - available-for-sale

U.S. government

$
—

$
186,974

$
—

$
186,974
U.S. agency

—

37,042

—

37,042
Non-U.S. govt. & agency

—

7,316

—

7,316
Agency MBS

—

414,262

—

414,262
ABS/CMBS*

—

223,601

—

223,601
Corporate

—

683,615

4,803

688,418
Municipal

—

405,972

—

405,972
Total fixed income securities - available-for-sale

$
—

$
1,958,782

$
4,803

$
1,963,585
Equity securities

356,403

—

—

356,403
Other invested assets

12,056

—

—

12,056
Total

$
368,459

$
1,958,782

$
4,803

$
2,332,044

As of December 31, 2019

Fair Value Measurements Using

Quoted Prices in

Significant Other

Significant



Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(in thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Fixed income securities - available-for-sale

U.S. government

$
—

$
193,661

$
—

$
193,661
U.S. agency

—

38,855

—

38,855
Non-U.S. govt. & agency

—

7,628

—

7,628
Agency MBS

—

420,165

—

420,165
ABS/CMBS*

—

224,870

—

224,870
Corporate

—

690,297

1,770

692,067
Municipal

—

405,840

—

405,840
Total fixed income securities - available-for-sale

$
—

$
1,981,316

$
1,770

$
1,983,086
Equity securities

460,630

—

—

460,630
Total

$
460,630

$
1,981,316

$
1,770

$
2,443,716

	As of March 31, 2021
	Fair Value Measurements Using
		Quoted Prices in		Significant Other		Significant
		Active Markets for		Observable		Unobservable
		Identical Assets		Inputs		Inputs
(in thousands)		(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government		$	—	$	170,422	$	—	$	170,422
U.S. agency			—		31,666		—		31,666
Non-U.S. government & agency			—		8,555		—		8,555
Agency MBS			—		369,212		—		369,212
ABS/CMBS/MBS*			—		218,232		—		218,232
Corporate			—		810,751		22,452		833,203
Municipal			—		544,579		—		544,579
Total fixed income securities - available-for-sale		$	—	$	2,153,417	$	22,452	$	2,175,869
Equity securities			555,105		104		—		555,209
Other invested assets			—		—		—		—
Total		$	555,105	$	2,153,521	$	22,452	$	2,731,078

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

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

Table of Contents

~~As of March 31, 2020, we had $4.8 million~~

	As of December 31, 2020
	Fair Value Measurements Using
		Quoted Prices in		Significant Other		Significant
		Active Markets for		Observable		Unobservable
		Identical Assets		Inputs		Inputs
(in thousands)		(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government		$	—	$	183,357	$	—	$	183,357
U.S. agency			—		32,872		—		32,872
Non-U.S. government & agency			—		10,965		—		10,965
Agency MBS			—		402,071		—		402,071
ABS/CMBS/MBS*			—		218,373		—		218,373
Corporate			—		798,794		17,798		816,592
Municipal			—		532,396		—		532,396
Total fixed income securities - available-for-sale		$	—	$	2,178,828	$	17,798	$	2,196,626
Equity securities			523,923		83		—		524,006
Other invested assets			6,068		—		—		6,068
Total		$	529,991	$	2,178,911	$	17,798	$	2,726,700

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

The following table summarizes changes in the balance of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3). ~~The following table summarizes changes in the balance of these Level 3 securities.~~

Level 3
(in thousands)

Securities
Balance as of January 1, 2020

$
1,770
Net realized and unrealized gains (losses)

Included in net earnings (loss) as a part of:

Net investment income

(5)
Net realized gains

(16)
Included in other comprehensive earnings (loss)

(1,048)
Total net realized and unrealized gains (losses)

$
(1,069)
Purchases

4,102
Balance as of March 31, 2020

$
4,803

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end -
included in net realized gains

$
(16)
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end -
included in other comprehensive earnings (loss)

$
(1,048)

(in thousands)	Level 3 Securities
Balance as of January 1, 2021	$	17,798
Net realized and unrealized gains (losses)
Included in net earnings as a part of:
Net investment income		(13	)
Net realized gains		(192	)
Included in other comprehensive earnings (loss)		(606	)
Total net realized and unrealized gains (losses)	$	(811	)
Purchases		5,465
Balance as of March 31, 2021	$	22,452
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains	$	(192	)
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings	$	(606	)

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of March 31, ~~2020~~2021 were as follows:

March 31, 2020
Available-for-sale

Amortized

Fair
(in thousands)

Cost

Value
Due in one year or less

$
56,844

$
56,702
Due after one year through five years

442,572

449,447
Due after five years through 10 years

549,193

569,898
Due after 10 years

236,938

249,675
Mtge/ABS/CMBS*

627,304

637,863
Total available-for-sale

$
1,912,851

$
1,963,585

	March 31, 2021
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	105,159	$	106,340
Due after one year through five years		512,686		539,027
Due after five years through 10 years		522,850		552,085
Due after 10 years		382,756		390,973
ABS/CMBS/MBS*		573,401		587,444
Total available-for-sale	$	2,096,852	$	2,175,869

*Mortgage-backed, asset-backed and commercial mortgage-backed

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

The amortized cost and fair value of available-for-sale securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are presented in the tables below. Amortized cost does not include the ~~$13.9 million and $13.5~~$14.9 million of accrued interest receivable as of March 31, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020.

Available-for-sale

March 31, 2020
(in thousands)

Cost or

Allowance

Gross

Gross



Amortized

for Credit

Unrealized

Unrealized

Fair
Asset Class

Cost

Losses

Gains

Losses

Value
U.S. government

$
171,026

$
-

$
15,948

$
-

$
186,974
U.S. agency

32,236

-

4,806

-

37,042
Non-U.S. govt. & agency

7,324

-

105

(113)

7,316
Agency MBS

396,474

-

17,807

(19)

414,262
ABS/CMBS*

230,830

(21)

1,908

(9,116)

223,601
Corporate

685,116

(857)

23,364

(19,205)

688,418
Municipal

389,845

-

16,203

(76)

405,972
Total Fixed Income

$
1,912,851

$
(878)

$
80,141

$
(28,529)

$
1,963,585

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

Table of Contents

Available-for-sale

December 31, 2019
(in thousands)

Cost or

Allowance

Gross

Gross



Amortized

for Credit

Unrealized

Unrealized

Fair
Asset Class

Cost

Losses

Gains

Losses

Value
U.S. government

$
186,699

$
-

$
6,994

$
(32)

$
193,661
U.S. agency

36,535

-

2,362

(42)

38,855
Non-U.S. govt. & agency

7,333

-

295

-

7,628
Agency MBS

411,808

-

8,920

(563)

420,165
ABS/CMBS*

222,832

-

2,514

(476)

224,870
Corporate

659,640

-

33,245

(818)

692,067
Municipal

390,431

-

16,131

(722)

405,840
Total Fixed Income

$
1,915,278

$
-

$
70,461

$
(2,653)

$
1,983,086

	March 31, 2021
	Cost or		Allowance			Gross		Gross
	Amortized		for Credit			Unrealized		Unrealized			Fair
(in thousands)	Cost		Losses			Gains		Losses			Value
U.S. government	$	161,956	$	—		$	9,539	$	(1,073	)	$	170,422
U.S. agency		28,883		—			2,783		—			31,666
Non-U.S. government & agency		8,296		—			407		(148	)		8,555
Agency MBS		358,224		—			14,007		(3,019	)		369,212
ABS/CMBS/MBS*		215,177		—			3,713		(658	)		218,232
Corporate		796,042		(375	)		42,200		(4,664	)		833,203
Municipal		528,274		—			21,781		(5,476	)		544,579
Total Fixed Income	$	2,096,852	$	(375	)	$	94,430	$	(15,038	)	$	2,175,869

	December 31, 2020
	Cost or		Allowance			Gross		Gross
	Amortized		for Credit			Unrealized		Unrealized			Fair
(in thousands)	Cost		Losses			Gains		Losses			Value
U.S. government	$	170,110	$	—		$	13,504	$	(257	)	$	183,357
U.S. agency		28,902		—			3,970		—			32,872
Non-U.S. government & agency		10,298		—			667		—			10,965
Agency MBS		384,015		—			18,789		(733	)		402,071
ABS/CMBS/MBS*		213,223		(17	)		5,580		(413	)		218,373
Corporate		753,404		(380	)		64,501		(933	)		816,592
Municipal		501,515		—			31,099		(218	)		532,396
Total Fixed Income	$	2,061,467	$	(397	)	$	138,110	$	(2,554	)	$	2,196,626

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

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required the recognition of a ~~reversible~~reversable allowance for credit losses on available-for-sale fixed income securities. ~~See note 1. B. for more information on the adoption of the ASU.~~ Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including:

●

•

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

●

•

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

●

•

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

●

•

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

●

•

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

●

•

Downgrades in credit quality by a major rating agency.

As of March 31, ~~2020,~~2021, the discounted cash flow analysis resulted in an allowance for credit losses on ~~39 securities totaling $0.9 million. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the~~16 securities. ~~Based on our analysis, we believe we will recover the amortized cost basis on the available-for-sale securities not included~~The following table presents changes in the allowance for expected credit ~~losses. We do not intend to sell the~~losses on available-for-sale ~~securities in an unrealized loss position and it is not more likely than not that we will be required to sell the investments before recovery~~securities:

Table of the amortized cost basis. 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.Contents

~~Prior to the adoption of ASU 2016-13, we conducted reviews of fixed income securities with unrealized losses to evaluate whether an impairment was other-than-temporary.~~ Any credit-related impairment on fixed income securities we did not plan to sell and for which we were not more likely than not to be required to sell were recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. We did ~~not~~ ~~recognize any other-than-temporary impairment losses in earnings on the fixed income portfolio in the first three months of 2019.~~

	Three Months Ended March 31,
(in thousands)	2021			2020
Beginning balance	$	397		$	0
Adoption impact of ASU 2016-13		-			28
Increase to allowance from securities for which credit losses were not previously recorded		-			624
Net increase (decrease) from securities that had an allowance at the beginning of the period		(22	)		226
Balance as of March 31,	$	375		$	878

As of March 31, ~~2020,~~2021, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained ~~381~~320 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The ~~$28.5~~$15.0 million in associated unrealized losses represents ~~1.5~~0.7 percent of the fixed income portfolio’s cost basis and ~~1.2~~0.5 percent of total invested ~~assets~~. assets. Isolated to these securities, u~~Unrealized~~nrealized losses increased through the first three months of ~~2020,~~2021, as ~~increased credit spreads more than offset~~

~~Table of Contents~~

~~declines in~~ interest rates increased during the period. Of the total ~~420~~320 securities, 3032 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 March 31, 2021 and December 31, 2020, after factoring in the allowance for credit ~~losses,~~losses. All fixed income securities continue to pay the expected coupon payments and ~~December 31, 2019.~~we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

March 31, 2020

December 31, 2019
(in thousands)

< 12 Mos.

12 Mos. &
Greater

Total

< 12 Mos.

