10-Q

13

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 March 31, 2020

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 April 20, 2020, the number of shares outstanding of the registrant’s Common Stock was 44,922,656.

Table of Contents

			Page
Part I - Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three-Month Periods Ended March 31, 2020 and 2019 (unaudited)	3
		Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)	4
		Condensed Consolidated Statements of Shareholders’ Equity For the Three-Month Periods Ended March 31, 2020 and 2019 (unaudited)	5
		Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2020 and 2019 (unaudited)	6
		Notes to Unaudited Condensed Consolidated Interim Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
	Item 4.	Controls and Procedures	33
Part II - Other Information			33
	Item 1.	Legal Proceedings	33
	Item 1a.	Risk Factors	33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3.	Defaults upon Senior Securities	34
	Item 4.	Mine Safety Disclosures	34
	Item 5.	Other Information	34
	Item 6.	Exhibits	34
Signatures			35

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

	For the Three-Month Periods
	Ended March 31,
(in thousands, except per share data)	2020		2019
Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Consolidated revenue	$	118,117	$	263,820
Losses and settlement expenses		111,021		94,297
Policy acquisition costs		72,941		71,292
Insurance operating expenses		14,381		16,667
Interest expense on debt		1,897		1,861
General corporate expenses		1,755		3,276
Total expenses	$	201,995	$	187,393
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473
Other comprehensive earnings (loss), net of tax		(13,031)		29,301
Comprehensive earnings (loss)	$	(74,298)	$	94,774
Earnings per share:
Basic:
Basic net earnings (loss) per share	$	(1.36)	$	1.47
Basic comprehensive earnings (loss) per share	$	(1.65)	$	2.13
Diluted:
Diluted net earnings (loss) per share	$	(1.36)	$	1.46
Diluted comprehensive earnings (loss) per share	$	(1.65)	$	2.11
Weighted average number of common shares outstanding:
Basic		44,920		44,536
Diluted		44,920		44,887

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

3

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31,		December 31,
(in thousands, except share and per share data)	2020		2019
ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value	$	1,963,585	$	1,983,086
(amortized cost of $1,912,851 and allowance for credit losses of $878 at 3/31/20)
(amortized cost of $1,915,278 and allowance for credit losses of $0 at 12/31/19)
Equity securities, at fair value (cost - $272,152 at 3/31/20 and $262,131 at 12/31/19)		356,403		460,630
Other invested assets		53,562		70,441
Cash		42,701		46,203
Total investments and cash	$	2,416,251	$	2,560,360
Accrued investment income		14,944		14,587
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,948 at 3/31/20 and $16,682 at 12/31/19		154,084		160,369
Ceded unearned premium		88,789		93,656
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $8,539 at 3/31/20 and $9,402 at 12/31/19		366,441		384,517
Deferred policy acquisition costs		84,208		85,044
Property and equipment, at cost, net of accumulated depreciation of $64,322 at 3/31/20 and $62,703 at 12/31/19		52,741		53,121
Investment in unconsolidated investees		108,081		103,836
Goodwill and intangibles		54,025		54,127
Other assets		39,047		36,104
TOTAL ASSETS	$	3,378,611	$	3,545,721
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,574,760	$	1,574,352
Unearned premiums		516,867		540,213
Reinsurance balances payable		30,865		25,691
Funds held		80,333		83,358
Income taxes-deferred		26,546		56,727
Bonds payable, long-term debt		149,349		149,302
Accrued expenses		27,536		66,626
Other liabilities		56,650		54,064
TOTAL LIABILITIES	$	2,462,906	$	2,550,333
Shareholders’ Equity
Common stock ($0.01 par value, 100,000,000 shares authorized)
(67,852,870 shares issued, 44,922,656 shares outstanding at 3/31/20)
(67,799,229 shares issued, 44,869,015 shares outstanding at 12/31/19)	$	679	$	678
Paid-in capital		325,052		321,190
Accumulated other comprehensive earnings		39,464		52,473
Retained earnings		943,509		1,014,046
Deferred compensation		6,970		7,980
Less: Treasury shares at cost
(22,930,214 shares at 3/31/20 and 12/31/19)		(399,969)		(400,979)
TOTAL SHAREHOLDERS’ EQUITY	$	915,705	$	995,388
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,378,611	$	3,545,721

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

4

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost
Balance, January 1, 2019	44,504,043	$	806,842	$	674	$	305,660	$	(14,572)	$	908,079	$	8,354	$	(401,353)
Net earnings (loss)	—		65,473		—		—		—		65,473		—		—
Other comprehensive earnings (loss), net of tax	—		29,301		—		—		29,301		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,039)		1,039
Share-based compensation	50,213		2,892		1		2,891		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,803)		—		—		—		(9,803)		—		—
Balance, March 31, 2019	44,554,256	$	894,705	$	675	$	308,551	$	14,729	$	963,749	$	7,315	$	(400,314)
								Accumulated
		Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury
(in thousands, except share and per share data)	Shares	Equity		Stock		Capital		Earnings (Loss)		Earnings		Compensation		Shares at Cost
Balance, January 1, 2020	44,869,015	$	995,388	$	678	$	321,190	$	52,473	$	1,014,046	$	7,980	$	(400,979)
Cumulative-effect adjustment from ASU 2016-13			1,095						22		1,073
Net earnings (loss)	—		(61,267)		—		—		—		(61,267)		—		—
Other comprehensive earnings (loss), net of tax	—		(13,031)		—		—		(13,031)		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,010)		1,010
Share-based compensation	53,641		3,863		1		3,862		—		—		—		—
Dividends and dividend equivalents ($0.23 per share)	—		(10,343)		—		—		—		(10,343)		—		—
Balance, March 31, 2020	44,922,656	$	915,705	$	679	$	325,052	$	39,464	$	943,509	$	6,970	$	(399,969)

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 Three-Month Periods
	Ended March 31,
(in thousands)	2020		2019
Net cash provided by (used in) operating activities	$	(5,767)	$	30,787
Cash Flows from Investing Activities
Purchase of:
Fixed income securities, available-for-sale	$	(69,233)	$	(95,984)
Equity securities		(31,811)		(31,962)
Property and equipment		(1,910)		(1,510)
Other		(2,611)		(4,134)
Proceeds from sale of:
Fixed income securities, available-for-sale		20,414		86,046
Equity securities		38,042		26,347
Other		2,267		154
Proceeds from call or maturity of:
Fixed income securities, available-for-sale		54,890		24,745
Net proceeds from sale (purchase) of short-term investments		-		(32,537)
Net cash provided by (used in) investing activities	$	10,048	$	(28,835)
Cash Flows from Financing Activities
Cash dividends paid	$	(10,332)	$	(9,797)
Proceeds from stock option exercises		2,549		2,886
Net cash used in financing activities	$	(7,783)	$	(6,911)
Net decrease in cash	$	(3,502)	$	(4,959)
Cash at the beginning of the period		46,203		30,140
Cash at March 31	$	42,701	$	25,181

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 of 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 2019 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 March 31, 2020 and the results of operations of RLI Corp. 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 2019 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

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost.

We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the Company’s balance sheet accounts: available-for-sale fixed income securities, premiums receivable and reinsurance balances recoverable. The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds (85 percent rated A or better at March 31, 2020 and December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances. In total, the cumulative-effect adjustment made to the balance sheet as of the beginning of the year resulted in a $1.1 million increase to retained earnings and an increase to accumulated other comprehensive earnings of less than $0.1 million.

C. REINSURANCE

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

We subject our reinsurance recoverables to detailed recoverable tests, including a segment-based analysis using the average default rating percentage by S&P rating. Our policy is to charge to earnings, in the form of a credit allowance, an estimate of unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such

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as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $15.7 million and $8.5 million, respectively, at March 31, 2020. At December 31, 2019, the amounts were $15.7 million and $9.4 million, respectively. Adoption of ASU 2016-03 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other changes 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 quarter of 2020.

D. INTANGIBLE ASSETS

Goodwill and intangible assets totaled $54.0 million and $54.1 million at March 31, 2020 and December 31, 2019, respectively, as detailed in the following table:

Goodwill and Intangible Assets		March 31,		December 31,
(in thousands)		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110
Small commercial		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19		463		565
Total intangibles	$	7,963	$	8,065
Total goodwill and intangibles	$	54,025	$	54,127

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

Annual impairment assessment was performed on our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and state insurance license indefinite-lived intangible asset during 2019. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of March 31, 2020 that would suggest our goodwill and intangible assets should be tested for impairment.

E. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents. 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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	For the Three-Month Period					For the Three-Month Period
	Ended March 31, 2020					Ended March 31, 2019
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,536	$	1.47
Effect of Dilutive Securities
Stock options		-	-				-	351
Diluted EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,887	$	1.46

F. COMPREHENSIVE EARNINGS

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

Unrealized gains (losses), net of tax, on the fixed income portfolio were $(13.0) million for the first three months of 2020, compared to $29.3 million during the same period last year. Unrealized losses in the first three months of 2020 were attributable to widening credit spreads, which more than offset declines in interest rates and decreased the fair value of securities held in the fixed income portfolio. In contrast, declining interest rates increased the fair value of securities held in the fixed income portfolio in the first three months of 2019.

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

(in thousands)	For the Three-Month Periods
	Ended March 31,
Unrealized Gains/Losses on Available-for-Sale Securities	2020		2019
Beginning balance	$	52,473	$	(14,572)
Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.)		22		-
Adjusted beginning balance	$	52,495	$	(14,572)
Other comprehensive earnings before reclassifications		(11,880)		29,795
Amounts reclassified from accumulated other comprehensive earnings		(1,151)		(494)
Net current-period other comprehensive earnings (loss)	$	(13,031)	$	29,301
Ending balance	$	39,464	$	14,729
Balance of securities for which an allowance for credit losses has been recognized in net earnings	$	5,727	$	-

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

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	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month
Component of Accumulated	Periods Ended March 31,				Affected line item in the
Other Comprehensive Earnings	2020		2019		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	2,306	$	625	Net realized gains
		(849)		-	Credit losses presented within net realized gains
	$	1,457	$	625	Earnings (loss) before income taxes
		(306)		(131)	Income tax benefit (expense)
	$	1,151	$	494	Net earnings (loss)

G. FAIR VALUE MEASUREMENTS

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluations of the tranches (non-volatile, volatile or credit sensitivity) are based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is used to determine the cash flows for each tranche, benchmark yields, prepayment 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 observable and unobservable inputs. Observable inputs include public corporate spread matrices classified by sector, rating and

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

For all of our fixed income securities classified as Level 2, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, if discrepancies are found, 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 securities provided by our pricing services are reasonable.

