RLI CORP – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations



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 2021, we achieved our 26th consecutive year
of underwriting profitability. Over the 26-year period, we averaged an 88.4
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.


Throughout this annual 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 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 12 to the consolidated
financial statements within Item 8, Financial Statements and Supplementary Data.
The nearest comparable GAAP measure is earnings before income taxes which, in
addition to underwriting income, includes net investment income, net realized
gains or losses, net unrealized gains or losses on equity securities, general
corporate expenses, debt costs and our portion of earnings from unconsolidated
investees. A reconciliation of net earnings to underwriting income follows:

                                                   Year ended December 31,
(in thousands)                                       2021             2020
Net earnings                                     $    279,354       $ 157,091
Income tax expense                                     64,967          32,750
Earnings before income taxes                     $    344,321       $ 189,841
Equity in earnings of unconsolidated investees        (37,060 )       (20,233 )
General corporate expenses                             13,330          10,265
Interest expense on debt                                7,677           7,603
Net unrealized gains on equity securities             (65,258 )       (32,101 )
Net realized gains                                    (64,222 )       (17,885 )
Net investment income                                 (68,862 )       (67,893 )
Underwriting income                              $    129,926       $  69,597

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.



When drawing up the consolidated accounts, we have to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and information on contingent assets and liabilities at
date of the consolidated financial statements and the amounts reported
income and expenses for the reporting period. Actual results may differ
significantly from these 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.




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

We record two categories of provisions for claims and LAE: provisions on a case-by-case basis and
IBNR reservations.

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

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

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

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

Following is a table of significant risk factors involved in estimating losses
grouped by major product line. We distinguish between loss ratio risk and
reserve estimation risk. Loss ratio risk refers to the possible dispersion of
loss ratios from year to year due to inherent volatility in the business, such
as high severity or aggregating exposures. Reserve estimation risk recognizes
the difficulty


in estimating a given year's ultimate loss liability. As an example, our
property catastrophe business (included below in other property) has significant
variance in year over year results; however, its reserving estimation risk is
relatively moderate.

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

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

General liability                   Long                  Internal          

Exposure/mixing changes Medium High

Unforeseen tort potential

Professional services              Medium            Internal & external          Highly varied exposures       Medium         Medium
                                                                                   Loss trend volatility
                                                                                 Unforeseen tort potential
Commercial transportation          Medium                 Internal                     High severity            Medium         Medium
                                                                                    Exposure change/mix
                                                                                   Loss trend volatility
                                                                                 Unforeseen tort potential

Small commercial                    Long                  Internal                  Exposure growth/mix         Medium         Medium
                                                                                 Unforeseen tort potential
                                                                                       Small volume

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

Other casualty                     Medium            Internal & external               Small volume             Medium         Medium

Marine                             Medium            Internal & external            Exposure growth/mix          High           High

Other property                     Short                  Internal               CAT aggregation exposure        High          Medium
                                                                                       Low frequency
                                                                                       High severity

Surety                             Medium                 Internal         

Economic volatility Medium Medium

Unique exhibitions

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

Due to the inherent uncertainty underlying estimates of loss reserves, including, but
without limitation, the future settlement environment, the final resolution of the
the estimated liability may be different from that anticipated at the closing date
Dated. Therefore, actual losses paid in the future could result in
amount different from that currently reserved – favorable or unfavourable.

The amount by which current estimated losses differ from those estimated for a
period at a prior valuation date is known as development. Development is
unfavorable when the losses ultimately settle for more than the levels at which
they were reserved or subsequent estimates indicate a basis for reserve
increases on unresolved claims. Development is favorable when losses ultimately
settle for less than the amount reserved or subsequent estimates indicate a
basis for reducing loss reserves on unresolved claims. We reflect favorable or
unfavorable development of loss reserves in the results of operations in the
period the estimates are changed.


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

Initial IBNR generation process

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

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

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

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

  • Significant changes in underlying policy terms and conditions,

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

• Small volume or lack of internal data requiring high usage of

        external data,

• Unique reinsurance features, including those with global stop-loss,

        reinstatement clauses, commutation provisions or clash protection,

• Longer emergence patterns with latent unforeseen mass crime exposures,

• Assumed reinsurance companies with an extended reporting lag

and/or more intensive use of data and complaints from ceding companies and products


  • High severity and/or low frequency,

  • Operational processes undergoing significant change and/or

• High sensitivity to major fluctuations in loss trends, economic changes or

        judicial change.

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

LAE Loss and Reserve Estimation Process

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


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

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

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

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

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

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

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

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

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

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

Weaknesses: The method involves additional estimation risk if significant changes
case booking practices took place.

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

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


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

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

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

Weaknesses: Ignores how losses actually emerge and thus produces the same
estimation of ultimate loss regardless of favorable/unfavourable emergence.

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

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

Weaknesses: Could potentially underestimate a favorable or unfavorable development in
give weight to the expected loss rate.

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

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

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

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

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

There is uncertainty in the estimates of ultimate losses. Considerable risk
factors in the reserve estimate include, but are not limited to, contingencies or
non-quantifiable changes in:

  • Loss payment patterns,

  • Loss reporting patterns,

  • Frequency and severity trends,

  • Underlying policy terms and conditions,

  • Business or exposure mix,

• Business or internal processes affecting timing of loss and LAE


  • Regulatory and legal environment and/or

  • Economic environment.

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

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

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

Determination of our best estimate

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

As a Majority Excess and Excess Insurer and Specialty Licensed Insurer
serving niche markets, we believe we are subject to above-average variations
estimates and that this variation is not symmetrical around the
central estimate.

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

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

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


favorable loss development will likely occur in subsequent periods. It is also
possible that the risks materialize above the enhanced reserve level, in which
case unfavorable loss development will likely occur in subsequent periods.

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

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

Loss reserve estimates are subject to a high degree of variability due to the
inherent uncertainty of ultimate settlement values. Periodic adjustments to
these estimates will likely occur as the actual loss emergence reveals itself
over time. Our loss reserving processes reflect accepted actuarial practices and
our methodologies result in a reasonable provision for reserves as of
December 31, 2021.

Reserve sensitivities

There are three major parameters that have significant influence on our
actuarial estimates of ultimate liabilities by product. They are the actual
losses that are reported, the expected loss emergence pattern and the expected
loss ratios used in the analyses. If the actual losses reported do not emerge as
expected, it may cause the Company to challenge all or some of our previous
assumptions. We may change expected loss emergence patterns, the expected loss
ratios used in our analysis and/or the weights we place on a given actuarial
method. The impact will be much greater and more leveraged for products with
longer emergence patterns. Our general liability product is an example of a
product with a relatively long emergence pattern. The following chart
illustrates the sensitivity of our general liability reserve estimates to these
key parameters. We believe the scenarios to be reasonable, as similar favorable
variations have occurred in recent years. For example, our general liability
emergence has ranged from 16 percent to 22 percent favorable and our management
liability emergence has ranged from 34 percent adverse to 61 percent favorable
over the last three years, while our overall emergence for all products combined
has ranged from 27 percent to 33 percent favorable. The numbers below are the
changes in estimated ultimate loss and ALAE in millions of dollars as of
December 31, 2021, resulting from the change in the parameters shown. These
parameters were applied to a general liability net loss and LAE reserve balance
of $227.7 million, in addition to associated ULAE and latent liability reserves,
at December 31, 2021.