12 Mos. &
Greater

Total

U.S. government

Fair value

$
—

$
—

$
—

$
2,505

$
8,463

$
10,968
Amortized cost

—

—

—

2,506

8,494

11,000
Unrealized Loss

$
—

$
—

$
—

$
(1)

$
(31)

$
(32)

U.S. agency

Fair value

$
—

$
—

$
—

$
6,794

$
—

$
6,794
Amortized cost

—

—

—

6,836

—

6,836
Unrealized Loss

$
—

$
—

$
—

$
(42)

$
—

$
(42)

Non-U.S. government

Fair value

$
3,011

$
—

$
3,011

$
—

$
—

$
—
Amortized cost

3,124

—

3,124

—

—

—
Unrealized Loss

$
(113)

$
—

$
(113)

$
—

$
—

$
—

Agency MBS

Fair value

$
249

$
1,296

$
1,545

$
21,548

$
41,718

$
63,266
Amortized cost

249

1,315

1,564

21,664

42,165

63,829
Unrealized Loss

$
—

$
(19)

$
(19)

$
(116)

$
(447)

$
(563)

ABS/CMBS*

Fair value

$
126,540

$
15,405

$
141,945

$
74,968

$
18,036

$
93,004
Amortized cost

134,660

16,401

151,061

75,332

18,148

93,480
Unrealized Loss

$
(8,120)

$
(996)

$
(9,116)

$
(364)

$
(112)

$
(476)

Corporate

Fair value

$
220,349

$
4,182

$
224,531

$
16,478

$
9,348

$
25,826
Amortized cost

238,510

5,226

243,736

16,950

9,694

26,644
Unrealized Loss

$
(18,161)

$
(1,044)

$
(19,205)

$
(472)

$
(346)

$
(818)

Municipal

Fair value

$
7,301

$
—

$
7,301

$
47,018

$
—

$
47,018
Amortized cost

7,377

—

7,377

47,740

—

47,740
Unrealized Loss

$
(76)

$
—

$
(76)

$
(722)

$
—

$
(722)

Total fixed income

Fair value

$
357,450

$
20,883

$
378,333

$
169,311

$
77,565

$
246,876
Amortized cost

383,920

22,942

406,862

171,028

78,501

249,529
Unrealized Loss

$
(26,470)

$
(2,059)

$
(28,529)

$
(1,717)

$
(936)

$
(2,653)

	March 31, 2021									December 31, 2020
(in thousands)	< 12 Mos.			12 Mos. & Greater			Total			< 12 Mos.			12 Mos. & Greater			Total
U.S. government
Fair value	$	4,864		$	—		$	4,864		$	5,680		$	—		$	5,680
Amortized cost		5,937			—			5,937			5,937			—			5,937
Unrealized loss	$	(1,073	)	$	—		$	(1,073	)	$	(257	)	$	—		$	(257	)
Non-U.S. government
Fair value	$	2,852		$	—		$	2,852		$	—		$	—		$	—
Amortized cost		3,000			—			3,000			—			—			—
Unrealized Loss	$	(148	)	$	—		$	(148	)	$	—		$	—		$	—
Agency MBS
Fair value	$	92,446		$	—		$	92,446		$	43,999		$	—		$	43,999
Amortized cost		95,465			—			95,465			44,732			—			44,732
Unrealized loss	$	(3,019	)	$	—		$	(3,019	)	$	(733	)	$	—		$	(733	)
ABS/CMBS/MBS*
Fair value	$	55,703		$	7,235		$	62,938		$	32,771		$	16,161		$	48,932
Amortized cost		56,341			7,255			63,596			33,094			16,251			49,345
Unrealized loss	$	(638	)	$	(20	)	$	(658	)	$	(323	)	$	(90	)	$	(413	)
Corporate
Fair value	$	165,717		$	14,193		$	179,910		$	52,655		$	6,235		$	58,890
Amortized cost		170,204			14,370			184,574			53,440			6,383			59,823
Unrealized loss	$	(4,487	)	$	(177	)	$	(4,664	)	$	(785	)	$	(148	)	$	(933	)
Municipal
Fair value	$	115,596		$	—		$	115,596		$	25,676		$	—		$	25,676
Amortized cost		121,072			—			121,072			25,894			—			25,894
Unrealized loss	$	(5,476	)	$	—		$	(5,476	)	$	(218	)	$	—		$	(218	)
Total fixed income
Fair value	$	437,178		$	21,428		$	458,606		$	160,781		$	22,396		$	183,177
Amortized cost		452,019			21,625			473,644			163,097			22,634			185,731
Unrealized loss	$	(14,841	)	$	(197	)	$	(15,038	)	$	(2,316	)	$	(238	)	$	(2,554	)

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

Table of Contents

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at March 31, ~~2020~~2021 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized			Percent
Rating	Rating	Rating	Cost		Fair Value		Loss			to Total
1	AAA/AA/A	Aaa/Aa/A	$	365,229	$	352,591	$	(12,638	)		84.1	%
2	BBB	Baa		55,575		54,161		(1,414	)		9.4	%
3	BB	Ba		23,838		23,455		(383	)		2.5	%
4	B	B		26,201		25,616		(585	)		3.9	%
5	CCC	Caa		2,801		2,783		(18	)		0.1	%
6	CC or lower	Ca or lower		-		-		-			0.0	%
		Total	$	473,644	$	458,606	$	(15,038	)		100.0	%

~~Table of Contents~~

Equivalent

Equivalent

(dollars in thousands)

NAIC

S&P

Moody’s

Amortized




Unrealized

Percent

Rating

Rating

Rating

Cost

Fair Value

Loss

to Total

1

AAA/AA/A

Aaa/Aa/A

$
202,517

$
191,912

$
(10,605)

37.2
%
2

BBB

Baa

85,785

80,759

(5,026)

17.6
%
3

BB

Ba

65,256

59,398

(5,858)

20.5
%
4

B

B

50,630

44,392

(6,238)

21.9
%
5

CCC

Caa

2,674

1,872

(802)

2.8
%
6

CC or lower

Ca or lower

-

-

-

-
%

Total

$
406,862

$
378,333

$
(28,529)

100.0
%

Unrealized Gains and Losses on Equity Securities

Unrealized gains recognized on equity securities still held as of March 31, 2021 were $41.2 million during the first quarter. Comparatively, unrealized losses recognized on equity securities still held as of March 31, 2020 were $115.2 million during the first ~~quarter of 2020. Comparatively, unrealized gains recognized on equity securities still held as of March 31, 2019 were $41.9 million during the first quarter of 2019.~~quarter.

Other Invested Assets

We had ~~$53.6~~$50.4 million of other invested assets at March 31, ~~2020,~~2021, compared to ~~$70.4~~$54.2 million at ~~the end of 2019.~~December 31, 2020. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private ~~funds and investments in restricted stock.~~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 investment’s net asset value. ~~Restricted stock is carried at quoted market prices, as the restrictions expire within one year.~~

Our LIHTC interests had a balance of ~~$22.4~~$19.4 million at March 31, ~~2020,~~2021, compared to ~~$23.3~~$20.3 million at December 31, ~~2019~~2020 and recognized a total tax benefit of $0.9 million during the first ~~quarter~~quarters of ~~2020, compared to $0.6 million the prior year.~~2021 and 2020. Our unfunded commitment for our LIHTC investments totaled ~~$8.0~~$2.7 million at March 31, ~~2020~~2021 and will be paid out in installments through 2035.

As of March 31, ~~2020, $15.1~~2021, $10.2 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the three-month period ended March 31, ~~2020,~~2021, there were 0 outstanding borrowings with the FHLBC.

Our investments in private funds totaled ~~$17.5~~$27.8 million at March 31, ~~2020,~~2021, compared to ~~$46.0~~$32.1 million at December 31, ~~2019,~~2020, and we had ~~$13.5~~$6.5 million of associated unfunded commitments at March 31, ~~2020.~~2021. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities. During the first quarter of 2020, one of the private funds transitioned into a publically traded common stock, but short term restrictions were applied on our ability to sell without prior approval. Our investment in restricted stock was $12.1 million as of March 31, 2020. For our remaining investments in private funds,entities and the timed dissolution of the partnerships would trigger redemption. At December 31, 2020, we had a publicly traded common stock with short-term restrictions that limited our ability to sell the security without prior approval. During the first quarter of 2021, our investment in this security became unrestricted and the investment was included in our equity portfolio as of March 31, 2021.

Cash

Cash consists of uninvested balances in bank accounts. We had a cash balance of ~~$42.7~~$94.9 million at March 31, ~~2020,~~2021, compared to ~~$46.2~~$62.2 million at ~~the end of 2019.~~December 31, 2020.

1615

Table of Contents

3. HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first three months of ~~2020~~2021 and ~~2019:~~2020:


	For the Three-Month Periods
	Ended March 31,
					For the Three Months
					Ended March 31,
(in thousands)	2020		2019		2021			2020
Unpaid losses and LAE at beginning of year
Gross	$	1,574,352	$	1,461,348	$	1,750,049		$	1,574,352
Ceded		(384,517)		(364,999)		(443,729	)		(384,517	)
Net	$	1,189,835	$	1,096,349	$	1,306,320		$	1,189,835


Adoption impact of ASU 2016-13 on reinsurance balances recoverable	$	(1,345)	$	—	$	—		$	(1,345	)


Increase (decrease) in incurred losses and LAE
Current accident year	$	126,194	$	113,930	$	142,013		$	126,194
Prior accident years		(15,173)		(19,633)		(37,121	)		(15,173	)
Total incurred	$	111,021	$	94,297	$	104,892		$	111,021


Loss and LAE payments for claims incurred
Current accident year	$	(9,295)	$	(5,531)	$	(5,962	)	$	(9,295	)
Prior accident years		(81,897)		(70,145)		(64,896	)		(81,897	)
Total paid	$	(91,192)	$	(75,676)	$	(70,858	)	$	(91,192	)


Net unpaid losses and LAE at March 31	$	1,208,319	$	1,114,970	$	1,340,354		$	1,208,319


Unpaid losses and LAE at March 31
Gross	$	1,574,760	$	1,479,344	$	1,795,275		$	1,574,760
Ceded		(366,441)		(364,374)		(454,921	)		(366,441	)
Net	$	1,208,319	$	1,114,970	$	1,340,354		$	1,208,319

We 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~~.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 ongoing modifications will continue to be recorded. ~~See note 1. B. for more information~~

For the first three months of 2021, incurred losses and LAE included $37.1 million of favorable development on ~~the adoption~~prior years’ loss reserves. General liability, transportation, small commercial, professional services, personal umbrella and surety were drivers of the ~~ASU.~~favorable development. No products experienced significant adverse development.

For the first three months of 2020, incurred losses and LAE included $15.2 million of favorable development on prior years’ loss reserves. The majority of products experienced modest amounts of favorable development on prior accident years, with notable contributions from transportation, marine, small commercial and surety. No products experienced significant adverse development.

For the first three months of 2019, incurred losses and LAE included $19.6 million of favorable development on prior years’ loss reserves. General liability, commercial excess and personal umbrella, professional services and surety were drivers of the favorable development. Executive products experienced adverse development.

~~The spread of COVID-19 and related economic shutdown has increased the uncertainty that is always present in our estimate of the ultimate cost of loss and settlement expense.~~ Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of March 31, ~~2020.~~2021. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we ~~underwrite.~~underwrite as a result of the spread of COVID-19 and the related economic shutdown. The industry is experiencing new issues, including the ~~temporary suspension~~postponement of civil court cases, ~~in most states,~~ the extension of ~~certain~~various statutes of limitations, changes in settlement trends and a significant reduction in economic activity and insured exposure in some classes. Our ~~booked~~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.

Table of Contents

4. INCOME TAXES

Our effective tax rate for the ~~three-month period~~three months ended March 31, ~~2020~~2021 was ~~22.8~~18.7 percent, compared to ~~19.9~~22.8 percent for the same period in ~~2019.~~2020. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was ~~higher~~lower for the ~~three-month period in 2020~~first three months of 2021 as tax-favored adjustments reduced income tax expense, while tax-favored adjustments increased the tax benefit ~~realized on~~recognized in the first quarter of 2020 as a result of pretax losses.

Income tax expense ~~(benefit)~~ attributable to income from operations for the three-month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income by the items detailed in the below table. In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line.


	For the Three-Month Periods Ended March 31,
	2020				2019
									For the Three Months Ended March 31,
									2021							2020
(in thousands)	Amount		%		Amount		%		Amount			%				Amount			%
Provision for income taxes at the statutory rate of 21%	$	(16,666)	21.0	%	$	17,166	21.0	%	$	18,865			21.0		%	$	(16,666	)		21.0		%
Increase (reduction) in taxes resulting from:
Excess tax benefit on share-based compensation		(1,029)	1.3	%		(741)	(0.9)	%		(1,924	)		(2.1	)	%		(1,029	)		1.3		%
Tax exempt interest income		(313)	0.4	%		(345)	(0.4)	%		(319	)		(0.4	)	%		(313	)		0.4		%
Dividends received deduction		(271)	0.3	%		(203)	(0.2)	%		(236	)		(0.3	)	%		(271	)		0.3		%
Investment tax credit										(801	)		(0.9	)	%		(1,321	)		1.7		%
ESOP dividends paid deduction		(132)	0.2	%		(137)	(0.2)	%		(130	)		(0.1	)	%		(132	)		0.2		%
Nondeductible expenses		203	(0.3)	%		509	0.6	%		411			0.5		%		203			(0.3	)	%
Other items, net		111	(0.1)	%		19	0.0	%		956			1.0		%		1,432			(1.8	)	%
Total tax expense (benefit)	$	(18,097)	22.8	%	$	16,268	19.9	%	$	16,822			18.7		%	$	(18,097	)		22.8		%

5. STOCK BASED COMPENSATION

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 ~~awarded 2,312,835 stock options and restricted stock units~~granted 2,667,865 awards under the 2015 LTIP, including ~~30,375 stock options~~44,496 thus far in ~~2020.~~2021.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $1.6 million and $1.3 million in the first three months of 2021 and 2020, respectively, and the total income tax benefit was $0.3 million and $0.2 million for each period, respectively. Total unrecognized compensation expense relating to outstanding and unvested awards was $5.4 million, which will be recognized over the weighted average vesting period of 2.56 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, 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

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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.