Common Stock: As of March 31, 2020, all of our common stock holdings are 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).

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy.

H. RISKS AND UNCERTAINTIES

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

Catastrophe Exposures

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

2. INVESTMENTS

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

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

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

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

FAIR VALUE MEASUREMENTS

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

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

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

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

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As of March 31, 2020, we had $4.8 million of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3). The following table summarizes changes in the balance of these Level 3 securities.

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

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

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

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

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

Available-for-sale	March 31, 2020
(in thousands)	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
Asset Class	Cost		Losses		Gains		Losses		Value
U.S. government	$	171,026	$	-	$	15,948	$	-	$	186,974
U.S. agency		32,236		-		4,806		-		37,042
Non-U.S. govt. & agency		7,324		-		105		(113)		7,316
Agency MBS		396,474		-		17,807		(19)		414,262
ABS/CMBS*		230,830		(21)		1,908		(9,116)		223,601
Corporate		685,116		(857)		23,364		(19,205)		688,418
Municipal		389,845		-		16,203		(76)		405,972
Total Fixed Income	$	1,912,851	$	(878)	$	80,141	$	(28,529)	$	1,963,585

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

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

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

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

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

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

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

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

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

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

● Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the securities fair value is below amortized cost.

As of March 31, 2020, the discounted cash flow analysis resulted in an allowance for credit losses on 39 securities totaling $0.9 million. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Based on our analysis, we believe we will recover the amortized cost basis on the available-for-sale securities not included in the allowance for credit losses. We do not intend to sell the available-for-sale securities in an unrealized loss position and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost basis. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest.

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

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

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declines in interest rates during the period. Of the total 420 securities, 30 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of March 31, 2020, after factoring in the allowance for credit losses, and December 31, 2019.

	March 31, 2020						December 31, 2019
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. government
Fair value	$	—	$	—	$	—	$	2,505	$	8,463	$	10,968
Amortized cost		—		—		—		2,506		8,494		11,000
Unrealized Loss	$	—	$	—	$	—	$	(1)	$	(31)	$	(32)
U.S. agency
Fair value	$	—	$	—	$	—	$	6,794	$	—	$	6,794
Amortized cost		—		—		—		6,836		—		6,836
Unrealized Loss	$	—	$	—	$	—	$	(42)	$	—	$	(42)
Non-U.S. government
Fair value	$	3,011	$	—	$	3,011	$	—	$	—	$	—
Amortized cost		3,124		—		3,124		—		—		—
Unrealized Loss	$	(113)	$	—	$	(113)	$	—	$	—	$	—
Agency MBS
Fair value	$	249	$	1,296	$	1,545	$	21,548	$	41,718	$	63,266
Amortized cost		249		1,315		1,564		21,664		42,165		63,829
Unrealized Loss	$	—	$	(19)	$	(19)	$	(116)	$	(447)	$	(563)
ABS/CMBS*
Fair value	$	126,540	$	15,405	$	141,945	$	74,968	$	18,036	$	93,004
Amortized cost		134,660		16,401		151,061		75,332		18,148		93,480
Unrealized Loss	$	(8,120)	$	(996)	$	(9,116)	$	(364)	$	(112)	$	(476)
Corporate
Fair value	$	220,349	$	4,182	$	224,531	$	16,478	$	9,348	$	25,826
Amortized cost		238,510		5,226		243,736		16,950		9,694		26,644
Unrealized Loss	$	(18,161)	$	(1,044)	$	(19,205)	$	(472)	$	(346)	$	(818)
Municipal
Fair value	$	7,301	$	—	$	7,301	$	47,018	$	—	$	47,018
Amortized cost		7,377		—		7,377		47,740		—		47,740
Unrealized Loss	$	(76)	$	—	$	(76)	$	(722)	$	—	$	(722)
Total fixed income
Fair value	$	357,450	$	20,883	$	378,333	$	169,311	$	77,565	$	246,876
Amortized cost		383,920		22,942		406,862		171,028		78,501		249,529
Unrealized Loss	$	(26,470)	$	(2,059)	$	(28,529)	$	(1,717)	$	(936)	$	(2,653)

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

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at March 31, 2020 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.

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	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	202,517	$	191,912	$	(10,605)	37.2	%
2	BBB	Baa		85,785		80,759		(5,026)	17.6	%
3	BB	Ba		65,256		59,398		(5,858)	20.5	%
4	B	B		50,630		44,392		(6,238)	21.9	%
5	CCC	Caa		2,674		1,872		(802)	2.8	%
6	CC or lower	Ca or lower		-		-		-	-	%
		Total	$	406,862	$	378,333	$	(28,529)	100.0	%

Unrealized Gains and Losses on Equity Securities

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

Other Invested Assets

We had $53.6 million of other invested assets at March 31, 2020, compared to $70.4 million at the end of 2019. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), investments in private funds and investments in restricted stock. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value. Restricted stock is carried at quoted market prices, as the restrictions expire within one year.

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

As of March 31, 2020, $15.1 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the three-month period ended March 31, 2020, there were no outstanding borrowings with the FHLBC.

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

Cash

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

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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 three months of 2020 and 2019:

	For the Three-Month Periods
	Ended March 31,
(in thousands)	2020		2019
Unpaid losses and LAE at beginning of year
Gross	$	1,574,352	$	1,461,348
Ceded		(384,517)		(364,999)
Net	$	1,189,835	$	1,096,349
Adoption impact of ASU 2016-13 on reinsurance balances recoverable	$	(1,345)	$	—
Increase (decrease) in incurred losses and LAE
Current accident year	$	126,194	$	113,930
Prior accident years		(15,173)		(19,633)
Total incurred	$	111,021	$	94,297
Loss and LAE payments for claims incurred
Current accident year	$	(9,295)	$	(5,531)
Prior accident years		(81,897)		(70,145)
Total paid	$	(91,192)	$	(75,676)
Net unpaid losses and LAE at March 31	$	1,208,319	$	1,114,970
Unpaid losses and LAE at March 31
Gross	$	1,574,760	$	1,479,344
Ceded		(366,441)		(364,374)
Net	$	1,208,319	$	1,114,970

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including reinsurance balances recoverable, to be presented at the net amount expected to be collected. We previously maintained an allowance for uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we released $1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes have and ongoing modifications will continue to be recorded. See note 1. B. for more information on the adoption of the ASU.

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

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

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

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4. INCOME TAXES

Our effective tax rate for the three-month period ended March 31, 2020 was 22.8 percent, compared to 19.9 percent for the same period in 2019. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher for the three-month period in 2020 as tax-favored adjustments increased the tax benefit realized on pretax losses.

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

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

5. STOCK BASED COMPENSATION

Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015.

In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have awarded 2,312,835 stock options and restricted stock units under the 2015 LTIP, including 30,375 stock options thus far in 2020.

Stock Options

Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

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The following tables summarize option activity for the three-month periods ended March 31, 2020 and 2019:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2020	1,667,290	$	62.52
Options granted	30,375		94.62
Options exercised	(56,725)		49.23		$	2,516
Options canceled/forfeited	(300)		58.60
Outstanding options at March 31, 2020	1,640,640	$	63.58	5.10	$	40,778
Exercisable options at March 31, 2020	614,040	$	54.68	3.75	$	20,438
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2019	1,964,880	$	54.24
Options granted	40,750		66.16
Options exercised	(50,580)		33.71		$	1,795
Options canceled/forfeited	(19,100)		57.28
Outstanding options at March 31, 2019	1,935,950	$	55.00	5.14	$	32,589
Exercisable options at March 31, 2019	702,250	$	47.84	3.73	$	16,794

The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

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

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

	2020			2019
Weighted-average fair value of grants	$	14.48		$	11.35
Risk-free interest rates		1.54	%		2.94	%
Dividend yield		2.69	%		2.98	%
Expected volatility		22.68	%		22.84	%
Expected option life		4.99	years		5.11	years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

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Restricted Stock Units

In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. These 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. 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.

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

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

6. OPERATING SEGMENT INFORMATION

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

	For the Three-Month Periods
REVENUES	Ended March 31,
(in thousands)	2020		2019
Casualty	$	143,420	$	136,900
Property		44,348		38,746
Surety		27,814		29,043
Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Total consolidated revenue	$	118,117	$	263,820
NET EARNINGS (LOSS)
(in thousands)	2020		2019
Casualty	$	(1,323)	$	5,343
Property		9,908		8,246
Surety		8,654		8,844
Net underwriting income	$	17,239	$	22,433
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
General corporate expense and interest on debt		(3,652)		(5,137)
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473

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

	For the Three-Month Periods
NET PREMIUMS EARNED	Ended March 31,
(in thousands)	2020		2019
Casualty
Commercial excess and personal umbrella	$	40,088	$	32,281
General liability		23,998		23,888
Commercial transportation		21,185		20,404
Professional services		20,695		20,299
Small commercial		15,633		13,188
Executive products		7,331		6,069
Other casualty		14,490		20,771
Total	$	143,420	$	136,900
Property
Marine	$	19,577	$	17,021
Commercial property		19,155		16,875
Specialty personal		5,000		4,584
Other property		616		266
Total	$	44,348	$	38,746
Surety
Commercial	$	10,938	$	10,812
Miscellaneous		10,516		11,602
Contract		6,360		6,629
Total	$	27,814	$	29,043
Grand Total	$	215,582	$	204,689

7. LEASES

Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s operating lease obligations are for branch office facilities. Our leases have remaining lease terms of 1 to 15 years. The components of lease expense and other lease information as of and during the three-month periods ended March 31, 2020 and 2019 are as follows:

	For the Three-Month Period Ended
(in thousands)	March 31, 2020		March 31, 2019
Operating lease cost	$	1,406	$	1,481
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	1,486	$	1,395
Right-of-use assets obtained in exchange for new operating lease liabilities	$	15	$	719
Other non-cash reductions to right-of-use assets	$	1,192	$	-

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(in thousands)	March 31, 2020			December 31, 2019
Operating lease right-of-use assets	$	19,889		$	22,335
Operating lease liabilities	$	23,141		$	24,475
Weighted-average remaining lease term - operating leases		4.48	years		4.69	years
Weighted-average discount rate - operating leases		2.34	%		2.33	%

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

(in thousands)	March 31, 2020
2020	$	4,505
2021		5,976
2022		5,904
2023		4,386
2024		2,334
Thereafter		1,365
Total future minimum lease payments	$	24,470
Less imputed interest		(1,329)
Total operating lease liability	$	23,141

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

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

OVERVIEW

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

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

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

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

The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout market cycles. We also use computer-assisted modeling techniques to provide estimates that help the Company carefully manage the concentration of risks exposed to catastrophic events.