                                                          Result from         Result from
                                                           favorable          unfavorable
                                                           change in           change in
(in millions)                                              parameter           parameter
+/-5 point change in expected loss ratio for all
accident years                                          $         (12.6 )   $           13.0
+/-10% change in expected emergence patterns            $          (5.9 )   $            6.0
+/-30% change in actual loss emergence over a
calendar year                                           $          (8.0 )   $            8.4

Simultaneous change in the expected loss ratio (5pts),

  emergence patterns (10%) and actual loss emergence
(30%).                                                  $         (26.6 )   $           27.4

There are often significant interrelationships between our reserving assumptions
that have offsetting or compounding effects on the reserve estimate. Thus, in
almost all cases, it is impossible to discretely measure the effect of a single
assumption or construct a meaningful sensitivity expectation that holds true in
all cases. The scenario above is representative of general liability, one of our
largest and longest-tailed products. It is unlikely that all of our products
would have variations as wide as illustrated in the example. It is also unlikely
that all of our products would simultaneously experience favorable or
unfavorable loss development in the same direction or at their extremes during a
calendar year. Because our portfolio is made up of a diversified mix of
products, there would ordinarily be some offsetting favorable and unfavorable
emergence by product as actual losses start to emerge and our loss estimates
become more reliable.


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

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


Fair value is defined as the price in the principal market that would be
received for an asset to facilitate an orderly transaction between market
participants on the measurement date. We 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.


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

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


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


We record deferred tax assets and liabilities to the extent that temporary
differences between the tax basis and GAAP basis of an asset or liability result
in future taxable or deductible amounts. Our deferred tax assets relate to
expected future tax deductions arising from claim reserves and future taxable
income related to changes in our unearned premium. We also have a significant
amount of deferred tax liabilities from unrealized gains on the investment
portfolio and deferred acquisition costs.

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

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


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


Our processes and controls continue to operate effectively and we have been able
to maintain the highest service and support levels possible for our customers
throughout the COVID-19 pandemic. It is difficult to predict how and to what
extent COVID-19, and its effects on the economy, will impact our revenues in the
coming quarters. In 2020, the product line that experienced the greatest impact
was public transportation. Many of our passenger transportation customers were
unable to effectively operate under social-distancing protocols and stay-at-home
orders. Although transportation premium was up from pre-pandemic levels in total
in 2021, public transportation may continue to be challenged. Additionally, a
number of our products support the construction industry, and revenues may be
impacted if disruption in this sector does not continue to ease.

The loss exposure arising out of the spread of COVID-19 and the 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 derivative implications that COVID-19 had
on the economy may have negative implications on products that are correlated
with the credit cycle, including, but not limited to, some of our surety and
executive products offerings. Additionally, the professional services and
executive product groups may be affected by claims made against companies who
are reopening or returning to 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 December 31, 2021. We expect there will be impacts to
the timing of loss emergence and ultimate loss ratios for certain coverages. The
industry experienced new issues, including the postponement of civil court
cases, the extension of various statutes of limitations and changes in
settlement trends. Our booked reserves include consideration of these factors,
but the duration and degree to which these issues persist, along with potential
legislative, regulatory or judicial actions, could result in loss reserve
deficiencies and reduce earnings in future periods.

Investment yields decreased throughout 2020, which resulted in lower
reinvestment rates through most of 2021. As investment yields rise, the fair
value of the fixed income portfolio will decline, as we observed with our $58.9
million of after-tax other comprehensive loss during 2021.

We produced solid operating results in 2021 and our financial position remains
strong. We generated $384.9 million of net operating cash inflows and believe we
have sufficient sources of liquidity to meet our anticipated needs over the next
12 to 24 months. Our revolving credit facility provides for a borrowing capacity
of $60.0 million, which can be increased to $120.0 million under certain
circumstances. Furthermore, our membership in the Federal Home Loan Bank system
provides a secured lending facility with additional borrowing capacity.

Ultimately, the extent to which COVID-19 will affect our business will be
influenced by its impact on the economy. We continue to evaluate all aspects of
our operations and are making necessary adjustments to manage our business. Our
diversified portfolio of products and financial strength have allowed us to
remain on solid footing. We believe we have a strong and sustainable
underwriting approach that will allow us to weather the economic environment and
uncertainty we continue to experience.


This section of this Form 10-K generally discusses 2021 and 2020 items and
year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and
year-to-year comparisons between 2020 and 2019 that are not included in this
Form 10-K can be found in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2020, incorporated herein by

Consolidated revenue for 2021 increased $195.6 million from 2020. Net premiums
earned for the Group increased 13 percent, driven by growth from our casualty
and property segments, while performance in the equity portfolio also surpassed
the return generated in 2020. Net investment income increased by 1 percent in
2021, primarily due to a larger asset base. Additionally, in the normal course
of portfolio rebalancing, we recorded net realized gains on our investment
portfolio in both 2021 and 2020.

CONSOLIDATED REVENUE                          Year ended December 31,
(in thousands)                                   2021            2020
Net premiums earned                         $      980,903     $ 865,747
Net investment income                               68,862        67,893
Net realized gains                                  64,222        17,885
Net unrealized gains on equity securities           65,258        32,101
Total consolidated revenue                  $    1,179,245     $ 983,626


Net earnings for 2021 totaled $279.4 million, up from $157.1 million in 2020.
Improved underwriting income was bolstered by an increase in unrealized gains on
equity securities.

NET EARNINGS                                       Year ended December 31,
(in thousands)                                       2021             2020
Underwriting income                              $    129,926       $  69,597
Net investment income                                  68,862          67,893
Net realized gains                                     64,222          17,885
Net unrealized gains on equity securities              65,258          32,101
Interest expense on debt                               (7,677 )        (7,603 )
General corporate expenses                            (13,330 )       (10,265 )
Equity in earnings of unconsolidated investees         37,060          20,233
Earnings before income taxes                     $    344,321       $ 189,841
Income tax expense                                    (64,967 )       (32,750 )
Net earnings                                     $    279,354       $ 157,091


Gross premiums written increased $210.9 million, or 19 percent, in 2021 when
compared to 2020. Growth was achieved in all three segments, though the increase
was driven by products in the casualty and property segments. Positive rate
movement across most of the casualty and property portfolio and expanded
distribution provided for growth opportunities in established lines. Net
premiums earned increased $115.2 million, or 13 percent, in 2021 when compared
to 2020.

Underwriting results for 2021 included $33.6 million of pretax losses and $0.4
million of reinstatement premium from hurricanes, as well as $25.0 million of
other storm losses. Comparatively, 2020 included $51.5 million of pretax losses
and $1.5 million of reinstatement premium from hurricanes, as well as $6.5
million of other storm and civil unrest losses. Additionally, $18.3 million of
COVID-19 related loss and defense reserves were established in 2020. Results for
each period benefited, however, from favorable development on prior years' loss
reserves, which provided additional pretax earnings of $125.5 million in 2021,
compared to $101.1 million in 2020. Further discussion of reserve development
can be found in note 6 to the consolidated financial statements within Item 8,
Financial Statements and Supplementary Data.