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The following tables summarize option activity for the three-month ~~periods~~period ended March 31, ~~2020~~2021:

						Weighted		Aggregate
				Weighted		Average		Intrinsic
				Average		Remaining		Value
	Options			Exercise Price		Contractual Life		(in 000’s)
Outstanding options at January 1, 2021		1,632,334		$	70.67
Options granted		44,496			97.64
Options exercised		(121,645	)		56.04
Options canceled/forfeited		(600	)		93.24
Outstanding options at March 31, 2021		1,554,585		$	72.57		5.17	$	60,622
Exercisable options at March 31, 2021		563,215		$	61.80		3.75	$	28,029

The intrinsic value, which is the difference between the fair value and ~~2019:~~

Weighted




Weighted

Average

Aggregate

Number of

Average

Remaining

Intrinsic

Options

Exercise

Contractual

Value


Outstanding

Price

Life

(in 000’s)

Outstanding options at January 1, 2020

1,667,290

$
62.52

Options granted

30,375

94.62

Options exercised

(56,725)

49.23

$
2,516
Options canceled/forfeited

(300)

58.60

Outstanding options at March 31, 2020

1,640,640

$
63.58

5.10

$
40,778
Exercisable options at March 31, 2020

614,040

$
54.68

3.75

$
20,438







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

40,750

66.16

Options exercised

(50,580)

33.71

$
1,795
Options canceled/forfeited

(19,100)

57.28

Outstanding options at March 31, 2019

1,935,950

$
55.00

5.14

$
32,589
Exercisable options at March 31, 2019

702,250

$
47.84

3.73

$
16,794

~~The majority~~the exercise price, 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 issued, the approach allows for a more even expense distribution throughout the year.

Inexercised was $6.9 million and $2.5 million during the first quarter of 2021 and 2020, 30,375 stock options were granted with a weighted average exercise price of $94.62 and a weighted average fair value of $14.48. We recognized $1.0 million of expense in the first quarter of 2020. Since options granted under our 2015 LTIP are non-qualified, we recorded a tax benefit of $0.2 million in the first quarter of 2020 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $4.2 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.0 million of compensation expense and a tax benefit of $0.2 million in the first quarter of 2019.respectively.

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


	2020			2019

							2021			2020
Weighted-average fair value of grants	$	14.48		$	11.35		$	13.82		$	14.48
Risk-free interest rates		1.54	%		2.94	%		0.27	%		1.54	%
Dividend yield		2.69	%		2.98	%		2.30	%		2.69	%
Expected volatility		22.68	%		22.84	%		22.67	%		22.68	%
Expected option life		4.99	years		5.11	years		4.96	years		4.99	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.

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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. ~~These~~For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75. 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.

				Weighted
				Average
				Grant Date
	RSUs			Fair Value
Nonvested at January 1, 2021		47,658		$	81.53
Reinvested		102			112.16
Forfeited		(51	)		93.42
Nonvested at March 31, 2021		47,709		$	81.58

As of March 31, 2020, 45,350 RSUs have been granted to employees under the 2015 LTIP and 43,708 remain outstanding. We recognized $0.2 million of expense on these units in the first quarter of 2020, compared to $0.1 million in the first quarter of 2019. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $0.8 million, which will be recognized over the remainder of the vesting period.

In 2019 and 2018, each outside director received RSUs with a fair market value that approximated $50 thousand on the date of grant as part of annual director compensation. Director RSUs vest one year from the date of grant. As of March 31, 2020, 15,085 restricted stock units have been granted to directors under the 2015 LTIP and 6,182 remain outstanding. We recognized $0.1 million of compensation expense on these units in the first quarter of 2020, the same amount as in the first quarter of 2019. Total unrecognized compensation expense relating to outstanding and unvested director RSUs was less than $0.1 million, which will be recognized over the remainder of the vesting period.

6. OPERATING SEGMENT INFORMATION

Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues.

For the Three-Month Periods
REVENUES

Ended March 31,
(in thousands)

2020

2019
Casualty

$
143,420

$
136,900
Property

44,348

38,746
Surety

27,814

29,043
Net premiums earned

$
215,582

$
204,689
Net investment income

17,778

16,565
Net realized gains

15,152

9,068
Net unrealized gains (losses) on equity securities

(130,395)

33,498
Total consolidated revenue

$
118,117

$
263,820

NET EARNINGS (LOSS)

(in thousands)

2020

2019
Casualty

$
(1,323)

$
5,343
Property

9,908

8,246
Surety

8,654

8,844
Net underwriting income

$
17,239

$
22,433
Net investment income

17,778

16,565
Net realized gains

15,152

9,068
Net unrealized gains (losses) on equity securities

(130,395)

33,498
General corporate expense and interest on debt

(3,652)

(5,137)
Equity in earnings of unconsolidated investees

4,514

5,314
Earnings (loss) before income taxes

$
(79,364)

$
81,741
Income tax expense (benefit)

(18,097)

16,268
Net earnings (loss)

$
(61,267)

$
65,473

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	For the Three Months
Revenues	Ended March 31,
(in thousands)	2021			2020
Casualty	$	148,770		$	143,420
Property		51,642			44,348
Surety		28,183			27,814
Net premiums earned	$	228,595		$	215,582
Net investment income		16,424			17,778
Net realized gains		14,150			15,152
Net unrealized gains (losses) on equity securities		28,162			(130,395	)
Total consolidated revenue	$	287,331		$	118,117

Net Earnings
(in thousands)	2021			2020
Casualty	$	24,867		$	(1,323	)
Property		(1,005	)		9,908
Surety		6,055			8,654
Net underwriting income	$	29,917		$	17,239
Net investment income		16,424			17,778
Net realized gains		14,150			15,152
Net unrealized gains (losses) on equity securities		28,162			(130,395	)
General corporate expense and interest on debt		(5,243	)		(3,652	)
Equity in earnings of unconsolidated investees		6,424			4,514
Earnings (loss) before income taxes	$	89,834		$	(79,364	)
Income tax expense (benefit)		16,822			(18,097	)
Net earnings (loss)	$	73,012		$	(61,267	)

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


	For the Three-Month Periods
NET PREMIUMS EARNED	Ended March 31,
					For the Three Months
Net Premiums Earned					Ended March 31,
(in thousands)	2020		2019		2021		2020
Casualty
Commercial excess and personal umbrella	$	40,088	$	32,281	$	51,554	$	40,088
General liability		23,998		23,888		22,407		23,998
Professional services						21,728		20,695
Commercial transportation		21,185		20,404		16,830		21,185
Professional services		20,695		20,299
Small commercial		15,633		13,188		15,722		15,633
Executive products		7,331		6,069		5,241		7,331
Other casualty		14,490		20,771		15,288		14,490
Total	$	143,420	$	136,900	$	148,770	$	143,420

Property
Marine	$	19,577	$	17,021	$	22,958	$	19,577
Commercial property		19,155		16,875		22,712		19,155
Specialty personal		5,000		4,584		5,034		5,000
Other property		616		266		938		616
Total	$	44,348	$	38,746	$	51,642	$	44,348

Surety
Commercial	$	10,938	$	10,812	$	11,013	$	10,938
Miscellaneous		10,516		11,602		10,635		10,516
Contract		6,360		6,629		6,535		6,360
Total	$	27,814	$	29,043	$	28,183	$	27,814

Grand Total	$	215,582	$	204,689	$	228,595	$	215,582

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7. LEASES

Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ~~right-of-use~~ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. ~~Lease expense~~Operating 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 lease terms of 1 to 15 years.~~ The components of lease expense and other lease information as of and during the three-month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 are as follows:

For the Three-Month Period Ended
(in thousands)

March 31, 2020

March 31, 2019
Operating lease cost

$
1,406

$
1,481

Cash paid for amounts included in measurement of lease liabilities

Operating cash flows from operating leases

$
1,486

$
1,395

Right-of-use assets obtained in exchange for new operating lease liabilities

$
15

$
719

Other non-cash reductions to right-of-use assets

$
1,192

$
-

	For the Three Months
	Ended March 31,
(in thousands)	2021			2020
Operating lease cost	$	1,351		$	1,406
Variable lease cost		384			355
Sublease income		(123	)		—
Total lease cost	$	1,612		$	1,761

Cash paid for amounts included in measurement of lease liabilities
Operating cash outflows from operating leases	$	1,488		$	1,486

ROU assets obtained in exchange for new operating lease liabilities	$	58		$	15

Reduction to ROU assets resulting from reduction to lease liabilities	$	59		$	—

Other non-cash reductions to ROU assets	$	—		$	1,192

(in thousands)	March 31, 2021			December 31, 2020
Operating lease ROU assets	$	14,952		$	16,200
Operating lease liabilities	$	17,676		$	19,072
Weighted-average remaining lease term - operating leases	3.68		years	3.87		years
Weighted-average discount rate - operating leases		2.33	%		2.32	%

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(in thousands)

March 31, 2020

December 31, 2019

Operating lease right-of-use assets

$
19,889

$
22,335

Operating lease liabilities

$
23,141

$
24,475

Weighted-average remaining lease term - operating leases

4.48
years

4.69
years

Weighted-average discount rate - operating leases

2.34
%

2.33
%

Future minimum lease payments under non-cancellable leases as of March 31, ~~2020~~2021 were as follows:


(in thousands)	March 31, 2020		March 31, 2021
2020	$	4,505
2021		5,976	$	4,466
2022		5,904		5,941
2023		4,386		4,424
2024		2,334		2,334
2025				802
2026				242
Thereafter		1,365		321
Total future minimum lease payments	$	24,470	$	18,530

Less imputed interest		(1,329)		(854	)
Total operating lease liability	$	23,141	$	17,676

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Item 2.

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

~~ITEM 2~~.~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~

Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other ~~factors and~~factors. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.

OVERVIEW

RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group (Group). Our focus is on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In ~~2019,~~2020, we achieved our ~~24th~~25th consecutive year of underwriting profitability. Over the ~~24 year~~25-year period, we averaged an 88.3 combined ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.

We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.

The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest

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rates, state regulations, court decisions and changes in the law. One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will not be more or less than recorded amounts; if actual liabilities differ from recorded amounts, there will be an adverse or favorable effect on net earnings.

The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and 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. 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, hurricanes and ~~hurricanes.~~other storms. 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 storms 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 ~~market~~insurance cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.

The surety segment specializes in writing small to large-sized commercial and contract surety coverages, including payment and performance bonds. 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

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loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our principals. 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.

The insurance marketplace is intensely competitive across all of our segments. However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

GAAP, non-GAAP and Performance Measures

Throughout this quarterly report, we include certain non-generally accepted accounting principles (non-GAAP) financial measures. Management believes that these non-GAAP measures further explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America (GAAP). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

~~Following~~The following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

Underwriting Income

Underwriting income or profit represents one measure of the pretax profitability of our insurance operations and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our ~~2019~~2020 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable

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GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized ~~gain~~gains or losses on equity securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:

	For the Three Months
	Ended March 31,
(in thousands)	2021			2020
Net earnings (loss)	$	73,012		$	(61,267	)
Income tax expense (benefit)		16,822			(18,097	)
Earnings (loss) before income taxes	$	89,834		$	(79,364	)
Equity in earnings of unconsolidated investees		(6,424	)		(4,514	)
General corporate expenses		3,342			1,755
Interest expense on debt		1,901			1,897
Net unrealized (gains) losses on equity securities		(28,162	)		130,395
Net realized gains		(14,150	)		(15,152	)
Net investment income		(16,424	)		(17,778	)
Net underwriting income	$	29,917		$	17,239

Combined Ratio

The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.

~~Net Unpaid Loss and Settlement Expenses~~22

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Unpaid losses and settlement expenses, as shown in the liabilities section of our consolidated balance sheets, represents the total obligations to claimants 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 expense, 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 unaudited condensed consolidated interim 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 financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our ~~2019~~2020 Annual Report on Form 10-K.