The surety segment specializes in writing small to large-sized commercial and contract surety coverages, including payment and performance bonds. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our principals. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

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

GAAP, non-GAAP and Performance Measures

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

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

Underwriting Income

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

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

Combined Ratio

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

Net Unpaid Loss and Settlement Expenses

Unpaid losses and settlement expenses, as shown in the liabilities section of our consolidated balance sheets, represents the total obligations to claimants for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The related asset item, reinsurance balances recoverable on unpaid losses and settlement expense, is the estimate of known claims and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.

Critical Accounting Policies

In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

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

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

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

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

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

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

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

● Downgrades in credit quality by a major rating agency.

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

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

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IMPACT OF COVID-19

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

It is too early to reasonably estimate the ultimate effect of the economic shut-down as a result of the pandemic on our revenues. Through the first quarter, our most impacted product line has been public transportation. A large number of our passenger transportation customers have been unable to effectively operate under social-distancing protocols and stay-at-home governmental orders. To support our customers, we allowed them to suspend coverage on vehicles that were not in use, which resulted in a $23.0 million reduction to gross written premium in the first quarter. All of the premium was unearned and we expect the amount of cash that will be returned to customers will be approximately $6 million. Other product lines which may be more significantly impacted could include those supporting non-essential and international cargo-haulers and the energy sector. A number of products support construction activity and our revenues may be impacted to the extent this sector experiences disruption. We also have many product lines that may see little to no impact, including our personal lines products, management liability products and property businesses.

The loss exposure arising out of the spread of COVID-19 and resulting shutdown will take time to resolve. We do not offer event cancellation, travel, trade credit or pandemic-related coverages which would be more impacted by the COVID-19 pandemic. The Company has received a number of claims, the majority of which relate to business interruption. We are reviewing the individual circumstances of each claim submitted and will fulfill our obligation to pay if coverage applies. To address greater expected costs to investigate and defend these claims, we recorded net reserves of $5.0 million. Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved greater uncertainty as of March 31, 2020. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The industry is experiencing new issues, including the temporary suspension of civil court cases in most states, the extension of certain statutes of limitations and a significant reduction in economic activity and insured exposure in some classes. Our booked reserves include consideration of these factors, but legislative, regulatory or judicial actions could result in loss reserve deficiencies and reduce earnings in future periods.

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

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

We believe we are financially strong despite the impact of the COVID-19 pandemic and continued to produce solid operating results in the first quarter. We are also confident in our liquidity position. In March, we replaced our revolving credit facility that was set to expire in May with an arrangement that provided for an increased borrowing capacity of $60.0 million and can be increased to $120.0 million under certain circumstances. Additionally, our membership in the Federal Home Loan Bank system provides a secured lending facility with an aggregate borrowing capacity of approximately $30.0 million. There were no amounts outstanding under any of these facilities as of March 31, 2020. In addition to the $99.4 million of cash and other investments maturing within one year as of March 31, 2020, we believe that cash generated from operations, the liquidity of our fixed income portfolio and our unused lines of credit provide sufficient sources of cash to meet our anticipated needs over the next 12 to 24 months.

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Amid rapidly changing dynamics, we are continuing to evaluate all aspects of our operations and making necessary adjustments to manage our business. Ultimately, the extent of the impact will depend on how long it takes for the economy to return to some degree of normality. Our diversified portfolio of products and financial strength have allowed us to remain on solid footing and we believe we are able to diligently serve our customers and other stakeholders now and in the future.

RESULTS OF OPERATIONS

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

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

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

Net loss for the first quarter of 2020 totaled $61.3 million, compared to $65.5 million of net earnings for the same period last year. The decrease in earnings for 2020 was primarily attributed to $103.0 million of net after-tax unrealized losses on equity securities, compared to $26.5 million of after-tax unrealized gains in 2019. Underwriting results for both periods reflect profitable current accident year results and favorable development from prior years’ loss reserves. Favorable development on prior years’ loss reserves provided additional pretax earnings of $15.2 million in the first quarter of 2020 compared to $19.6 million in 2019. Catastrophe activity was light for both periods, with $0.5 million of pretax storm losses in the first quarter of 2020 and $1.0 million for the same period in the prior year. Pretax bonus and profit sharing-related expenses associated with the net impact of prior years’ reserve development and catastrophe losses totaled $2.2 million in 2020, compared to $2.8 million in 2019. These performance-related expenses affected policy acquisition, insurance operating and general corporate expenses. Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital.

During the first quarter of 2020, equity in earnings of unconsolidated investees totaled $4.5 million. This amount includes $2.6 million from Maui Jim and $1.9 million from Prime. Comparatively, the first quarter of 2019 reflected $5.3 million of earnings, including $3.6 million from Maui Jim and $1.7 million from Prime.

Comprehensive loss totaled $74.3 million for the first quarter of 2020, compared to $94.8 million of comprehensive earnings for the first quarter of 2019. Other comprehensive earnings primarily included after-tax unrealized gains and losses from the fixed income portfolio. The first quarter’s $13.0 million of other comprehensive loss was due to unrealized losses on the fixed income portfolio as declines in interest rates were more than offset by wider credit spreads. This compares to $29.3 million of other comprehensive earnings for the same period in 2019, primarily attributable to declining interest rates during the period.

Premiums

Gross premiums written for the Group increased $14.9 million, or 6 percent, for the first quarter of 2020 when compared to the same period of 2019. Products in our casualty and property segments drove the growth. Net premiums earned increased $10.9 million, or 5 percent, also driven by products in our casualty and property segments.

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	Gross Premiums Written						Net Premiums Earned
	For the Three-Month Periods Ended March 31,						For the Three-Month Periods Ended March 31,
(in thousands)	2020		2019		% Change		2020		2019		% Change
Casualty
Commercial excess and personal umbrella	$	55,590	$	40,995	35.6	%	$	40,088	$	32,281	24.2	%
General liability		24,691		22,743	8.6	%		23,998		23,888	0.5	%
Commercial transportation		(3,777)		17,679	(121.4)	%		21,185		20,404	3.8	%
Professional services		21,498		21,026	2.2	%		20,695		20,299	2.0	%
Small commercial		16,117		13,964	15.4	%		15,633		13,188	18.5	%
Executive products		20,947		15,549	34.7	%		7,331		6,069	20.8	%
Other casualty		24,170		20,151	19.9	%		14,490		20,771	(30.2)	%
Total	$	159,236	$	152,107	4.7	%	$	143,420	$	136,900	4.8	%
Property
Marine	$	21,111	$	20,080	5.1	%	$	19,577	$	17,021	15.0	%
Commercial property		29,779		23,550	26.5	%		19,155		16,875	13.5	%
Specialty personal		4,872		5,079	(4.1)	%		5,000		4,584	9.1	%
Other property		959		312	207.4	%		616		266	131.6	%
Total	$	56,721	$	49,021	15.7	%	$	44,348	$	38,746	14.5	%
Surety
Commercial	$	11,280	$	11,654	(3.2)	%	$	10,938	$	10,812	1.2	%
Miscellaneous		11,948		11,828	1.0	%		10,516		11,602	(9.4)	%
Contract		6,647		6,302	5.5	%		6,360		6,629	(4.1)	%
Total	$	29,875	$	29,784	0.3	%	$	27,814	$	29,043	(4.2)	%
Grand Total	$	245,832	$	230,912	6.5	%	$	215,582	$	204,689	5.3	%

Casualty

Gross premiums written for the casualty segment were up 5 percent, or $7.1 million, in the first quarter of 2020. Premiums from commercial excess and personal umbrella increased $14.6 million, due to an expanded distribution base in personal umbrella, rate increases and overall exposure growth. Substantial rate increases led to a 35 percent increase for our executive products group. Other casualty increased $4.0 million, as our general binding authority (GBA) business continued to grow.

Transportation was impacted by the suspension of a large portion of our public transportation book and the reversal of $23.0 million in gross premiums written. Public transportation is focused primarily on charter or city buses, which stopped running to a large degree in March as a result of COVID-19 and the associated stay at home orders across the United States. See the Impact of COVID-19 section above for more information on the observed effect of the pandemic on RLI Corp. at the time of this report.

Property

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

Surety

The surety segment recorded gross premiums written of $29.9 million for the first quarter of 2020, an increase of $0.1 million from the same period last year. Refocused sales efforts contributed to growth within contract and miscellaneous, but declining oil prices and industry consolidation led to reductions within commercial lines.

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Underwriting Income

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

	For the Three-Month Periods
	Ended March 31,
	2020		2019
Underwriting income (in thousands)
Casualty	$	(1,323)	$	5,343
Property		9,908		8,246
Surety		8,654		8,844
Total	$	17,239	$	22,433
Combined ratio
Casualty		100.9		96.1
Property		77.7		78.7
Surety		68.9		69.5
Total		92.0		89.0

Casualty

The casualty segment recorded an underwriting loss of $1.3 million in the first quarter of 2020, compared to $5.3 million of underwriting income for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by $6.4 million, primarily on accident years 2017 through 2019. Transportation, small commercial and general liability were drivers of the favorable development. In comparison, $13.3 million of reserves were released in the first quarter of 2019. General liability, professional services, transportation, commercial excess, personal umbrella and small commercial developed favorably, while executive products developed adversely.

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

Property

The property segment recorded underwriting income of $9.9 million for the first quarter of 2020, compared to $8.2 million for the same period last year. Underwriting results for 2020 included $4.8 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the marine business, and $0.5 million of storm losses. Comparatively, the 2019 underwriting results included $2.1 million of favorable development on prior years’ loss and catastrophe reserves and $0.9 million of storm losses.

