UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2023
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-09463
RLI Corp.
(Exact name of registrant as specified in its charter)
Delaware | 37-0889946 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
9025 North Lindbergh Drive, Peoria, IL | 61615 | |
(Address of principal executive offices) | (Zip Code) |
(309) 692-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock $0.01 par value | RLI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 17, 2023, the number of shares outstanding of the registrant’s Common Stock was 45,596,196.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(Unaudited)
For the Three Months | For the Six Months | |||||||||||
Ended June 30, | Ended June 30, | |||||||||||
(in thousands, except per share data) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net premiums earned | $ | 322,280 | $ | 282,810 | $ | 630,003 | $ | 551,962 | ||||
Net investment income | 28,788 | 18,472 | 55,872 | 36,355 | ||||||||
Net realized gains | 5,580 | 12,804 | 20,200 | 18,392 | ||||||||
Net unrealized gains (losses) on equity securities | 25,214 | (100,994) | 40,710 | (128,804) | ||||||||
Consolidated revenue | $ | 381,862 | $ | 213,092 | $ | 746,785 | $ | 477,905 | ||||
Losses and settlement expenses | 153,943 | 117,914 | 268,431 | 223,438 | ||||||||
Policy acquisition costs | 102,626 | 89,615 | 204,070 | 174,902 | ||||||||
Insurance operating expenses | 24,510 | 19,325 | 48,411 | 38,188 | ||||||||
Interest expense on debt | 2,047 | 2,011 | 4,055 | 4,021 | ||||||||
General corporate expenses | 4,219 | 2,435 | 8,433 | 5,798 | ||||||||
Total expenses | $ | 287,345 | $ | 231,300 | $ | 533,400 | $ | 446,347 | ||||
Equity in earnings of unconsolidated investees | 1,514 | 11,654 | 5,437 | 20,413 | ||||||||
Earnings (loss) before income taxes | $ | 96,031 | $ | (6,554) | $ | 218,822 | $ | 51,971 | ||||
Income tax expense (benefit) | 18,379 | (4,315) | 42,359 | 6,287 | ||||||||
Net earnings (loss) | $ | 77,652 | $ | (2,239) | $ | 176,463 | $ | 45,684 | ||||
| ||||||||||||
Other comprehensive earnings (loss), net of tax | (19,721) | (97,563) | 17,986 | (213,144) | ||||||||
Comprehensive earnings (loss) | $ | 57,931 | $ | (99,802) | $ | 194,449 | $ | (167,460) | ||||
| ||||||||||||
Basic net earnings (loss) per share | $ | 1.70 | $ | (0.05) | $ | 3.87 | $ | 1.01 | ||||
Diluted net earnings (loss) per share | $ | 1.69 | $ | (0.05) | $ | 3.83 | $ | 1.00 | ||||
| ||||||||||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic | 45,591 | 45,354 | 45,560 | 45,330 | ||||||||
Diluted | 46,044 | 45,354 | 46,045 | 45,748 | ||||||||
See accompanying notes to the unaudited condensed consolidated interim financial statements.
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RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, | December 31, | |||||
(in thousands, except share and per share data) |
| 2023 |
| 2022 | ||
ASSETS | ||||||
Investments and cash: | ||||||
Fixed income: | ||||||
Available-for-sale, at fair value | $ | 2,689,100 | $ | 2,666,950 | ||
(amortized cost of $2,946,920 and allowance for credit losses of $434 at 6/30/23) | ||||||
(amortized cost of $2,945,273 and allowance for credit losses of $339 at 12/31/22) | ||||||
Equity securities, at fair value (cost - $340,184 at 6/30/23 and $328,019 at 12/31/22) | 552,566 | 498,382 | ||||
Short-term investments, at cost which approximates fair value | 271,296 | 36,229 | ||||
Other invested assets | 60,907 | 47,922 | ||||
Cash | 16,707 | 22,818 | ||||
Total investments and cash | $ | 3,590,576 | $ | 3,272,301 | ||
Accrued investment income | 22,525 | 21,259 | ||||
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,768 at 6/30/23 and $18,696 at 12/31/22 | 229,471 | 189,501 | ||||
Ceded unearned premium | 112,353 | 138,457 | ||||
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,251 at 6/30/23 and $11,250 at 12/31/22 | 720,858 | 740,089 | ||||
Deferred policy acquisition costs | 148,336 | 127,859 | ||||
Property and equipment, at cost, net of accumulated depreciation of $72,404 at 6/30/23 and $68,633 at 12/31/22 | 48,358 | 49,573 | ||||
Investment in unconsolidated investees | 55,250 | 58,275 | ||||
Goodwill and intangibles | 53,562 | 53,562 | ||||
Income taxes-deferred | 29,864 | 40,269 | ||||
Other assets | 54,693 | 75,923 | ||||
TOTAL ASSETS | $ | 5,065,846 | $ | 4,767,068 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Liabilities | ||||||
Unpaid losses and settlement expenses | $ | 2,361,577 | $ | 2,315,637 | ||
Unearned premiums | 891,103 | 785,085 | ||||
Reinsurance balances payable | 35,931 | 61,100 | ||||
Funds held | 102,429 | 101,144 | ||||
Income taxes-current | 5,326 | — | ||||
Current portion of long-term debt | 199,956 | 199,863 | ||||
Accrued expenses | 70,220 | 94,869 | ||||
Other liabilities | 47,392 | 32,029 | ||||
TOTAL LIABILITIES | $ | 3,713,934 | $ | 3,589,727 | ||
| ||||||
Shareholders’ Equity | ||||||
Common stock ($0.01 par value) | ||||||
(Shares authorized - 200,000,000) | ||||||
(68,526,410 shares issued, 45,596,196 shares outstanding at 6/30/23) | ||||||
(68,399,966 shares issued, 45,469,752 shares outstanding at 12/31/22) | $ | 685 | $ | 684 | ||
Paid-in capital | 357,656 | 352,391 | ||||
Accumulated other comprehensive earnings (loss) | (211,090) | (229,076) | ||||
Retained earnings | 1,597,660 | 1,446,341 | ||||
Deferred compensation | 12,507 | 12,015 | ||||
Less: Treasury shares, at cost (22,930,214 shares at 6/30/23 and 12/31/22) | (405,506) | (405,014) | ||||
TOTAL SHAREHOLDERS’ EQUITY | $ | 1,351,912 | $ | 1,177,341 | ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 5,065,846 | $ | 4,767,068 | ||
See accompanying notes to the unaudited condensed consolidated interim financial statements.
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RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
|
|
|
| Accumulated |
|
|
| |||||||||||||||||
Other | ||||||||||||||||||||||||
Total | Comprehensive | Treasury | ||||||||||||||||||||||
Common | Shareholders’ | Common | Paid-in | Earnings | Retained | Deferred | Shares | |||||||||||||||||
(in thousands, except share and per share data) |
| Shares |
| Equity |
| Stock |
| Capital |
| (Loss) |
| Earnings |
| Compensation |
| at Cost | ||||||||
Balance, January 1, 2022 |
| 45,289,337 | $ | 1,229,361 | $ | 682 | $ | 343,742 | $ | 49,826 | $ | 1,228,110 | $ | 9,642 | $ | (402,641) | ||||||||
Net earnings (loss) |
| — | 47,923 | — | — | — | 47,923 | — | — | |||||||||||||||
Other comprehensive earnings (loss), net of tax |
| — | (115,581) | — | — | (115,581) | — | — | — | |||||||||||||||
Deferred compensation |
| — | — | — | — | — | — | (973) | 973 | |||||||||||||||
Share-based compensation |
| 26,605 | 3,049 | — | 3,049 | — | — | — | — | |||||||||||||||
Dividends and dividend equivalents ($0.25 per share) |
| — | (11,330) | — | — | — | (11,330) | — | — | |||||||||||||||
Balance, March 31, 2022 |
| 45,315,942 | $ | 1,153,422 | $ | 682 | $ | 346,791 | $ | (65,755) | $ | 1,264,703 | $ | 8,669 | $ | (401,668) | ||||||||
Net earnings (loss) |
| — | (2,239) | — | — | — | (2,239) | — | — | |||||||||||||||
Other comprehensive earnings (loss), net of tax |
| — | (97,563) | — | — | (97,563) | — | — | — | |||||||||||||||
Deferred compensation |
| — | — | — | — | — | — | 276 | (276) | |||||||||||||||
Share-based compensation |
| 52,862 | 2,371 | 1 | 2,370 | — | — | — | — | |||||||||||||||
Dividends and dividend equivalents ($0.26 per share) |
| — | (11,803) | — | — | — | (11,803) | — | — | |||||||||||||||
Balance, June 30, 2022 |
| 45,368,804 | $ | 1,044,188 | $ | 683 | $ | 349,161 | $ | (163,318) | $ | 1,250,661 | $ | 8,945 | $ | (401,944) | ||||||||
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Total | Comprehensive | Treasury | ||||||||||||||||||||||
Common | Shareholders’ | Common | Paid-in | Earnings | Retained | Deferred | Shares | |||||||||||||||||
(in thousands, except share and per share data) | Shares | Equity | Stock | Capital | (Loss) | Earnings | Compensation | at Cost | ||||||||||||||||
Balance, January 1, 2023 |
| 45,469,752 | $ | 1,177,341 | $ | 684 | $ | 352,391 | $ | (229,076) | $ | 1,446,341 | $ | 12,015 | $ | (405,014) | ||||||||
Cumulative-effect adjustment from ASU 2023-02 | — | (951) | — | — | — | (951) | — | — | ||||||||||||||||
Net earnings (loss) |
| — | 98,811 | — | — | — | 98,811 | — | — | |||||||||||||||
Other comprehensive earnings (loss), net of tax |
| — | 37,707 | — | — | 37,707 | — | — | — | |||||||||||||||
Deferred compensation |
| — | — | — | — | — | — | 249 | (249) | |||||||||||||||
Share-based compensation |
| 84,944 | 2,864 | 1 | 2,863 | — | — | — | — | |||||||||||||||
Dividends and dividend equivalents ($0.26 per share) |
| — | (11,851) | — | — | — | (11,851) | — | — | |||||||||||||||
Balance, March 31, 2023 |
| 45,554,696 | $ | 1,303,921 | $ | 685 | $ | 355,254 | $ | (191,369) | $ | 1,532,350 | $ | 12,264 | $ | (405,263) | ||||||||
Net earnings (loss) |
| — | 77,652 | — | — | — | 77,652 | — | — | |||||||||||||||
Other comprehensive earnings (loss), net of tax |
| — | (19,721) | — | — | (19,721) | — | — | — | |||||||||||||||
Deferred compensation |
| — | — | — | — | — | — | 243 | (243) | |||||||||||||||
Share-based compensation |
| 41,500 | 2,402 | — | 2,402 | — | — | — | — | |||||||||||||||
Dividends and dividend equivalents ($0.27 per share) |
| — | (12,342) | — | — | — | (12,342) | — | — | |||||||||||||||
Balance, June 30, 2023 |
| 45,596,196 | $ | 1,351,912 | $ | 685 | $ | 357,656 | $ | (211,090) | $ | 1,597,660 | $ | 12,507 | $ | (405,506) | ||||||||
See accompanying notes to the unaudited condensed consolidated interim financial statements.
5
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months | ||||||
Ended June 30, | ||||||
(in thousands) |
| 2023 |
| 2022 | ||
Net cash provided by operating activities | $ | 243,595 | $ | 170,645 | ||
Cash Flows from Investing Activities | ||||||
Purchase of: | ||||||
Fixed income securities, available-for-sale | $ | (365,976) | $ | (292,056) | ||
Equity securities | (25,454) | (36,605) | ||||
Property and equipment | (2,790) | (3,024) | ||||
Other | (2,669) | (6,326) | ||||
Proceeds from sale of: | ||||||
Fixed income securities, available-for-sale | 19,490 | 20,892 | ||||
Equity securities | 22,029 | 53,525 | ||||
Equity method investments | 14,134 | — | ||||
Other | 473 | 1,172 | ||||
Proceeds from call or maturity of: | ||||||
Fixed income securities, available-for-sale | 349,714 | 137,476 | ||||
Net proceeds from sale (purchase) of short-term investments | (235,067) | — | ||||
Net cash used in investing activities | $ | (226,116) | $ | (124,946) | ||
Cash Flows from Financing Activities | ||||||
Cash dividends paid | $ | (24,172) | $ | (23,115) | ||
Proceeds from stock option exercises | 582 | 1,656 | ||||
Net cash used in financing activities | $ | (23,590) | $ | (21,459) | ||
Net increase in cash | $ | (6,111) | $ | 24,240 | ||
Cash at the beginning of the period | 22,818 | 88,804 | ||||
Cash at June 30, | $ | 16,707 | $ | 113,044 | ||
See accompanying notes to the unaudited condensed consolidated interim financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A. BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2022 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2023 and the results of operations of RLI Corp. (the Company) and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2022 to conform to the classifications used in the current year.
The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.
B. ADOPTED ACCOUNTING STANDARDS
2023-02—Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Method
The amendments in this ASU permit the use of the proportional amortization method for investments in tax credits if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits presented as a component of income tax expense. Under previous guidance, equity investments in tax credit structures, other than qualified affordable housing projects, were accounted for using the equity method of accounting, which required the presentation of income, gains and losses, and tax credits in their respective line items of the statement of earnings. This ASU allows entities to make an accounting policy election on an individual tax credit program basis for all equity investments whose primary purpose is receiving income tax credits or other income tax benefits. When the proportional amortization method is selected, this amendment also requires a liability be recognized for delayed equity contributions that are unconditional or for contingent contributions when the contingent event becomes probable.
We adopted on January 1, 2023 using a modified-retrospective approach. Through 2022, our investment in historic tax credit partnerships was presented in the balance sheet as an investment in unconsolidated investee. On January 1, 2023, the $11 million investment was moved to the other invested assets line item, an unfunded commitment for the investment was recognized by establishing a $7 million liability and increasing other invested assets, and the asset and retained earnings were reduced by $1 million to reflect the difference between applying the equity method and the proportional method since the investment was entered into. While the amortization of the investment will be presented in income tax expense going forward, rather than in equity in earnings of unconsolidated investees, the impact to net earnings will not have a material impact on our financial statements.
C. PROSPECTIVE ACCOUNTING STANDARDS
There are no prospective accounting standards which would have a material impact on our financial statements as of June 30, 2023.
D. REINSURANCE
Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our
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monitoring efforts, we review reinsurers’ annual financial statements and Securities and Exchange Commission filings for those that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of each of our reinsurance placements.
Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverables for the reinsurer are specifically identified and written off through use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.
The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $16.2 million and $10.3 million, respectively, at June 30, 2023. At December 31, 2022, the amounts were $16.1 million and $11.3 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs or recoveries were applied to the allowances in the first six months of 2023. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.
E. INTANGIBLE ASSETS
The composition of goodwill and intangible assets at June 30, 2023 and December 31, 2022 is detailed in the following table:
June 30, | December 31, | |||||
(in thousands) |
| 2023 |
| 2022 | ||
Goodwill | ||||||
Surety | $ | 40,816 | $ | 40,816 | ||
Casualty | 5,246 | 5,246 | ||||
Total goodwill | $ | 46,062 | $ | 46,062 | ||
Indefinite-lived intangibles | 7,500 | 7,500 | ||||
Total goodwill and intangibles | $ | 53,562 | $ | 53,562 | ||
Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible assets during the second quarter of 2023. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of June 30, 2023 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.
F. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of these items increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding these items. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:
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G. COMPREHENSIVE EARNINGS
Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio. In reporting the components of comprehensive earnings, we used the federal statutory tax rate of 21 percent. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax benefit of $5 million for the second quarter of 2023, compared to $26 million of tax benefit for the same period in 2022. For the six-month period ended June 30, 2023, other comprehensive earnings (loss) is net of tax expense of $5 million, compared to $57 million of tax benefit for the same period in 2022.
Unrealized gains, net of tax, recognized in other comprehensive earnings (loss) were $18 million for the first six months of 2023, compared to $213 million of unrealized losses, net of tax, during the same period last year. The unrealized gains in 2023 were attributable to a decline in interest rates, which increased the fair value of securities held in the fixed income portfolio, compared to rising interest rates during 2022, which decreased the fair value of fixed income securities.
The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings (loss) for each period presented in the unaudited condensed consolidated interim financial statements:
Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings (loss) to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings (loss) by the respective line items of net earnings are presented in the following table:
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H. FAIR VALUE MEASUREMENTS
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.
Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.
Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.
Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.
As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.
Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities are deemed Level 2.
Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology primarily includes interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.
Regulation D Private Placement Securities: All Regulation D privately-placed bonds are classified as corporate securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of
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observable and unobservable inputs. Observable inputs include public corporate spread matrices classified by sector, rating and average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company. An increase to the credit spread assumptions would result in a lower fair value.
For all of our fixed income securities classified as Level 2, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. If discrepancies are found in our comparisons, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing services are reasonable.
Equity Securities: As of June 30, 2023, nearly all of our equity holdings were traded on an exchange. Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). Pricing for the equity securities not traded on an exchange is provided by a third-party pricing source using observable inputs and are classified as Level 2. Pricing for equity securities not traded on an exchange rely on one or more unobservable inputs and are classified as Level 3.
Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy.
I. RISKS AND UNCERTAINTIES
Certain risks and uncertainties are inherent in our day-to-day operations. Adverse changes in the economy, including inflation; rising interest rates; volatile equity markets; and ongoing supply chain disruptions, could lower demand for our insurance products, result in increased levels of loss costs that we could not anticipate at the time we priced our coverages, or negatively impact our investment results, all of which could have an adverse effect on the profitability of our operations.
Catastrophe Exposures
Our catastrophe reinsurance treaty renewed on January 1, 2023. We purchased limits of $700 million in excess of $25 million first-dollar retention for earthquakes in California, $700 million in excess of $50 million first-dollar retention for earthquakes outside of California and $600 million in excess of $50 million first-dollar retention for all other perils, including wind. These amounts are subject to certain co-participations by the Company on losses in excess of the first-dollar retentions. On June 1, 2023, we purchased $150 million of additional catastrophe reinsurance protection on top of the previously described coverage. This increases the limits to $850 million in excess of $25 million first-dollar retention for earthquakes in California, $850 million in excess of $50 million first-dollar retention for earthquakes outside of California and $750 million in excess of $50 million first-dollar retention for all other perils, including wind, all of which are still subject to certain co-participations in excess of the retentions.
2. INVESTMENTS
Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value.
Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the six-month periods ended June 30, 2023 and 2022:
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FAIR VALUE MEASUREMENTS
Assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are summarized below:
As of June 30, 2023 | ||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||
Active Markets for | Observable | Unobservable | ||||||||||
Identical Assets | Inputs | Inputs | ||||||||||
(in thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Fixed income securities - available-for-sale | ||||||||||||
U.S. government | $ | — | $ | 315,976 | $ | — | $ | 315,976 | ||||
U.S. agency | — | 43,719 | — | 43,719 | ||||||||
Non-U.S. government & agency | — | 3,960 | — | 3,960 | ||||||||
Agency MBS | — | 372,030 | — | 372,030 | ||||||||
ABS/CMBS/MBS* | — | 252,330 | — | 252,330 | ||||||||
Corporate | — | 1,095,038 | 52,466 | 1,147,504 | ||||||||
Municipal | — | 553,581 | — | 553,581 | ||||||||
Total fixed income securities - available-for-sale | $ | — | $ | 2,636,634 | $ | 52,466 | $ | 2,689,100 | ||||
Equity securities | 550,986 | — | 1,580 | 552,566 | ||||||||
Total | $ | 550,986 | $ | 2,636,634 | $ | 54,046 | $ | 3,241,666 | ||||
As of December 31, 2022 | ||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||
Active Markets for | Observable | Unobservable | ||||||||||
Identical Assets | Inputs | Inputs | ||||||||||
(in thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Fixed income securities - available-for-sale | ||||||||||||
U.S. government | $ | — | $ | 454,021 | $ | — | $ | 454,021 | ||||
U.S. agency | — | 73,063 | — | 73,063 | ||||||||
Non-U.S. government & agency | — | 5,847 | — | 5,847 | ||||||||
Agency MBS | — | 331,806 | — | 331,806 | ||||||||
ABS/CMBS/MBS* | — | 240,736 | — | 240,736 | ||||||||
Corporate | — | 980,676 | 53,654 | 1,034,330 | ||||||||
Municipal | — | 527,147 | — | 527,147 | ||||||||
Total fixed income securities - available-for-sale | $ | — | $ | 2,613,296 | $ | 53,654 | $ | 2,666,950 | ||||
Equity securities | 496,731 | 39 | 1,612 | 498,382 | ||||||||
Total | $ | 496,731 | $ | 2,613,335 | $ | 55,266 | $ | 3,165,332 | ||||
* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
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The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3).
The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of June 30, 2023 were as follows:
* | Asset-backed, commercial mortgage-backed and mortgage-backed securities |
The amortized cost and fair value of available-for-sale securities at June 30, 2023 and December 31, 2022 are presented in the tables below. Amortized cost does not include the $22 million and $20 million of accrued interest receivable as of June 30, 2023 and December 31, 2022, respectively.
* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
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Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities
A reversable allowance for credit losses is recognized on available-for-sale fixed income securities. Several criteria are reviewed to determine if securities in the fixed income portfolio should be included in the allowance for expected credit loss evaluation, including:
| ● | Changes in technology that may impair the earnings potential of the investment, |
| ● | The discontinuance of a segment of business that may affect future earnings potential, |
| ● | Reduction of or non-payment of interest and/or principal, |
| ● | Specific concerns related to the issuer’s industry or geographic area of operation, |
| ● | Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and |
| ● | Downgrades in credit quality by a major rating agency. |
If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the security’s fair value is below amortized cost. As of June 30, 2023, the discounted cash flow analysis resulted in an allowance for credit losses on 18 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:
During the first six months of 2023, net realized gains included $1.7 million of losses on fixed income securities for which the cost basis was written down to fair value due to a credit event and restructurings. We recognized $0.1 million of losses on securities for which we no longer had the intent to hold until recovery during the first six months of 2022.
As of June 30, 2023, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,474 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $261 million in associated unrealized losses represents 9 percent of the fixed income portfolio’s cost basis and 7 percent of total invested assets. Isolated to these securities, unrealized losses decreased through the first six months of 2023, as credit spreads have tightened modestly while interest rates stayed flat during the period. Of the total 1,474 securities, 995 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of June 30, 2023 and December 31, 2022 after factoring in the allowance for credit losses. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.
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* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2023 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.
Other Invested Assets
We had $61 million of other invested assets at June 30, 2023, compared to $48 million at December 31, 2022. Other invested assets include investments in low income housing tax credit partnerships (LIHTC) and historic tax credit partnerships (HTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC and
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HTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC, HTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.
Our LIHTC interests had a balance of $12 million at June 30, 2023, compared to $13 million on December 31, 2022. Our LIHTC interests recognized amortization of $0.8 million as a component of income tax expense and a total tax benefit of $0.8 million during the second quarter of 2023, compared to $0.8 million of amortization and $0.9 million of tax benefit during the same period in 2022. For the six-months ended June 30, 2023, our LIHTC interest recognized amortization of $1.6 million and a total benefit of $1.6 million, compared to $1.7 million of amortization and $1.7 million of tax benefit for the same period in 2022. Our unfunded commitment for our LIHTC investments totaled $1 million at June 30, 2023 and will be paid out in installments through 2035.
Our HTC investment had a balance of $15 million at June 30, 2023, compared to $11 million at December 31, 2022. Through 2022, the investment was accounted for as an investment in unconsolidated investee. Due to the adoption of ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, the investment was reclassified as an other invested asset during 2023. A total tax benefit of $1.5 million was recognized from our HTC investment during the second quarter of 2023, compared to $1.3 million in the second quarter of 2022. For the six-months ended June 30, 2023, our HTC investment recognized a total benefit of $2.9 million, compared to $2.6 million for the same period in 2022. Our HTC investment recognized $1.1 million of amortization as a component of income tax expense during the second quarter of 2023 and $2.3 million of amortization during the first six months of 2023. Our unfunded commitment for our HTC investment totaled $4 million at June 30, 2023 and is expected be paid during 2023.
As of June 30, 2023, $56 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of June 30, 2023, $50 million of borrowings were outstanding with the FHLBC.
Our investments in private funds totaled $27 million as of June 30, 2023, down from $28 million as of December 31, 2022, and had $5 million of associated unfunded commitments at June 30, 2023. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities, and the timed dissolution of the partnerships would trigger redemption.
Investments in Unconsolidated Investees
We had $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022. At June 30, 2023, our investment in Prime Holdings Insurance Services, Inc. (Prime) was $55 million and other investments in unconsolidated investees totaled less than $1 million. Through December 31, 2022, our $11 million HTC investment was accounted for as an unconsolidated investee, but was reclassified as an other invested asset during 2023 due to the adoption of ASU 2023-02.
Cash and Short-Term Investments
Cash consists of uninvested balances in bank accounts. Short-term investments consist of investments with original maturities of 90 days or less, primarily AAA-rated government money market funds. Short-term investments are carried at cost. We had a cash and short-term investment balance of $17 million and $271 million, respectively, at June 30, 2023, compared to $23 million and $36 million, respectively, at December 31, 2022.
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3. HISTORICAL LOSS AND LAE DEVELOPMENT
The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first six months of 2023 and 2022:
For the Six Months | ||||||
Ended June 30, | ||||||
(in thousands) |
| 2023 |
| 2022 | ||
Unpaid losses and LAE at beginning of year | ||||||
Gross | $ | 2,315,637 | $ | 2,043,555 | ||
Ceded | (740,089) | (608,086) | ||||
Net | $ | 1,575,548 | $ | 1,435,469 | ||
| ||||||
Increase (decrease) in incurred losses and LAE | ||||||
Current accident year | $ | 339,951 | $ | 293,158 | ||
Prior accident years | (71,520) | (69,720) | ||||
Total incurred | $ | 268,431 | $ | 223,438 | ||
| ||||||
Loss and LAE payments for claims incurred | ||||||
Current accident year | $ | (30,978) | $ | (21,628) | ||
Prior accident years | (172,282) | (153,490) | ||||
Total paid | $ | (203,260) | $ | (175,118) | ||
| ||||||
Net unpaid losses and LAE at June 30, | $ | 1,640,719 | $ | 1,483,789 | ||
| ||||||
Unpaid losses and LAE at June 30, | ||||||
Gross | $ | 2,361,577 | $ | 2,150,519 | ||
Ceded | (720,858) | (666,730) | ||||
Net | $ | 1,640,719 | $ | 1,483,789 | ||
For the first six months of 2023, incurred losses and LAE included $72 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2022. Commercial excess, professional services, surety, general liability, personal umbrella, marine and commercial property were drivers of the favorable development. No products experienced significant adverse development.
For the first six months of 2022, incurred losses and LAE included $70 million of favorable development on prior years’ loss reserves, largely from accident years 2018 through 2021. General liability, professional services, transportation, marine and surety were drivers of the favorable development. No products experienced significant adverse development.
4. INCOME TAXES
Our effective tax rate for the three and six months ended June 30, 2023 was 19.1 percent and 19.4 percent, respectively, compared to 65.8 percent and 12.1 percent, respectively, for the same period in 2022. Effective rates are dependent upon components of pretax earnings and the related tax effects. Tax-favored adjustments acting on pretax earnings resulted in a lower effective tax rate for the second quarter of 2023. The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments.
Income tax expense attributable to income from operations for the three and six-month period ended June 30, 2023 and 2022 differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income by the items detailed in the below table. In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line.
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We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the result of future operations, which will generate sufficient taxable income to realize the deferred tax asset.
5. STOCK BASED COMPENSATION
Our RLI Corp. Long-Term Incentive Plan (2015 LTIP) was in place from 2015 to 2023. The 2015 LTIP provided for equity-based compensation, including stock options and restricted stock units, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2015 and 2023, we granted 3,291,388 awards under the 2015 LTIP. The 2015 LTIP was replaced in 2023.
In 2023, our shareholders approved the 2023 RLI Corp. Long-Term Incentive Plan (2023, LTIP), which provides for equity-based compensation. In conjunction with the adoption of the 2023 LTIP, effective May 4, 2023, awards are no longer granted under the 2015 LTIP. Awards under the 2023 LTIP may be in the form of restricted stock, restricted stock units, stock options (incentive or non-qualified), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2023 LTIP is limited to employees, directors, consultants and independent contractors of the Company or any affiliate. The granting of awards under the 2023 LTIP is solely at the discretion of the Human Capital and Compensation Committee of the board of directors or its delegate. The maximum number of shares of common stock available for distribution under the 2023 LTIP is 4,004,891 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2023, we have granted 135,838 awards under the 2023 LTIP.
Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $2.2 million and $4.7 million in the three and six-month periods ended June 30, 2023, respectively, compared to $2.3 million and $3.7 million, respectively, for the same period in 2022. The total income tax benefit was $0.3 million and $0.8 million for the three and six-month periods ended June 30, 2023, compared to $0.4 million and $0.6 million, respectively, for the same periods in 2022. Total unrecognized compensation expense relating to outstanding and unvested awards was $8 million, which will be recognized over the weighted average vesting period of 2.77 years.
Stock Options
Under the 2023 LTIP, as under the 2015 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable over a five-year period and expire eight years after grant.
For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or greater, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.
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The following tables summarize option activity for the six-month period ended June 30, 2023:
The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $16 million and $5 million during the first six months of 2023 and 2022, respectively.
The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of June 30:
| 2023 |
| 2022 | ||||
Weighted-average fair value of grants | $ | 26.79 | $ | 21.05 | |||
Risk-free interest rates | 3.44 | % | 2.84 | % | |||
Dividend yield | 2.29 | % | 2.50 | % | |||
Expected volatility | 22.95 | % | 22.89 | % | |||
Expected option life | 4.94 | years | 5.06 | years | |||
The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.
Restricted Stock Units
In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 or greater. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period. The total fair value of restricted stock units that vested was $1 million and $2 million during the first six months of 2023 and 2022, respectively.
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6. OPERATING SEGMENT INFORMATION
Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues.