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which eliminated the concept of other-than-temporary impairment and required the recognition of a reversible allowance for credit losses on available-for-sale fixed income securities. See note 1. B. for more information on the adoption of the ASU. Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including:

●

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

●

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

●

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

●

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

●

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

●

~~Downgrades in credit quality by a major rating agency.~~

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the securities fair value is below amortized cost. If we intend to sell a security or if we determine it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis, any allowance for credit loss or unrealized loss would be written off and the amortized cost basis of the security would be written down to the security’s fair value.

There have been no ~~other~~ significant changes to critical accounting policies during the year.

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IMPACT OF COVID-19

~~The coronavirus (COVID-19) pandemic continues to impact individuals and businesses worldwide.~~ As an employee-owned company, the health and well-being of our customers, partners and associates is our highest priority. ~~Nearly all~~While a large percentage of our associates are still working from home, our processes and controls continue to operate effectively and we have suspended all nonessential travel. Our business continuity plans were designed to address various threats and vulnerabilities, including pandemic and high absenteeism scenarios, along with other types of business interruptions. Through a highly-distributed workforce and investments we have made in our technology infrastructure over time, we werebeen able to ~~seamlessly transition to a remote work model while maintaining~~maintain the highest service and support levels possible for our customers. We are fully operational, able to produce financial statements supported by controls which continue to operate effectively and we believe we are in a good position to continue working remotely for as long as necessary.

It is ~~too early~~difficult to ~~reasonably estimate~~predict how and to what extent COVID-19, and its effects on the ~~ultimate effect of~~economy, will impact our revenues in the ~~economic shut-down as a result of~~coming quarters. To date, the ~~pandemic on our revenues. Through~~product line that has experienced the ~~first quarter, our most impacted product line~~greatest impact has been public transportation. ~~A large number~~Many of our passenger transportation customers have been unable to effectively operate under social-distancing protocols and stay-at-home ~~governmental~~ orders. ~~To support our customers, we allowed them to suspend coverage on vehicles that were not in use, which resulted in a $23.0 million reduction to gross written~~Transportation premium was down from pre-pandemic levels in the first ~~quarter. All~~quarter of ~~the premium was unearned~~2021 and we expect transportation premium may be challenged until the ~~amount~~use of ~~cash that will be returned to customers will be approximately $6 million. Other product lines~~public transportation increases, which may not be until after vaccines are more ~~significantly impacted could include those supporting non-essential~~fully distributed or there is a significant reduction in cases. Additionally, slowdowns in the construction industry contributed to premium declines for our general liability, commercial umbrella and ~~international cargo-haulers and the energy sector.~~contract surety products. A number of our products support the construction ~~activity~~industry, and ~~our~~ revenues may continue to be impacted ~~to the extent~~as long as this sector experiences disruption. ~~We also have many product lines that may see little to no impact, including~~However, our personal lines products, management liability products and property ~~businesses.~~businesses have seen little to no impact on premium from the pandemic.

The loss exposure arising out of the spread of COVID-19 and resulting shutdown will take time to resolve. We do not offer event cancellation, travel, trade credit or pandemic-related coverages, which would be more directly impacted by the COVID-19 pandemic. The ~~Company~~derivative implications that COVID-19 has ~~received a number~~on the economy may have negative implications on products that are correlated with the credit cycle, including, but not limited to, some of our executive products and surety offerings. Additionally, the professional services and executive product groups may be affected by claims ~~the majority of which relate~~made against companies who are reopening or returning to business interruption. We are reviewing the individual circumstances of each claim submitted and will fulfill our obligation to pay if coverage applies. To address greater expected costs to investigate and defend these claims, we recorded net reserves of $5.0 million. work.

Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved greater uncertainty as of March 31, ~~2020.~~2021. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The industry is experiencing new issues, including the ~~temporary suspension~~postponement of civil court cases, ~~in most states,~~ the extension of ~~certain~~various statutes of limitations, changes in settlement trends and a significant reduction in economic activity and insured exposure in some classes. 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.

~~Market declines~~Investment yields decreased throughout 2020, which resulted in ~~$130.4 million~~lower reinvestment rates and, in turn, lower investment income in the first quarter of ~~unrealized losses on equity securities, driving a net loss for~~2021. Additionally, the ~~quarter. The~~fair value of the fixed income portfolio ~~also experienced unrealized losses~~will decline as ~~widening credit spreads more than offset declining~~ interest ~~rates. Our fixed income portfolio is weighted towards higher rated bonds (85 percent rated A or better at March 31, 2020) and~~rates rise, as was observed with our ~~equity portfolio is part~~$44.7 million of ~~a long-term strategy that has contributed significantly to our growth in book value in~~after-tax other comprehensive loss during the ~~past. Reinvestment rates may be at lower levels if treasury yields remain low and credit spreads normalize, but we cannot anticipate how the market will perform in the coming months.~~first quarter.

Investee earnings in Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime) continued to post positive results in the quarter. While earnings for Prime were modestly higher, Maui Jim results were down, reflective of the current retail and economic environment. The length of any economic downturn will impact the results of these investees, particularly any lasting impact on the retail sector as it relates to Maui Jim.

We ~~believe we are financially strong despite the impact of the COVID-19 pandemic and continued to produce~~produced solid operating results in the first ~~quarter.~~quarter of 2021 and our financial position remains strong. We ~~are also confident in~~generated $60.3 million of net operating cash inflows and believe we have sufficient sources of liquidity to meet our ~~liquidity position. In March, we replaced our~~anticipated needs over the next 12 to 24 months. Our revolving credit facility ~~that was set to expire in May with an arrangement that provided~~provides for ~~an increased~~a borrowing capacity of $60.0 million, ~~and~~which can be increased to $120.0 million under certain circumstances. Additionally, our membership in the Federal Home Loan Bank system provides a secured lending facility with an aggregate borrowing capacity of approximately $30.0 million. ~~There were no amounts outstanding under any of these facilities as of March 31, 2020. In addition~~

Ultimately, the extent to which COVID-19 will impact our business will be influenced by how long it takes for the $99.4 million of cash and other investments maturing within one year as of March 31, 2020, we believe that cash generated from operations, the liquidity of our fixed income portfolio and our unused lines of credit provide sufficient sources of casheconomy to ~~meet our anticipated needs over the next 12 to 24 months.~~

~~Table of Contents~~

~~Amid rapidly changing dynamics, we are continuing~~recover. We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business. ~~Ultimately, the extent of the impact will depend on how long it takes for the economy to return to some degree of normality.~~ Our diversified portfolio of products and financial strength have allowed us to remain on solid ~~footing and we~~footing. We believe we have a strong and sustainable underwriting approach that will allow us to weather the economic environment and uncertainty we are ~~able to diligently serve our customers and other stakeholders now and in the future.~~currently experiencing.

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RESULTS OF OPERATIONS

Three Months Ended March 31, ~~2020~~2021 Compared to Three Months Ended March 31, ~~2019~~2020

Consolidated revenue for the first ~~quarter~~three months of ~~2020 decreased $145.7~~2021 increased $169.2 million from the first quarter of ~~2019 as~~2020. Net premiums earned for the Group increased 6 percent, driven by growth from our property and casualty segments, while performance in the equity portfolio varied significantly between the periods. ~~Overall~~Positive market performance resulted in $28.2 million of unrealized gains in our equity portfolio in 2021, while overall market declines resulted in $130.4 million of unrealized losses on equity securities in ~~2020, while a market rebound generated $33.5 million of unrealized gains in our equity portfolio in~~ the first quarter of ~~2019. Net premiums earned for the Group increased 5 percent, driven by growth from our casualty and property segments.~~2020. Investment income ~~increased 7~~was down 8 percent ~~due to a larger asset base relative~~compared to the prior ~~year.~~year, as reinvestment rates declined during 2020. Realized gains during the ~~quarter were $15.2 million and~~first three months of 2021 were comprised of ~~$15.2~~$13.1 million of realized gains on equity securities from rebalancing our portfolio, $1.2 million of realized gains on the fixed income portfolio and $0.1 million of other realized losses. This compares to $15.2 million of realized gains on the equity portfolio, $2.3 million of realized gains on the fixed income portfolio and $2.3 million of other realized ~~losses. This compares to $8.4 million of realized gains on the equity portfolio and $0.6 million of realized~~ losses ~~on the fixed income portfolio~~ for the same period in ~~2019.~~2020.


	For the Three-Month Periods
	Ended March 31,
	2020		2019
Consolidated revenues (in thousands)
					For the Three Months
					Ended March 31,
Consolidated Revenues (in thousands)					2021		2020
Net premiums earned	$	215,582	$	204,689	$	228,595	$	215,582
Net investment income		17,778		16,565		16,424		17,778
Net realized gains		15,152		9,068		14,150		15,152
Net unrealized gains (losses) on equity securities		(130,395)		33,498		28,162		(130,395	)
Total consolidated revenue	$	118,117	$	263,820	$	287,331	$	118,117

Net ~~loss~~earnings for the first ~~quarter~~three months of ~~2020~~2021 totaled ~~$61.3~~$73.0 million, compared to ~~$65.5~~$61.3 million of net ~~earnings~~loss for the same period ~~last year.~~in 2020. The ~~decrease~~increase in earnings for ~~2020~~the first three months of 2021 was primarily attributed to ~~$103.0~~$22.2 million of net after-tax unrealized ~~losses~~gains on equity securities, compared to ~~$26.5~~$103.0 million of after-tax unrealized ~~gains~~losses in ~~2019.~~2020. Underwriting results for ~~both periods reflect profitable current accident year results and favorable development from prior years’ loss reserves. Favorable development on prior years’ loss reserves provided additional~~2021 were impacted by $16.0 million of pretax ~~earnings of $15.2 million in the first quarter of 2020~~storm losses, compared to ~~$19.6 million in 2019. Catastrophe activity was light for both periods, with~~ $0.5 million of pretax storm losses in the first quarter of ~~2020 and $1.0~~2020. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $37.1 million ~~for the same period~~ in the ~~prior year.~~first three months of 2021, compared to $15.2 million in 2020. Pretax bonus and profit sharing-related expenses associated with the net impact of prior years’ reserve development and catastrophe losses totaled $3.1 million in 2021, compared to $2.2 million in ~~2020, compared to $2.8 million in 2019.~~2020. These performance-related expenses affected policy acquisition, insurance operating and general corporate expenses. 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.

~~During~~Underwriting income was $29.9 million on an 86.9 combined ratio for the ~~first quarter~~three months of 2021, compared to $17.2 million on a 92.0 combined ratio in the same period of 2020. Both periods reflect favorable reserve development on prior accident years. The loss ratio decreased to 45.9 from 51.5, due to improvements in the current accident year loss ratio, a higher level of favorable development in 2021 and the $5.0 million of reserves added in 2020 related to COVID-19 investigative and claim defense costs. The Group’s expense ratio increased to 41.0 from 40.5, as 2021 experienced larger net earnings, which led to larger levels of bonus and profit-sharing expenses.

Our equity in earnings of unconsolidated investees ~~totaled $4.5 million. This amount includes~~primarily relate to our investments in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, and Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. In the first quarter of 2021, $3.7 million of investee earnings were recorded for Maui Jim and $3.7 million of investee earnings were recorded for Prime. Comparatively, the first three months of 2020 reflected investee earnings of $2.6 million and $1.9 million from Maui Jim and ~~$1.9 million from Prime. Comparatively, the first quarter of 2019 reflected $5.3 million of earnings, including $3.6 million from Maui Jim and $1.7 million from Prime.~~Prime, respectively.

Comprehensive ~~loss~~earnings totaled ~~$74.3~~$28.3 million for the first ~~quarter~~three months of ~~2020,~~2021, compared to ~~$94.8~~$74.3 million of comprehensive ~~earnings~~loss for the first ~~quarter~~three months of ~~2019.~~2020. Other comprehensive ~~earnings~~loss primarily included net after-tax unrealized ~~gains and~~ losses from the fixed income portfolio. ~~The~~Other comprehensive loss of $44.7 million in the first ~~quarter’s~~quarter of 2021 was attributable to increased interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $13.0 million of other comprehensive loss was ~~due to unrealized losses on the fixed income portfolio~~recognized in 2020 as widening credit spreads more than offset declines in interest rates were more than offset by wider credit spreads. This compares to $29.3 million of other comprehensive earnings for the same period in 2019, primarily attributable to declining interest rates during the period.rates.