Incentive and profit-sharing amounts earned by executives, managers and
associates are predominately influenced by corporate performance including
operating return on equity, combined ratio and Market Value Potential (MVP). MVP
is a compensation model that measures components of comprehensive earnings
against a minimum required return on capital. MVP is the primary measure of
executive bonus achievement and a significant component of manager and associate
incentive targets. Incentive and profit-sharing related expenses attributable to
the favorable reserve developments totaled $18.3 million and $14.2 million for
2021 and 2020, respectively. These performance-related expenses impact policy
acquisition, insurance operating and general corporate expenses line items in
the financial statements. Partially offsetting the 2021 and 2020 increases were
$8.5 million and $11.2 million, respectively, in reductions to incentive and
profit-sharing amounts earned due to losses associated with catastrophe
activity, as well as the reserves that were established for COVID-19 in 2020.

In total, underwriting income was $129.9 million on an 86.8 combined ratio in
2021, compared to $69.6 million on a 92.0 combined ratio in 2020. The loss ratio
was 46.5 in 2021, compared to 51.2 in 2020. The expense ratio decreased to 40.3
in 2021, from 40.8 in 2020. While higher levels of underwriting income and net
earnings led to larger levels of bonus and profit-sharing expenses, the expense
ratio declined as a result of a larger earned premium base.

We achieved our 26th consecutive year of underwriting profit in 2021. Our
ability to continue to produce underwriting income, and to do so at margins
which have consistently outperformed the broader industry, is a testament to our
underwriters' discipline throughout the insurance cycle and our continued
commitment to underwriting for a profit. We believe our underwriting discipline
can differentiate the Company from the broader insurance market by ensuring
sound risk selection and appropriate pricing.

The following tables and narrative provide a more detailed overview of the
segment performance over the past two years.



                                             Gross Premiums Written                        Net Premiums Earned
(in thousands)                        2021            2020          % Change       2021          2020         % Change
Commercial excess and personal
umbrella                           $   283,242     $   237,239          19   %   $ 219,437     $ 178,214          23   %
General liability                       99,017          94,307           5   %      90,853        91,653          (1 ) %
Professional services                   96,735          91,300           6   %      88,855        85,196           4   %
Commercial transportation              106,432          63,345          68   %      83,352        64,624          29   %
Small commercial                        68,475          65,843           4   %      64,660        63,357           2   %
Executive products                     136,078         121,653          12   %      21,873        26,509         (17 ) %
Other casualty                          81,605          75,722           8   %      64,609        59,968           8   %
Total casualty                     $   871,584     $   749,409          16   %   $ 633,639     $ 569,521          11   %

Commercial property                $   202,855     $   145,371          40   %   $ 107,941     $  79,406          36   %
Marine                                 112,721          98,027          15   %      97,745        81,852          19   %
Specialty personal                      24,672          20,962          18   %      21,385        19,596           9   %
Other property                           7,618           4,409          73   %       4,766         2,866          66   %
Total property                     $   347,866     $   268,769          29   %   $ 231,837     $ 183,720          26   %

Miscellaneous                      $    46,599     $    43,174           8   %   $  43,982     $  42,292           4   %
Commercial                              51,529          46,426          11   %      43,738        42,872           2   %
Contract                                29,776          28,654           4   %      27,707        27,342           1   %
Total surety                       $   127,904     $   118,254           8   %   $ 115,427     $ 112,506           3   %

Grand total                        $ 1,347,354     $ 1,136,432          19   %   $ 980,903     $ 865,747          13   %


Gross premiums written for the casualty segment were up $122.2 million for 2021.
Gross premiums from commercial excess and personal umbrella increased $46.0
million, due to rate increases and an expanded distribution base. Rate increases
led to a 12 percent increase in premiums for our executive products group.
Growth in the amount of business written by Prime, with whom we maintain a quota
share reinsurance treaty, led to an increase in other casualty premium.

Commercial transportation was meaningfully affected by the stay-at-home orders
associated with COVID-19, which resulted in a significant decrease in premium in
2020. Transportation premiums were up $43.1 million in 2021, when compared to
2020, and were up from pre-pandemic levels.


Gross premiums written from our property segment were up $79.1 million in 2021.
Our commercial property business was up $57.5 million, as rates on wind and
earthquake exposures continued to increase, building valuations rose and market
disruption provided an opportunity to increase market share. Rate increases and
improved retention led to $14.7 million of growth for our marine product. Other
property premium increased as a result of property-exposed GBA business that
continued to gain scale.


Gross premiums written from our surety segment were up $9.7 million in 2021. The
expansion of existing accounts and new business resulted in increased premium
for commercial surety. The increase in miscellaneous surety premium is
attributable to growth in existing programs and new opportunities from market
disruption. Contract surety benefited from new construction opportunities.

(in thousands)          2021          2020
Casualty              $  95,519     $ 44,427
Property                 11,300       (3,182 )
Surety                   23,107       28,352
Total                 $ 129,926     $ 69,597

COMBINED RATIO    2021       2020
Casualty           84.9        92.2
Property           95.1       101.7
Surety             80.0        74.8
Total              86.8        92.0


Underwriting income for the casualty segment was $95.5 million on an 84.9
combined ratio in 2021, compared to $44.4 million on a 92.2 combined ratio in
2020. The improvement is the result of increased favorable development on prior
accident years' reserves and improved current accident year performance.

Favorable development on prior accident years' loss reserves contributed to
underwriting earnings in each of the past two years. The total benefit from
favorable development on prior years' reserves was $108.6 million for 2021,
which was experienced across accident years 2014 through 2020. Products which
generated the majority of the favorable development include general liability,
transportation, professional services, commercial excess and personal umbrella.
No product experienced significant adverse development. Comparatively, results
for the casualty segment in 2020 included favorable development of $75.1
million, with the bulk of the development attributable to transportation,
general liability, commercial excess and professional services across accident
years 2016 through 2019. Hurricane and storm losses on casualty-oriented package
policies that include property coverage resulted in $4.1 million of losses in
2021. Comparatively, $4.4 million of hurricane losses were incurred in 2020 and
$12.9 million of reserves were established for COVID-19 loss and defense costs
on financial-related product lines.

The segment's loss ratio was 49.2 in 2021, compared to 56.6 in 2020. The lower
loss ratio in 2021 was due to the higher amounts of favorable development on
prior years' reserves. The expense ratio for the casualty segment was 35.7 in
2021, compared to 35.6 in 2020.


Underwriting income from the property segment was $11.3 million on a 95.1
combined ratio in 2021, compared to $3.2 million of underwriting loss on a 101.7
combined ratio in 2020. Underwriting results for 2021 included $11.0 million of
favorable development on prior years' loss and catastrophe reserves, primarily
from the marine business, $32.2 million of hurricane losses and $22.3 million of
other storm losses. Comparatively, results for 2020 included $13.0 million of
favorable development in prior years' reserves, largely from marine, $5.0
million of storm and civil unrest losses and $2.0 million of reserves related to
COVID-19 investigative and defense costs. Additionally, hurricane activity
resulted in $47.2 million of losses and $1.5 million of ceded reinstatement

A larger earned premium base resulted in higher levels of underwriting income as
well as lower loss and expense ratios. The segment's loss ratio was 56.0 in
2021, compared to 60.6 in 2020. Catastrophe losses added 24 points to the loss
ratio in 2021, compared to 30 points of impact from catastrophe losses in 2020.
The expense ratio for the property segment declined to 39.1 in 2021, from 41.1
in 2020.