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

Surety

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

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

The combined ratio for the surety segment totaled 68.9 for the first quarter of 2020, compared to 69.5 for the same period in 2019. The segment’s loss ratio was 2.8 in 2020, down from 3.1 in 2019. The expense ratio was 66.1, down from 66.4 in the prior year.

Investment Income and Realized Capital Gains

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

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

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

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

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

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

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

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

Income Taxes

Our effective tax rate for the first quarter of 2020 was 22.8 percent, compared to 19.9 percent for the same period in 2019. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective rate was higher for the first quarter of 2020 as tax-favored adjustments increased the tax benefit realized on pretax losses.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

(in thousands)	2020		2019
Operating cash flows	$	(5,767)	$	30,787
Investing cash flows		10,048		(28,835)
Financing cash flows		(7,783)		(6,911)
Total	$	(3,502)	$	(4,959)

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 quarter of 2020 were impacted by increased levels of loss and settlement expense payments relative to the first quarter of 2019. Additionally, improved financial performance in 2019 resulted in a higher level of bonus and profit-sharing contributions that were paid in the first quarter of 2020, which also reduced operating cash flows in the current period.

We have $149.3 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150.0 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. The estimated fair value for the senior note at March 31, 2020 was $154.7 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

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

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

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

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

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

We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. As of March 31, 2020, our investment portfolio had a balance sheet value of $2.4 billion. Invested assets at March 31, 2020 have decreased $144.1 million from December 31, 2019.

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

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

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

**Asset-backed and commercial mortgage-backed securities

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

AAA	48.9	%
AA	16.9	%
A	19.3	%
BBB	8.4	%
BB	3.5	%
B	2.5	%
CCC	0.1	%
NR	0.4	%
Total	100.0	%

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

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

As of March 31, 2020, we had $81.7 million in commercial mortgage backed securities and $414.3 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 9.3 percent of our investment portfolio at quarter end.

We had $688.4 million in corporate fixed income securities as of March 31, 2020, which includes $93.0 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.

We also maintain an allocation to municipal fixed income securities. As of March 31, 2020, we had $406.0 million in municipal securities. The municipal portfolio includes approximately 73 percent tax-exempt securities and 27 percent taxable securities. Approximately 86 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 99 percent of the municipal bond portfolio is rated ‘A’ or better.

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

As of March 31, 2020, our equity portfolio had a dividend yield of 2.8 percent, compared to 2.3 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 226 individual securities and three ETF positions. No single stock exposure is greater than 2 percent of the equity portfolio.

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

Our investment portfolio does not have any exposure to derivatives.

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

We paid a regular quarterly cash dividend of $0.23 per share on March 20, 2020, the same as the prior quarter. We have increased dividends in each of the last 44 years.

Our three insurance subsidiaries are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance subsidiary. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of March 31, 2020, our holding company had $915.7 million in equity. This includes amounts related to the equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $44.6 million in liquid assets, which would cover the majority of our annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.

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

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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 85 percent rated A or better by at least two nationally recognized rating organizations.

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

ITEM 4. Controls and Procedures

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.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings – There were no material changes to report.
Item 1A.	Risk Factors

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

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

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

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

● Reduced cash flows from our policyholders delaying premium payments,

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

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

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

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

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

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

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

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

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

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

Item 3.	Defaults Upon Senior Securities - Not Applicable.
Item 4.	Mine Safety Disclosures - Not Applicable.
Item 5.	Other Information - Not Applicable.

Item 6.	Exhibits
Exhibit No.		Description of Document	Reference
10.1		Credit Agreement (Bank of Montreal, Chicago Branch) dated as of March 27, 2020, among RLI Corp., the Lenders party thereto and Bank of Montreal, Chicago Branch, as Administrative Agent and Bank of Montreal, Chicago Branch, as Sole Bookrunner and Sole Lead Arranger.	Incorporated by reference to the Company’s Current Report on Form 8-K filed March 31, 2020.
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 31.1.
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 31.2.
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 32.1.
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Attached as Exhibit 32.2.
101		iXBRL-Related Documents	Attached as Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RLI Corp.
	/s/ Todd W. Bryant
	Todd W. Bryant
	Vice President, Chief Financial Officer
	(Principal Financial and Chief Accounting Officer)
Date: April 28, 2020

35

EX-31.1

Exhibit 31.1

CERTIFICATION

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jonathan E. Michael, 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:April  28, 2020

/s/ Jonathan E. Michael

Jonathan E. Michael

Chairman & CEO

EX-31.2

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:April  28, 2020

S
	/s/ Todd W. Bryant
	Todd W. Bryant
	Vice President, Chief Financial Officer

EX-32.1

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 March  31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jonathan E. Michael, 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/ Jonathan E. Michael

Jonathan E. Michael

Chairman & CEO

April  28, 2020

EX-32.2

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 March  31, 2020 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

Vice President, Chief Financial Officer

April 28, 2020

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OPERATING SEGMENT INFORMATION

3 Months Ended

Mar. 31, 2020

OPERATING SEGMENT INFORMATION

OPERATING SEGMENT INFORMATION

6. OPERATING SEGMENT INFORMATION

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

	For the Three-Month Periods
REVENUES	Ended March 31,
(in thousands)	2020		2019
Casualty	$	143,420	$	136,900
Property		44,348		38,746
Surety		27,814		29,043
Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Total consolidated revenue	$	118,117	$	263,820
NET EARNINGS (LOSS)
(in thousands)	2020		2019
Casualty	$	(1,323)	$	5,343
Property		9,908		8,246
Surety		8,654		8,844
Net underwriting income	$	17,239	$	22,433
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
General corporate expense and interest on debt		(3,652)		(5,137)
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473

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

	For the Three-Month Periods
NET PREMIUMS EARNED	Ended March 31,
(in thousands)	2020		2019
Casualty
Commercial excess and personal umbrella	$	40,088	$	32,281
General liability		23,998		23,888
Commercial transportation		21,185		20,404
Professional services		20,695		20,299
Small commercial		15,633		13,188
Executive products		7,331		6,069
Other casualty		14,490		20,771
Total	$	143,420	$	136,900
Property
Marine	$	19,577	$	17,021
Commercial property		19,155		16,875
Specialty personal		5,000		4,584
Other property		616		266
Total	$	44,348	$	38,746
Surety
Commercial	$	10,938	$	10,812
Miscellaneous		10,516		11,602
Contract		6,360		6,629
Total	$	27,814	$	29,043
Grand Total	$	215,582	$	204,689

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INVESTMENTS (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of disposition of fixed maturities and equities

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

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

Fair Value, Assets Measured on Recurring Basis

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

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

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

Summary of changes in balance of Level 3 securities

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

Schedule of amortized cost and fair value of available-for-sale securities

Available-for-sale	March 31, 2020
(in thousands)	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
Asset Class	Cost		Losses		Gains		Losses		Value
U.S. government	$	171,026	$	-	$	15,948	$	-	$	186,974
U.S. agency		32,236		-		4,806		-		37,042
Non-U.S. govt. & agency		7,324		-		105		(113)		7,316
Agency MBS		396,474		-		17,807		(19)		414,262
ABS/CMBS*		230,830		(21)		1,908		(9,116)		223,601
Corporate		685,116		(857)		23,364		(19,205)		688,418
Municipal		389,845		-		16,203		(76)		405,972
Total Fixed Income	$	1,912,851	$	(878)	$	80,141	$	(28,529)	$	1,963,585

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

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

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

Schedule of securities in an unrealized loss position segregated by type and length of time in an unrealized loss position

	March 31, 2020						December 31, 2019
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. government
Fair value	$	—	$	—	$	—	$	2,505	$	8,463	$	10,968
Amortized cost		—		—		—		2,506		8,494		11,000
Unrealized Loss	$	—	$	—	$	—	$	(1)	$	(31)	$	(32)
U.S. agency
Fair value	$	—	$	—	$	—	$	6,794	$	—	$	6,794
Amortized cost		—		—		—		6,836		—		6,836
Unrealized Loss	$	—	$	—	$	—	$	(42)	$	—	$	(42)
Non-U.S. government
Fair value	$	3,011	$	—	$	3,011	$	—	$	—	$	—
Amortized cost		3,124		—		3,124		—		—		—
Unrealized Loss	$	(113)	$	—	$	(113)	$	—	$	—	$	—
Agency MBS
Fair value	$	249	$	1,296	$	1,545	$	21,548	$	41,718	$	63,266
Amortized cost		249		1,315		1,564		21,664		42,165		63,829
Unrealized Loss	$	—	$	(19)	$	(19)	$	(116)	$	(447)	$	(563)
ABS/CMBS*
Fair value	$	126,540	$	15,405	$	141,945	$	74,968	$	18,036	$	93,004
Amortized cost		134,660		16,401		151,061		75,332		18,148		93,480
Unrealized Loss	$	(8,120)	$	(996)	$	(9,116)	$	(364)	$	(112)	$	(476)
Corporate
Fair value	$	220,349	$	4,182	$	224,531	$	16,478	$	9,348	$	25,826
Amortized cost		238,510		5,226		243,736		16,950		9,694		26,644
Unrealized Loss	$	(18,161)	$	(1,044)	$	(19,205)	$	(472)	$	(346)	$	(818)
Municipal
Fair value	$	7,301	$	—	$	7,301	$	47,018	$	—	$	47,018
Amortized cost		7,377		—		7,377		47,740		—		47,740
Unrealized Loss	$	(76)	$	—	$	(76)	$	(722)	$	—	$	(722)
Total fixed income
Fair value	$	357,450	$	20,883	$	378,333	$	169,311	$	77,565	$	246,876
Amortized cost		383,920		22,942		406,862		171,028		78,501		249,529
Unrealized Loss	$	(26,470)	$	(2,059)	$	(28,529)	$	(1,717)	$	(936)	$	(2,653)

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

Schedule of credit quality indicators for investments in unrealized loss positions