Premiums

Gross premiums written for the Group increased ~~$14.9~~$49.1 million ~~or 6 percent,~~ for the first ~~quarter~~three months of ~~2020~~2021 when compared to the same period of ~~2019. Products~~2020. Growth was achieved in ~~our~~all three segments, though the increase was driven by products in the casualty

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and property ~~segments drove the growth.~~segments. Net premiums earned increased ~~$10.9~~$13.0 million, ~~or 5 percent,~~ also driven by products in our property and casualty ~~and property~~ segments.

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Gross Premiums Written

Net Premiums Earned

For the Three-Month Periods Ended March 31,

For the Three-Month Periods Ended March 31,

(in thousands)

2020

2019

% Change

2020

2019

% Change
Casualty

Commercial excess and personal umbrella

$
55,590

$
40,995

35.6

%

$
40,088

$
32,281

24.2

%
General liability

24,691

22,743

8.6

%

23,998

23,888

0.5

%
Commercial transportation

(3,777)

17,679

(121.4)

%

21,185

20,404

3.8

%
Professional services

21,498

21,026

2.2

%

20,695

20,299

2.0

%
Small commercial

16,117

13,964

15.4

%

15,633

13,188

18.5

%
Executive products

20,947

15,549

34.7

%

7,331

6,069

20.8

%
Other casualty

24,170

20,151

19.9

%

14,490

20,771

(30.2)

%
Total

$
159,236

$
152,107

4.7

%

$
143,420

$
136,900

4.8

%

Property

Marine

$
21,111

$
20,080

5.1

%

$
19,577

$
17,021

15.0

%
Commercial property

29,779

23,550

26.5

%
��

19,155

16,875

13.5

%
Specialty personal

4,872

5,079

(4.1)

%

5,000

4,584

9.1

%
Other property

959

312

207.4

%

616

266

131.6

%
Total

$
56,721

$
49,021

15.7

%

$
44,348

$
38,746

14.5

%

Surety

Commercial

$
11,280

$
11,654

(3.2)

%

$
10,938

$
10,812

1.2

%
Miscellaneous

11,948

11,828

1.0

%

10,516

11,602

(9.4)

%
Contract

6,647

6,302

5.5

%

6,360

6,629

(4.1)

%
Total

$
29,875

$
29,784

0.3

%

$
27,814

$
29,043

(4.2)

%

Grand Total

$
245,832

$
230,912

6.5

%

$
215,582

$
204,689

5.3

%

~~Casualty~~

	Gross Premiums Written									Net Premiums Earned
	For the Three Months Ended March 31,									For the Three Months Ended March 31,
(in thousands)	2021		2020			% Change				2021		2020		% Change
Casualty
Commercial excess and personal umbrella	$	64,723	$	55,590			16		%	$	51,554	$	40,088		29		%
General liability		23,209		24,691			(6	)	%		22,407		23,998		(7	)	%
Professional services		22,407		21,498			4		%		21,728		20,695		5		%
Commercial transportation		16,438		(3,777	)	NM					16,830		21,185		(21	)	%
Small commercial		16,378		16,117			2		%		15,722		15,633		1		%
Executive products		22,770		20,947			9		%		5,241		7,331		(29	)	%
Other casualty		22,971		24,170			(5	)	%		15,288		14,490		6		%
Total	$	188,896	$	159,236			19		%	$	148,770	$	143,420		4		%
Property
Marine	$	26,853	$	21,111			27		%	$	22,958	$	19,577		17		%
Commercial property		40,136		29,779			35		%		22,712		19,155		19		%
Specialty personal		5,662		4,872			16		%		5,034		5,000		1		%
Other property		1,886		959			97		%		938		616		52		%
Total	$	74,537	$	56,721			31		%	$	51,642	$	44,348		16		%
Surety
Commercial	$	13,301	$	11,280			18		%	$	11,013	$	10,938		1		%
Miscellaneous		11,974		11,948			0		%		10,635		10,516		1		%
Contract		6,187		6,647			(7	)	%		6,535		6,360		3		%
Total	$	31,462	$	29,875			5		%	$	28,183	$	27,814		1		%
Grand Total	$	294,895	$	245,832			20		%	$	228,595	$	215,582		6		%

NM = Not Meaningful

Casualty

Gross premiums written for the casualty segment were up ~~5 percent, or $7.1~~$29.7 million in the first ~~quarter~~three months of ~~2020. Premiums~~2021. Gross premiums from commercial excess and personal umbrella increased ~~$14.6~~$9.1 million, due to an expanded distribution base in personal umbrella and rate ~~increases and overall exposure growth. Substantial rate~~increases. Rate increases led to a 359 percent increase in premiums for our executive products group. ~~Other casualty increased $4.0 million, as our general binding authority (GBA) business continued to grow.~~

~~Transportation was impacted~~Commercial transportation has been significantly affected by the ~~suspension~~stay-at-home orders associated with COVID-19. In the first quarter of ~~a large portion of our public transportation book and the reversal of~~2020, we reversed $23.0 million of gross premium written, which resulted in ~~gross~~negative premium for the quarter. While still down from pre-pandemic levels, premium increased to $16.4 million in 2021. Additionally, general liability premiums ~~written. Public transportation is focused primarily on charter or city buses, which stopped running to a large degree in March~~declined as a result of ~~COVID-19~~increased competition, as well as decreases in construction related activity and the associated stay at home orders across the United States. See the Impact of COVID-19 section above for more information on the observed effect of the pandemic on RLI Corp. at the time of this report.use-based exposures.

Property

Gross premiums written for the property segment ~~totaled $56.7~~were up $17.8 million ~~for~~in the first ~~quarter~~three months of ~~2020, up 16 percent from the same period last year.~~2021. Our commercial property business ~~accounted for a large portion of the increase,~~was up ~~$6.3~~$10.4 million, as ~~an improving market has allowed our underwriters to find more opportunities with acceptable rate levels. Additionally,~~ rates on wind-prone and earthquake exposures continued to ~~increase in the first quarter.~~increase. Rate increases and market disruption, which created new business opportunities, led to ~~$1.0~~$5.7 million of growth for our marine product. Other property premium increased as a result of ~~property exposed~~property-exposed GBA business that continues to gain scale.

Surety

The surety segment recorded gross premiums written of ~~$29.9~~$31.5 million for the first ~~quarter~~three months of ~~2020,~~2021, an increase of ~~$0.1~~$1.6 million from the same period last year. ~~Refocused sales efforts contributed to~~Commercial surety has benefited from growth within existing accounts and writing bonds with new customers, while the economic slowdown and increased competition continued to create headwinds for contract ~~and miscellaneous, but declining oil prices and industry consolidation led to reductions within commercial lines.~~surety.

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~~Underwriting Income~~

Underwriting income for the Group totaled $17.2 million for the first quarter of 2020, compared to $22.4 million in the same period last year. Both periods reflect positive underwriting results for the current accident year and favorable reserve development on prior accident years, with 2019 experiencing a larger benefit. The combined ratio for the Group totaled 92.0 in the first quarter of 2020, compared to 89.0 in the same period of 2019. The loss ratio increased to 51.5 from 46.0, due to the decreased level of favorable development in 2020 and the addition of $5.0 million in current accident year reserves related to COVID-19 investigative and claim defense costs. The Group’s expense ratio decreased to 40.5 from 43.0 as 2019 experienced strong earnings and growth in book value, which led to larger levels of bonus and profit-sharing expenses.Income


	For the Three-Month Periods
	Ended March 31,
	2020		2019
Underwriting income (in thousands)
					For the Three Months
					Ended March 31,
					2021			2020
Underwriting Income (Loss) (in thousands)
Casualty	$	(1,323)	$	5,343	$	24,867		$	(1,323	)
Property		9,908		8,246		(1,005	)		9,908
Surety		8,654		8,844		6,055			8,654
Total	$	17,239	$	22,433	$	29,917		$	17,239

Combined ratio

Combined Ratio
Casualty		100.9		96.1		83.3		100.9
Property		77.7		78.7	101.9				77.7
Surety		68.9		69.5	78.5			68.9
Total		92.0		89.0	86.9				92.0

Casualty

The casualty segment recorded an underwriting ~~loss~~earnings of ~~$1.3~~$24.9 million in the first ~~quarter~~three months of ~~2020,~~2021, compared to ~~$5.3~~$1.3 million of underwriting ~~income~~loss for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by ~~$6.4~~$28.3 million, primarily on accident years ~~2017~~2018 through ~~2019. Transportation,~~2020. Favorable development was widespread with notable amounts from general liability, transportation, professional services, small commercial and ~~general liability were drivers of~~personal umbrella. Offsetting the favorable ~~development.~~development in 2021, winter storm losses on casualty-oriented package policies that include property coverage resulted in $1.1 million of losses. In comparison, ~~$13.3~~$6.4 million of reserves were released in the first quarter of ~~2019. General liability, professional services, transportation, commercial excess, personal umbrella and~~2020. Transportation, small commercial ~~developed favorably, while executive products developed adversely.~~and general liability drove the favorable development.

The combined ratio for the casualty segment was 83.3 in 2021, compared to 100.9 in ~~2020, compared to 96.1 in 2019.~~2020. The segment’s loss ratio was ~~65.7~~47.2 in ~~2020, up~~2021, down from ~~58.8 in 2019. The loss ratio increased~~65.7 in 2020 as a result of ~~less~~improvements in the current accident year loss ratio, the increased level of favorable development ~~on prior years’ reserves~~ and the addition of $3.0 million of reserves in ~~current year reserves~~2020 related to COVID-19 investigative and defense costs. The expense ratio for the casualty segment was ~~35.2, down~~36.1, up from ~~37.3~~35.2 for the same period last ~~year, as reduced levels of bonus and profit-sharing expenses were incurred.~~year.

Property

The property segment recorded underwriting ~~income~~loss of ~~$9.9~~$1.0 million for the first ~~quarter~~three months of ~~2020,~~2021, compared to ~~$8.2~~$9.9 million of underwriting income for the same period last year. Underwriting results for 2021 included $6.1 million of favorable development on prior years’ loss and catastrophe reserves across most products and $14.9 million of winter storm losses. Comparatively, the 2020 underwriting results included $4.8 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the marine business, ~~and~~ $0.5 million of storm ~~losses. Comparatively,~~losses and the ~~2019 underwriting results included $2.1~~addition of $2.0 million of ~~favorable development on prior years’ loss~~reserves related to COVID-19 investigative and ~~catastrophe reserves and $0.9 million of storm losses.~~defense costs.

Underwriting results for the first ~~quarter~~three months of ~~2020~~2021 translated into a combined ratio of ~~77.7,~~101.9, compared to ~~78.7~~77.7 for the same period last year. The segment’s loss ratio was 61.3 in 2021, up from 36.0 in 2020 ~~up from 33.4 in 2019~~ due to ~~the addition~~higher levels of ~~$2.0 million in current year reserves related to COVID-19 investigative and defense costs.~~storm losses. The segment’s expense ratio decreased to ~~41.7~~40.6 in ~~2020~~2021 from ~~45.3~~41.7 in the prior year, as increased levels of earned premium allowed the segment to better leverage expenses.

Surety

The surety segment recorded underwriting income of ~~$8.7~~$6.1 million for the first ~~quarter~~three months of ~~2020,~~2021, compared to ~~$8.8~~$8.7 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for ~~2020~~2021 included favorable development on prior accident

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years’ reserves, which decreased loss and settlement expenses for the segment by ~~$4.0~~$2.8 million. Comparatively, ~~2019~~2020 results included favorable development on prior accident years’ loss reserves, ~~across most products,~~ which decreased the segment’s loss and settlement expenses by ~~$4.2~~$4.0 million.

The combined ratio for the surety segment totaled ~~68.9~~78.5 for the first ~~quarter~~three months of ~~2020,~~2021, compared to ~~69.5~~68.9 for the same period in ~~2019.~~2020. The segment’s loss ratio was 10.7 in 2021, up from 2.8 in 2020 ~~down from 3.1 in 2019.~~due to lower reserve releases and modestly higher current accident year losses. The expense ratio was ~~66.1, down~~67.8, up from ~~66.4~~66.1 in the prior year.