Underwriting income for the surety segment totaled $23.1 million on an 80.0
combined ratio in 2021, compared to $28.4 million on a 74.8 combined ratio in
2020. Underwriting performance for each year reflects a combination of positive
current accident year results and favorable development in prior accident years'
loss reserves. The current accident year combined ratio for each period has been
in the low to mid 80s. Results for 2021 included favorable development on prior
accident years' reserves, which decreased loss and settlement expenses for the
segment by $5.9 million. Comparatively, 2020 results included favorable
development on prior accident years' loss reserves, which decreased the
segment's loss and settlement expenses by $13.0 million, and offset $3.4 million
in reserves established for COVID-19 related losses.

The segment's loss ratio was 13.0 in 2021, compared to 8.4 in 2020. A decreased
amount of favorable development on prior years' reserves in 2021 led to a higher
loss ratio. The expense ratio for the surety segment was 67.0 in 2021, compared
to 66.4 in 2020.



In 2021, net investment income increased by 1%. The increase was
mainly due to a larger asset base. The average annual returns of our
the investments were as follows for 2021 and 2020:

                              2021         2020

Taxable (on book value) 2.76% 3.10%
Tax exempt (on book value) 2.63% 2.69%
Equities (at fair value) 2.07% 2.33%

Taxable (on book value) 2.18% 2.45%
Tax exempt (on book value) 2.49% 2.55%
Equities (at fair value) 1.80% 2.02%

The after-tax yield reflects the different tax rates applicable to each category
of investment. Our taxable fixed income securities were subject to a corporate
tax rate of 21.0 percent, our tax-exempt municipal securities were subject to a
tax rate of 5.3 percent and our dividend income was generally subject to a tax
rate of 13.1 percent. During 2021, the average after-tax yield on the taxable
fixed income portfolio was 2.2 percent, a decrease from 2.5 percent in the prior
year. The average after-tax yield on the tax-exempt portfolio declined slightly
to 2.5 percent.

The fixed income portfolio increased by $213.3 million during the year, as the
majority of operating cash flows were allocated to the fixed income portfolio.
The tax-adjusted total return on a mark-to-market basis was -0.3 percent. Our
equity portfolio increased by $89.8 million to $613.8 million in 2021 as a
result of the strong equity market returns during the year. The total return for
the year on the equity portfolio was 26.4 percent.

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

                                                                                             Pre-tax          Equivalent
                                                                                            Annualized        Annualized
                                                                          Change in         Return on          Return on
                   Average             Net                                Unrealized           Avg.              Avg.
                  Invested         Investment         Net Realized       Appreciation        Invested          Invested
(in thousands)   Assets (1)       Income (2)(3)        Gains (3)            (3)(4)            Assets            Assets
     2017        $ 2,081,309     $        54,876     $        4,411     $       53,719              5.4   %           5.8   %
     2018          2,167,510              62,085             63,407           (140,513 )           (0.7 ) %          (0.6 ) %
     2019          2,377,295              68,870             17,520            161,848             10.4   %          10.5   %
     2020          2,698,721              67,893             17,885             99,451              6.9   %           6.9   %
     2021          3,000,025              68,862             64,222             (6,280 )            4.2   %           4.3   %
  5-yr Avg.      $ 2,464,972     $        64,517     $       33,489     $       33,645              5.2   %           5.4   %

(1) Average amounts at the beginning and end of the year (including cash and

short-term investments).

(2) Investment income, net of investment expenses.

(3) Before income taxes.

(4) Relates to fixed-income securities and available-for-sale equities.

In 2021, we recognized $62.5 million in net realized gains in the equity
portfolio, $1.9 million in net realized gains in the fixed income portfolio and
$0.2 million in other net realized losses. In 2020, we recognized $15.8 million
in net realized gains in the equity portfolio, $3.9 million in net realized
gains in the fixed income portfolio and $1.8 million in other net realized


We maintain a diversified investment portfolio with a prudent mix of fixed
income and risk assets. We continually monitor economic conditions, our capital
position and the insurance market to determine our tactical allocation. As of
December 31, 2021, the portfolio had a fair value of $3.2 billion, an increase
of $325.9 million from the end of 2020.

We have determined the fair value of certain financial instruments based on their
underlying characteristics and relevant market transactions. We
maximize the use of observable inputs and minimize the use of unobservable inputs
inputs during fair measurement


assess. For more information, see notes 1 and 2 to the consolidated financial statements
financial statements in Section 8, Financial Statements and Supplementary Data.

From December 31, 2021our investment portfolio had the following asset
distribution of allowances:

                                          Cost or                           Unrealized       % of Total
(in thousands)                         Amortized Cost      Fair Value      Gain/(Loss)       Fair Value        Quality*
U. S. government                      $        127,752     $   134,554     $      6,802              4.3   %     AAA
U.S. agency                                     30,403          32,760            2,357              1.0   %     AAA
Non-U.S. government & agency                     8,297           8,481              184              0.3   %     BBB+
Agency MBS                                     362,861         367,187            4,326             11.6   %     AAA
ABS/CMBS/MBS**                                 264,273         264,054             (219 )            8.3   %      AA
Corporate                                      925,394         957,095           31,701             30.3   %     BBB+
Municipal                                      627,287         645,756           18,469             20.4   %      AA
Total fixed income                    $      2,346,267     $ 2,409,887     $     63,620             76.2   %     AA-
Equities                                       324,501         613,776          289,275             19.4   %
Other invested assets                           44,435          50,501            6,066              1.6   %
Cash                                            88,804          88,804                -              2.8   %
Total portfolio                       $      2,804,007     $ 3,162,968     $    358,961            100.0   %

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

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

The quality in the preceding table and in all subsequent tables is an average of each
the bond’s credit rating, adjusted for its relative weight in the portfolio.

Fixed income represented 76 percent of our total 2021 portfolio, down from 77
percent in 2020. As of December 31, 2021, the fair value of our fixed income
portfolio consisted of 36 percent AAA-rated securities, 23 percent AA-rated
securities, 20 percent A-rated securities, 13 percent BBB-rated securities and 8
percent non-investment grade or non-rated securities. This compares to 44
percent AAA-rated securities, 19 percent AA-rated securities, 21 percent A-rated
securities, 10 percent BBB-rated securities and 6 percent non-investment grade
or non-rated securities in 2020.

In selecting the maturity of securities in which we invest, we consider the
relationship between the duration of our fixed income investments and the
duration of our liabilities, including the expected ultimate payout patterns of
our reserves. We believe that both liquidity and interest rate risk can be
minimized by such asset/liability management. As of December 31, 2021, our fixed
income portfolio's duration was 5.0 years.

Consistent underwriting income allows a portion of our investment portfolio to
be invested in equity securities and other risk asset classes. Equities
comprised 19 percent of our total 2021 portfolio, the same as 2020. Securities
within the equity portfolio are well diversified and are primarily invested in
broad index exchange traded funds (ETFs). Our actively managed equity strategy
has a preference for dividend income and value oriented security selection with
low turnover which minimizes transaction costs and taxes throughout our long
investment horizon.