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	202,517	$	191,912	$	(10,605)	37.2	%
2	BBB	Baa		85,785		80,759		(5,026)	17.6	%
3	BB	Ba		65,256		59,398		(5,858)	20.5	%
4	B	B		50,630		44,392		(6,238)	21.9	%
5	CCC	Caa		2,674		1,872		(802)	2.8	%
6	CC or lower	Ca or lower		-		-		-	-	%
		Total	$	406,862	$	378,333	$	(28,529)	100.0	%

Available for sale securities

Schedule of contractual maturity of securities

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

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

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OPERATING SEGMENT INFORMATION - Reconciliation of Segment Totals to Total Earnings (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
REVENUES
Net premiums earned	$ 215,582	$ 204,689
Net investment income	17,778	16,565
Net realized gains	15,152	9,068
Net unrealized gains (losses) on equity securities	(130,395)	33,498
Consolidated revenue	118,117	263,820
NET EARNINGS
Net underwriting income	17,239	22,433
Net investment income	17,778	16,565
Net realized gains	15,152	9,068
Net unrealized gains (losses) on equity securities	(130,395)	33,498
General corporate expense and interest on debt	(3,652)	(5,137)
Equity in earnings of unconsolidated investees	4,514	5,314
Earnings (loss) before income taxes	(79,364)	81,741
Income tax expense (benefit)	(18,097)	16,268
Net earnings (loss)	(61,267)	65,473
Casualty segment
REVENUES
Net premiums earned	143,420	136,900
NET EARNINGS
Net underwriting income	(1,323)	5,343
Property segment
REVENUES
Net premiums earned	44,348	38,746
NET EARNINGS
Net underwriting income	9,908	8,246
Surety segment
REVENUES
Net premiums earned	27,814	29,043
NET EARNINGS
Net underwriting income	$ 8,654	$ 8,844

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INVESTMENTS Debt and Short-term Investments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Other invested assets
Other investments	$ 53,562		$ 70,441
Investments pledged as collateral	$ 15,100
Investment in Federal Home Loan Bank Stock	us-gaap:AssetPledgedAsCollateralMember
Federal Home Loan Bank Borrowings, Fair Value Disclosure	$ 0
Cash and Short-term Investments
Cash	42,701		46,203
Investment In Low Income Housing Tax Credit Partnership Net Of Amortization
Other invested assets
Other investments	22,400		23,300
Total tax benefit on investments in housing tax credit partnership	900	$ 600
Qualified Affordable Housing Project Investments, Commitment	8,000
Investment in Private Funds
Other invested assets
Other investments	17,500		$ 46,000
Fair Value, Investments, Entities that Calculate Net Asset Value Per Share, Unfunded Commitments	13,500
Investment in Restricted Stock
Other invested assets
Other investments	$ 12,100

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INVESTMENTS - Level 3 (Details) - Regulation D private placement fixed income securities $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)
Summary of changes in Level 3 securities
Beginning balance	$ 1,770
Net investment income	(5)
Net realized gains	(16)
Included in other comprehensive income (loss)	(1,048)
Total net realized and unrealized gains (losses)	(1,069)
Purchases	4,102
Ending balance	4,803
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Gain (Loss) Included in Other Comprehensive Income (Loss)	(1,048)
Other comprehensive earnings (loss)
Summary of changes in Level 3 securities
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end	(1,048)
Net realized gains
Summary of changes in Level 3 securities
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end	$ (16)

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OPERATING SEGMENT INFORMATION (Tables)

3 Months Ended

Mar. 31, 2020

OPERATING SEGMENT INFORMATION

Schedule of revenues and net earnings by segment

	For the Three-Month Periods
REVENUES	Ended March 31,
(in thousands)	2020		2019
Casualty	$	143,420	$	136,900
Property		44,348		38,746
Surety		27,814		29,043
Net premiums earned	$	215,582	$	204,689
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
Total consolidated revenue	$	118,117	$	263,820
NET EARNINGS (LOSS)
(in thousands)	2020		2019
Casualty	$	(1,323)	$	5,343
Property		9,908		8,246
Surety		8,654		8,844
Net underwriting income	$	17,239	$	22,433
Net investment income		17,778		16,565
Net realized gains		15,152		9,068
Net unrealized gains (losses) on equity securities		(130,395)		33,498
General corporate expense and interest on debt		(3,652)		(5,137)
Equity in earnings of unconsolidated investees		4,514		5,314
Earnings (loss) before income taxes	$	(79,364)	$	81,741
Income tax expense (benefit)		(18,097)		16,268
Net earnings (loss)	$	(61,267)	$	65,473

Schedule of net premiums earned by major product type

	For the Three-Month Periods
NET PREMIUMS EARNED	Ended March 31,
(in thousands)	2020		2019
Casualty
Commercial excess and personal umbrella	$	40,088	$	32,281
General liability		23,998		23,888
Commercial transportation		21,185		20,404
Professional services		20,695		20,299
Small commercial		15,633		13,188
Executive products		7,331		6,069
Other casualty		14,490		20,771
Total	$	143,420	$	136,900
Property
Marine	$	19,577	$	17,021
Commercial property		19,155		16,875
Specialty personal		5,000		4,584
Other property		616		266
Total	$	44,348	$	38,746
Surety
Commercial	$	10,938	$	10,812
Miscellaneous		10,516		11,602
Contract		6,360		6,629
Total	$	27,814	$	29,043
Grand Total	$	215,582	$	204,689

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Intangible Assets and EPS (Details) - USD ($) $ / shares in Units, shares in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Business Acquisition
Goodwill	$ 46,062,000		$ 46,062,000
Indefinite-lived intangibles - state insurance licenses	7,500,000		7,500,000
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19	463,000		565,000
Total intangibles	7,963,000		8,065,000
Goodwill and intangibles	54,025,000		54,127,000
Accumulated amortization of definite-lived intangibles	3,572,000		3,470,000
Amortization of intangible assets	100,000	$ 100,000
Basic EPS, Income (Numerator)
Income available to common shareholders	(61,267,000)	65,473,000
Diluted EPS, Income (Numerator)
Income available to common shareholders	$ (61,267,000)	$ 65,473,000
Basic EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	44,920	44,536
Effect of Dilutive Securities, Shares (Denominator)
Stock options (in shares)		351
Diluted EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	44,920	44,887
Basic EPS, Per Share Amount
Basic net earnings per share (in dollars per share)	$ (1.36)	$ 1.47
Diluted EPS, Per Share Amount
Diluted earnings per share (in dollars per share)	$ (1.36)	$ 1.46
Contractors Bonding and Insurance Company
Business Acquisition
Impairment of indefinite-lived intangible assets			0
Energy Surety
Business Acquisition
Goodwill	$ 25,706,000		25,706,000
Goodwill, Impairment Loss			0
Miscellaneous and Contract Surety
Business Acquisition
Goodwill	15,110,000		15,110,000
Goodwill, Impairment Loss			0
Small commercial
Business Acquisition
Goodwill	$ 5,246,000		5,246,000
Goodwill, Impairment Loss			$ 0

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INVESTMENTS - Assets Measured At Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Assets measured at Fair Value
Available-for-sale fixed income	$ 1,963,585	$ 1,983,086
Equity securities	356,403	460,630
Fair value measured on recurring basis
Assets measured at Fair Value
Available-for-sale fixed income	1,963,585	1,983,086
Equity securities	356,403	460,630
Other invested assets	12,056
Total assets at fair value	2,332,044	2,443,716
Fair value measured on recurring basis | U.S. government
Assets measured at Fair Value
Available-for-sale fixed income	186,974	193,661
Fair value measured on recurring basis | U.S. Agency
Assets measured at Fair Value
Available-for-sale fixed income	37,042	38,855
Fair value measured on recurring basis | Non-U.S. govt. & agency
Assets measured at Fair Value
Available-for-sale fixed income	7,316	7,628
Fair value measured on recurring basis | Agency MBS
Assets measured at Fair Value
Available-for-sale fixed income	414,262	420,165
Fair value measured on recurring basis | ABS/CMBS
Assets measured at Fair Value
Available-for-sale fixed income	223,601	224,870
Fair value measured on recurring basis | Corporate Debt
Assets measured at Fair Value
Available-for-sale fixed income	688,418	692,067
Fair value measured on recurring basis | Municipal
Assets measured at Fair Value
Available-for-sale fixed income	405,972	405,840
Fair value measured on recurring basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets measured at Fair Value
Equity securities	356,403	460,630
Other invested assets	12,056
Total assets at fair value	368,459	460,630
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2)
Assets measured at Fair Value
Available-for-sale fixed income	1,958,782	1,981,316
Total assets at fair value	1,958,782	1,981,316
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | U.S. government
Assets measured at Fair Value
Available-for-sale fixed income	186,974	193,661
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | U.S. Agency
Assets measured at Fair Value
Available-for-sale fixed income	37,042	38,855
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | Non-U.S. govt. & agency
Assets measured at Fair Value
Available-for-sale fixed income	7,316	7,628
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | Agency MBS
Assets measured at Fair Value
Available-for-sale fixed income	414,262	420,165
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | ABS/CMBS
Assets measured at Fair Value
Available-for-sale fixed income	223,601	224,870
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | Corporate Debt
Assets measured at Fair Value
Available-for-sale fixed income	683,615	690,297
Fair value measured on recurring basis | Significant Other Observable Inputs (Level 2) | Municipal
Assets measured at Fair Value
Available-for-sale fixed income	405,972	405,840
Fair value measured on recurring basis | Significant Unobservable Inputs (Level 3)
Assets measured at Fair Value
Available-for-sale fixed income	4,803	1,770
Total assets at fair value	4,803	1,770
Fair value measured on recurring basis | Significant Unobservable Inputs (Level 3) | Corporate Debt
Assets measured at Fair Value
Available-for-sale fixed income	$ 4,803	$ 1,770