For the Three Months | For the Six Months | |||||||||||
Revenues | Ended June 30, | Ended June 30, | ||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Casualty | $ | 187,048 | $ | 177,123 | $ | 373,079 | $ | 348,879 | ||||
Property | 101,841 | 74,690 | 190,608 | 142,130 | ||||||||
Surety | 33,391 | 30,997 | 66,316 | 60,953 | ||||||||
Net premiums earned | $ | 322,280 | $ | 282,810 | $ | 630,003 | $ | 551,962 | ||||
Net investment income | 28,788 | 18,472 | 55,872 | 36,355 | ||||||||
Net realized gains | 5,580 | 12,804 | 20,200 | 18,392 | ||||||||
Net unrealized gains (losses) on equity securities | 25,214 | (100,994) | 40,710 | (128,804) | ||||||||
Total consolidated revenue | $ | 381,862 | $ | 213,092 | $ | 746,785 | $ | 477,905 | ||||
Net Earnings | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Casualty | $ | 6,977 | $ | 21,442 | $ | 38,808 | $ | 49,089 | ||||
Property | 25,877 | 26,105 | 54,260 | 48,581 | ||||||||
Surety | 8,347 | 8,409 | 16,023 | 17,764 | ||||||||
Net underwriting income | $ | 41,201 | $ | 55,956 | $ | 109,091 | $ | 115,434 | ||||
Net investment income | 28,788 | 18,472 | 55,872 | 36,355 | ||||||||
Net realized gains | 5,580 | 12,804 | 20,200 | 18,392 | ||||||||
Net unrealized gains (losses) on equity securities | 25,214 | (100,994) | 40,710 | (128,804) | ||||||||
General corporate expense and interest on debt | (6,266) | (4,446) | (12,488) | (9,819) | ||||||||
Equity in earnings of unconsolidated investees | 1,514 | 11,654 | 5,437 | 20,413 | ||||||||
Earnings (loss) before income taxes | $ | 96,031 | $ | (6,554) | $ | 218,822 | $ | 51,971 | ||||
Income tax expense (benefit) | 18,379 | (4,315) | 42,359 | 6,287 | ||||||||
Net earnings (loss) | $ | 77,652 | $ | (2,239) | $ | 176,463 | $ | 45,684 | ||||
The following table further summarizes revenues by major product type within each operating segment:
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7. LEASES
Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease term.
The Company’s operating lease obligations are for branch office facilities. The components of lease expense and other lease information as of and during the three and six-month periods ended June 30, 2023 and 2022 were as follows:
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | |||
$ | 11,185 | $ | 12,766 | ||||
$ | 12,635 | $ | 14,499 | ||||
Weighted-average remaining lease term - operating leases | 4.18 | years | 4.21 | years | |||
Weighted-average discount rate - operating leases | 1.97 | % | 2.11 | % | |||
Future minimum lease payments under non-cancellable leases as of June 30, 2023 were as follows:
8. ACQUISITONS AND DISPOSTIONS
On September 30, 2022, RLI Corp. completed the sale of its equity method investment in Maui Jim, Inc. to Kering Eyewear for cash proceeds of $687 million. A net realized gain of $571 million was recognized during 2022 and the payout of
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the working capital escrow during the first quarter of 2023 resulted in the recognition of an additional $14 million realized gain. The gains were recorded in the net realized gain line item of the statement of earnings.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance, surety and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors. These assumptions are subject to various risks, uncertainties and other factors, including, without limitation those set forth in “Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, 2022 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.
OVERVIEW
RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property, casualty and surety products through major subsidiaries. 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 2022, we achieved our 27th consecutive year of underwriting profitability. Over the 27-year period, we averaged an 88.2 combined ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio.
We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.
The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law. One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will equal recorded amounts. If actual liabilities differ from recorded amounts, there will either be an adverse or favorable effect on net earnings.
The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.
Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and other storms. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast, and wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by managing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout insurance cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.
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The surety segment specializes in writing small to medium-sized contract surety coverages, including payment and performance bonds. We offer a variety of commercial surety bonds for medium to large-sized businesses across a broad spectrum of industries, including the financial, healthcare as well as on and offshore energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.
The insurance marketplace is competitive across all of our segments. However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.
Key Performance Measures
The following is a list of key performance measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.
Underwriting Income
Underwriting income or profit represents one measure of the pretax profitability of our insurance operations, and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q, and in note 12 to the consolidated financial statements in our 2022 Annual Report on Form 10-K, regarding operating segment information. 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:
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.
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Critical Accounting Policies
In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2022 Annual Report on Form 10-K.
There have been no significant changes to critical accounting policies during the year.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Net premiums earned increased 14 percent, driven by growth from our property and casualty segments. Positive market performance resulted in $41 million of unrealized gains on equity securities in the first six months of 2023, while overall market declines resulted in $129 million of unrealized losses in our equity portfolio in 2022. Investment income was up 54 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains during the first six months of 2023 were comprised of $9 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $3 million of realized losses on the fixed income portfolio and $14 million of realized gains from the payout of the working capital escrow from our sale of Maui Jim, Inc. (Maui Jim). This compares to $19 million of realized gains on the equity portfolio and $1 million of realized losses on the fixed income portfolio in the previous year.
Net earnings for the first six months of 2023 totaled $176 million, compared to $46 million for the same period in 2022. The increase for 2023 was largely attributed to the $39 million of net after-tax realized and unrealized gains on equity securities, compared to $87 million of after-tax realized and unrealized losses in 2022. Underwriting results for 2023 were impacted by $22 million of pretax storm losses, compared to $5 million of pretax storm losses in the first six months of 2022. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $72 million in the first six months of 2023, compared to $70 million in 2022.
Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.
Underwriting income was $109 million on an 82.7 combined ratio for the first six months of 2023, compared to $115 million on a 79.1 combined ratio in the same period of 2022. The loss ratio increased to 42.6 from 40.5, due to higher levels of storm losses in 2023. The expense ratio increased to 40.1 from 38.6, as higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023. We also increased investments in our people and technology to support growth, improve customer experience and drive efficiencies, which impacted all segments.
Our equity in earnings of unconsolidated investees primarily relates to our investment in Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. In the first six months of 2023, we recognized $6 million of investee earnings from Prime. Comparatively, the first six months of 2022 reflected investee earnings of $6 million from Prime and $15 million from Maui Jim. Our interest in Maui Jim was sold in the third quarter of 2022.
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Comprehensive earnings totaled $194 million for the first six months of 2023, compared to $167 million of comprehensive loss for the first six months of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive earnings of $18 million in the first six months of 2023 was attributable to modestly tighter credit spreads while interest rates remained relatively flat, which increased the fair value of securities held in the fixed income portfolio. Comparatively, $213 million of other comprehensive loss was recognized in 2022, as interest rates increased.
Premiums
Gross premiums written increased $145 million for the first six months of 2023, compared to the same period of 2022. Growth was achieved in all three segments, though the increase was largely driven by products in the property segment. Net premiums earned increased $78 million, driven by products in our property and casualty segments.
Gross Premiums Written | Net Premiums Earned | |||||||||||||||||
For the Six Months | For the Six Months | |||||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| % Change |
| 2023 |
| 2022 |
| % Change | ||||||
Casualty | ||||||||||||||||||
Commercial excess and personal umbrella | $ | 176,840 | $ | 163,298 | 8 | % | $ | 136,843 | $ | 122,535 | 12 | % | ||||||
General liability | 55,612 | 59,192 | (6) | % | 51,916 | 48,846 | 6 | % | ||||||||||
Commercial transportation | 58,715 | 60,592 | (3) | % | 50,630 | 47,569 | 6 | % | ||||||||||
Professional services | 55,282 | 52,390 | 6 | % | 48,959 | 47,416 | 3 | % | ||||||||||
Small commercial | 40,246 | 36,937 | 9 | % | 36,396 | 33,458 | 9 | % | ||||||||||
Executive products | 40,345 | 45,622 | (12) | % | 12,506 | 13,652 | (8) | % | ||||||||||
Other casualty | 41,851 | 46,105 | (9) | % | 35,829 | 35,403 | 1 | % | ||||||||||
Total | $ | 468,891 | $ | 464,136 | 1 | % | $ | 373,079 | $ | 348,879 | 7 | % | ||||||
Property | ||||||||||||||||||
Commercial property | $ | 284,945 | $ | 162,148 | 76 | % | $ | 109,481 | $ | 72,218 | 52 | % | ||||||
Marine | 74,970 | 64,996 | 15 | % | 63,048 | 54,907 | 15 | % | ||||||||||
Other property | 20,820 | 18,302 | 14 | % | 18,079 | 15,005 | 20 | % | ||||||||||
Total | $ | 380,735 | $ | 245,446 | 55 | % | $ | 190,608 | $ | 142,130 | 34 | % | ||||||
Surety | ||||||||||||||||||
Commercial | $ | 27,039 | $ | 25,230 | 7 | % | $ | 24,923 | $ | 23,366 | 7 | % | ||||||
Miscellaneous | 25,821 | 25,814 | 0 | % | 23,934 | 22,940 | 4 | % | ||||||||||
Contract | 20,490 | 17,322 | 18 | % | 17,459 | 14,647 | 19 | % | ||||||||||
Total | $ | 73,350 | $ | 68,366 | 7 | % | $ | 66,316 | $ | 60,953 | 9 | % | ||||||
Grand Total | $ | 922,976 | $ | 777,948 | 19 | % | $ | 630,003 | $ | 551,962 | 14 | % | ||||||
Casualty
Gross premiums written for the casualty segment were up $5 million in the first six months of 2023. Continued growth within our personal umbrella distribution base and positive rate movement across a large portion of our casualty segment offset challenging conditions some lines experienced during the first six months. As we mentioned in prior filings, we are running off our excess energy liability business, which resulted in a $9 million decrease within the commercial excess product and negatively impacted the production of our primary energy liability business within the general liability product. Increased competition led to a further reduction in commercial excess business. Additionally, executive products premium decreased as a result of a more competitive market, particularly with public directors and officers coverages. However, the benefit of our diversified book of business is that select products can work through challenges they may encounter while the success of other products allows us to achieve positive overall results.
Property
Gross premiums written for the property segment were up $135 million in the first six months of 2023. Our commercial property business was up $123 million, as wind rates continued to increase and limited exposure growth was experienced. Rate increases and new opportunities led to $10 million of premium growth for our marine product.
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Surety
Gross premiums written for the surety segment were up $5 million for the first six months of 2023. Contract surety benefited from new agency relationships and new construction projects. The expansion of existing accounts and new business resulted in increased premium for commercial surety.
Underwriting Income
For the Six Months | ||||||
Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Underwriting Income (in thousands) | ||||||
Casualty | $ | 38,808 | $ | 49,089 | ||
Property | 54,260 | 48,581 | ||||
Surety | 16,023 | 17,764 | ||||
Total | $ | 109,091 | $ | 115,434 | ||
Combined Ratio | ||||||
Casualty | 89.6 | 85.9 | ||||
Property | 71.5 | 65.8 | ||||
Surety | 75.8 | 70.9 | ||||
Total | 82.7 | 79.1 | ||||
Casualty
The casualty segment recorded underwriting income of $39 million in the first six months of 2023, compared to $49 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $47 million, primarily on accident years 2018 through 2022. Favorable development was widespread, with notable amounts from commercial excess, professional services, general liability and personal umbrella. In comparison, $45 million of prior accident years’ reserves were released in the first six months of 2022. General liability, professional services and transportation were drivers of the favorable development. Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $1.7 million of losses in 2023 and $0.5 million of losses in 2022.
The combined ratio for the casualty segment was 89.6 in 2023, compared to 85.9 in 2022. The segment’s loss ratio was 52.2 in 2023, up from 51.0 in 2022. A higher earned premium base, which reduced the loss ratio impact of favorable prior years’ reserve development, and an increased level of storm losses resulted in the higher loss ratio in 2023. The expense ratio for the casualty segment was 37.4, up from 34.9 for the same period last year. Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.
Property
The property segment recorded underwriting income of $54 million for the first six months of 2023, compared to $49 million for the same period last year. Underwriting results for 2023 included $17 million of favorable development on prior years’ loss and catastrophe reserves and $20 million of storm losses. Comparatively, the 2022 underwriting results included $17 million of favorable development on prior years’ loss and catastrophe reserves and $5 million of storm losses.
Underwriting results for the first six months of 2023 translated into a combined ratio of 71.5, compared to 65.8 for the same period last year. The segment’s loss ratio was 35.5 in 2023, up from 28.7 in 2022, due to an increase in storm losses. The segment’s expense ratio decreased to 36.0 in 2023 from 37.1 in the prior year, as the growth in the earned premium base exceeded the growth in expense.
Surety
The surety segment recorded underwriting income of $16 million for the first six months of 2023, compared to $18 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for 2023 included favorable development on prior
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accident years’ reserves, which decreased loss and settlement expenses for the segment by $7.5 million. Results for 2022 also included $7.5 million of favorable development on prior accident years’ reserves.
The combined ratio for the surety segment totaled 75.8 for the first six months of 2023, compared to 70.9 for the same period in 2022. The segment’s loss ratio increased to 9.0 in 2023, up from 7.4 in 2022, as a higher earned premium base reduced the loss ratio impact of favorable prior accident years’ reserve development. The expense ratio was 66.8, up from 63.5 in the prior year.
Investment Income
Our investment portfolio generated net investment income of $56 million during the first six months of 2023, an increase of 54 percent from that reported for the same period in 2022. The increase in investment income was due to higher interest rates as well as an increased average asset base relative to the prior year.
Yields on our fixed income investments for the first six months of 2023 and 2022 were as follows:
| 2023 |
|
| 2022 | ||
Pretax Yield | ||||||
Taxable | 3.40 | % | 2.75 | % | ||
Tax-Exempt | 2.78 | % | 2.66 | % | ||
Taxable | 2.69 | % | 2.17 | % | ||
Tax-Exempt | 2.63 | % | 2.52 | % |
The following table depicts the composition of our investment portfolio at June, 2023 as compared to December 31, 2022:
We believe our overall asset allocation supports our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations and effectively grow book value over a long-term investment horizon.
The fixed income portfolio increased by $22 million in the first six months of 2023. Average fixed income duration was 4.6 years at June 30, 2023, reflecting our liability structure and sound capital position. The equity portfolio increased by $54 million during the first six months of 2023, due to the positive performance of equity markets. Short-term investments increased by $235 million, as improved yields made AAA-rated government money market funds an investable asset class that also allowed us to maximize liquidity for events in the second half of the year.
Income Taxes
Our effective tax rate for the first six months of 2023 was 19.4 percent, compared to 12.1 percent for the same period in 2022. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective tax rate was higher for the six-month period in 2023, as higher pretax income decreased the percentage impact of tax-favored adjustments, such as tax credits and excess tax benefits on share-based compensation.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Net premiums earned increased 14 percent, driven by growth from our property and casualty segments. Positive market performance resulted in $25 million of unrealized gains on equity securities in the second quarter of 2023, while overall market declines resulted in $101 million of unrealized losses in our equity portfolio in the second quarter of 2022. Investment income was up 56 percent, due to an increased average asset base and higher interest rates relative to the prior year. Realized gains
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during the second quarter of 2023 were comprised of $6 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, and less than $1 million of realized losses on the fixed income portfolio. This compares to $13 million of realized gains on the equity portfolio and less than $1 million of realized losses on the fixed income portfolio in the same period of 2022.