As of December 31, 2021, our fixed income portfolio had the following rating

FAIR VALUE                                                                                Below
(in thousands)                    AAA           AA             A            BBB           Grade          No Rating      Fair Value
U.S. government & agency
(GSE)                          $ 156,604     $  10,710     $       -     $ 

-$-$- $167,314
No-we government agency

           -             -         1,940         6,541                                -           8,481
Corporate - industrial            21,126        43,343       124,150       195,645           41,606               -         425,870
Corporate - financial              3,133        38,750       215,804        68,119           11,370               -         337,176
Corporate - utilities              1,281         1,039        28,909        30,443            4,246               -          65,918
Corporate industrial -
private placements                     -             -                       2,937           73,992          19,564          96,493
Corporate financial -
private placements                     -                           -                          6,899          22,797          29,696
Corporate utilities -
private placements                     -             -                                          784           1,158           1,942
Municipal                        169,426       414,360        59,842             -                -           2,128         645,756
GSE - RMBS                       283,607             -             -             -                -               -         283,607
Non-GSE RMBS                      62,488        16,009                           -                -               -          78,497
CLO                               27,362         7,000             -             -                -               -          34,362
ABS - credit cards                   567             -        21,289             -                -               -          21,856
ABS - auto loans                   9,187         4,293         4,011                              -               -          17,491
All other ABS/MBS                 21,381         7,430        18,813             -                -           8,632          56,256
GSE - CMBS                        83,580             -             -             -                -               -          83,580
CMBS                              38,435         3,647        13,510             -                -               -          55,592
Total                          $ 878,177     $ 546,581     $ 488,268     $ 303,685     $    138,897     $    54,279     $ 2,409,887

backed by a mortgage, Asset-backed securities and commercial mortgage-backed securities

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

(in thousands)                Amortized Cost       Fair Value       % of Total
Pass-throughs                $        187,456     $    190,512             51.9   %
Planned amortization class             95,182           93,095             25.3   %
Sequential                             80,223           83,580             22.8   %
Total                        $        362,861     $    367,187            100.0   %

Pass-throughs                $        220,516     $    230,610             57.3   %
Planned amortization class             67,185           67,377             16.8   %
Sequential                             96,314          104,084             25.9   %
Total                        $        384,015     $    402,071            100.0   %

Agency MBS represented 15 percent of the fixed income portfolio, compared to 18
percent as of December 31, 2020. Our objective for the agency MBS portfolio is
to provide reasonable cash flow stability where we are compensated for the call
risk associated with residential refinancing. The agency MBS portfolio includes
mortgage-backed pass-through securities and collateralized mortgage obligations
(CMO), which include planned amortization classes (PACs) and sequential pay
structures. As of December 31, 2021, all of the securities in our agency MBS
portfolio were rated AAA and issued by Government Sponsored Enterprises (GSEs)
such as the Governmental National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation


Variability in the average life of principal repayment is an inherent risk of
owning mortgage-related securities. However, we reduce our portfolio's exposure
to prepayment risk by seeking characteristics that tighten the probable
scenarios for expected cash flows. As of December 31, 2021, the agency MBS
portfolio contained 52 percent of pure pass-throughs, compared to 57 percent as
of December 31, 2020. An additional 23 percent of the MBS portfolio was invested
in sequential payer, down from 26 percent in 2020.

The following table summarizes the breakdown of our asset-backed assets and
portfolio of commercial mortgage-backed securities at the 31st of December:

(in thousands)      Cost         Fair Value       % of Total
Non-GSE RMBS     $   79,281     $     78,497             29.7   %
CMBS                 55,293           55,592             21.1   %
CLO                  34,305           34,362             13.0   %
Equipment            22,134           21,856              8.3   %
Auto                 17,401           17,491              6.6   %
Consumers            12,242           12,442              4.7   %
Railcars             10,066           10,037              3.8   %
Credit card           4,919            5,135              1.9   %
Other                28,632           28,642             10.8   %
Total            $  264,273     $    264,054            100.0   %

Non-GSE RMBS     $   54,271     $     55,074             25.2   %
CMBS                 23,927           25,941             11.9   %
CLO                  39,315           39,244             18.0   %
Equipment             9,348            9,448              4.3   %
Auto                 28,093           28,739             13.2   %
Consumers             6,502            6,912              3.2   %
Railcars              3,601            3,741              1.7   %
Credit card          24,218           24,746             11.3   %
Other                23,948           24,528             11.2   %
Total            $  213,223     $    218,373            100.0   %

An ABS, CMBS or non-agency residential mortgage-backed security (RMBS) is a
securitization collateralized by the cash flows from a specific pool of
underlying assets. These asset pools can include items such as credit card
payments, auto loans, structured bank loans in the form of collateralized loan
obligations (CLOs) and residential or commercial mortgages. As of December 31,
2021, ABS/CMBS/RMBS investments were 11 percent of the fixed income portfolio,
compared to 10 percent as of December 31, 2020. Sixty percent of the securities
in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2021, while 97
percent were rated A or better. We believe that ABS/CMBS investments often add
superior cash flow stability over mortgage pass-throughs or CMOs.

When making investments in MBS/ABS/CMBS, we evaluate the quality of the
underlying collateral, the structure of the transaction, which dictates how any
losses in the underlying collateral will be distributed, and prepayment risks.
We had $7.3 million in unrealized losses in these asset classes as of
December 31, 2021.

Fixed Income Municipal Securities

As of December 31, 2021, municipal bonds composed 27 percent of our fixed income
portfolio, compared to 24 percent as of December 31, 2020. We believe municipal
fixed income securities can provide diversification and additional
tax-advantaged yield to our portfolio. Our objective for the municipal fixed
income portfolio is to provide reasonable cash flow stability and increased
after-tax yield.

Our municipal fixed income portfolio is comprised of general obligation (GO) and
revenue securities. The revenue sources include sectors such as sewer and water,
public improvement, school, transportation and colleges and universities. As of
December 31, 2021, approximately 48 percent of the municipal fixed income
securities in the investment portfolio were GO and the remaining 52 percent were
revenue based. The municipal portfolio is diversified amongst 336 issues with
the largest single issuer representing less than 1 percent of invested assets.


Ninety percent of our municipal fixed income securities were rated AA or better,
while 99 percent were rated A or better. The municipal portfolio includes 55
percent taxable and 45 percent tax-exempt securities.

Corporate debt securities

As of December 31, 2021, our corporate debt portfolio comprised 40 percent of
the fixed income portfolio, compared to 37 percent as of December 31, 2020. The
corporate allocation includes floating rate bank loans and bonds that are below
investment grade in credit quality and offer incremental yield over our core
fixed income portfolio. Non-investment grade bonds totaled $123.4 while
non-rated Regulation D securities totaled $43.5 million at the end of 2021. The
corporate debt portfolio has an overall quality rating of BBB+ diversified among
776 issues.

The table below illustrates our exposure to corporate debt at December 31, 2021.
Private placements include bank loans and Regulation D securities.