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Investments:
Available-for-sale, at fair value (amortized cost of $1,912,851 and allowance for credit losses of $878 at 3/31/20) (amortized cost of $1,915,278 and allowance for credit losses of $0 at 12/31/19)	$ 1,963,585	$ 1,983,086
Equity securities, at fair value (cost - $272,152 at 3/31/20 and $262,131 at 12/31/19)	356,403	460,630
Other invested assets	53,562	70,441
Cash	42,701	46,203
Total investments and cash	2,416,251	2,560,360
Accrued investment income	14,944	14,587
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,948 at 3/31/20 and $16,682 at 12/31/19	154,084	160,369
Ceded unearned premium	88,789	93,656
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $8,539 at 3/31/20 and $9,402 at 12/31/19	366,441	384,517
Deferred policy acquisition costs	84,208	85,044
Property and equipment, at cost, net of accumulated depreciation of $64,322 at 3/31/20 and $62,703 at 12/31/19	52,741	53,121
Investment in unconsolidated investees	108,081	103,836
Goodwill and intangibles	54,025	54,127
Other assets	39,047	36,104
TOTAL ASSETS	3,378,611	3,545,721
Liabilities:
Unpaid losses and settlement expenses	1,574,760	1,574,352
Unearned premiums	516,867	540,213
Reinsurance balances payable	30,865	25,691
Funds held	80,333	83,358
Income taxes - deferred	26,546	56,727
Bonds payable, long-term debt	149,349	149,302
Accrued expenses	27,536	66,626
Other liabilities	56,650	54,064
TOTAL LIABILITIES	2,462,906	2,550,333
Shareholders' Equity
Common stock ($0.01 par value, 100,000,000 shares authorized; 67,852,870 shares issued, 44,922,656 shares outstanding at 3/31/20; 67,799,229 shares issued, 44,869,015 shares outstanding at 12/31/19)	679	678
Paid-in capital	325,052	321,190
Accumulated other comprehensive earnings	39,464	52,473
Retained earnings	943,509	1,014,046
Deferred compensation	6,970	7,980
Less: Treasury shares at cost (22,930,214 shares at 3/31/20 and 12/31/19)	(399,969)	(400,979)
TOTAL SHAREHOLDERS' EQUITY	915,705	995,388
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 3,378,611	$ 3,545,721

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Condensed Consolidated Statements of Cash Flows
Net cash provided by (used in) operating activities	$ (5,767)	$ 30,787
Purchase of:
Fixed income securities, available-for-sale	(69,233)	(95,984)
Equity securities	(31,811)	(31,962)
Property and equipment	(1,910)	(1,510)
Other	(2,611)	(4,134)
Proceeds from sale of:
Fixed income securities, available-for-sale	20,414	86,046
Equity securities	38,042	26,347
Other	2,267	154
Proceeds from call or maturity of:
Fixed income securities, available-for-sale	54,890	24,745
Net proceeds from sale (purchase) of short-term investments		(32,537)
Net cash provided by (used in) investing activities	10,048	(28,835)
Cash Flows from Financing Activities
Cash dividends paid	(10,332)	(9,797)
Proceeds from stock option exercises	2,549	2,886
Net cash used in financing activities	(7,783)	(6,911)
Net decrease in cash	(3,502)	(4,959)
Cash at the beginning of the period	46,203	30,140
Cash at the end of the period	$ 42,701	$ 25,181

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Leases - Components of Lease Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Leases
Operating Lease Cost	$ 1,406	$ 1,481
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	1,486	1,395
Right-of-use assets obtained in exchange for new operating lease liabilities	15	$ 719
Other non-cash reductions to right of use assets	1,192
Operating lease right-of-use assets	$ 19,889		$ 22,335
Operating lease, right-of-use asset, Statement of Financial Position	us-gaap:OtherAssets
Operating Lease Liabilities	$ 23,141		$ 24,475
Operating lease liability, Statement of Financial Position	us-gaap:OtherLiabilities
Weighted-average remaining lease term - operating leases	4 years 5 months 23 days		4 years 8 months 8 days
Weighted-average discount rate - operating leases	2.34%		2.33%
Minimum
Leases
Remaining lease terms - operating leases	1 year
Maximum
Leases
Remaining lease terms - operating leases	15 years

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INVESTMENTS - Disposition of Fixed Securities and Equities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Debt securities | Available for sale securities | SALES
Summary of the disposition of fixed income and equity securities
Proceeds From Sales	$ 19,858	$ 92,277
Gross Realized Gains	2,270	1,356
Gross Realized Losses	(102)	(723)
Net Realized Gain (Loss)	2,168	633
Debt securities | Available for sale securities | CALLS/MATURITIES
Summary of the disposition of fixed income and equity securities
Proceeds From Sales	54,890	24,745
Gross Realized Gains	145	1
Gross Realized Losses	(7)	(9)
Net Realized Gain (Loss)	138	(8)
Equity securities | SALES
Summary of the disposition of fixed income and equity securities
Proceeds From Sales	38,042	26,347
Gross Realized Gains	17,792	9,034
Gross Realized Losses	(2,633)	(592)
Net Realized Gain (Loss)	$ 15,159	$ 8,442

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STOCK BASED COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2020

STOCK BASED COMPENSATION

Schedule of stock option activity

The following tables summarize option activity for the three-month periods ended March 31, 2020 and 2019:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2020	1,667,290	$	62.52
Options granted	30,375		94.62
Options exercised	(56,725)		49.23		$	2,516
Options canceled/forfeited	(300)		58.60
Outstanding options at March 31, 2020	1,640,640	$	63.58	5.10	$	40,778
Exercisable options at March 31, 2020	614,040	$	54.68	3.75	$	20,438
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2019	1,964,880	$	54.24
Options granted	40,750		66.16
Options exercised	(50,580)		33.71		$	1,795
Options canceled/forfeited	(19,100)		57.28
Outstanding options at March 31, 2019	1,935,950	$	55.00	5.14	$	32,589
Exercisable options at March 31, 2019	702,250	$	47.84	3.73	$	16,794

Schedule of stock option assumptions for fair value estimate

	2020			2019
Weighted-average fair value of grants	$	14.48		$	11.35
Risk-free interest rates		1.54	%		2.94	%
Dividend yield		2.69	%		2.98	%
Expected volatility		22.68	%		22.84	%
Expected option life		4.99	years		5.11	years

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Reinsurance (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Amount of allowance for uncollectible amounts on paid recoverables	$ 15,700,000	$ 15,700,000
Reinsurance balances recoverable on unpaid losses and settlement expenses, allowances for uncollectible amounts	8,539,000	9,402,000
Financing Receivable, Allowance for Credit Loss, Writeoff	0
Financing Receivable, Allowance for Credit Loss, Recovery	$ 0
Restatement Adjustment | Accounting Standards Update 2016-13
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Adoption impact of ASU 2016-13 on reinsurance balances recoverable		$ 1,345,000

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Leases - Future Minimum Lease Payments (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Future minimum lease payments under non-cancellable leases
2020	$ 4,505
2021	5,976
2022	5,904
2023	4,386
2024	2,334
Thereafter	1,365
Total future minimum lease payments	24,470
Less imputed interest	(1,329)
Total operating lease liability	$ 23,141	$ 24,475

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Condensed Consolidated Statements of Earnings and Comprehensive Earnings - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Net premiums earned	$ 215,582	$ 204,689
Net investment income	17,778	16,565
Net realized gains	15,152	9,068
Net unrealized gains (losses) on equity securities	(130,395)	33,498
Consolidated revenue	118,117	263,820
Losses and settlement expenses	111,021	94,297
Policy acquisition costs	72,941	71,292
Insurance operating expenses	14,381	16,667
Interest expense on debt	1,897	1,861
General corporate expenses	1,755	3,276
Total expenses	201,995	187,393
Equity in earnings of unconsolidated investees	4,514	5,314
Earnings (loss) before income taxes	(79,364)	81,741
Income tax expense:
Income tax expense (benefit)	(18,097)	16,268
Net earnings (loss)	(61,267)	65,473
Other comprehensive earnings (loss), net of tax	(13,031)	29,301
Comprehensive earnings (loss)	$ (74,298)	$ 94,774
Basic:
Net earnings (loss) per share (in dollars per share)	$ (1.36)	$ 1.47
Comprehensive earnings (loss) per share (in dollars per share)	(1.65)	2.13
Diluted:
Net earnings (loss) per share (in dollars per share)	(1.36)	1.46
Comprehensive earnings (loss) per share (in dollars per share)	$ (1.65)	$ 2.11
Weighted average number of common shares outstanding
Basic (in shares)	44,920	44,536
Diluted (in shares)	44,920	44,887

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Condensed Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Condensed Consolidated Statements of Shareholders' Equity
Cash dividends paid per common share	$ 0.23	$ 0.22

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STOCK BASED COMPENSATION

3 Months Ended

Mar. 31, 2020

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

5. STOCK BASED COMPENSATION

Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015.

In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have awarded 2,312,835 stock options and restricted stock units under the 2015 LTIP, including 30,375 stock options thus far in 2020.

Stock Options

Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during 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.

The following tables summarize option activity for the three-month periods ended March 31, 2020 and 2019:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2020	1,667,290	$	62.52
Options granted	30,375		94.62
Options exercised	(56,725)		49.23		$	2,516
Options canceled/forfeited	(300)		58.60
Outstanding options at March 31, 2020	1,640,640	$	63.58	5.10	$	40,778
Exercisable options at March 31, 2020	614,040	$	54.68	3.75	$	20,438
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2019	1,964,880	$	54.24
Options granted	40,750		66.16
Options exercised	(50,580)		33.71		$	1,795
Options canceled/forfeited	(19,100)		57.28
Outstanding options at March 31, 2019	1,935,950	$	55.00	5.14	$	32,589
Exercisable options at March 31, 2019	702,250	$	47.84	3.73	$	16,794

The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

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

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

	2020			2019
Weighted-average fair value of grants	$	14.48		$	11.35
Risk-free interest rates		1.54	%		2.94	%
Dividend yield		2.69	%		2.98	%
Expected volatility		22.68	%		22.84	%
Expected option life		4.99	years		5.11	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. 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. 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.