Net earnings for the second quarter of 2023 totaled $78 million, compared to a net loss of $2 million for the same period in 2022. The increase for 2023 was largely attributed to the $25 million of net after-tax realized and unrealized gains on equity securities, compared to $69 million of after-tax realized and unrealized losses in the second quarter of 2022. Underwriting results for 2023 were impacted by $18 million of pretax storm losses, compared to $3 million of pretax storm losses in the second quarter of 2022. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $20 million in the second quarter of 2023, compared to $24 million in 2022.
Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.
Underwriting income was $41 million on an 87.2 combined ratio for the second quarter of 2023, compared to $56 million on an 80.2 combined ratio in the same period of 2022. The loss ratio increased to 47.8 from 41.7, due to higher storm losses and lower levels of favorable development on prior years’ loss reserves in 2023. The expense ratio increased to 39.4 from 38.5, as higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023. We also increased investments in our people and technology to support growth, improve customer experience and drive efficiencies, which impacted all segments.
In the second quarter of 2023, we recognized $2 million of investee earnings from Prime. Comparatively, the second quarter of 2022 reflected investee earnings of $4 million from Prime and $9 million from Maui Jim. Our interest in Maui Jim was sold in the third quarter of 2022.
Comprehensive earnings totaled $58 million for the second quarter of 2023, compared to $100 million of comprehensive loss for the second quarter of 2022. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive loss of $20 million in the second quarter of 2023 was attributable to higher interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $98 million of other comprehensive loss was recognized in 2022, as interest rates increased.
Premiums
Gross premiums written increased $89 million for the second quarter of 2023, compared to the same period of 2022. Growth was achieved in all three segments, though the increase was largely driven by products in the property segment. Net premiums earned increased $39 million, driven by products in our property and casualty segments.
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Casualty
Gross premiums written for the casualty segment were up $3 million in the second quarter of 2023. Continued momentum with our personal umbrella distribution base offset challenging conditions some lines experienced during the second quarter. The runoff of our excess energy liability business resulted in a $5 million decrease within the commercial excess product for the quarter and negatively impacted the production of our primary energy liability business within the general liability product. Commercial transportation was down, as the trucking market continues to be highly competitive and trucking companies’ revenues are down compared to last year. Additionally, executive products premium decreased as a result of a more competitive market, particularly with directors and officers coverages.
Property
Gross premiums written for the property segment were up $86 million in the second quarter of 2023. Our commercial property business was up $80 million. Continued rate increases on wind exposures has allowed us to achieve this result with limited exposure growth, while also strengthening terms and conditions. Rate increases and new opportunities led to $5 million of premium growth for our marine product.
Surety
Gross premiums written for the surety segment were up $0.4 million for the second quarter of 2023. The growth in contract surety was driven by new agency relationships, while the decline in commercial surety was due to accounts having non-recurring activity within select accounts that bolstered premium in 2022.
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Underwriting Income
For the Three Months | ||||||
Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Underwriting Income (in thousands) | ||||||
Casualty | $ | 6,977 | $ | 21,442 | ||
Property | 25,877 | 26,105 | ||||
Surety | 8,347 | 8,409 | ||||
Total | $ | 41,201 | $ | 55,956 | ||
| ||||||
Combined Ratio | ||||||
Casualty | 96.3 | 87.9 | ||||
Property | 74.6 | 65.0 | ||||
Surety | 75.0 | 72.9 | ||||
Total | 87.2 | 80.2 | ||||
Casualty
The casualty segment recorded underwriting income of $7 million in the second quarter of 2023, compared to $21 million for the same period last year. Prior accident years’ reserve releases reduced loss and settlement expenses for the casualty segment by $11 million, primarily on accident years 2020 through 2022. Favorable development was widespread, with notable amounts from small commercial, commercial excess and personal umbrella. In comparison, $17 million of prior accident years’ reserves were released in the second quarter of 2022. General liability, professional services and transportation were drivers of the favorable development. Storm losses on casualty-oriented package policies that include property coverage offset the favorable development and resulted in $1.3 million of losses in 2023 and $0.5 million of losses in 2022.
The combined ratio for the casualty segment was 96.3 in 2023, compared to 87.9 in 2022. The segment’s loss ratio was 58.9 in 2023, up from 53.2 in 2022. The increase in loss ratio was attributable to lower levels of reserve releases on prior accident years, as well as increased storm losses and modest additions to the current accident year for energy casualty. The expense ratio for the casualty segment was 37.4, up from 34.7 for the same period last year. Higher net earnings and growth in book value led to larger levels of bonus and profit-sharing expenses in 2023 for all segments.
Property
The property segment recorded underwriting income of $26 million for the second quarter of 2023 and 2022. Underwriting results for 2023 included $4 million of favorable development on prior years’ loss and catastrophe reserves and $17 million of storm losses. Comparatively, the 2022 underwriting results included $4 million of favorable development on prior years’ loss and catastrophe reserves and $3 million of storm losses.
Underwriting results for the second quarter of 2023 translated into a combined ratio of 74.6, compared to 65.0 for the same period last year. The segment’s loss ratio was 40.4 in 2023, up from 27.4 in 2022, due to the increase in storm losses. The segment’s expense ratio decreased to 34.2 in 2023 from 37.6 in the prior year, as the growth in the earned premium base exceeded the growth in expense.
Surety
The surety segment recorded underwriting income of $8 million for the second quarter of 2023 and 2022. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for 2023 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $4 million, compared to $3 million in 2022.
The combined ratio for the surety segment totaled 75.0 for the second quarter of 2023, compared to 72.9 for the same period in 2022. The segment’s loss ratio was 7.8 in 2023, down from 10.3 in 2022, due to higher levels of prior accident year reserve releases. The expense ratio was 67.2, up from 62.6 in the prior year.
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Investment Income
Our investment portfolio generated net investment income of $29 million during the second quarter of 2023, an increase of 56 percent from that reported for the same period in 2022. The increase in investment income was due to higher interest rates, as well as an increased average asset base relative to the prior year.
Yields on our fixed income investments for the second quarter of 2023 and 2022 were as follows:
| 2023 |
| 2022 | |||
Pretax Yield | ||||||
Taxable | 3.41 | % | 2.79 | % | ||
Tax-Exempt | 2.79 | % | 2.69 | % | ||
After-Tax Yield | ||||||
Taxable | 2.69 | % | 2.20 | % | ||
Tax-Exempt | 2.64 | % | 2.55 | % |
Income Taxes
Our effective tax rate for the second quarter of 2023 was 19.1 percent, compared to 65.8 percent for the same period in 2022. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. Tax-favored adjustments acting on pretax income decreased the effective tax rate in 2023, whereas tax-favored adjustments acting on pretax loss increased the effective tax rate in 2022.
LIQUIDITY AND CAPITAL RESOURCES
We have three primary types of cash flows: (1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.
The following table summarizes cash flows provided by (used in) our activities for the six-month periods ended June 30, 2023 and 2022:
(in thousands) |
| 2023 |
| 2022 | ||
Operating cash flows | $ | 243,595 | $ | 170,645 | ||
Investing cash flows | (226,116) | (124,946) | ||||
Financing cash flows | (23,590) | (21,459) | ||||
Total | $ | (6,111) | $ | 24,240 | ||
Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received. Operating cash flows in the first six months of 2023 benefited from increased premium receipts relative to the first six months of 2022.
We have $200 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $149 million. The estimated fair value for the senior notes at June 30, 2023 was $150 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities. Additionally, RLI Insurance Company borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 10, 2021. The borrowing matures on November 10, 2023 and has an option to be paid off prior to maturity. Interest is paid monthly at an annualized rate of 0.84 percent.
As of June 30, 2023, we had cash and other investments maturing within one year of approximately $482 million and an additional $896 million maturing between one to five years. Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.
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We also maintain a revolving line of credit with PNC Bank, N.A., which permits us to borrow up to an aggregate principal amount of $100 million. This facility was entered into during the first quarter of 2023 and replaced the previous $60 million facility with Bank of Montreal, Chicago Branch, which expired on March 27, 2023. Under certain conditions, the line may be increased up to an aggregate principal amount of $130 million. The facility has a three-year term that expires on May 29, 2026. As of and during the six-month period ended June 30, 2023, no amounts were outstanding on either facility.
Additionally, two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of June 30, 2023, $56 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.
We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.
We 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. Invested assets at June 30, 2023 have increased $318 million from December 31, 2022. As of June 30, 2023, our investment portfolio had the following asset allocation breakdown:
* | Quality ratings provided by Moody’s, S&P and Fitch |
** | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities |
Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of June 30, 2023, our fixed income portfolio had the following rating distribution:
AAA |
| 38.2 | % |
AA | 19.2 | % | |
A |
| 22.3 | % |
BBB | 12.2 | % | |
BB | 2.8 | % | |
B | 2.3 | % | |
CCC | 0.1 | % | |
D | 0.0 | % | |
NR | 2.9 | % | |
Total | 100.0 | % |
As of June 30, 2023, our fixed income portfolio remained well diversified, with 1,751 individual issues.
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Our investment portfolio has limited exposure to structured asset-backed securities. As of June 30, 2023, we had $136 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).
As of June 30, 2023, we had $116 million in commercial mortgage-backed securities and $372 million in mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the GSE-backed MBS, our exposure to ABS and CMBS was 7.0 percent of our investment portfolio at quarter end.
We had $1,148 million in corporate fixed income securities as of June 30, 2023, which includes $110 million invested in a high-yield credit strategy. This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.
The municipal portfolio includes approximately 56 percent taxable securities and 44 percent tax-exempt securities. Approximately 90 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 100 percent of the municipal bond portfolio is rated ‘A’ or better.
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 June 30, 2023, our equity portfolio had a dividend yield of 2.0 percent, compared to 1.5 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 85 individual securities and four ETF positions. No single company exposure in the equity portfolio represents more than 1 percent of invested assets.
Other invested assets include investments in low income housing tax credit and historic tax credit partnerships, membership in the FHLBC and investments in private funds.
We had $55 million of investments in unconsolidated investees at June 30, 2023, compared to $58 million at December 31, 2022.
Our investment portfolio does not have any exposure to derivatives.
Our capital structure is comprised of equity and debt outstanding. As of June 30, 2023, our capital structure consisted of $200 million in long-term debt and $1.4 billion of shareholders’ equity. Debt outstanding comprised 13 percent of total capital as of June 30, 2023. Interest and fees on debt obligations totaled $4 million for the first six months of 2023 and 2022. We incurred interest expense on debt at an average annual interest rate of 3.89 percent during the first six months of 2023 and 2022.
We paid a regular quarterly cash dividend of $0.27 per share on June 20, 2023, an increase of $0.01 from the prior quarter. We have increased dividends in each of the last 48 years.
Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance 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 June 30, 2023, our holding company had $1.4 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 $262 million in liquid assets, which was elevated by the cash proceeds received from the sale of Maui Jim. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.
33
Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first six months of 2023, RLI Ins. paid $30 million in ordinary dividends to RLI Corp. In 2022, our principal insurance subsidiary paid ordinary dividends totaling $13 million. As of June 30, 2023, $120 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp. as ordinary dividends without prior approval from the IDOI. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Historically, our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We have limited exposure to both foreign currency risk and commodity risk.
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of AA-, with 80 percent rated A or better by at least two nationally recognized rating organizations.
On an overall basis, our exposure to market risk has not significantly changed from that reported in our 2022 Annual Report on Form 10-K.
Item 4.Controls and Procedures
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.
No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1.Legal Proceedings – There were no material changes to report.
Item 1A. Risk Factors – There were no material changes to report.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds -
Items 2(a) and (b) are not applicable.
In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares during 2023. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be suspended or discontinued at any time without prior notice.
Item 3.Defaults Upon Senior Securities - Not Applicable.
Item 4.Mine Safety Disclosures - Not Applicable.
Item 5.Other Information –
Securities Trading Plans of Executive Officers and Directors
Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables prearranged transactions in Company securities in a manner that avoids concerns about initiating transactions at a future date while possibly in possession of material nonpublic information. Our Insider Trading Policy permits our executive officers and directors to enter into trading plans designed to comply with Rule 10b5-1.
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
Item 6.Exhibits
Exhibit No. |
| Description of Document |
| Reference |
3.1 | Attached as Exhibit 3.1. | |||
10.1 | RLI Corp. Nonemployee Directors’ Deferred Compensation Plan, as amended* | Attached as Exhibit 10.1. | ||
10.2 | Attached as Exhibit 10.2. | |||
10.3 | Attached as Exhibit 10.3. | |||
10.4 | RLI Corp. 2023 Long-Term Incentive Plan Stock Option Agreement* | Attached as Exhibit 10.4. | ||
10.5 | RLI Corp. 2023 Long-Term Incentive Plan Non-Employee Director Restricted Stock Unit Agreement* | Attached as Exhibit 10.5. | ||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Attached as Exhibit 31.1. | ||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Attached as Exhibit 31.2. | ||
32.1 | Attached as Exhibit 32.1. | |||
32.2 | Attached as Exhibit 32.2. | |||
101 | iXBRL-Related Documents | Attached as Exhibit 101. | ||
104 | Cover Page Interactive Data File | Embedded in Inline XBRL and contained in Exhibit 101. |
* | Management contract or compensatory plan. |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RLI Corp. | ||
/s/ Todd W. Bryant | ||
Todd W. Bryant | ||
Chief Financial Officer | ||
(Principal Financial and Chief Accounting Officer) | ||
Date: July 26, 2023 |
36
Exhibit 31.1
CERTIFICATION
Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Craig W. Kliethermes, certify that:
I have reviewed this quarterly report on Form 10-Q of RLI Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 26, 2023
| /s/ Craig W. Kliethermes |
| Craig W. Kliethermes |
| President & CEO |
Exhibit 31.2
CERTIFICATION
Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Todd W. Bryant, certify that:
I have reviewed this quarterly report on Form 10-Q of RLI Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 26, 2023
| /s/ Todd W. Bryant |
| Todd W. Bryant |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig W. Kliethermes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Craig W. Kliethermes | |
| |
Craig W. Kliethermes | |
President & CEO | |
July 26, 2023 | |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd W. Bryant, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Todd W. Bryant | |
| |
Todd W. Bryant | |
Chief Financial Officer | |
July 26, 2023 | |
Exhibit 10.1
RLI CORP.
NONEMPLOYEE DIRECTORS
DEFERRED COMPENSATION PLAN
(Restated as of May 4, 2023)
RLI CORP.
NONEMPLOYEE DIRECTORS
DEFERRED COMPENSATION PLAN
The obligation of RLI to make payments under the Plan constitutes an unsecured (but legally enforceable) promise of RLI to make such payments and no person, including any Participant or Beneficiary, shall have any lien, prior claim or other security interest in any property of RLI as a result of the Plan.
2
3
In general, an election shall become irrevocable as of the last day of the enrollment period applicable to it. However, if a Participant incurs an “unforeseeable emergency,” as defined in Section 4.8(h), or becomes entitled to receive a hardship distribution pursuant to Treas. Reg. § 1.401(k)-1(d)(3) after the election otherwise becomes irrevocable, the election shall be cancelled as of the date on which the Participant is determined to have incurred the unforeseeable emergency or becomes eligible to receive the hardship distribution and no further deferrals will be made under it.
4
5
6
7
Distributions because of an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution). A determination of the amounts reasonably necessary to satisfy the emergency need must take into account any additional compensation that is available due to cancellation of the Participant’s election as a result of this paragraph (h).