(in thousands)                                 Cost         Fair Value       % of Total
Corporate - industrial                      $  409,056     $    425,870             44.5   %
Corporate - financial                          324,652          337,176             35.2   %
Corporate - utilities                           63,913           65,918              6.9   %
Corporate industrial - private placements       96,056           96,493             10.1   %
Corporate financial - private placements        29,830           29,696              3.1   %
Corporate utilities - private placements         1,887            1,942              0.2   %
Total                                       $  925,394     $    957,095            100.0   %

We believe corporate debt investments add diversification and additional yield
to our portfolio. Because corporates make up a large portion of the fixed income
opportunity set, the corporate debt investments will continue to be a
significant part of our investment program.


As of December 31, 2021, our equity portfolio comprised 19 percent of the
investment portfolio, the same as the previous year. The securities within the
equity portfolio are well diversified and are primarily invested in broad index
ETFs that represent market indexes similar to the Russell 1000 Index, Russell
3000 Index, S&P 500 Index and S&P 600 Index. The ETF portfolio is congruent with
the actively managed equity portfolios and solves for exposures that line up
with our overall benchmark index, the Russell 3000. In total, the equity
portfolio is comprised of 87 securities with the largest single company exposure
representing less than 1 percent of invested assets.


We incurred $7.7 million of interest expense on outstanding debt during 2021 and
$7.6 million in 2020. At December 31, 2021 and 2020, our long-term debt
consisted of $150.0 million in senior notes maturing September 15, 2023 and
paying interest semi-annually at a rate of 4.875 percent. Additionally, RLI Ins.
borrowed $50.0 million from the Federal Home Loan Bank of Chicago on November
10, 2021. The borrowing matures on November 10, 2023 and interest is paid
monthly at an annualized rate of 0.84 percent.

As discussed previously, general corporate expenses tend to fluctuate relative
to our incentive compensation plans. Our compensation model measures components
of comprehensive earnings against a minimum required return on our capital.
Bonuses are earned as we generate earnings in excess of this required return. In
2021 and 2020, we exceeded the required return, resulting in the accrual of
executive bonuses. Increased levels of net earnings in 2021 resulted in higher
variable compensation earned than in 2020.


We maintain a 40 percent equity interest in Maui Jim, a manufacturer of
high-quality sunglasses. As a private company, the market for Maui Jim's stock
is limited. Our investment in Maui Jim is carried at the RLI Corp. holding
company level, as it is not core to our insurance operations. While we have
certain rights under our shareholder agreement with Maui Jim as a minority
shareholder, we are subject to the decisions of the controlling shareholder,
which may impact the value of our investment. In 2021, we recorded $22.8 million
in earnings from this investment, compared to $10.4 million in 2020. Sales
recovered from the shutdown the traditional retail sector experienced during

From December 31, 2021we held a 23% stake in equity and earnings
from the first. Prime writes business through two Illinois domiciled insurance
carriers, Prime Insurance Company, an excess and excess lines company, and
Main property and


Casualty Insurance Inc., an admitted insurance company. As a private company,
the market for Prime's stock is limited. While we have certain rights under our
shareholder agreement, we are subject to the decisions of the controlling
shareholder, which may impact the value of our investment. In 2021, we recorded
$17.0 million in investee earnings for Prime, compared to $10.8 million in 2020,
reflective of their growth in revenue. Additionally, we maintain a quota share
reinsurance treaty with Prime, which contributed $22.2 million of gross premiums
written and $19.1 million of net premiums earned during 2021, compared to $15.7
million of gross premiums written and $14.3 million of net premiums earned
during 2020.

We did not receive a dividend from our equity method investments in 2021, but
received a dividend from Prime in 2020. Dividends from Maui Jim and Prime have
been irregular in nature and while they provide added liquidity when received,
we do not rely on those dividends to meet our liquidity needs. While these
dividends do not flow through the investee earnings line, they do result in the
recognition of a tax benefit, which is discussed in the income tax section that


Our effective tax rates were 18.9 percent and 17.3 percent for 2021 and 2020,
respectively. Effective rates are dependent upon components of pretax earnings,
which is impacted by the volatility of unrealized gains and losses, and the
related tax effects. The effective rate was higher in 2021 due to higher levels
of pretax earnings, which decreased the impact of tax-favored adjustments on a
percentage basis.

Our net earnings include equity in earnings of unconsolidated investees, Maui
Jim and Prime. The investees do not have a policy or pattern of paying
dividends. As a result, we record a deferred tax liability on the earnings at
the corporate capital gains rate of 21 percent in anticipation of recovering our
investments through means other than through the receipt of dividends, such as a
sale. We received a $4.7 million dividend from Prime in 2020 and recognized a
$0.5 million tax benefit from applying the lower tax rate applicable to
affiliated dividends paid to an insurance company (10.8 percent in 2020), as
compared to the corporate capital gains rate on which the deferred tax
liabilities were based. Standing alone, the dividend resulted in a 0.2 percent
reduction to the 2020 effective tax rate. No dividends were declared from
unconsolidated investees in 2021, therefore having no impact to the 2021
effective tax rate.

Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax
deduction. Dividends paid to the ESOP in 2021 and 2020 resulted in tax benefits
of $1.6 million and $1.1 million, respectively. These tax benefits reduced the
effective tax rate for 2021 and 2020 by 0.5 percent and 0.6 percent,


The primary liability on our balance sheet relates to unpaid losses and
settlement expenses, which represents our estimated liability for losses and
related settlement expenses before considering offsetting reinsurance balances
recoverable. The largest asset on our balance sheet, outside of investments, is
the reinsurance balances recoverable on unpaid losses and settlement expenses,
which serves to offset this liability. The liability can be split into two
parts: (1) case reserves representing estimates of losses and settlement
expenses on known claims and (2) IBNR reserves representing estimates of losses
and settlement expenses on claims that have occurred but have not yet been
reported to the Company. Our gross liability for both case and IBNR reserves is
reduced by reinsurance balances recoverable on unpaid losses and settlement
expenses to calculate our net reserve balance. This net reserve balance
increased to $1.4 billion at December 31, 2021, from $1.3 billion as of
December 31, 2020. This reflects incurred losses of $456.6 million in 2021
offset by paid losses of $327.5 million, compared to incurred losses of $442.9
million offset by $325.1 million paid in 2020. For more information on the
changes in loss and LAE reserves by segment, see note 6 to the consolidated
financial statements within Item 8, Financial Statements and Supplementary Data.

Gross reserves (liability) and the reinsurance balances recoverable (asset) are
generally subject to the same influences that affect net reserves, though
changes to our reinsurance agreements can cause reinsurance balances recoverable
to behave differently. Total gross loss and LAE reserves increased to $2.0
billion at December 31, 2021, from $1.8 billion at December 31, 2020, while
ceded loss and LAE reserves increased to $608.1 million from $443.7 million over
the same period.