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

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Mar. 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of goodwill and intangible assets

Goodwill and Intangible Assets		March 31,		December 31,
(in thousands)		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110
Small commercial		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19		463		565
Total intangibles	$	7,963	$	8,065
Total goodwill and intangibles	$	54,025	$	54,127

Schedule of reconciliation of numerator and denominator of the basic and diluted earnings per share computations

	For the Three-Month Period					For the Three-Month Period
	Ended March 31, 2020					Ended March 31, 2019
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,536	$	1.47
Effect of Dilutive Securities
Stock options		-	-				-	351
Diluted EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,887	$	1.46

Schedule of changes in the balance of each component of accumulated other comprehensive earnings

(in thousands)	For the Three-Month Periods
	Ended March 31,
Unrealized Gains/Losses on Available-for-Sale Securities	2020		2019
Beginning balance	$	52,473	$	(14,572)
Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.)		22		-
Adjusted beginning balance	$	52,495	$	(14,572)
Other comprehensive earnings before reclassifications		(11,880)		29,795
Amounts reclassified from accumulated other comprehensive earnings		(1,151)		(494)
Net current-period other comprehensive earnings (loss)	$	(13,031)	$	29,301
Ending balance	$	39,464	$	14,729
Balance of securities for which an allowance for credit losses has been recognized in net earnings	$	5,727	$	-

Schedule of effects of reclassifications out of accumulated other comprehensive earnings

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month
Component of Accumulated	Periods Ended March 31,				Affected line item in the
Other Comprehensive Earnings	2020		2019		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	2,306	$	625	Net realized gains
		(849)		-	Credit losses presented within net realized gains
	$	1,457	$	625	Earnings (loss) before income taxes
		(306)		(131)	Income tax benefit (expense)
	$	1,151	$	494	Net earnings (loss)

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HISTORICAL LOSS AND LAE DEVELOPMENT - Unpaid Losses and Settlement Expenses (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Unpaid losses and LAE at beginning of year:
Gross	$ 1,574,352	$ 1,461,348
Ceded	(384,517)	(364,999)
Net	1,189,835	1,096,349
Increase (decrease) in incurred losses and LAE:
Current accident year	126,194	113,930
Prior accident years	(15,173)	(19,633)
Total incurred	111,021	94,297
Loss and LAE payments for claims incurred:
Current accident year	(9,295)	(5,531)
Prior accident year	(81,897)	(70,145)
Total paid	(91,192)	(75,676)
Net	1,208,319	1,114,970
Unpaid losses and LAE at year end
Gross	1,574,760	1,479,344
Ceded	(366,441)	(364,374)
Net	$ 1,208,319	$ 1,114,970
Accounting Standards Update 2016-13 | Restatement Adjustment
Adoption impact of ASU 2016-13
Adoption impact of ASU 2016-13 on reinsurance balances recoverable			$ (1,345)

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INVESTMENTS - Amortized Cost and Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
INVESTMENTS
Accrued interest receivable	$ 14,944	$ 14,587
Available-for-sale
Total amortized cost	1,912,851	1,915,278
Allowance for credit losses	(878)	0
Available-for-sale Securities, Debt Securities	1,963,585	1,983,086
Amortized Cost
Due in one year or less	56,844
Due after one year through five years	442,572
Due after five years through 10 years	549,193
Due after 10 years	236,938
Mtge/ABS/CMBS	627,304
Total amortized cost	1,912,851	1,915,278
Fair Value
Due in one year or less	56,702
Due after one year through five years	449,447
Due after five years through 10 years	569,898
Due after 10 years	249,675
Mtge/ABS/CMBS	637,863
Total fair value	1,963,585	1,983,086
Fair value measured on recurring basis
INVESTMENTS
Total assets at fair value	2,332,044	2,443,716
Available-for-sale
Available-for-sale Securities, Debt Securities	1,963,585	1,983,086
Fair Value
Total fair value	1,963,585	1,983,086
Fair value measured on recurring basis | Significant Unobservable Inputs (Level 3)
INVESTMENTS
Total assets at fair value	4,803	1,770
Available-for-sale
Available-for-sale Securities, Debt Securities	4,803	1,770
Fair Value
Total fair value	4,803	1,770
Debt securities
INVESTMENTS
Accrued interest receivable	13,900	13,500
Available-for-sale
Total amortized cost	1,912,851	1,915,278
Allowance for credit losses	(878)
Gross unrealized gains	80,141	70,461
Gross unrealized losses	(28,529)	(2,653)
Available-for-sale Securities, Debt Securities	1,963,585	1,983,086
Amortized Cost
Total amortized cost	1,912,851	1,915,278
Fair Value
Total fair value	1,963,585	1,983,086
U.S. government
Available-for-sale
Total amortized cost	171,026	186,699
Gross unrealized gains	15,948	6,994
Gross unrealized losses		(32)
Available-for-sale Securities, Debt Securities	186,974	193,661
Amortized Cost
Total amortized cost	171,026	186,699
Fair Value
Total fair value	186,974	193,661
U.S. Agency
Available-for-sale
Total amortized cost	32,236	36,535
Gross unrealized gains	4,806	2,362
Gross unrealized losses		(42)
Available-for-sale Securities, Debt Securities	37,042	38,855
Amortized Cost
Total amortized cost	32,236	36,535
Fair Value
Total fair value	37,042	38,855
Non-U.S. govt. & agency
Available-for-sale
Total amortized cost	7,324	7,333
Gross unrealized gains	105	295
Gross unrealized losses	(113)
Available-for-sale Securities, Debt Securities	7,316	7,628
Amortized Cost
Total amortized cost	7,324	7,333
Fair Value
Total fair value	7,316	7,628
Agency MBS
Available-for-sale
Total amortized cost	396,474	411,808
Gross unrealized gains	17,807	8,920
Gross unrealized losses	(19)	(563)
Available-for-sale Securities, Debt Securities	414,262	420,165
Amortized Cost
Total amortized cost	396,474	411,808
Fair Value
Total fair value	414,262	420,165
ABS/CMBS
Available-for-sale
Total amortized cost	230,830	222,832
Allowance for credit losses	(21)
Gross unrealized gains	1,908	2,514
Gross unrealized losses	(9,116)	(476)
Available-for-sale Securities, Debt Securities	223,601	224,870
Amortized Cost
Total amortized cost	230,830	222,832
Fair Value
Total fair value	223,601	224,870
Corporate Debt
Available-for-sale
Total amortized cost	685,116	659,640
Allowance for credit losses	(857)
Gross unrealized gains	23,364	33,245
Gross unrealized losses	(19,205)	(818)
Available-for-sale Securities, Debt Securities	688,418	692,067
Amortized Cost
Total amortized cost	685,116	659,640
Fair Value
Total fair value	688,418	692,067
Municipal
Available-for-sale
Total amortized cost	389,845	390,431
Gross unrealized gains	16,203	16,131
Gross unrealized losses	(76)	(722)
Available-for-sale Securities, Debt Securities	405,972	405,840
Amortized Cost
Total amortized cost	389,845	390,431
Fair Value
Total fair value	$ 405,972	$ 405,840

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OPERATING SEGMENT INFORMATION - Major Products (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue by major product
Net premiums earned	$ 215,582	$ 204,689
Casualty segment
Revenue by major product
Net premiums earned	143,420	136,900
Casualty segment | Commercial excess and personal umbrella
Revenue by major product
Net premiums earned	40,088	32,281
Casualty segment | General liability
Revenue by major product
Net premiums earned	23,998	23,888
Casualty segment | Transportation
Revenue by major product
Net premiums earned	21,185	20,404
Casualty segment | Professional services
Revenue by major product
Net premiums earned	20,695	20,299
Casualty segment | Small commercial
Revenue by major product
Net premiums earned	15,633	13,188
Casualty segment | Executive products
Revenue by major product
Net premiums earned	7,331	6,069
Casualty segment | Other casualty
Revenue by major product
Net premiums earned	14,490	20,771
Property segment
Revenue by major product
Net premiums earned	44,348	38,746
Property segment | Marine
Revenue by major product
Net premiums earned	19,577	17,021
Property segment | Commercial
Revenue by major product
Net premiums earned	19,155	16,875
Property segment | Specialty Personal
Revenue by major product
Net premiums earned	5,000	4,584
Property segment | Other property
Revenue by major product
Net premiums earned	616	266
Surety segment
Revenue by major product
Net premiums earned	27,814	29,043
Surety segment | Commercial surety product
Revenue by major product
Net premiums earned	10,938	10,812
Surety segment | Miscellaneous
Revenue by major product
Net premiums earned	10,516	11,602
Surety segment | Contract
Revenue by major product
Net premiums earned	$ 6,360	$ 6,629

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LEASES (Tables)

3 Months Ended

Mar. 31, 2020

Leases

Schedule of components of lease expense and other lease information

	For the Three-Month Period Ended
(in thousands)	March 31, 2020		March 31, 2019
Operating lease cost	$	1,406	$	1,481
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	1,486	$	1,395
Right-of-use assets obtained in exchange for new operating lease liabilities	$	15	$	719
Other non-cash reductions to right-of-use assets	$	1,192	$	-

(in thousands)	March 31, 2020			December 31, 2019
Operating lease right-of-use assets	$	19,889		$	22,335
Operating lease liabilities	$	23,141		$	24,475
Weighted-average remaining lease term - operating leases		4.48	years		4.69	years
Weighted-average discount rate - operating leases		2.34	%		2.33	%

Schedule of future minimum lease payments under non-cancellable leases

(in thousands)	March 31, 2020
2020	$	4,505
2021		5,976
2022		5,904
2023		4,386
2024		2,334
Thereafter		1,365
Total future minimum lease payments	$	24,470
Less imputed interest		(1,329)
Total operating lease liability	$	23,141

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Changes in Accumulated Other Comprehensive Earnings (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
COMPREHENSIVE EARNINGS
Tax rate used (as a percent)	21.00%	21.00%
Other comprehensive income (loss), tax	$ (3,500,000)	$ 7,800,000
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	52,473,000
Net current-period other comprehensive earnings (loss)	(13,031,000)	29,301,000
Ending balance	39,464,000
Balance of securities for which an allowance for credit losses has been recognized in net earnings	5,727,000
Reclassification Adjustment Out of Accumulated Other Comprehensive Income
Net realized gains	15,152,000	9,068,000
Credit losses on available-for-sale securities	800,000
Earnings (loss) before income taxes	(79,364,000)	81,741,000
Income tax expense (benefit)	18,097,000	(16,268,000)
Net earnings (loss)	(61,267,000)	65,473,000
Allowance for credit losses	878,000		$ 0
Debt Securities, Available-for-sale, Allowance for Credit Loss, Writeoff	0
Debt Securities, Available-for-sale, Allowance for Credit Loss, Recovery	0
Unrealized Gains and Losses on Available-for-Sale Securities
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	52,495,000	(14,572,000)
Other comprehensive earnings before reclassifications	(11,880,000)	29,795,000
Amounts reclassified from accumulated other comprehensive earnings	(1,151,000)	(494,000)
Net current-period other comprehensive earnings (loss)	(13,031,000)	29,301,000
Ending balance	39,464,000	14,729,000
Unrealized Gains and Losses on Available-for-Sale Securities | Previously Reported
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	52,473,000	(14,572,000)
Unrealized Gains and Losses on Available-for-Sale Securities | Restatement Adjustment | Accounting Standards Update 2016-13
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	22,000
Reclassifications out of accumulated other comprehensive earnings | Unrealized Gains and Losses on Available-for-Sale Securities
Reclassification Adjustment Out of Accumulated Other Comprehensive Income
Net realized gains	2,306,000	625,000
Credit losses on available-for-sale securities	849,000
Earnings (loss) before income taxes	1,457,000	625,000
Income tax expense (benefit)	(306,000)	(131,000)
Net earnings (loss)	$ 1,151,000	$ 494,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 of 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 2019 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 March 31, 2020 and the results of operations of RLI Corp. 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 2019 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

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost.