Notwithstanding anything in this Section 4.8 to the contrary, except for a Participant’s election to request a distribution due to an unforeseeable emergency under paragraph (h), above (which the Participant, in the Participant’s discretion, may elect to make or not make), RLI shall not provide the Participant with discretion or a direct or indirect election regarding whether a payment is accelerated pursuant to this Section 4.8.
8
Determination of the identity of the Beneficiary in each case shall be made by RLI.
9
10
11
RLI Corp. |
By: Craig W. Kliethermes |
Its: President & Chief Executive Officer |
And |
By: Jeffrey D. Fick |
Its: Chief Legal Officer & Corporate Secretary |
IN WITNESS WHEREOF, RLI has cause the Plan to be executed by its duly authorized officers as of the 4th day of May, 2023.
12
Exhibit 10.2
RLI CORP. EXECUTIVES
DEFERRED COMPENSATION PLAN
Restated as of May 4, 2023
RLI CORP. EXECUTIVES
DEFERRED COMPENSATION PLAN
The obligation of RLI to make payments under the Plan constitutes an unsecured (but legally enforceable) promise of RLI to make such payments and no person, including any Participant or Beneficiary, shall have any lien, prior claim or other security interest in any property of RLI as a result of the Plan.
Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that RLI or its Affiliate and the Participant reasonably anticipated that no further services will be performed after a certain date or that the level of bona fide services the Participant will perform after such date will permanently decrease to no more than 49 percent of the average level of bona fide services performed over the immediately preceding 36-month period (or the full period of services if the Participant has been providing services for less than 36 months).
Notwithstanding anything in Section 1.3.22 to the contrary, in determining whether a Participant has had a Termination of Employment with RLI or an Affiliate, an entity’s status as an “Affiliate” shall be determined substituting “50 percent” for “80 percent” each place it appears in Section 1563(a)(1),(2), and (3) and in Treasury Regulation Section 1.414(c)-2.
RLI shall have discretion to determine whether a Participant has experienced a Termination of Employment in connection with an asset sale transaction entered into by RLI or an Affiliate, provided that such determination conforms to the requirements of Section 409A and the regulations and other guidance issued under such section, in which case RLI’s determination shall be binding on the Participant.
| (1) | Have the title of Vice President or above, and |
| (2) | Be expected to have compensation in excess of the Section 401(a)(17) of the Code limit in the Participant’s initial Year of eligibility. |
Notwithstanding the foregoing, elections for Incentive Compensation that is Performance-Based Compensation must be completed and submitted to the Company not later than six months before the end of the performance period for the Incentive Compensation; provided, however, that in order for such an election to be valid, the Participant must perform services continuously from the beginning of the performance period (or the date the performance criteria are established, if later) through the date the election is entered into, and provided further, that in no event may an election be effective to defer Incentive Compensation after the Incentive Compensation has become reasonably ascertainable. For purposes hereof, if Incentive Compensation is a specific or calculable amount, the Incentive Compensation is readily ascertainable if and when the amount is first substantially certain to be paid. If Incentive Compensation is not a specific or calculable amount, the Incentive Compensation, or any portion thereof, is readily ascertainable when the amount is both calculable and substantially certain to be paid. Accordingly, in general, any minimum amount that is both calculable and substantially certain to be paid will be treated as readily ascertainable.
In general, an election shall become irrevocable as of the last day of the enrollment period applicable to it. However, if a Participant incurs an “unforeseeable emergency,” as defined in Section 4.8(h), or becomes entitled to receive a hardship distribution pursuant to Treas. Reg. § 1.401(k)-1(d)(3) after the election otherwise becomes irrevocable, the election shall be cancelled as of the date on which the Participant is determined to have incurred the unforeseeable emergency or becomes eligible to receive the hardship distribution and no further deferrals will be made under it. In addition, if a Participant becomes “disabled”
(as defined below), RLI may, in its discretion, cancel the Participant’s election then in effect, provided that such cancellation is made no later than the end of the Plan Year, or if later, the 15th day of the third month following the date on which the Participant becomes disabled, and provided further that RLI does not allow the Participant a direct or indirect election regarding the cancellation. For purposes of the preceding sentence, “disability” means any medically determinable physical or mental impairment resulting in the Participant’s inability to perform the duties required by the Participant’s position or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six months.
Distributions because of an unforeseeable emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any Federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution). A determination of the amounts reasonably necessary to satisfy the emergency need must take into account any additional compensation that is available due to cancellation of the Participant’s election as a result of this paragraph (h).
Notwithstanding anything in this Section 4.8 to the contrary, except for a Participant’s election to request a distribution due to an unforeseeable emergency under paragraph (h), above (which the Participant, in the Participant’s discretion, may elect to make or not make), RLI shall not provide the Participant with discretion or a direct or indirect election regarding whether a payment is accelerated pursuant to this Section 4.8.
Notwithstanding any provision of this Section 5.2 to the contrary, any Beneficiary designation made under the Prior Agreements will continue in effect under this Plan until modified by the Participant pursuant to this Section 5.2.
Determination of the identity of the Beneficiary in each case shall be made by RLI.
IN WITNESS WHEREOF, RLI has cause the Plan to be executed by its duly authorized officers as of the 4th day of May, 2023.
By: Craig W. Kliethermes |
Its: President & Chief Executive Officer |
And |
By: Jeffrey D. Fick |
Its: Chief Legal Officer & Corporate Secretary |
Exhibit 10.3
RLI CORP.
2023 LONG-TERM INCENTIVE PLAN
“Agreement” shall mean the written or electronic agreement evidencing an award hereunder between the Company and the recipient of such award.
“Automatic Exercise Date” shall mean the last business day of the term of an option or SAR.
“Board” shall mean the Board of Directors of the Company.
“Cause” shall mean the participant’s: (i) failure to comply with any material policies and procedures of the Company or any Subsidiary; (ii) conduct reflecting dishonesty or disloyalty to the Company or any Subsidiary, or which may have a negative impact on the reputation of the Company or any Subsidiary; (iii) commission of a felony, theft or fraud, or violations of law involving moral turpitude; (iv) failure to perform the material duties of his or her employment; (v) excessive absenteeism; (vi) unethical behavior. If a participant’s employment is terminated for “Cause,” the date on which the participant’s employment is considered to be terminated, for purposes hereof, shall be the time at which such participant is instructed or notified to cease performing job responsibilities for the Company or any Subsidiary, whether or not for other reasons, such as payroll, benefits or compliance with legal procedures or requirements, he or she may still have other attributes of an employee.
“Change in Control” shall have the meaning set forth in Section 5.8(b).
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Committee” shall mean the Human Capital & Compensation Committee of the Board, or a subcommittee thereof, or such other committee designated by the Board, in each case, consisting of two or more members of the Board, each of whom is intended to be (i) a “Non-Employee Director” within the meaning of Rule 16b-3 under the Exchange Act and (ii) “independent” within the meaning of the rules of the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, within the meaning of the rules of the principal stock exchange on which the Common Stock is then traded.
“Common Stock” shall mean the common stock, par value $0.01 per share, of the Company, and all rights appurtenant thereto.
“Company” shall mean RLI Corp., a corporation organized under the laws of the State of Delaware, or any successor thereto.
“Disabled” or “Disability,” with respect to a participant, means that the participant satisfies the requirements to receive long-term disability benefits under the Company-sponsored group long-term disability plan in which the participant participates (or in the case of a Non-Employee Director, would have satisfied the requirements of the Company-sponsored long-term disability plan had the Non-Employee Director participated) without regard to any waiting periods, or that the participant has been determined by the Social Security
Administration to be eligible to receive Social Security disability benefits. In addition, if Disability constitutes a payment event with respect to any award which provides for the deferral of compensation and is subject to Code Section 409A, the disability described in the preceding sentences of this Section 2(i) must be a “disability” within the meaning of Treasury Regulation Section 1.409A-3(i)(4). A participant shall not be considered to be “Disabled” unless the participant furnishes proof of the Disability to the Company in such form and manner as the Company may require.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Fair Market Value” shall mean the closing transaction price of a share of Common Stock as reported on the New York Stock Exchange on the date as of which such value is being determined or, if the Common Stock is not listed on the New York Stock Exchange, the closing transaction price of a share of Common Stock on the principal national stock exchange on which the Common Stock is traded on the date as of which such value is being determined or, if there shall be no reported transactions for such date, on the next following date for which transactions were reported; provided, however, the Company may in its discretion use the closing transaction price of a share of Common Stock on the day preceding the date as of which such value is being determined to the extent the Company determines such method is more practical for administrative purposes, such as for purposes of tax withholding. If the Common Stock is not listed on a national stock exchange or if Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate and in compliance with Section 409A of the Code.
“Free-Standing SAR” shall mean an SAR which is not granted in tandem with, or by reference to, an option, which entitles the holder thereof to receive, upon exercise, shares of Common Stock (which may be Restricted Stock) or, to the extent set forth in the applicable Agreement, cash or a combination thereof, with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of such SARs which are exercised.
“Fundamental Change” means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company.
“Good Reason” means any of the following conditions arising without the consent of the participant: (i) a material diminution in base salary or in the opportunity for any bonus or incentive compensation; (ii) a material diminution in the participant’s authority, duties or responsibilities; (iii) a material diminution in the authority, duties or responsibilities of the supervisor to whom the participant is required to report, including a requirement that the participant report to an officer or employee instead of directly to the Board; (iv) a material diminution in the budget over which the participant retains authority; (v) a material change in the geographic location at which the participant must perform services; or (vi) any action or inaction that results in a material breach in the terms of an applicable employment agreement. A termination will only be considered to have been made for Good Reason if the participant provides written notice of the existence of such condition to the Company or any successor employer within 90 days after the participant first becomes aware of such condition, the Company or successor employer fails to cure such condition within 30 days after receipt of such notice and the participant terminates employment within six months after the existence of such condition.
“Incentive Stock Option” shall mean an option to purchase shares of Common Stock that meets the requirements of Section 422 of the Code, or any successor provision, which is intended by the Committee to constitute an Incentive Stock Option.
“Non-Employee Director” shall mean any director of the Board who is considered a non-employee director within the meaning of Rule 16b-3(b)(3) of the Exchange Act or its successor provision.
“Nonqualified Stock Option” shall mean an option to purchase shares of Common Stock which is not an Incentive Stock Option.
“Other Stock Award” shall mean an award granted pursuant to Section 3.4 of the Plan.
“Performance Award” shall mean a right to receive an amount of cash, Common Stock, or a combination of both, contingent upon the attainment of specified Performance Measures within a specified Performance Period.
“Performance Measures” shall mean the criteria and objectives, established by the Committee, which shall be satisfied or met (i) as a condition to the grant or exercisability of all or a portion of an option or SAR or (ii) during the applicable Restriction Period or Performance Period as a condition to the vesting of the holder’s interest, in the case of a Restricted Stock Award, of the shares of Common Stock subject to such award, or, in the case of a Restricted Stock Unit Award, Other Stock Award or Performance Award, to the holder’s receipt of the shares of Common Stock subject to such award or of payment with respect to such award. Such performance criteria and objectives may include, without limitation, any one or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries, business or geographical units or operating areas of the Company (except with respect to the total shareholder return and earnings per share criteria) on an individual basis: the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time; increase in stockholder value; earnings per share; return on or net assets; return on equity; return on investments; return on capital or invested capital; total stockholder return; earnings or income of the Company before or after taxes and/or interest; earnings before interest, taxes, depreciation and amortization (“EBITDA”); EBITDA margin; operating income; revenues; operating expenses, attainment of expense levels or cost reduction goals; market share; cash flow, cash flow per share, cash flow margin or free cash flow; interest expense; economic value created; gross profit or margin; operating profit or margin; net cash provided by operations; price-to-earnings growth; comprehensive earnings; growth in book value; combined ratio (or corollary underwriting profit); and strategic business criteria, consisting of one or more objectives based on meeting specified goals relating to market penetration, customer acquisition, business expansion, cost targets, customer satisfaction, reductions in errors and omissions, reductions in lost business, management of employment practices and employee benefits, supervision of litigation, supervision of information technology, quality and quality audit scores, efficiency, and acquisitions or divestitures, or such other goals as the Committee may determine whether or not listed herein. Each such goal may be determined on a pre-tax or post-tax basis or on an absolute or relative basis, and may include comparisons based on current internal targets, the past performance of the Company (including the performance of one or more subsidiaries, divisions, or operating units) or the past or current performance of other companies or market indices (or a combination of such past and current performance). In addition to the ratios specifically enumerated above, performance goals may include comparisons relating to capital (including, but not limited to, the cost of capital), shareholders’ equity, shares outstanding, assets or net assets, sales, or any combination thereof. In establishing a Performance Measure or determining the achievement of a Performance Measure, the Committee may provide that achievement of the applicable Performance Measures may be amended or adjusted to include or exclude components of any Performance Measure, including, without limitation, foreign exchange gains and losses, asset write-downs, acquisitions and divestitures, change in fiscal year, unbudgeted capital expenditures, special charges such as restructuring or impairment charges, debt refinancing costs, extraordinary or noncash items, unusual, infrequently occurring, nonrecurring or one-time events affecting the Company or its financial statements or changes in law or accounting principles. Performance Measures shall be subject to such other special rules and conditions as the Committee may establish at any time.
“Performance Period” shall mean any period designated by the Committee during which (i) the Performance Measures applicable to an award shall be measured and (ii) the conditions to vesting applicable to an award shall remain in effect.
“Prior Plan” shall mean the RLI Corp. 2015 Long-Term Incentive Plan.
“Qualifying Termination” means an involuntary termination of employment without Cause or a termination of employment for Good Reason that occurs within two years following a Change in Control. In addition, if the participant’s termination of employment occurs prior to a Change in Control and it is determined that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who subsequently effectuates a Change in Control or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, for purposes of this definition, the date of a Change in Control with respect to the participant shall mean the date immediately prior to the date of the participant’s termination of employment.
“Restricted Stock” shall mean shares of Common Stock which are subject to a Restriction Period and which may, in addition thereto, be subject to the attainment of specified Performance Measures within a specified Performance Period.
“Restricted Stock Award” shall mean an award of Restricted Stock under this Plan.
“Restricted Stock Unit” shall mean a right to receive one share of Common Stock or, in lieu thereof and to the extent set forth in the applicable Agreement, the Fair Market Value of such share of Common Stock in cash, which shall be contingent upon the expiration of a specified Restriction Period and which may, in addition thereto, be contingent upon the attainment of specified Performance Measures within a specified Performance Period.
“Restricted Stock Unit Award” shall mean an award of Restricted Stock Units under this Plan.
“Restriction Period” shall mean any period designated by the Committee during which (i) the Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in this Plan or the Agreement relating to such award, or (ii) the conditions to vesting applicable to a Restricted Stock Unit Award or Other Stock Award shall remain in effect.
“Retirement” or “Retires” means a participant’s termination of employment on or after the date when the participant’s age plus years of service equals at least 75. For this purpose, (i) a participant’s age shall be measured in whole and partial years (with partial years measured in days) as of the date of the participant’s termination of employment and (ii) a participant’s years of service shall be based only on the participant’s actual service with the Company or a Subsidiary (and not with any other employer that may be acquired by the Company with respect to service prior to the acquisition, except as otherwise provided by the Company in writing) and shall be calculated based on the number of whole and partial years of employment (with partial years measured in days) that the participant has completed from the date of the participant’s initial employment with the Company or a Subsidiary through the date of the participant’s termination of employment. Notwithstanding the foregoing, the Committee may specify, in its discretion, in a written Agreement, policy or guideline that a participant will be considered to have had a “Retirement” if the participant satisfies the terms of a non-competition covenant or under such other terms and conditions as specified by the Committee in its discretion.