We have three main types of cash flow: (1) operating cash flow, which
consist primarily of cash generated from our underwriting operations and income
earned on our investment portfolio, (2) invest the cash flows related to the
buying, selling and


maturity of investments and (3) financing cash flows that impact our capital
structure, such as changes in debt, issuance of common stock and dividend
payments. The following table summarizes these three cash flows over the last
two years:

(in thousands)                   2021           2020
Operating cash flows          $  384,905     $  263,259
Investing cash flows (uses)     (274,826 )     (167,987 )
Financing cash flows (uses)      (83,492 )      (79,258 )

We have posted positive operating cash flow in the last two years. Variations in
operating cash flow between periods are largely driven by the volume and timing
of premium receipt, claim payments, reinsurance and taxes. In addition,
fluctuations in insurance operating expenses impact operating cash flow. During
2021, the majority of cash flow uses were related to financing and investing
activities and associated with the payments of dividends and net purchases of
investments, respectively.

We have entered into certain contractual obligations that require the Company to
make recurring payments. The following table summarizes our contracts
obligations from December 31, 2021:

                                                                 Payments due by period
                                                                                                  More than
(in thousands)                               Less than 1 year      1-3 years      3-5 years        5 years          Total
Loss and settlement expense reserves         $         580,730     $  735,027     $  391,900     $   335,898     $ 2,043,555
Long-term debt                                               -        200,000              -               -         200,000
Interest on long-term debt                               7,733          5,546              -               -          13,279
Operating leases                                         5,353          7,670          2,365           2,283          17,671
Other invested assets and equity method
investees                                               13,135          6,762            131             103          20,131
Total                                        $         606,951     $  955,005     $  394,396     $   338,284     $ 2,294,636

Loss and settlement expense reserves represent our best estimate of the ultimate
cost of settling reported and unreported claims and related expenses. As
discussed previously, the estimation of loss and loss expense reserves is based
on various complex and subjective judgments. Actual losses and settlement
expenses paid may deviate, perhaps substantially, from the reserve estimates
reflected in our financial statements. Similarly, the timing for payment of our
estimated losses is not fixed and is not determinable on an individual or
aggregate basis. The assumptions used in estimating the payments due by periods
are based on our historical claims payment experience. Due to the uncertainty
inherent in the process of estimating the timing of such payments, there is a
risk that the amounts paid in any period can be significantly different than the
amounts disclosed above. Amounts disclosed above are gross of anticipated
amounts recoverable from reinsurers. Reinsurance balances recoverable on unpaid
loss and settlement reserves are reported separately as assets, instead of being
netted with the related liabilities, since reinsurance does not discharge the
Company of our liability to policyholders. Reinsurance balances recoverable on
unpaid loss and settlement reserves totaled $608.1 million at December 31, 2021,
compared to $443.7 million in 2020.

The next largest contractual obligation relates to long-term debt outstanding.
On October 2, 2013, we completed a public debt offering of $150.0 million in
senior notes maturing September 15, 2023, (a 10-year maturity) and paying
interest semi-annually at the rate of 4.875 percent. The notes were issued at a
discount resulting in proceeds, net of discount and commission, of $148.6
million. Additionally, RLI Ins. borrowed $50.0 million from the Federal Home
Loan Bank of Chicago on November 10, 2021. The borrowing matures on November 10,
2023 and has an option to pay off the debt early on November 10, 2022. Interest
is paid monthly at an annualized rate of 0.84 percent. We are not party to any
off-balance sheet arrangements. See note 4 to the consolidated financial
statements within Item 8, Financial Statements and Supplementary Data for more
information on our long-term debt. Additionally, see note 2 to the consolidated
financial statements within Item 8, Financial Statements and Supplementary Data
for information on our obligations for other invested assets.

Our primary objective in managing our capital is to preserve and grow
shareholders' equity and statutory surplus to improve our competitive position
and allow for expansion of our insurance operations. Our insurance subsidiaries
must maintain certain minimum capital levels in order to meet the requirements
of the states in which we are regulated. Our insurance companies are also
evaluated by rating agencies that assign financial strength ratings that measure
our ability to meet our obligations to policyholders over an extended period of

We have historically grown our total capital as a result of three sources of
funds: (1) earnings on underwriting and investing activities, (2) appreciation
in the value of our investments and (3) the issuance of common stock and debt.

At December 31, 2021, we had cash, short-term investments and other investments
maturing within one year of approximately $146.9 million and an additional
$672.9 million of investments maturing between 1 to 5 years. We 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. 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. This facility replaced the previous $50.0
million facility with JP Morgan Chase Bank N.A., which was set to expire on May
24, 2020. As of and during the year ended December 31, 2021, no amounts were
outstanding on these facilities.

Additionally, two of our insurance companies, RLI Ins. and Mt. Hawley, are
members of the Federal Home Loan Bank of Chicago (FHLBC). Membership in the
Federal Home Loan Bank system provides both companies with access to an
additional source of liquidity via a secured lending facility. Based on
qualifying assets and the $50.0 million borrowing outstanding at year-end,
additional aggregate borrowing capacity is approximately $14.9 million. However,
under certain circumstances, that capacity may be increased based on additional
FHLBC stock purchased and available collateral. Our membership allows each
insurance subsidiary to determine tenor and structure at the time of borrowing.

We believe that cash generated by operations, cash generated by investments and
cash available from financing activities will provide sufficient sources of
liquidity to meet our anticipated needs over the next 12 to 24 months. We have
consistently generated positive operating cash flow. The primary factor in our
ability to generate positive operating cash flow is underwriting profitability,
which we have achieved for 26 consecutive years.


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

Sources                                             Uses
Premiums received                                   Claims
Loss payments from reinsurers                       Ceded premium to 


Investment income (interest and dividends)          Commissions paid
Unconsolidated investee dividends from affiliates   Operating expenses
Funds held                                          Interest expense
                                                    Income taxes
                                                    Funds held

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

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


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

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

We maintain a diversified investment portfolio representing policyholder funds
that have not yet been paid out as claims, as well as the capital we hold for
our shareholders. As of December 31, 2021, our portfolio had a carrying value of
$3.2 billion. Portfolio assets at December 31, 2021, increased by $325.9
million, or 11 percent, from December 31, 2020.

Our overall investment philosophy is designed to first protect policyholders by
maintaining sufficient funds to meet corporate and policyholder obligations and
then generate long-term growth in shareholders' equity. Because our existing and
projected liabilities


are sufficiently funded by the fixed income portfolio, we can improve returns by
investing a portion of the surplus (within limits) in a risk assets portfolio
largely made up of equities. As of December 31, 2021, 50 percent of our
shareholders' equity was invested in equities, an increase from 46 percent at
December 31, 2020.

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


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

Sources                                  Uses
Proceeds from stock offerings            Shareholder dividends
Proceeds from debt offerings             Debt repayment
Short-term borrowing                     Share buy-backs

Shares issued under stock option plans

Our capital structure is comprised of equity and debt securities. From
December 31, 2021our capital structure consisted of $199.7 million in
long-term debt and $1.2 billion equity. Outstanding debt
represented 14% of the total capital at December 31, 2021.