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Investment Income ~~and Realized Capital Gains~~

Our investment portfolio generated net investment income of ~~$17.8~~$16.4 million during the first ~~quarter~~three months of ~~2020, an increase~~2021, a decrease of ~~7.3~~7.6 percent from that reported for the same period in ~~2019.~~2020. The ~~increase~~decrease in investment income was largely due to a ~~larger asset base relative to the prior year.~~decline in reinvestment rates during 2020.

Yields on our fixed income investments for the first ~~quarter~~three months of ~~2020~~2021 and ~~2019~~2020 were as follows:


	1Q 2020		1Q 2019
					2021			2020
Pretax Yield
Taxable	3.27	%	3.44	%		2.87	%		3.27	%
Tax-Exempt	2.77	%	2.84	%		2.63	%		2.77	%
After-Tax Yield
Taxable	2.58	%	2.72	%		2.27	%		2.58	%
Tax-Exempt	2.62	%	2.69	%		2.49	%		2.62	%

We recognized $15.2 million of realized gains in the first quarter of 2020, which were comprised of $15.2 million of realized gains on equity securities from rebalancing our portfolio, $2.3 million of realized gains on the fixed income portfolio and $2.3 million of other realized losses. This compares to realized gains of $9.1 million in the first quarter of 2019, which were comprised of $8.4 million of realized gains on the equity portfolio and $0.6 million of realized gains on the fixed income portfolio.

The following table depicts the composition of our investment portfolio at March 31, ~~2020~~2021 as compared to December 31, ~~2019:~~2020:

March 31, 2020

December 31, 2019

Financial

Financial

(in thousands)

Stmt Value

%


Stmt Value

%

Fixed income

$
1,963,585

81.3
%

$
1,983,086

77.5
%
Equity securities

356,403

14.7
%

460,630

18.0
%
Other invested assets

53,562

2.2
%

70,441

2.7
%
Cash and short-term investments

42,701

1.8
%

46,203

1.8
%
Total

$
2,416,251

100.0
%

$
2,560,360

100.0
%

(in thousands)	March 31, 2021				December 31, 2020
Fixed income	$	2,175,869	75.6	%	$	2,196,626	77.4	%
Equity securities		555,209	19.3	%		524,006	18.5	%
Other invested assets		50,413	1.8	%		54,232	1.9	%
Cash		94,935	3.3	%		62,217	2.2	%
Total investments and cash	$	2,876,426	100.0	%	$	2,837,081	100.0	%

We believe our overall asset allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations and to effectively grow book value over a long-term investment horizon.

The fixed income portfolio decreased by ~~$19.5~~$20.8 million in the first three months of ~~2020.~~2021. The decrease was due to ~~increased credit spreads more than offsetting declines~~the increase in interest rates during the first ~~three months of the year,~~quarter, decreasing the fair value of securities in the fixed income portfolio. Average fixed income duration was ~~4.6~~4.8 years at March 31, ~~2020,~~2021, reflecting our current liability structure and sound capital position. The equity portfolio ~~decreased~~increased by ~~$104.2~~$31.2 million during the first three months of ~~2020 as the equity~~2021, reflecting strong market ~~sold off sharply in the quarter.~~returns.

Income Taxes

Our effective tax rate for the first ~~quarter~~three months of ~~2020~~2021 was ~~22.8~~18.7 percent, compared to ~~19.9~~22.8 percent for the same period in ~~2019.~~2020. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective rate was ~~higher~~lower for the first three months of 2021 as tax-favored adjustments reduced income tax expense, while tax-favored adjustments increased the tax benefit recognized in the first quarter of 2020 as ~~tax-favored adjustments increased the tax benefit realized on~~a result of pretax losses.

~~Table of Contents~~

LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows: (1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the three-month periods ended March 31, ~~2020~~2021 and ~~2019:~~2020:


(in thousands)	2020		2019		2021			2020
Operating cash flows	$	(5,767)	$	30,787	$	60,287		$	(5,767	)
Investing cash flows		10,048		(28,835)		(16,544	)		10,048
Financing cash flows		(7,783)		(6,911)		(11,025	)		(7,783	)
Total	$	(3,502)	$	(4,959)	$	32,718		$	(3,502	)

Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are

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made or received. Operating cash flows in the first ~~quarter~~three months of ~~2020 were impacted by increased~~2021 benefited from lower levels of loss and settlement expense payments and increase premium receipts relative to the first ~~quarter~~three months of 2019. Additionally, improved financial performance in 2019 resulted in a higher level of bonus and profit-sharing contributions that were paid in the first quarter of 2020, which also reduced operating cash flows in the current period.2020.

We have ~~$149.3~~$149.5 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $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 per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. The estimated fair value for the senior ~~note~~notes at March 31, ~~2020~~2021 was ~~$154.7~~$164.4 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

As of March 31, ~~2020,~~2021, we had cash and other investments maturing within one year of approximately ~~$99.4~~$201.8 million and an additional ~~$449.4~~$572.0 million maturing between one to five years. Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

We also maintain a revolving line of credit with Bank of Montreal, Chicago Branch, which permits us to borrow up to an aggregate principal amount of $60.0 million. This facility was entered into during the first quarter of 2020 and replaced the previous $50.0 million facility with JP Morgan Chase Bank N.A., which was set to expire on May 24, 2020. Under certain conditions, the line may be increased up to an aggregate principal amount of $120.0 million. The facility has a three-year term that expires on March 27, 2023. As of and during the three-month period ended March 31, ~~2020,~~2021, no amounts were outstanding on either facility.

Additionally, two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the Federal Home Loan Bank of Chicago (FHLBC). Membership in the Federal Home Loan Bank ~~System~~system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of and during the three-month period ended March 31, ~~2020,~~2021, there were no outstanding borrowing amounts with the FHLBC.

We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.

We have not had any liquidity issues affecting our operations as we have sufficient cash flow to support operations. In addition to our bank credit facility and FHLBC membership, our highly liquid investment portfolio provides an additional source of liquidity.

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 March 31, 2020, our investment portfolio had a balance sheet value of $2.4 billion.~~ Invested assets at March 31, ~~2020~~2021 have ~~decreased $144.1~~increased $39.3 million from December 31, ~~2019.~~

~~Table of Contents~~

2020. As of March 31, ~~2020,~~2021, our investment portfolio had the following asset allocation breakdown:

Portfolio Allocation

(in thousands)

Cost or

Fair

Unrealized

% of Total

Asset class

Amortized Cost

Value

Gain/(Loss)

Fair Value

Quality*
U.S. government

$
171,026

$
186,974

$
15,948

7.7
%
AAA
U.S. agency

32,236

37,042

4,806

1.5
%
AAA
Non-U.S. govt. & agency

7,324

7,316

(8)

0.3
%
BBB+
Agency MBS

396,474

414,262

17,788

17.1
%
AAA
ABS/CMBS**

230,830

223,601

(7,229)

9.3
%
AAA
Corporate

685,116

688,418

3,302

28.5
%
BBB+
Municipal

389,845

405,972

16,127

16.8
%
AA
Total Fixed Income

$
1,912,851

$
1,963,585

$
50,734

81.2
%
AA-
Equity

272,152

356,403

84,251

14.8
%

Other Invested Assets

70,075

53,562

(16,513)

2.2
%

Cash

42,701

42,701

—

1.8
%

Total Portfolio

$
2,297,779

$
2,416,251

$
118,472

100.0
%

	Cost or		Fair		Unrealized		% of Total
(in thousands)	Amortized Cost		Value		Gain/(Loss)		Fair Value			Quality*
U.S. government	$	161,956	$	170,422	$	8,466		5.9	%	AAA
U.S. agency		28,883		31,666		2,783		1.1	%	AAA
Non-U.S. government & agency		8,296		8,555		259		0.3	%	BBB+
Agency MBS		358,224		369,212		10,988		12.8	%	AAA
ABS/CMBS/MBS**		215,177		218,232		3,055		7.6	%	AA+
Corporate		796,042		833,203		37,161		29.0	%	BBB+
Municipal		528,274		544,579		16,305		18.9	%	AA
Total fixed income	$	2,096,852	$	2,175,869	$	79,017		75.6	%	AA-
Equity		298,926		555,209		256,283		19.3	%
Other invested assets		48,451		50,413		1,962		1.8	%
Cash		94,935		94,935		—		3.3	%
Total portfolio	$	2,539,164	$	2,876,426	$	337,262		100.0	%

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

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

**Asset-backed and commercial mortgage-backed securities28

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Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of March 31, ~~2020,~~2021, our fixed income portfolio had the following rating distribution:


AAA	~~48.9~~	40.7	%
AA	~~16.9~~	20.0	%
A	~~19.3~~	21.8	%
BBB	~~8.4~~	11.0	%
BB	~~3.5~~	3.4	%
B	~~2.5~~	2.8	%
CCC	~~0.1~~	0.2	%
NR	~~0.4~~	0.1	%
Total	~~100.0~~	100.0	%

As of March 31, ~~2020,~~2021, the duration of the fixed income portfolio was ~~4.6~~4.8 years. Our fixed income portfolio remained well diversified, with ~~1,242~~1,435 individual issues.

Our investment portfolio has limited exposure to structured asset-backed securities. As of March 31, ~~2020,~~2021, we had ~~$141.9~~$137.8 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of March 31, ~~2020,~~2021, we had ~~$81.7~~$80.4 million in commercial ~~mortgage backed~~mortgage-backed securities and ~~$414.3~~$369.2 million in ~~mortgage backed~~mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the ~~GSE backed~~GSE-backed MBS, our exposure to ABS and CMBS was ~~9.3~~7.6 percent of our investment portfolio at quarter end.

We had ~~$688.4~~$833.2 million in corporate fixed income securities as of March 31, ~~2020,~~2021, which includes ~~$93.0~~$107.5 million invested in a ~~high yield~~high-yield credit strategy. This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

~~We also maintain an allocation to municipal fixed income securities. As of March 31, 2020, we had $406.0 million in municipal securities.~~ The municipal portfolio includes approximately 7359 percent tax-exempt securities and 2741 percent taxable securities. Approximately 8687 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 99 percent of the municipal bond portfolio is rated ‘A’ or better.

~~Table of Contents~~

~~Our equity portfolio had a fair value of $356.4 million as of March 31, 2020 and is also a source of liquidity.~~ The securities within the equity portfolio remain primarily invested in large-cap issues with a focus on dividend ~~income.~~income and are a source of liquidity. In the equity portfolio, the strategy remains one of value investing, with security selection taking precedence over market timing.

As of March 31, ~~2020,~~2021, our equity portfolio had a dividend yield of ~~2.8~~2.0 percent, compared to ~~2.3~~1.4 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with ~~226~~213 individual securities and three ETF positions. No single ~~stock~~company exposure ~~is greater~~in the equity portfolio represents more than 21 percent of ~~the equity portfolio.~~invested assets.

~~We had $53.6 million of other~~Other invested assets ~~at March 31, 2020, including~~include investments in low income housing tax credit partnerships, membership in the FHLBC and investments in private ~~funds and investments in restricted stock.~~funds. As of March 31, ~~2020, $15.1~~2021, $10.2 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the three-month period ~~ending~~ended March 31, ~~2020,~~2021, there were no outstanding borrowings with the FHLBC.

Our investment portfolio does not have any exposure to derivatives.

Our capital structure is comprised of equity and debt outstanding. As of March 31, ~~2020,~~2021, our capital structure consisted of ~~$149.3~~$149.5 million in 10-year maturity senior notes maturing in 2023 (debt) and ~~$915.7 million~~$1.2 billion of shareholders’ equity. Debt outstanding comprised ~~14.0~~11.5 percent of total capital as of March 31, ~~2020.~~2021. Interest and fees on debt obligations totaled $1.9 million during each of the first three months of ~~2020, the same amount as the previous year.~~2021 and 2020. We have incurred interest expense on debt at an average annual interest rate of 4.91 percent for the three-month periods ended March 31, ~~2020~~2021 and ~~2019.~~2020.

We paid a regular quarterly cash dividend of ~~$0.23~~$0.24 per share on March ~~20, 2020,~~19, 2021, the same amount as the prior quarter. We have increased dividends in each of the last 4445 years.

Our three insurance ~~subsidiaries~~companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance ~~subsidiary.~~company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance ~~company~~ subsidiaries to meet our

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obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of March 31, ~~2020,~~2021, our holding company had ~~$915.7 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 ~~$44.6~~$70.7 million in liquid assets, which ~~would cover the majority of~~exceeds our normal annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.

Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first three months of ~~2020,~~2021, RLI Ins. paid ~~$11.5~~$25.0 million in ordinary dividends to RLI Corp. In ~~2019,~~2020, our principal insurance subsidiary paid ordinary dividends totaling ~~$59.0~~$110.0 million. As of March 31, ~~2020, $53.8~~2021, $11.8 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp. as ordinary dividends without prior approval from the IDOI. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

~~Table of Contents~~

~~ITEM 3. Quantitative~~ ~~and Qualitative Disclosures about Market Risk~~

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Historically, our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We have limited exposure to both foreign currency risk and commodity risk.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of AA-, with 8583 percent rated A or better by at least two nationally recognized rating organizations.

On an overall basis, our exposure to market risk has not significantly changed from that reported in our ~~2019~~2020 Annual Report on Form 10-K. The COVID-19 pandemic does present new and emerging uncertainty to the financial markets. See further discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~and Part II, Item 1A., Risk Factors,~~ of this Quarterly Report on Form 10-Q.

Item 4.

Controls and Procedures

~~ITEM 4. Controls~~ ~~and Procedures~~

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.

No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

Item 1.
~~Item~~ 1.	Legal Proceedings – There were no material changes to report.

Item 1A.

Risk Factors – There were no material changes to report.

Item 2.
~~Ite~~~~m 1A.~~	~~Risk Factors~~

~~The Company is supplementing its risk factors previously disclosed in the Company’s 2019 Annual Report on Form 10-K as follows:~~

The recent coronavirus (COVID-19) global pandemic has adversely affected our business. Epidemics, pandemics and public health outbreaks, including the ongoing COVID-19 pandemic, could further adversely affect our business, including revenues, profitability, results of operations and/or cash flows, in a manner and to a degree that cannot be predicted but could be material.

The global COVID-19 pandemic has resulted in and is expected to continue to result in significant disruptions in economic activity and financial markets. COVID-19 has directly and indirectly adversely affected the Company and will likely continue to do so for an uncertain period of time. The cumulative effects of COVID-19 on the Company, and the effect of any other epidemic, pandemic or public health outbreak, cannot be predicted at this time, but could include, without limitation:

●

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

●

~~Reduced cash flows from our policyholders delaying premium payments,~~

~~Table of Contents~~

●

~~Increased costs of operations due to the remote working environments of our employees,~~

●

~~Increased claims, losses, litigation, and related expenses,~~

●

Legislative, regulatory, and judicial actions in response to COVID-19, including, but not limited to, actions prohibiting us from cancelling insurance policies in accordance with our policy terms, requiring us to cover losses when our policies did not provide coverage or excluded coverage, ordering us to provide premium refunds, granting extended grace periods for payment of premiums and providing for extended periods of time to pay past due premiums,

●

~~Policyholder losses from COVID-19-related claims could be greater than our reserves for those losses,~~

●

Volatility and declines in financial markets which, in response to COVID-19, has reduced, and could continue to reduce, the fair market value of, or result in the impairment of, invested assets held by the Company and

●

~~the decline in interest rates which could reduce future investment results.~~

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A, Risk Factors, of the 2019 Annual Report on Form 10-K.


~~Item~~ 2.	Unregistered Sales of Equity Securities and Use of Proceeds -

Items 2(a) and (b) are not applicable.

In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares during ~~2020.~~2021. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be suspended or discontinued at any time without prior notice.


Item 3.	Defaults Upon Senior Securities - Not Applicable.

Item 4.

Mine Safety Disclosures - Not Applicable.

Item 5.

Other Information - Not Applicable.

Item 6.

Exhibits

Exhibit No.		Description of Document	Reference

~~Item~~ 4.	~~Mine~~ ~~Safety Disclosures -~~ ~~Not Applicable.~~

~~Item~~ 5.	~~Other Information~~ ~~- Not Applicable.~~

~~Item~~ 6.	~~Exhibits~~

~~Exhibit No.~~		~~Description of Document~~		~~Reference~~
~~10.1~~		Credit Agreement (Bank of Montreal, Chicago Branch) dated as of March 27, 2020, among RLI Corp., the Lenders party thereto and Bank of Montreal, Chicago Branch, as Administrative Agent and Bank of Montreal, Chicago Branch, as Sole Bookrunner and Sole Lead Arranger.		~~Incorporated by reference to the Company’s Current Report on Form 8-K filed March 31, 2020.~~
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 31.1.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 31.2.

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

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

101		iXBRL-Related Documents	Attached as Exhibit 101.

104		Cover Page Interactive Data File	Embedded in Inline XBRL and contained in Exhibit 101.

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~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements 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.


	/s/ Todd W. Bryant
		Todd W. Bryant
		Vice President, Chief Financial Officer
		(Principal Financial and Chief Accounting Officer)

Date: April ~~28, 2020~~23, 2021


Delaware		37-0889946
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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


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


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


			Page

Part I - Financial Information			3

	Item 1.	Financial Statements	3

		Condensed Consolidated Statements of Earnings and Comprehensive Earnings ~~For~~for the Three-Month Periods Ended March 31, ~~2020~~2021 and ~~2019~~2020 (unaudited)	3

		Condensed Consolidated Balance Sheets as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 (unaudited)	4

		Condensed Consolidated Statements of Shareholders’ Equity ~~For~~for the Three-Month Periods Ended March 31, ~~2020~~2021 and ~~2019~~2020 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows ~~For~~for the Three-Month Periods Ended March 31, ~~2020~~2021 and ~~2019~~2020 (unaudited)	6

		Notes to Unaudited Condensed Consolidated Interim Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2221

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3330

	Item 4.	Controls and Procedures	3330

Part II - Other Information			3331

	Item 1.	Legal Proceedings	3331

	Item 1a.	Risk Factors	3331

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3431

	Item 3.	Defaults upon Senior Securities	3431

	Item 4.	Mine Safety Disclosures	3431

	Item 5.	Other Information	3431

	Item 6.	Exhibits	3431

Signatures			3532



	March 31,		December 31,
(in thousands, except share and per share data)	2020		2019

ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	1,963,585	$	1,983,086
(amortized cost of $1,912,851 and allowance for credit losses of $878 at 3/31/20)
(amortized cost of $1,915,278 and allowance for credit losses of $0 at 12/31/19)
Equity securities, at fair value (cost - $272,152 at 3/31/20 and $262,131 at 12/31/19)		356,403		460,630
Other invested assets		53,562		70,441
Cash		42,701		46,203
Total investments and cash	$	2,416,251	$	2,560,360
Accrued investment income		14,944		14,587
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,948 at 3/31/20 and $16,682 at 12/31/19		154,084		160,369
Ceded unearned premium		88,789		93,656
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $8,539 at 3/31/20 and $9,402 at 12/31/19		366,441		384,517
Deferred policy acquisition costs		84,208		85,044
Property and equipment, at cost, net of accumulated depreciation of $64,322 at 3/31/20 and $62,703 at 12/31/19		52,741		53,121
Investment in unconsolidated investees		108,081		103,836
Goodwill and intangibles		54,025		54,127
Other assets		39,047		36,104
TOTAL ASSETS	$	3,378,611	$	3,545,721

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,574,760	$	1,574,352
Unearned premiums		516,867		540,213
Reinsurance balances payable		30,865		25,691
Funds held		80,333		83,358
Income taxes-deferred		26,546		56,727
Bonds payable, long-term debt		149,349		149,302
Accrued expenses		27,536		66,626
Other liabilities		56,650		54,064
TOTAL LIABILITIES	$	2,462,906	$	2,550,333

Shareholders’ Equity
Common stock ($0.01 par value, 100,000,000 shares authorized)
(67,852,870 shares issued, 44,922,656 shares outstanding at 3/31/20)
(67,799,229 shares issued, 44,869,015 shares outstanding at 12/31/19)	$	679	$	678
Paid-in capital		325,052		321,190
Accumulated other comprehensive earnings		39,464		52,473
Retained earnings		943,509		1,014,046
Deferred compensation		6,970		7,980
Less: Treasury shares at cost
(22,930,214 shares at 3/31/20 and 12/31/19)		(399,969)		(400,979)
TOTAL SHAREHOLDERS’ EQUITY	$	915,705	$	995,388
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,378,611	$	3,545,721



	For the Three-Month Periods
	Ended March 31,
(in thousands, except per share data)	2020		2019

Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Consolidated revenue	$	118,117	$	263,820
Losses and settlement expenses		111,021		94,297
Policy acquisition costs		72,941		71,292
Insurance operating expenses		14,381		16,667
Interest expense on debt		1,897		1,861
General corporate expenses		1,755		3,276
Total expenses	$	201,995	$	187,393
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473

Other comprehensive earnings (loss), net of tax		(13,031)		29,301
Comprehensive earnings (loss)	$	(74,298)	$	94,774

Earnings per share:
Basic:
Basic net earnings (loss) per share	$	(1.36)	$	1.47
Basic comprehensive earnings (loss) per share	$	(1.65)	$	2.13

Diluted:
Diluted net earnings (loss) per share	$	(1.36)	$	1.46
Diluted comprehensive earnings (loss) per share	$	(1.65)	$	2.11

Weighted average number of common shares outstanding:
Basic		44,920		44,536
Diluted		44,920		44,887

	March 31,			December 31,
(in thousands, except share and per share data)	2021			2020
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	2,175,869		$	2,196,626
(amortized cost of $2,096,852 and allowance for credit losses of $375 at 3/31/21)
(amortized cost of $2,061,467 and allowance for credit losses of $397 at 12/31/20)
Equity securities, at fair value (cost - $298,926 at 3/31/21 and $293,190 at 12/31/20)		555,209			524,006
Other invested assets		50,413			54,232
Cash		94,935			62,217
Total investments and cash	$	2,876,426		$	2,837,081
Accrued investment income		16,109			16,126
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,172 at 3/31/21 and $17,658 at 12/31/20		149,736			174,628
Ceded unearned premium		111,071			113,488
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $8,953 at 3/31/21 and $8,634 at 12/31/20		454,921			443,729
Deferred policy acquisition costs		92,595			88,425
Property and equipment, at cost, net of accumulated depreciation of $70,089 at 3/31/21 and $68,682 at 12/31/20		50,470			51,406
Investment in unconsolidated investees		134,314			128,382
Goodwill and intangibles		53,617			53,719
Other assets		33,181			31,501
TOTAL ASSETS	$	3,972,440		$	3,938,485

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,795,275		$	1,750,049
Unearned premiums		590,364			586,386
Reinsurance balances payable		26,560			42,265
Funds held		85,572			81,747
Income taxes-deferred		74,624			80,235
Bonds payable, long-term debt		149,536			149,489
Accrued expenses		45,784			75,925
Other liabilities		49,939			36,411
TOTAL LIABILITIES	$	2,817,654		$	2,802,507

Shareholders’ Equity
Common stock ($0.01 par value)
(Shares authorized - 200,000,000 at 3/31/21 and 12/31/20)
(68,133,652 shares issued, 45,203,438 shares outstanding at 3/31/21)
(68,072,794 shares issued, 45,142,580 shares outstanding at 12/31/20)	$	681		$	681
Paid-in capital		336,757			335,365
Accumulated other comprehensive earnings		63,967			108,714
Retained earnings		1,146,380			1,084,217
Deferred compensation		7,926			8,292
Less: Treasury shares, at cost
(22,930,214 shares at 3/31/21 and 12/31/20)		(400,925	)		(401,291	)
TOTAL SHAREHOLDERS’ EQUITY	$	1,154,786		$	1,135,978
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,972,440		$	3,938,485


								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost
Balance, January 1, 2019	44,504,043	$	806,842	$	674	$	305,660	$	(14,572)	$	908,079	$	8,354	$	(401,353)
Net earnings (loss)	—		65,473		—		—		—		65,473		—		—
Other comprehensive earnings (loss), net of tax	—		29,301		—		—		29,301		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,039)		1,039
Share-based compensation	50,213		2,892		1		2,891		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,803)		—		—		—		(9,803)		—		—
Balance, March 31, 2019	44,554,256	$	894,705	$	675	$	308,551	$	14,729	$	963,749	$	7,315	$	(400,314)