“SAR” shall mean a stock appreciation right which may be a Free-Standing SAR or a Tandem SAR.
“Stock Award” shall mean a Restricted Stock Award, Restricted Stock Unit Award or Other Stock Award.
“Subsidiary” shall mean any corporation, limited liability company, partnership, joint venture or similar entity in which the Company owns, directly or indirectly, an equity interest possessing more than 50% of the combined voting power of the total outstanding equity interests of such entity.
“Substitute Award” shall mean an award granted under this Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by a company or other entity in connection with a corporate transaction, including a merger, combination, consolidation or acquisition of property or stock; provided, however, that in no event shall the term “Substitute Award” be construed to refer to an award made in connection with the cancellation and repricing of an option or SAR.
“Tandem SAR” shall mean an SAR which is granted in tandem with, or by reference to, an option (including a Nonqualified Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock (which may be Restricted Stock) or, to the extent set forth in the applicable Agreement, cash or a combination thereof, with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered.
“Tax Date” shall have the meaning set forth in Section 5.5.
“Ten Percent Holder” shall have the meaning set forth in Section 2.1(a).
The Committee may delegate some or all of its power and authority hereunder to the Board or, subject to applicable law, to a subcommittee of the Board, a member of the Board, the President and the Chief Executive Officer or other executive officer of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority to a member of the Board, the President and the Chief Executive Officer or other executive officer of the Company with regard to the selection for participation in this Plan of an officer, director or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an award to such an officer, director or other person.
No member of the Board or Committee, and neither the President and the Chief Executive Officer nor any other executive officer to whom the Committee delegates any of its power and authority hereunder, shall be liable for any act, omission, interpretation, construction or determination made in connection with this Plan in good faith, and the members of the Board and the Committee and the President and the Chief Executive Officer or other executive officer shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorneys’ fees) arising therefrom to the full extent permitted by law (except as otherwise may be provided in the Company’s Certificate of Incorporation and/or By-laws) and under any directors’ and officers’ liability insurance that may be in effect from time to time.
To the extent that shares of Common Stock subject to an outstanding option, SAR, Stock Award or Performance Award granted under the Plan or the Prior Plan, other than Substitute Awards, are not issued or delivered by reason of (i) the expiration, termination, cancellation or forfeiture of such award (excluding shares subject to an option cancelled upon settlement in shares of a related Tandem SAR or shares subject to a Tandem SAR cancelled upon exercise of a related option) or (ii) the settlement of such award in cash, then such shares of Common Stock shall again be available under this Plan; provided, however, that shares of Common Stock subject to an award under this Plan or the Prior Plan shall not again be available for issuance under this Plan if such shares are (x) shares that were subject to an option or stock-settled SAR and were not issued or delivered upon the net settlement or net exercise of such option or SAR, (y) shares delivered to or withheld by the Company to pay the purchase price or the withholding taxes related to an outstanding award or (z) shares repurchased by the Company on the open market with the proceeds of an option exercise. The number of shares that again become available pursuant to this paragraph shall be equal to (i) one share for each share subject to an option or Free-Standing SAR described herein and (ii) 2.5 shares for each share subject to a Stock Award or Performance Award described herein. At the time this Plan becomes effective, none of the shares of Common Stock available for future grant under the Prior Plan shall be available for grant under the Prior Plan.
The number of shares of Common Stock available for awards under this Plan shall not be reduced by (i) the number of shares of Common Stock subject to Substitute Awards or (ii) available shares under a stockholder approved plan of a company or other entity which was a party to a corporate transaction with the Company (as appropriately adjusted to reflect such corporate transaction) which become subject to awards granted under this Plan (subject to applicable stock exchange requirements).
Shares of Common Stock to be delivered under this Plan shall be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise or a combination thereof.
Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable:
Notwithstanding the foregoing, in the case of an option that is a Substitute Award, the purchase price per share of the shares subject to such option may be less than 100% of the Fair Market Value per share on the date of grant, provided, that the excess of: (a) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award, over (b) the aggregate purchase price thereof does not exceed the excess of: (x) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Committee) of the shares of the predecessor company or other entity that were subject to the grant assumed or substituted for by the Company, over (y) the aggregate purchase price of such shares.
SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable:
Notwithstanding the foregoing, in the case of an SAR that is a Substitute Award, the base price per share of the shares subject to such SAR may be less than 100% of the Fair Market Value per share on the date of grant, provided, that the excess of: (a) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award, over (b) the aggregate base price thereof does not exceed the excess of: (x) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Committee) of the shares of the predecessor company or other entity that were subject to the grant assumed or substituted for by the Company, over (y) the aggregate base price of such shares.
Awards hereunder may be made at any time prior to the termination of this Plan, provided that no Incentive Stock Option may be granted later than ten years after the date on which the Plan was approved by the Board. In the event that this Plan is not approved by the stockholders of the Company, this Plan and any awards hereunder shall be void and of no force or effect, and the RLI Corp. 2015 Long-Term Incentive Plan shall remain in effect in accordance with its terms.
For the avoidance of doubt, except as explicitly authorized in an Agreement, by this Section 5.8(a) or by a participant in writing, the Board may not terminate or cancel any equity awards (whether vested or unvested) in connection with a Change in Control.
Notwithstanding the foregoing, a Change in Control shall not occur as the result of an acquisition of outstanding shares of the Company by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by a Person to 30% or more of the shares of the Company then outstanding; provided, however, that if a Person becomes the Beneficial Owner of 30% or more of the shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of the Company, then a Change in Control shall be deemed to have occurred; or
(A) the stockholders of the Company immediately prior to the consummation of the transaction would not, immediately after such consummation, as a result of their beneficial ownership of voting stock of the Company immediately prior to such consummation
(I)be the Beneficial Owners, directly or indirectly, of securities of the resulting or acquiring entity entitled to elect a majority of the members of the board of directors or other governing body of the resulting or acquiring entity; and
(II)be the Beneficial Owners of the resulting or acquiring entity in substantially the same proportion as their beneficial ownership of the voting stock of the Company immediately prior to such transaction; or
(B) those persons who were directors of the Company immediately prior to the consummation of the proposed transaction would not, immediately after such consummation, constitute a majority of the directors of the resulting entity; or
provided, that with respect to any nonqualified deferred compensation that becomes payable on account of the Change in Control, the transaction or event described in clause (1), (2), (3) or (4) also constitutes a “change in control event,” as defined in Treasury Regulation §1.409A-3(i)(5) if required in order for the payment not to violate Section 409A of the Code.
The Committee shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters relating thereto.
Date: May 4, 2023RLI CORP.
By: Craig W. Kliethermes
Chief Executive Officer
Exhibit 10.4
RLI CORP.
2023 Long-Term Incentive Plan
Stock Option Agreement
(May 4, 2023 Form of Agreement)
Name of Participant: | |
Number of Shares of Common Stock Covered: | Date of Grant: |
Exercise Price Per Share of Common Stock: | Expiration Date: |
Exercise Schedule (Cumulative): Actual vesting dates and corresponding shares incorporated as follows: | |
Date(s) of Exercisability [Date of Grant plus one year] [Date of Grant plus two years] [Date of Grant plus three years] [Date of Grant plus four years] [Date of Grant plus five years] | Number of Shares as to Which Option Becomes Exercisable [20%] [20%] [20%] [20%] [20%] |
Effective as of the “Date of Grant” specified above, RLI Corp., a Delaware corporation (the “Company”), grants to the individual named above (the “Participant”) an option representing the right to purchase shares of common stock, par value $0.01 per share, of the Company (“Common Stock”) at the “Exercise Price Per Share of Common Stock” stated above (the “Option”). The Option shall be subject to the terms and conditions set forth in this Stock Option Agreement (the “Agreement”) and in the RLI Corp. 2023 Long-Term Incentive Plan (the “Plan”). In the event of any conflict between the terms of the Agreement and the Plan, the terms of the Plan shall govern. Capitalized terms used but not defined shall have the meaning ascribed thereto in the Plan.
Background
A.The Company maintains the Plan (i) to align the interests of the Company’s stockholders and the recipients of awards under the Plan by increasing the proprietary interest of such recipients in the Company’s growth and success, (ii) to advance the interests of the Company by attracting and retaining officers, other employees, Non-Employee Directors, consultants and independent contractors and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.
B.Under the Plan, the Human Capital & Compensation Committee of the Board of Directors of the Company, or such other committee designated by the Board in accordance with the Plan (the “Committee”), administers the Plan and has the authority to determine the awards to be granted under the Plan.
C.The Committee has determined that the Participant is eligible to receive an award under the Plan in the form of an Option.
D.The Company hereby grants the Option to the Participant under the following terms and conditions:
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Terms and Conditions
1. | Grant. The Participant is granted the Option to purchase the number of shares of Common Stock specified at the beginning of this Agreement. |
2. | Exercise Price. The purchase price of each share of Common Stock subject to the Option will be the Exercise Price Per Share of Common Stock specified at the beginning of this Agreement (which price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant). |
3. | Non-Qualified Stock Option. The Option is not intended to be and is not an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Option does not qualify for the tax treatment specified therein. The Option is a Nonqualified Stock Option for purposes of the Plan. |
4. | Exercise Schedule. The Option will become vested and exercisable with respect to twenty percent (20%) of the shares of Common Stock covered under the Option annually over each of the five years from the Date of Grant as specified in the exercise schedule at the beginning of this Agreement. The exercise schedule will be cumulative; thus, to the extent the Option has not already been exercised and has not expired, terminated or been cancelled, the Participant or the person otherwise entitled to exercise the Option as to vested shares of Common Stock as provided herein may at any time, and from time to time, purchase all or any portion of the whole shares of Common Stock then purchasable under the exercise schedule. |
Nothwithstanding the foregoing or any other provision of this Agreement, the Participant may not exercise all or any portion of the Option (in any manner) during the Company’s quiet periods in accordance with the Company’s Insider Trading Policy in effect at such time.
The Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.
5. | Expiration. The Option shall expire at 5:00 p.m. Central Time on the “Expiration Date” specified at the beginning of this Agreement. In no event may anyone exercise the Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement. |
6. | Procedure to Exercise Option. |
(a) Notice of Exercise. The Company partners with Solium Capital for the management and administration of its long-term incentives program using Solium’s web-based application, Shareworks by Morgan Stanley®. The Option may be exercised by initiating an exercise through the Company’s Shareworks by Morgan Stanley® site, https://rli.solium.com, or by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Secretary or other designated Company employees or representative. The notice shall be in writing and state the Grant Date and number of whole shares of Common Stock subject to such Option to be exercised. If the person exercising the Option is not the Participant, he/she also must submit appropriate proof that is satisfactory to the Committee in its sole discretion of his/her right to exercise the Option.
(b) Tender of Payment. Upon giving notice of any exercise hereunder, the Participant shall provide for payment of the purchase price of the shares of Common Stock being purchased through one or a combination of the following methods:
(i)Purchase. Cash (including check paid to the Company, wire transfer, bank draft, or money order);
(ii)Broker-Assisted Cashless Exercise. By directing, via an irrevocable notice of exercise, a stockbroker designated by the Company through Shareworks by Morgan Stanley to effect a broker assisted cashless exercise to sell shares of Common Stock issued on exercise of the Option and remitting the proceeds of such sale to the Company to pay the exercise price and taxes, and remitting the net cash and/or shares to the Participant; or
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(iii) Net Exercise. By instructing the Company to withhold whole shares of Common Stock having an aggregate Fair Market Value, determined as of the date of exercise, less than or equal to the purchase price of the Shares acquired upon exercise and any applicable withholding taxes in accordance with Section 6(d) of this Agreement; provided that this method of exercise may only be used to deliver net shares to the Participant and no cash compensation may be provided, other than cash in lieu of a fractional share.
Notwithstanding the foregoing, the Participant shall not be permitted to pay any portion of the purchase price with Shares, though a broker-assisted cashless exercise or through net exercise, if the Committee, in its sole discretion, determines that payment in such manner could have adverse tax or financial accounting consequences for the Company.
(c) Company’s Option to Cash-Out. Upon receipt of notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Common Stock for which an Option is being exercised by paying Participant an amount, in cash or shares of Common Stock, equal to the excess of the Fair Market Value of the shares of Common Stock over the aggregate purchase price for the shares of Common Stock for which the Option is being exercised on the effective date of such cash-out.
(d) Withholding Taxes. Participant is responsible for payment of any federal, state, local or other taxes which must be withheld or paid in connection with the Option, and Participant must promptly pay to the Company any such taxes. The Participant hereby authorizes the Company and any Subsidiary to deduct from any payment owed to Participant any taxes required to be withheld or paid in connection with the Option, including social security and Medicare (FICA) taxes and federal, state and local taxes. The Company shall have the right to require that the Participant satisfy such obligations by making a cash payment to the Company. In lieu of all or any part of such a cash payment, the Participant may elect to authorize the Company to withhold whole shares of Common Stock which would otherwise be issuable upon the settlement of the Option equal to the amount necessary to satisfy any such tax obligations. Shares of Common Stock to be withheld may not have an aggregate Fair Market Value in excess of the amount determined by applying the maximum individual statutory tax rate in the Participant’s applicable jurisdiction; provided that the Company shall be permitted to limit the number of shares so withheld to a lesser number if necessary, in the judgment of the Committee, to avoid adverse accounting consequences or for administrative convenience. Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be withheld.
(d) Delivery of Certificates. As soon as practicable after the Company receives the notice and purchase price in full and payment for applicable taxes as provided above, it shall deliver to the person exercising the Option, in the name of such person, a certificate or certificates representing the shares of Common Stock being purchased; provided, however, that the Company may deliver the shares of Common Stock electronically in book-entry form. The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the shares of Common Stock and all fees and expenses incurred by it in connection therewith. All shares of Common Stock so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, no certificate for shares of Common Stock distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the federal Securities Act of 1933 and the Securities Exchange Act of 1934, and related regulations, and the Company may may further require that any such certificates bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder.
7. | Termination of Employment. The Option may be exercised at any time prior to the Expiration Date only while the Participant remains employed with the Company or a parent or subsidiary thereof, and only if the Participant has been continuously so employed since the date the Option was granted; provided that: |
(a)Except as otherwise provided below, the Option may be exercised for three months after termination of the Participant’s employment, but only to the extent that it was exercisable immediately prior to termination of employment; provided that if the Participant dies within such three-month period, the Option may be exercised until the first anniversary of the Participant’s termination of employment;
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(b)The Option may be exercised for one year after termination of the Participant’s employment if such termination is because of death of the Participant;
(c)The Option may be exercised for three years after the date of Participant’s termination of employment if such termination of employment is because of the Participant’s Disability;
(d)The Option may be exercised for three years after termination of the Participant’s employment if such termination is because of the Participant’s Retirement; and
(e)The Option may be exercised at any time prior to the expiration of the Option pursuant to Section 5 of this Agreement if such termination is because of the Participant’s Qualifying Termination (pursuant to Section 18(a) of the Agreement).