At the holding company (RLI Corp.) level, we rely largely on dividends from our
insurance company subsidiaries to meet our obligations for paying principal and
interest on outstanding debt, corporate expenses and dividends to RLI Corp.
shareholders. As discussed further below, dividend payments to RLI Corp. from
our principal insurance subsidiary are restricted by state insurance laws as to
the amount that may be paid without prior approval of the insurance regulatory
authorities of Illinois. As a result, we may not be able to receive dividends
from such subsidiary at times and in amounts necessary to pay desired dividends
to RLI Corp. shareholders. On a GAAP basis, as of December 31, 2021, our holding
company had $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 $87.9 million in liquid
investment assets, which exceeds our normal annual holding company expenditures.
Unrestricted funds at the holding company level are available to fund debt
interest, general corporate obligations and regular dividend payments to our
shareholders. If necessary, the holding company also has other potential sources
of liquidity that could provide for additional funding to meet corporate
obligations or pay shareholder dividends, which include a revolving line of
credit, as well as access to the capital markets.

Ordinary dividends, which may be paid by our principal insurance subsidiary
without prior regulatory approval, are subject to certain limitations based upon
statutory income, surplus and earned surplus. The maximum ordinary dividend
distribution from our principal insurance subsidiary in a rolling 12-month
period is limited by Illinois law to the greater of 10 percent of RLI Ins.
policyholder surplus, as of December 31 of the preceding year, or the net income
of RLI Ins. for the 12-month period ending December 31 of the preceding year.
Ordinary dividends are further restricted by the requirement that they be paid
from earned surplus. In 2021 and 2020, our principal insurance subsidiary paid
ordinary dividends totaling $70.0 million and $110.0 million, respectively, to
RLI Corp. Any dividend distribution in excess of the ordinary dividend limits is
deemed extraordinary and requires prior approval from the IDOI. In 2021, our
principal insurance subsidiary sought and received regulatory approval prior to
the payment of extraordinary dividends totaling $110.0 million. No extraordinary
dividends were paid in 2020. As of December 31, 2021, $26.1 million of the net
assets of our principal insurance subsidiary are not restricted and could be
distributed to RLI Corp. as ordinary dividends. Because the limitations are
based upon a rolling 12-month period, the amount and impact of these
restrictions vary over time. In addition to restrictions from our principal
subsidiary's insurance regulator, we also consider internal models and how
capital adequacy is defined by our rating agencies in determining amounts
available for distribution.

Our 183rd consecutive dividend payment was declared in February 2022 and will be
paid on March 18, 2022, in the amount of $0.25 per share. Since the inception of
cash dividends in 1976, we have increased our annual dividend every year.


The pandemic's impact on the industry was more moderate in 2021, and it was a
year of transition, with broad-based momentum fueling growth across most
business lines. The current hard market cycle is being sustained by several
factors, including: resurgent core inflation, significant catastrophe activity,
continued low interest rates and higher reinsurance costs. Market participants
are acting rationally by reducing capacity in more volatile segments and the
persistent uncertainty of the frequency and severity of losses remains,
especially for longer tailed exposures. Our diverse portfolio of specialty
products and focus on surplus lines has afforded us the flexibility to meet the
needs of insureds and navigate changing market environments.


GDP growth should be a foundation for our industry over time, with commercial
coverages expanding alongside the economy. The property and casualty industry is
expected to exceed GDP growth, as market conditions continue to make up for the
soft cycle in the mid-2010s. With positive rate increases entering a third or
fourth year, the compounding effects for our industry are significant, and
likely a reason that many carriers are citing rate in excess of loss costs.
Growth through positive rate momentum should benefit industry loss ratios, and
scale is an important contributor to helping absorb the fixed costs of embedded

RLI also experienced a transition in 2021, with changes in management that
inaugurated Craig Kliethermes as Managing Director, the third
award in our 56-year history. For RLI however, a change of direction
does not mean a change in philosophy and our underwriting discipline remains a
cornerstone of our corporate culture.

Our underwriting team continues to focus on improving the experience with our
distribution partners, making it easier and more efficient for brokers and
agents to do business with us. We recognize the importance of maintaining strong
personal relationships with producers, especially in light of significant
consolidation among our distribution partners and the virtual nature of today's
business interactions. As we invest in technology to enhance the submission and
binding of new business, we would expect written premium to increase alongside
expenses. We anticipate that this would minimize any increase, and should
eventually result in a decrease, to our expense ratio.

Capital markets were rational in 2021, with accommodative monetary policy and
fiscal stimulus supporting asset prices and consumers respectively. The prospect
of continued inflation will likely require the Federal Reserve to change course
in 2022, an expectation that led to higher bond yields at year-end. We
anticipate that yields will continue to move up throughout 2022, which will
offer support to investment income, especially when coupled with a larger
invested asset base. As of February 2022, equity prices may be in a transition
of their own, as tighter financial conditions and a higher discount rate may
impact future earnings. Absent a recession, those earnings should be supportive
over the long term, but we expect bouts of volatility in the new year.

The economy is stable with strong demand for labor, household balance sheets in
a de-levered state and consumers poised to re-engage the service sector as the
country continues to re-open. Supply chain issues, labor shortages and inflation
in the cost of materials may offer a challenging backdrop for industries like
construction, where activity might be stunted. About one third of RLI's business
lines touch the construction industry, and we are watching the trends in this
market closely.


The casualty segment remains highly influenced by long term trends, inflation
and the prospect for increasing damage awards for liability losses. We have seen
continued momentum in rates across nearly all casualty businesses, a trend we
expect to continue into 2022. The growth rate was particularly robust for our
transportation and personal umbrella products in 2021, but is expected to be
more temperate and closer to the growth rate of the rest of our casualty
business moving forward. Supportive environments will depend on the broader
capacity for risk transfer from the industry and the cadence and magnitude of
loss activity. Economic activity can be correlated with more frequent losses,
especially for commercial auto coverages, and we expect this trend to play out
over the course of the year. Social inflation has been less prominent in recent
quarters, but we are watchful for resurgent influence on court outcomes. We
believe our balance sheet and underwriting model have the strength and
flexibility to navigate the nuanced nature of the casualty business and growth
should continue for most lines in 2022.


The industry has experienced elevated property losses, with significant levels
of catastrophe activity in the last several years. This has restrained some
capacity and created opportunity for RLI to continue growing. Reinsurance cost
increases, wage and materials inflation, and rising building valuations have
increased the probability of continued growth and rate improvement into 2022.
Storm activity will be the primary driver of profitability in the near term. The
industry will continue to evaluate the impacts of climate change on the
frequency and severity of weather-based events. However, our approach of
mitigating climate and catastrophe-related risks through aggregation management,
reinsurance and pricing will remain unchanged.


In 2021, our surety business experienced meaningful growth, largely attributable
to investments in technology and a growing economy. Several recession-related
industry losses resulted in disruption to the market, allowing for greater
opportunity in the commercial space. In contrast, smaller miscellaneous exposure
remains very competitive and we expect continued demand for higher commissions
in this market segment over the course of the next year. The construction
industry is a large part of our surety business, and labor and materials
shortages are significantly impacting the market. As the economy normalizes,
these constraints should improve and we anticipate continued growth will occur.



We marked our 26th consecutive year of underwriting profitability in 2021. The
consistent results and value that we have delivered to our stakeholders is
directly correlated to our customer focus, hallmark underwriting discipline and
ownership culture. We believe this is a market we can thrive in, as rates are
still moving up broadly. Achieving strong results for 2022 will require deep
expertise and knowledge of the markets and insured that we serve. We believe the
strong collaboration between our underwriters, claims and analytical teams will
result in risk selection advantages in our favor.


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


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