								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
																									Accumulated
																									Other
																		Total							Comprehensive									Treasury
																Common		Shareholders’			Common		Paid-in		Earnings			Retained			Deferred			Shares
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost		Shares		Equity			Stock		Capital		(Loss)			Earnings			Compensation			at Cost
Balance, January 1, 2020	44,869,015	$	995,388	$	678	$	321,190	$	52,473	$	1,014,046	$	7,980	$	(400,979)		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						—		1,095			—		—		22			1,073			—			—
Net earnings (loss)	—		(61,267)		—		—		—		(61,267)		—		—		—		(61,267	)		—		—		—			(61,267	)		—			—
Other comprehensive earnings (loss), net of tax	—		(13,031)		—		—		(13,031)		—		—		—		—		(13,031	)		—		—		(13,031	)		—			—			—
Deferred compensation	—		—		—		—		—		—		(1,010)		1,010		—		—			—		—		—			—			(1,010	)		1,010
Share-based compensation	53,641		3,863		1		3,862		—		—		—		—		53,641		3,863			1		3,862		—			—			—			—
Dividends and dividend equivalents ($0.23 per share)	—		(10,343)		—		—		—		(10,343)		—		—		—		(10,343	)		—		—		—			(10,343	)		—			—
Balance, March 31, 2020	44,922,656	$	915,705	$	679	$	325,052	$	39,464	$	943,509	$	6,970	$	(399,969)		44,922,656	$	915,705		$	679	$	325,052	$	39,464		$	943,509		$	6,970		$	(399,969	)

																									Accumulated
																									Other
																		Total							Comprehensive									Treasury
																Common		Shareholders’			Common		Paid-in		Earnings			Retained			Deferred			Shares
(in thousands, except share and per share data)																Shares		Equity			Stock		Capital		(Loss)			Earnings			Compensation			at Cost
Balance, January 1, 2021																	45,142,580	$	1,135,978		$	681	$	335,365	$	108,714		$	1,084,217		$	8,292		$	(401,291	)
Net earnings (loss)																	—		73,012			—		—		—			73,012			—			—
Other comprehensive earnings (loss), net of tax																	—		(44,747	)		—		—		(44,747	)		—			—			—
Deferred compensation																	—		—			—		—		—			—			(366	)		366
Share-based compensation																	60,858		1,392			—		1,392		—			—			—			—
Dividends and dividend equivalents ($0.24 per share)																	—		(10,849	)		—		—		—			(10,849	)		—			—
Balance, March 31, 2021																	45,203,438	$	1,154,786		$	681	$	336,757	$	63,967		$	1,146,380		$	7,926		$	(400,925	)


Goodwill and Intangible Assets		March 31,		December 31,
(in thousands)		2020		2019
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
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19		463		565
Total intangibles	$	7,963	$	8,065

Total goodwill and intangibles	$	54,025	$	54,127


	For the Three-Month Period					For the Three-Month Period
	Ended March 31, 2020					Ended March 31, 2019
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount

Basic EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,536	$	1.47
Effect of Dilutive Securities
Stock options		-	-				-	351
Diluted EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,887	$	1.46


	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month
Component of Accumulated	Periods Ended March 31,				Affected line item in the
Other Comprehensive Earnings	2020		2019		Statement of Earnings

Unrealized gains and losses on available-for-sale securities	$	2,306	$	625	Net realized gains
		(849)		-	Credit losses presented within net realized gains
	$	1,457	$	625	Earnings (loss) before income taxes
		(306)		(131)	Income tax benefit (expense)
	$	1,151	$	494	Net earnings (loss)


SALES	Proceeds		Gross Realized				Net Realized
(in thousands)	From Sales		Gains		Losses		Gain (Loss)
2020
Available-for-sale	$	19,858	$	2,270	$	(102)	$	2,168
Equities		38,042		17,792		(2,633)		15,159
2019
Available-for-sale	$	92,277	$	1,356	$	(723)	$	633
Equities		26,347		9,034		(592)		8,442


CALLS/MATURITIES			Gross Realized				Net Realized
(in thousands)	Proceeds		Gains		Losses		Gain (Loss)
2020
Available-for-sale	$	54,890	$	145	$	(7)	$	138
2019
Available-for-sale	$	24,745	$	1	$	(9)	$	(8)


	As of March 31, 2020
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	186,974	$	—	$	186,974
U.S. agency		—		37,042		—		37,042
Non-U.S. govt. & agency		—		7,316		—		7,316
Agency MBS		—		414,262		—		414,262
ABS/CMBS*		—		223,601		—		223,601
Corporate		—		683,615		4,803		688,418
Municipal		—		405,972		—		405,972
Total fixed income securities - available-for-sale	$	—	$	1,958,782	$	4,803	$	1,963,585
Equity securities		356,403		—		—		356,403
Other invested assets		12,056		—		—		12,056
Total	$	368,459	$	1,958,782	$	4,803	$	2,332,044


	As of December 31, 2019
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Fixed income securities - available-for-sale
U.S. government	$	—	$	193,661	$	—	$	193,661
U.S. agency		—		38,855		—		38,855
Non-U.S. govt. & agency		—		7,628		—		7,628
Agency MBS		—		420,165		—		420,165
ABS/CMBS*		—		224,870		—		224,870
Corporate		—		690,297		1,770		692,067
Municipal		—		405,840		—		405,840
Total fixed income securities - available-for-sale	$	—	$	1,981,316	$	1,770	$	1,983,086
Equity securities		460,630		—		—		460,630
Total	$	460,630	$	1,981,316	$	1,770	$	2,443,716


	Level 3
(in thousands)	Securities
Balance as of January 1, 2020	$	1,770
Net realized and unrealized gains (losses)
Included in net earnings (loss) as a part of:
Net investment income		(5)
Net realized gains		(16)
Included in other comprehensive earnings (loss)		(1,048)
Total net realized and unrealized gains (losses)	$	(1,069)
Purchases		4,102
Balance as of March 31, 2020	$	4,803

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains	$	(16)
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss)	$	(1,048)


	March 31, 2020
Available-for-sale	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	56,844	$	56,702
Due after one year through five years		442,572		449,447
Due after five years through 10 years		549,193		569,898
Due after 10 years		236,938		249,675
Mtge/ABS/CMBS*		627,304		637,863
Total available-for-sale	$	1,912,851	$	1,963,585


Available-for-sale	December 31, 2019
(in thousands)	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
Asset Class	Cost		Losses		Gains		Losses		Value
U.S. government	$	186,699	$	-	$	6,994	$	(32)	$	193,661
U.S. agency		36,535		-		2,362		(42)		38,855
Non-U.S. govt. & agency		7,333		-		295		-		7,628
Agency MBS		411,808		-		8,920		(563)		420,165
ABS/CMBS*		222,832		-		2,514		(476)		224,870
Corporate		659,640		-		33,245		(818)		692,067
Municipal		390,431		-		16,131		(722)		405,840
Total Fixed Income	$	1,915,278	$	-	$	70,461	$	(2,653)	$	1,983,086


	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total

1	AAA/AA/A	Aaa/Aa/A	$	202,517	$	191,912	$	(10,605)	37.2	%
2	BBB	Baa		85,785		80,759		(5,026)	17.6	%
3	BB	Ba		65,256		59,398		(5,858)	20.5	%
4	B	B		50,630		44,392		(6,238)	21.9	%
5	CCC	Caa		2,674		1,872		(802)	2.8	%
6	CC or lower	Ca or lower		-		-		-	-	%
		Total	$	406,862	$	378,333	$	(28,529)	100.0	%


				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)

Outstanding options at January 1, 2020	1,667,290	$	62.52
Options granted	30,375		94.62
Options exercised	(56,725)		49.23		$	2,516
Options canceled/forfeited	(300)		58.60
Outstanding options at March 31, 2020	1,640,640	$	63.58	5.10	$	40,778
Exercisable options at March 31, 2020	614,040	$	54.68	3.75	$	20,438

				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	40,750		66.16
Options exercised	(50,580)		33.71		$	1,795
Options canceled/forfeited	(19,100)		57.28
Outstanding options at March 31, 2019	1,935,950	$	55.00	5.14	$	32,589
Exercisable options at March 31, 2019	702,250	$	47.84	3.73	$	16,794


	For the Three-Month Periods
REVENUES	Ended March 31,
(in thousands)	2020		2019
Casualty	$	143,420	$	136,900
Property		44,348		38,746
Surety		27,814		29,043
Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Total consolidated revenue	$	118,117	$	263,820

NET EARNINGS (LOSS)
(in thousands)	2020		2019
Casualty	$	(1,323)	$	5,343
Property		9,908		8,246
Surety		8,654		8,844
Net underwriting income	$	17,239	$	22,433
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
General corporate expense and interest on debt		(3,652)		(5,137)
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473


	For the Three-Month Period Ended
(in thousands)	March 31, 2020		March 31, 2019
Operating lease cost	$	1,406	$	1,481

Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	1,486	$	1,395

Right-of-use assets obtained in exchange for new operating lease liabilities	$	15	$	719

Other non-cash reductions to right-of-use assets	$	1,192	$	-


	Gross Premiums Written							Net Premiums Earned
	For the Three-Month Periods Ended March 31,							For the Three-Month Periods Ended March 31,
(in thousands)	2020		2019		% Change			2020		2019		% Change
Casualty
Commercial excess and personal umbrella	$	55,590	$	40,995	35.6	%		$	40,088	$	32,281	24.2	%
General liability		24,691		22,743	8.6	%			23,998		23,888	0.5	%
Commercial transportation		(3,777)		17,679	(121.4)	%			21,185		20,404	3.8	%
Professional services		21,498		21,026	2.2	%			20,695		20,299	2.0	%
Small commercial		16,117		13,964	15.4	%			15,633		13,188	18.5	%
Executive products		20,947		15,549	34.7	%			7,331		6,069	20.8	%
Other casualty		24,170		20,151	19.9	%			14,490		20,771	(30.2)	%
Total	$	159,236	$	152,107	4.7	%		$	143,420	$	136,900	4.8	%

Property
Marine	$	21,111	$	20,080	5.1	%		$	19,577	$	17,021	15.0	%
Commercial property		29,779		23,550	26.5	%	��		19,155		16,875	13.5	%
Specialty personal		4,872		5,079	(4.1)	%			5,000		4,584	9.1	%
Other property		959		312	207.4	%			616		266	131.6	%
Total	$	56,721	$	49,021	15.7	%		$	44,348	$	38,746	14.5	%

Surety
Commercial	$	11,280	$	11,654	(3.2)	%		$	10,938	$	10,812	1.2	%
Miscellaneous		11,948		11,828	1.0	%			10,516		11,602	(9.4)	%
Contract		6,647		6,302	5.5	%			6,360		6,629	(4.1)	%
Total	$	29,875	$	29,784	0.3	%		$	27,814	$	29,043	(4.2)	%

Grand Total	$	245,832	$	230,912	6.5	%		$	215,582	$	204,689	5.3	%


	March 31, 2020				December 31, 2019
	Financial				Financial
(in thousands)	Stmt Value		%		Stmt Value		%
Fixed income	$	1,963,585	81.3	%	$	1,983,086	77.5	%
Equity securities		356,403	14.7	%		460,630	18.0	%
Other invested assets		53,562	2.2	%		70,441	2.7	%
Cash and short-term investments		42,701	1.8	%		46,203	1.8	%
Total	$	2,416,251	100.0	%	$	2,560,360	100.0	%


Portfolio Allocation
(in thousands)
	Cost or		Fair		Unrealized		% of Total
Asset class	Amortized Cost		Value		Gain/(Loss)		Fair Value		Quality*
U.S. government	$	171,026	$	186,974	$	15,948	7.7	%	AAA
U.S. agency		32,236		37,042		4,806	1.5	%	AAA
Non-U.S. govt. & agency		7,324		7,316		(8)	0.3	%	BBB+
Agency MBS		396,474		414,262		17,788	17.1	%	AAA
ABS/CMBS**		230,830		223,601		(7,229)	9.3	%	AAA
Corporate		685,116		688,418		3,302	28.5	%	BBB+
Municipal		389,845		405,972		16,127	16.8	%	AA
Total Fixed Income	$	1,912,851	$	1,963,585	$	50,734	81.2	%	AA-
Equity		272,152		356,403		84,251	14.8	%
Other Invested Assets		70,075		53,562		(16,513)	2.2	%
Cash		42,701		42,701		—	1.8	%
Total Portfolio	$	2,297,779	$	2,416,251	$	118,472	100.0	%