Notwithstanding the above, in no event will any Option be exercisable at any time after the Expiration Date. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated. The Company has no duty to inform Participant of the imminent expiration of the Option. The Option will expire as provided in this Section 7 and the term of the Option will not be extended, even if the Option expires during a period when the Option is unexercisable (i.e., during a “quiet period” or on a date on which the NYSE is closed for trading).
Termination for Cause. Notwithstanding the foregoing, the Option shall terminate immediately if Participant is notified that Participant’s employment is being terminated or has been terminated for Cause. Participant's termination shall be deemed to have been for Cause if, before or after such termination, facts and circumstances are discovered that would have justified a termination for Cause.
8. | Acceleration of Vesting. In the event of the death, Disability, Retirement or Qualifying Termination of the Participant, any portion of the Option that has not expired or otherwise been terminated and was not previously exercisable shall become immediately exercisable in full if the Participant shall have been continuously employed by the Company or a parent or subsidiary thereof between the date the Option was granted and the date of such Disability, Retirement or Qualifying Termination. |
9. | Limitation on Transfer. During the lifetime of the Participant, only the Participant or his/her guardian or legal representative may exercise the Option. The Option may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process otherwise than by will, the laws of descent and distribution, pursuant to beneficiary designation procedures approved by the Committee, or pursuant to a qualified domestic relations order. Notwithstanding the foregoing, the Participant may transfer the Option, without payment or consideration from the transferee, (a) to any one or more of the Participant’s spouse or issue, (b) to one or more trusts established solely for the benefit of the Participant’s spouse or issue or (c) to one or more partnerships in which the only partners are the Participant’s spouse or issue. For purpose of this provision, the term “spouse” shall include a former spouse who receives a transfer pursuant to a qualified domestic relations order, and the term issue shall include stepchildren, step-grandchildren and adopted children. No such transfer shall be effective unless reasonable prior notice thereof is delivered to the Company. Any such permitted transferee shall be subject to all of the terms and conditions applicable to the person transferring the Option including the terms and conditions set forth in the Plan and this Agreement. Any attempt to sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Option other than in accordance with this Section 9 shall be null and void. |
10. | No Stockholder Rights Before Exercise. No person shall have any of the rights of a stockholder of the Company with respect to any share of Common Stock subject to the Option unless and until the share of Common Stock actually is issued to him/her upon valid exercise of the Option and such person becomes a stockholder of record with respect to such shares of Common Stock. |
11. | Adjustment. The Option is subject to adjustment, without the consent of the Participant, pursuant to Section 5.7 of the Plan. |
12. | Interpretation of this Agreement. All decisions and interpretations made by the Committee (or, as applicable, the Board) with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon |
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the Company and the Participant. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.
13. | Discontinuance of Employment. This Agreement shall not give the Participant a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Participant may terminate his/her employment at any time and otherwise deal with the Participant without regard to the effect it may have upon him/her under this Agreement. |
14. | Binding Effect. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Participant. |
15. | Choice of Law; Jurisdiction. This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles), provided that Sections 16, 17, 20, 22 and 23 shall be construed and interpreted under the laws of the State of Illinois (without regard to its conflicts of law principles). All disputes under this Agreement shall be heard in the federal and state courts located in Peoria, Illinois. |
16. | Restrictions on Solicitation of Company Employee(s). Participant understands and acknowledges that the Company and its Subsidiaries have expended and continues to expend significant time and expense in recruiting and training its employees and that the loss of employees would cause significant and irreparable harm to the Company and any Subsidiary. |
(a) Solicitation of Company Employee(s) During Participant’s Employment. Unless otherwise prohibited by applicable law, in return for this Option grant and by virtue of Participant’s ongoing duty of loyalty to the Company, the Participant – while Participant remains employed by the Company – shall not, directly, indirectly, or through the direction or control of others, solicit, hire, recruit, attempt to hire or recruit, encourage, or induce any employee(s) of the Company or any Subsidiary to terminate their employment with the Company or any Subsidiary (collectively, “Solicitation of Company Employee(s) During Participant’s Employment”), unless Participant’s Solicitation of Company Employee(s) during Participant’s Employment is in the best interest of the Company and prior consent for the Solicitation of Company Employee(s) During Participant’s Employment has been received from an authorized officer of the Company.
(b) Solicitation of Company Employee(s) Following Participant’s Employment. Unless otherwise prohibited by applicable law, in return for this Option grant, the Participant – during the twelve (12) month period that immediately follows the Participant’s termination of employment with the Company, regardless of the reason for termination and whether it is initiated by the Participant, the Company or otherwise – shall not, directly, indirectly, or through the direction or control of others, solicit, hire, recruit, attempt to hire or recruit, encourage, or induce any employee(s) of the Company or any Subsidiary whom Participant supervised or with whom Participant directly worked (regardless of whether such individuals worked in the same location) during the last two (2) years of Participant’s employment by the Company and/or with respect to whom Participant received confidential employment or background information during the last two (2) years of Participant’s employment by the Company to terminate their employment with the Company or any Subsidiary (collectively, “Solicitation of Company Employee(s) Following Participant’s Employment”), unless Participant’s Solicitation of Company Employee(s) Following Participant’s Employment is in the best interest of the Company and prior consent for the Solicitation of Company Employee(s) Following Participant’s Employment has been received from an authorized officer of the Company. Participant's obligations under this Section 16(b) shall not apply to soliciting any individual(s) formerly employed by or who otherwise provided services to the Company or any Subsidiary whose employment was terminated or whose services were disengaged by the Company or any Subsidiary; or to any individual(s) who voluntarily terminated their employment with or ceased providing services to the Company or any Subsidiary at least six (6) months prior to any solicitation by Participant.
(c) Violation(s) of Section 16. If Participant has received or been entitled to payment of cash, delivery of shares of Common Stock, or a combination thereof pursuant to this Option grant within six (6) months before the Participant’s termination of employment with the Company or any Subsidiary, the Committee, in its sole discretion, may require Participant to return or forfeit the cash and/or shares of Common Stock received with respect to the Option (or its economic value as of the date of the exercise of Option) in the event of a violation of
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this Section 16. The Committee’s right to require forfeiture must be exercised within ninety (90) days after discovery of such an occurrence but in no event later than fifteen (15) months after Participant’s termination of employment with the Company or any Subsidiary.
17. | Restrictions on Solicitation of Company Customer(s). Participant understands and acknowledges that because of Participant’s experience with, training by, and relationship to the Employer or any Subsidiary, Participant will have access to and learn about the Company and any Subsidiary's Confidential Information (defined below), including its or their customer information. It is understood and agreed by Participant that all business relationships and goodwill now existing with respect to the prospects and customers of the Company or any Subsidiary, whether or not created by Participant, and all such relationships and goodwill which may hereafter be created or enhanced during Participant’s employment by the Company or any Subsidiary, at all times shall be considered by the parties as near permanent relationships belonging to the Company and any Subsidiary, and that the loss of any such business relationship or goodwill will cause significant and irreparable harm to the Company or any Subsidiary. Accordingly, Participant agrees to the restrictions on solicitation of Company Customer(s) (as defined below) as outlined below in this Section 17. |
(a) Solicitation of Company Customer(s) During Participant’s Employment. Unless otherwise prohibited by applicable law, in return for this Option grant and by virtue of Participant’s ongoing duty of loyalty to the Company, the Participant – while Participant remains employed by the Company – shall not, directly or indirectly, solicit or otherwise induce any person or entity engaged in a business relationship with Company, including, but not limited to, any policyholder, or any reinsurer, producer, broker, or other third party business partner of the Company (collectively, “Company Customer(s)”) to: (a) discontinue or diminish its or their relationship with the Company and/or any Subsidiary ; (b) conduct with any person or entity other than the Company or any Subsidiary any business that such Company Customer(s) conducts or could conduct with the Company and/or any Subsidiary; or (c) otherwise interfere with or disrupt, or in any manner attempt to interfere with or disrupt, any of the Company's and/or any Subsidiary relationships with Company Customer(s) (collectively, “Solicitation of Company Customer(s) During Participant’s Employment”).
(b) Solicitation of Company Customer(s) Following Participant’s Employment. Unless otherwise prohibited by applicable law, in return for this Option grant, the Participant – during the twelve (12) month period that immediately follows the Participant’s termination of employment with the Company, regardless of the reason for termination and whether it is initiated by the Participant, the Company or otherwise – shall not, as proprietor, partner, joint venturer, stockholder, director, officer, trustee, principal, agent, member, consultant, servant, employee, or in any other capacity whatsoever, directly or indirectly, solicit or otherwise induce any Company Customer(s) to: (a) discontinue or diminish its or their relationship with the Company and/or any Subsidiary; (b) conduct with any person or entity other than the Company or any Subsidiary any business that such Company Customer(s) conducts or could conduct with the Company and/or any Subsidiary; or (c) otherwise interfere with or disrupt, or in any manner attempt to interfere with or disrupt, any of the Company's and/or any Subsidiary’s relationships with Company Customer(s) (collectively, “Solicitation of Company Customer(s) Following Participant’s Employment”); provided, however, Participant’s obligations under this Section 17(b) shall apply only to any Company Customer(s) doing business with the Company and/or any Subsidiary at any time during the last twelve (12) months of the Participant’s employment with the Company (or at any time during the Participant’s employment with the Company, if the length of employment is less than twelve (12) months): and either (i) with which Participant had material personal dealings during the last twelve (12) months of the Participant’s employment with the Company (or at any time during the Participant’s employment with the Company, if the length of employment is less than twelve (12) months); (ii) with which someone under Participant's direct supervision had material personal dealings during the last twelve (12) months of the Participant’s employment with the Company (or at any time during the Participant’s employment with the Company, if the length of employment is less than twelve (12) months); or (iii) about which Participant received Confidential Information, or other information that is not publicly available, by or through their relationship to the Company or any Subsidiary. The Company and any Subsidiary, on the one hand, and Participant, on the other, expressly acknowledge and agree that this Section 17(b) in itself is not intended to, and will not, function as a covenant against competition.
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(c) Violation(s) of Section 17. If Participant has received or been entitled to payment of cash, delivery of shares of Common Stock, or a combination thereof pursuant to this Option grant within six (6) months before the Participant’s termination of employment with the Company or any Subsidiary, the Committee, in its sole discretion, may require Participant to return or forfeit the cash and/or shares of Common Stock received with respect to the Option (or its economic value as of the date of the exercise of Option) in the event of a violation of this Section 17. The Committee’s right to require forfeiture must be exercised within ninety (90) days after discovery of such an occurrence but in no event later than fifteen (15) months after Participant’s termination of employment with the Company or any Subsidiary.
18. | Change in Control. In the event of a Change in Control, the Committee shall take one of the actions described in Sections 18(a) or (b). |
(a) Substitution. If the Change in Control is a merger, consolidation or statutory share exchange, the Committee may make appropriate provision for the replacement of the Option by the substitution of an option to purchase stock of the corporation surviving any merger or consolidation with substantially similar terms and conditions (or, if appropriate, an option to purchase stock of the parent corporation of the Company or such surviving corporation), provided such option preserves the full economic value of the Option (to the extent permitted under Code Section 409A, or, if applicable, the stock rights exemption from Code Section 409A) and provides for full vesting of the option in the event Participant experiences a Qualifying Termination; provided that if the Company continues to be a publicly traded corporation immediately after a Change in Control, the Committee may provide for the Option to continue in effect in accordance with its terms, in which case the Option shall become fully vested in the event Participant experiences a Qualifying Termination.
(b) Acceleration of Vesting and Payment of Awards. At least ten days before the occurrence of the Change in Control, the Committee may declare, and provide written notice to Participant of the declaration that the Option, whether or not then exercisable, shall be cancelled at the time of, or immediately before the occurrence of, the Change in Control in exchange for payment to Participant, within ten (10) days after the Change in Control of cash equal to, for each share of Common Stock covered by the canceled Option, the amount, if any, by which the Fair Market Value per share of Common Stock exceeds the purchase price per share of Common Stock covered by the Option. Alternatively, at least ten days before the occurrence of the Change in Control, the Committee may cause the Option to become immediately become exercisable in full and Participant shall have the right, during the period preceding the time of cancellation of the Option, to exercise the Option as to all or any part of the shares of Common Stock covered thereby in whole or in part. In the event the Committee takes the actions contemplated by the preceding sentence, to the extent the Option shall not have been exercised before the Change in Control, the Option shall be cancelled at the time of, or immediately before, the Change in Control.
19. | Amendment. Subject to the terms of the Plan, the Committee may amend the terms and conditions of this Agreement. Amendments to the Agreement may be unilaterally made by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially impair the rights of Participant and not required as a matter of law. |
20. | Confidential Information. |
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Participant further understands and acknowledges that this Confidential Information and the Company’s ability to reserve it for the exclusive knowledge and use of the Company and any Subsidiary is of great competitive importance and commercial value to the Company, and that improper use or disclosure of the Confidential Information by Participant will cause irreparable harm to the Company, for which remedies at law will not be adequate, and may also cause the Company to incur financial costs, loss of business advantage, liability under confidentiality agreements with third parties, and civil damages.
Participant acknowledges and agrees that Participant, shall not, without the express prior written consent of an authorized officer of the Company, directly or indirectly use, disclose, communicate, publish, copy, or make available any Confidential Information, including any work in which the Participant may have been engaged on behalf of the Company, to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, except as required in the performance of Participant’s authorized employment duties to the Company. At the conclusion of employment with the Company, the Participant is required to return or destroy all Company documents and records in his or her possession or control, including those containing Confidential Information. The Participant further acknowledges that Participant’s obligations to maintain and protect Confidential Information pursuant to this Agreement, the Company’s Confidential Information Protection Policy, the Company’s Code of Conduct, and any additional confidentiality policy and/or agreement governing Participant’s use/disclosure of confidential information, will continue after Participant’s employment termination date. However, unless otherwise prohibited by applicable law, Participant’s nondisclosure obligation shall extend for three (3) years after Participant’s employment termination date as to Confidential Information that does not qualify as a trade secret or is not otherwise protected under applicable law; trade secret information shall be protected from disclosure as long as the information at issue continues to qualify as a trade secret.
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(c) Violation(s) of Section 20. If Participant has received or been entitled to payment of cash, delivery of shares of Common Stock, or a combination thereof pursuant to this Option grant within six (6) months before the Participant’s termination of employment with the Company or any Subsidiary, the Committee, in its sole discretion, may require Participant to return or forfeit the cash and/or shares of Common Stock received with respect to the Option (or its economic value as of the date of the exercise of Option) in the event of a violation of this Section 20. The Committee’s right to require forfeiture must be exercised within ninety (90) days after discovery of such an occurrence but in no event later than fifteen (15) months after Participant’s termination of employment with the Company or any Subsidiary.
21. | Consideration. Participant acknowledges that the Option provided pursuant to this Agreement is in exchange for the promises made in this Agreement, including the confidentiality and non-solicitation obligations. Participant agrees that the Company has business interests which are legitimately in need of the protections provided for herein. |
22. | Specific Performance. Because of the difficulty of measuring economic losses to the Company as a result of a breach or threatened breach of the covenants set forth in Sections 16, 17 and 20 of this Agreement, and because of the immediate and irreparable damage that would be caused to the Company for which it would have no other adequate remedy, the Company shall be entitled to enforce the foregoing covenants in the event of a breach or threatened breach, by injunctions and restraining orders from any arbitrator or court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall not be the Company’s exclusive remedy for a breach but instead shall be in addition to all other rights and remedies available to the Company, at law and equity. |
23. | Survival; Third Party Beneficiaries. Participant’s obligations under Sections 16, 17, and 20 of this Agreement will continue in effect after the termination of Participant’s employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary. Participant’s obligations under this Agreement will be binding upon Participant’s heirs, executors, assigns, and administrators and will inure to the benefit of each Subsidiary of the Company and their respective subsidiaries, successors, and assigns. Each Subsidiary of the Company that is not a signatory hereto shall be a third-party beneficiary of Employee’s representations and covenants hereunder and shall be entitled to enforce this Agreement as if a party hereto. |
24. | Modification. Should any provision of this Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby, and said illegal or invalid part, term, or provision shall be deemed not be a part of this Agreement. The parties expressly empower a court of competent jurisdiction to modify any term or provision of this Agreement to the extent necessary to comply with existing law and to enforce the Agreement as modified. |
25. | Advice of Counsel. Certain statutes and/or other regulations require that Participant be provided with an opportunity to consult with an attorney before signing this Agreement, including the covenants not to solicit in Section 16-17. Participant acknowledges that they have been given at least fourteen (14) calendar days from the time they receive this Agreement to consider whether to sign this Agreement. |
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The Participant and the Company have executed this Agreement as of ###TODAY’S DATE AND TIME OF ACCEPTANCE###.
RLI Corp.
By
Name
Title____________________________________
I, ###PARTICIPANT_NAME###, by clicking on the “Accept” button below do hereby electronically accept the Stock Option Award (“Award”) as of today’s date and agree to the terms and conditions set forth in the Stock Option Agreement included above.
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Exhibit 10.5
RLI CORP.
2023 Long-Term Incentive Plan
Non-Employee Director Restricted Stock Unit Agreement
(May 4, 2023 Form of Agreement)
Name of Participant: | |
Number of Units: | Date of Grant: |
Restriction Period: | |
Date of Vesting [______] | Percentage of Units that Become Vested 100% |
Effective as of the “Date of Grant” specified above, RLI Corp., a Delaware corporation (the “Company”), grants to the individual named above (the “Participant”) Restricted Stock Units (“Restricted Stock Units”), each of which represents the right to receive one share of common stock, par value $0.01 per share, of the Company (“Common Stock”) at the time and subject to the terms and conditions set forth in this Restricted Stock Unit Agreement (the “Agreement”) and in the RLI Corp. 2023 Long-Term Incentive Plan (the “Plan”). In the event of any conflict between the terms of the Agreement and the Plan, the terms of the Plan shall govern. Capitalized terms used but not defined shall have the meaning ascribed thereto in the Plan.
Background
A.The Company maintains the Plan (i) to align the interests of the Company’s stockholders and the recipients of awards under the Plan by increasing the proprietary interest of such recipients in the Company’s growth and success, (ii) to advance the interests of the Company by attracting and retaining officers, other employees, Non-Employee Directors, consultants and independent contractors and (iii) to motivate such persons to act in the long term best interests of the Company and its stockholders.
B.Under the Plan, the Human Capital & Compensation Committee of the Board of Directors of the Company, or such other committee designated by the Board in accordance with the Plan (the “Committee”), administers the Plan and has the authority to determine the awards to be granted under the Plan.
C.Pursuant to the outside director compensation program recommended by the Nominating/Corporate Governance Committee and approved by the Board of Directors, the Committee has determined that the Participant is eligible to receive an award of Restricted Stock Units under the Plan (the “Restricted Stock Unit Award”).
D.The Company grants the Restricted Stock Unit Award to the Participant under the following terms and conditions:
Terms and Conditions
1. | Grant. The Participant is granted the Restricted Stock Unit Award with respect to the number of Restricted Stock Units specified at the beginning of this Agreement. |
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2. | Restriction Period. One hundred percent (100%) of the Restricted Stock Units subject to the Award will become vested on the Date of Vesting as specified at the beginning of this Agreement, provided that the Participant continuously serves as a Non-Employee Director or otherwise provides services to the Company as an employee or service provider through such Date of Vesting. |
The Restricted Stock Units shall also become vested in full (notwithstanding the vesting schedule) under the circumstances described in Section 3 of this Agreement or in the event of a Qualifying Termination in accordance with Section 14 of this Agreement if they have not been forfeited prior thereto. Except as provided in Sections 3 or 14 of this Agreement, the Restricted Stock Units shall be forfeited in their entirety the Participant’s service as a Non-Employee Director, employee or service provider of the Company terminates prior to the Date of Vesting.
3. | Acceleration of Vesting. In the event of the death or Disability of the Participant, the Units shall immediately become vested in full if the Participant continuously served as a Non-Employee Director or otherwise provided services to the Company as an employee or service provider between the date the Award was granted and the date of such death or Disability. |
6. | Withholding Taxes. Except as required by applicable law, no federal, state, local or other taxes will be withheld or paid in connection with the Restricted Stock Unit Award, and the Participant is responsible for the payment of all such taxes. |
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term “spouse” shall include a former spouse who receives a transfer pursuant to a qualified domestic relations order, and the term issue shall include stepchildren, step-grandchildren and adopted children. No such transfer shall be effective unless reasonable prior notice thereof is delivered to the Company. Any such permitted transferee shall be subject to all of the terms and conditions applicable to the person transferring the Restricted Stock Unit Award including the terms and conditions set forth in the Plan and this Agreement. Any attempt to sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the Restricted Stock Unit Award other than in accordance with this Section 7 shall be null and void.
8. | No Stockholder Rights Before Issuance of Shares. No person shall have any of the rights of a stockholder of the Company with respect to any share of Common Stock subject to the Restricted Stock Unit Award unless and until the share of Common Stock actually is issued to him/her following the vesting and settlement of the Restricted Stock Unit Award and such person becomes a stockholder of record with respect to such shares of Common Stock. |
9. | Adjustment. The Restricted Stock Unit Award is subject to adjustment, without the consent of the Participant, pursuant to Section 5.7 of the Plan. |
10. | Interpretation of this Agreement. All decisions and interpretations made by the Committee (or, as applicable, the Board) with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Participant. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern. |
11. | Discontinuance of Service. This Agreement shall not give the Participant a right to continued service with the Company, and the Company may terminate his/her service at any time and otherwise deal with the Participant without regard to the effect it may have upon him/her under this Agreement. |
12. | Binding Effect. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Participant. |
13. | Choice of Law; Jurisdiction. This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles). All disputes hereunder shall be heard in the federal and state courts located in Peoria, Illinois. |
14. | Change in Control. In the event of a Change in Control, the Committee shall take one of the actions described in Sections 14(a) or (b). |
(a) Substitution. If the Change in Control is a merger, consolidation or statutory share exchange, the Committee may make appropriate provision for the replacement of the Restricted Stock Unit Award by the substitution of an award relating to the stock of the corporation surviving any merger or consolidation with substantially similar terms and conditions (or, if appropriate, an award relating to the stock of the parent corporation of the Company or such surviving corporation), provided such award preserves the full economic value of the Restricted Stock Unit Award (to the extent permitted under Section 409A of the Code) and provides for full vesting of the award in the event the Participant experiences a Qualifying Termination; provided that if the Company continues to be a publicly traded corporation immediately after a Change in Control, the Committee may provide for the Award to continue in effect in accordance with its terms, in which case the Restricted Stock Unit Award shall become fully vested in the event the Participant experiences a Qualifying Termination.
(b) Acceleration of Vesting and Payment of Awards. The Committee may declare, and provide written notice to the Participant of the declaration, that the Restricted Stock Unit Award, whether or not then vested, shall be cancelled at the time of, or immediately before the occurrence of, the Change in Control in exchange for payment to the Participant, within ten (10) days after the Change in Control, of cash equal to, for each Restricted Stock Unit covered by the canceled Restricted Stock Unit Award, an amount equal to the Fair Market Value per share of Common Stock; provided, however, that if the Restricted Stock Unit Award is deferred compensation, within the meaning of Section 409A of the Code, and the Change in Control is not a “change in control event,” within the meaning of Section 409A of the Code, the Restricted Stock Unit
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Award shall become immediately vested upon the Change in Control, but the cash payment pursuant to this Section 14(b) shall be made in accordance with Section 5 of this Agreement.
15. | Amendment. Subject to the terms of the Plan, the Committee may amend the terms and conditions of this Agreement. Amendments to the Agreement may be unilaterally made by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially impair the rights of the Participant and not required as a matter of law. |
16. | Section 409A. This Agreement is intended to comply with, or be exempt from, the applicable requirements of Section 409A of the Code, and limited, construed and interpreted in accordance with such intent. Although the Company does not guarantee any particular tax treatment, to the extent that the Restricted Stock Unit Award is subject to Section 409A of the Code, it shall be paid in a manner that is intended to comply with Section 409A of the Code, including regulations and any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto. In no event whatsoever shall the Company be liable for any additional tax, interest or penalties that may be imposed on the Participant by Section 409A of the Code or any damages for failing to comply with Section 409A of the Code. Notwithstanding anything in the Plan or this Agreement to the contrary, the Participant shall be solely responsible for the tax consequences of the Restricted Stock Unit Award, and in no event shall the Company have any responsibility or liability if the Restricted Stock Unit Award does not meet any applicable requirements of Section 409A of the Code. Although the Company intends to administer the Plan to prevent taxation under Section 409A of the Code, the Company does not represent or warrant that the Plan or the Restricted Stock Unit Award complies with Section 409A or any other provision of federal, state, local or other tax law. To the extent any amounts under this Agreement are payable by reference to the Participant’s termination of employment, such term shall be deemed to refer to the Participant’s “separation from service,” within the meaning of Section 409A of the Code. |
17. | Plan Administration. The Company partners with Solium Capital for the management and administration of its long-term incentives program using Solium’s web-based application, Shareworks by Morgan Stanley®. The Participant may access information pertaining to the Restricted Stock Unit Award via the Company’s Shareworks by Morgan Stanley® site, https://rli.solium.com. |
****Signatures Appear on the Following Page****
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****Signature Page to [NAME] Restricted Stock Unit Agreement****
The Participant and the Company have executed this Agreement as of the [__] day of [__], [___].
PARTICIPANT
RLI Corp.
By
Name
Title__ ____________________________________
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Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RLI CORP.
The name of the corporation is RLI Corp. (the “Corporation”). The Corporation was incorporated under the name RLI Corp. by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on November 20, 2017. This Amended and Restated Certificate of Incorporation of the Corporation, which amends and restates in its entirety the Corporation’s original Certificate of Incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware (the “DGCL”). The original Certificate of Incorporation of the Corporation is hereby amended, integrated and restated to read in its entirety as follows:
FIRST: The name of the Corporation is RLI Corp.
SECOND: The address of the Corporation’s registered office in the State of Delaware is 251 Little Falls Drive, Wilmington, County of New Castle, Delaware, 19808, and the name of its registered agent at such address is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL, as it now exists or may hereafter be amended and supplemented.
FOURTH: The Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares of capital stock which the Corporation shall have authority to issue is 205,000,000. The total number of shares of Common Stock that the Corporation is authorized to issue is 200,000,000, having a par value of $0.01 per share, and the total number of shares of Preferred Stock that the corporation is authorized to issue is 5,000,000, having a par value of $0.01 per share.
FIFTH: The designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation are as follows:
| A. | COMMON STOCK. |
| 1. | General. The voting, dividend, liquidation, conversion and stock split rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors of the Corporation (the “Board of Directors”) upon any issuance of the Preferred Stock of any series. |
| 2. | Voting.Each holder of Common Stock shall be entitled to one (1) vote for each share of Common Stock held by such holder. Each holder of Common Stock shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation (as in effect at the time in question) (the “Bylaws”) and applicable law on all matters put to a vote of the stockholders of the Corporation. |
The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the DGCL.
| 3. | Dividends. Subject to the rights of any holders of any shares of Preferred Stock which may from time to time come into existence and be outstanding, the holders of Common Stock shall be entitled to the payment of dividends when and as declared by the Board of Directors in accordance with applicable law and to receive other distributions from the Corporation. Any dividends declared by the Board of Directors to the holders of the then outstanding Common Stock shall be paid to the holders thereof pro rata in accordance with the number of shares of Common Stock held by each such holder as of the record date of such dividend. |
| 4. | Liquidation. Subject to the rights of any holders of any shares of Preferred Stock which may from time |
| to time come into existence and be outstanding, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the funds and assets of the Corporation that may be legally distributed to the Corporation’s stockholders shall be distributed among the holders of the then outstanding Common Stock pro rata in accordance with the number of shares of Common Stock held by each such holder. |
| B. | PREFERRED STOCK |
Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided.
Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate of designations relating thereto in accordance with the DGCL, to determine and fix the number of shares of such series and such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the fullest extent now or hereafter permitted by the DGCL. Without limiting the generality of the foregoing, the resolution or resolutions providing for the issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to any other series of Preferred Stock to the extent permitted by law.
The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the DGCL.
SIXTH: The personal liability of the directors and officers of the Corporation, to the Corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as director or officer, is hereby eliminated to the fullest extent permitted by the DGCL, as the same may be amended and supplemented. Any amendment, repeal or modification of this Article Sixth, or the adoption of any provision of the Amended and Restated Certificate of Incorporation inconsistent with this Article Sixth, shall not adversely affect any right or protection of a director or officer of the Corporation existing immediately prior to such amendment, repeal or modification. If the DGCL is amended after approval by the stockholders of this Article Sixth to authorize corporate action further eliminating or limiting the personal liability of directors or officers, then the liability of a director or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended. For purposes of this Article Sixth, “officer” shall have the meaning provided in Section 102(b)(7) of the DGCL, as it presently exists or may hereafter be amended from time to time.
SEVENTH: The Corporation shall, through the Bylaws or otherwise, to the fullest extent permitted by the DGCL, as the same exists or may hereafter be amended and supplemented, indemnify, advance expenses and hold harmless any person who was or is a director or officer of the Corporation or its subsidiaries. The Corporation may, by action of the Board of Directors, provide rights to indemnification and to advancement of expenses to such other employees or agents of the Corporation or its subsidiaries to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by the DGCL. Any amendment, repeal or modification of this Article Seventh shall not adversely affect any rights or protection existing hereunder immediately prior to such repeal or modification. Notwithstanding the foregoing, the Corporation shall be required to indemnify a person in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative (each a “Proceeding”), initiated by such person only if the Proceeding was authorized in the specific case by the Board of Directors.
EIGHTH: From time to time any of the provisions of this Amended and Restated Certificate of Incorporation may be amended, altered, changed or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Amended and Restated Certificate of Incorporation are granted subject to the provisions of this Article Eighth.
NINTH:In furtherance and not in limitation of the rights, powers, privileges and discretionary authority granted or conferred by the DGCL or other statutes or laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws, without any action on the part of the stockholders, but the stockholders may make additional Bylaws and may alter, amend or repeal any Bylaw whether adopted by them or otherwise. The Corporation may in its Bylaws confer powers upon its Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law.
[Signature Page to Follow.]
IN WITNESS WHEREOF, the Corporation has executed this Amended and Restated Certificate of Incorporation on this 9th day of May, 2023
/s/ Craig W. Kliethermes
Craig W. Kliethermes
President and Chief Executive Officer