We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the Company’s balance sheet accounts: available-for-sale fixed income securities, premiums receivable and reinsurance balances recoverable. The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds (85 percent rated A or better at March 31, 2020 and December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances. In total, the cumulative-effect adjustment made to the balance sheet as of the beginning of the year resulted in a $1.1 million increase to retained earnings and an increase to accumulated other comprehensive earnings of less than $0.1 million.

C. REINSURANCE

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

We subject our reinsurance recoverables to detailed recoverable tests, including a segment-based analysis using the average default rating percentage by S&P rating. Our policy is to charge to earnings, in the form of a credit allowance, an estimate of unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such

as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $15.7 million and $8.5 million, respectively, at March 31, 2020. At December 31, 2019, the amounts were $15.7 million and $9.4 million, respectively. Adoption of ASU 2016-03 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other changes 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 quarter of 2020.

D. INTANGIBLE ASSETS

Goodwill and intangible assets totaled $54.0 million and $54.1 million at March 31, 2020 and December 31, 2019, respectively, as detailed in the following table:

Goodwill and Intangible Assets		March 31,		December 31,
(in thousands)		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110
Small commercial		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19		463		565
Total intangibles	$	7,963	$	8,065
Total goodwill and intangibles	$	54,025	$	54,127

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

Annual impairment assessment was performed on our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and state insurance license indefinite-lived intangible asset during 2019. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of March 31, 2020 that would suggest our goodwill and intangible assets should be tested for impairment.

E. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:

	For the Three-Month Period					For the Three-Month Period
	Ended March 31, 2020					Ended March 31, 2019
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,536	$	1.47
Effect of Dilutive Securities
Stock options		-	-				-	351
Diluted EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,887	$	1.46

F. COMPREHENSIVE EARNINGS

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

Unrealized gains (losses), net of tax, on the fixed income portfolio were $(13.0) million for the first three months of 2020, compared to $29.3 million during the same period last year. Unrealized losses in the first three months of 2020 were attributable to widening credit spreads, which more than offset declines in interest rates and decreased the fair value of securities held in the fixed income portfolio. In contrast, declining interest rates increased the fair value of securities held in the fixed income portfolio in the first three months of 2019.

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

(in thousands)	For the Three-Month Periods
	Ended March 31,
Unrealized Gains/Losses on Available-for-Sale Securities	2020		2019
Beginning balance	$	52,473	$	(14,572)
Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.)		22		-
Adjusted beginning balance	$	52,495	$	(14,572)
Other comprehensive earnings before reclassifications		(11,880)		29,795
Amounts reclassified from accumulated other comprehensive earnings		(1,151)		(494)
Net current-period other comprehensive earnings (loss)	$	(13,031)	$	29,301
Ending balance	$	39,464	$	14,729
Balance of securities for which an allowance for credit losses has been recognized in net earnings	$	5,727	$	-

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

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month
Component of Accumulated	Periods Ended March 31,				Affected line item in the
Other Comprehensive Earnings	2020		2019		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	2,306	$	625	Net realized gains
		(849)		-	Credit losses presented within net realized gains
	$	1,457	$	625	Earnings (loss) before income taxes
		(306)		(131)	Income tax benefit (expense)
	$	1,151	$	494	Net earnings (loss)

G. FAIR VALUE MEASUREMENTS

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluations of the tranches (non-volatile, volatile or credit sensitivity) are based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is used to determine the cash flows for each tranche, benchmark yields, prepayment 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 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 measurement.

For all of our fixed income securities classified as Level 2, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, if discrepancies are found, 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 securities provided by our pricing services are reasonable.

Common Stock: As of March 31, 2020, all of our common stock holdings are 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).

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy.

H. RISKS AND UNCERTAINTIES

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

Catastrophe Exposures

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

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Condensed Consolidated Balance Sheets
Available-for-sale, amortized cost	$ 1,912,851	$ 1,915,278
Available-for-sale, allowance for credit losses	878	0
Equity securities, cost	272,152	262,131
Premiums and reinsurance balances receivable, allowances for uncollectible amounts	16,948	16,682
Reinsurance balances recoverable on unpaid losses and settlement expenses, allowances for uncollectible amounts	8,539	9,402
Property and equipment, accumulated depreciation	$ 64,322	$ 62,703
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	67,852,870	67,799,229
Common stock, shares outstanding (in shares)	44,922,656	44,869,015
Treasury stock, shares (in shares)	22,930,214	22,930,214

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STOCK BASED COMPENSATION (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		12 Months Ended	59 Months Ended	60 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019	Mar. 31, 2020	May 06, 2015
Weighted Number of Options Outstanding
Outstanding options at the beginning of the period (in shares)	1,667,290	1,964,880	1,964,880
Options granted (in shares)	30,375	40,750
Options exercised (in shares)	(56,725)	(50,580)
Options canceled/forfeited (in shares)	(300)	(19,100)
Outstanding options at the end of the period (in shares)	1,640,640	1,935,950	1,667,290	1,640,640
Exercisable options at the end of the period (in shares)	614,040	702,250		614,040
Weighted Average Exercise Price
Outstanding options at the beginning of the period (in dollars per share)	$ 62.52	$ 54.24	$ 54.24
Options granted (in dollars per share)	94.62	66.16
Options exercised (in dollars per share)	49.23	33.71
Options canceled/forfeited (in dollars per share)	58.60	57.28
Outstanding options at the end of the period (in dollars per share)	63.58	55.00	$ 62.52	$ 63.58
Exercisable options at the end of the period (in dollars per share)	$ 54.68	$ 47.84		$ 54.68
Weighted Average Remaining Contractual Life
Weighted-average remaining contractual term of options outstanding	5 years 1 month 6 days	5 years 1 month 20 days
Weighted-average remaining contractual term of exercisable options	3 years 9 months	3 years 8 months 23 days
Aggregate Intrinsic Value
Options exercised (in dollars)	$ 2,516	$ 1,795
Outstanding options at the end of the period (in dollars)	40,778	32,589		$ 40,778
Exercisable options at the end of the period (in dollars)	$ 20,438	$ 16,794		20,438
Weighted-average fair value of grants (in dollars per share)	$ 14.48	$ 11.35
Stock-based compensation expenses (in dollars)	$ 1,000	$ 1,000
Income tax benefit from stock-based compensation (in dollars)	200	$ 200
Unrecognized stock-based compensation expense (in dollars)	$ 4,200			4,200
Weighted average grant date assumptions and weighted average fair value
Weighted-average fair value of grants (in dollars per share)	$ 14.48	$ 11.35
Risk-free interest rates (as a percent)	1.54%	2.94%
Dividend yield (as a percent)	2.69%	2.98%
Expected volatility (as a percent)	22.68%	22.84%
Expected option life	4 years 11 months 26 days	5 years 1 month 9 days
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award
Award vesting period	3 years
Age and period of service of the participant to be eligible for retirement	75 years
Aggregate Intrinsic Value
Stock-based compensation expenses (in dollars)	$ 200	$ 100
Unrecognized stock-based compensation expense (in dollars)	$ 800			$ 800
Weighted average grant date assumptions and weighted average fair value
RSUs Granted				45,350
RSUs Outstanding	43,708			43,708
Outside director | Maximum
Aggregate Intrinsic Value
Unrecognized stock-based compensation expense (in dollars)	$ 100			$ 100
Outside director | Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award
Award vesting period	1 year
Aggregate Intrinsic Value
Stock-based compensation expenses (in dollars)	$ 100	$ 100
Weighted average grant date assumptions and weighted average fair value
RSUs Granted				15,085
RSUs Outstanding	6,182			6,182
Grant date fair value of RSUs	$ 50		$ 50
RLI Corp. Long-Term Incentive Plan (LTIP) and Omnibus Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award
Award vesting period	5 years
Term of options	8 years
Age and period of service of the participant to be eligible for retirement	75 years
RLI Corp. Long-Term Incentive Plan (2010 LTIP)
Share-based Compensation Arrangement by Share-based Payment Award
Shares authorized for grant					4,000,000
Weighted Number of Options Outstanding
Options granted (in shares)					2,878,000
RLI Corp. Long-Term Incentive Plan (2015 LTIP)
Share-based Compensation Arrangement by Share-based Payment Award
Shares authorized for grant	4,000,000			4,000,000
Weighted Number of Options Outstanding
Options granted (in shares)	30,375			2,312,835

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INVESTMENTS - Unrealized Losses (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Debt securities
Fair value
Less than 12 months	$ 357,450	$ 169,311
12 months and greater	20,883	77,565
Total Fair Value	378,333	246,876
Cost or amortized Cost
Amortized cost, less than 12 months	383,920	171,028
12 months and greater	22,942	78,501
Total Cost or Amortized Cost	406,862	249,529
Unrealized Loss
Less than 12 months	(26,470)	(1,717)
12 months and greater	(2,059)	(936)
Total Unrealized Loss	$ (28,529)	(2,653)
Percent to Total	100.00%
Debt securities | NAIC Rating 1 | AAA/AA/A | Aaa/Aa/A
Fair value
Total Fair Value	$ 191,912
Cost or amortized Cost
Total Cost or Amortized Cost	202,517
Unrealized Loss
Total Unrealized Loss	$ (10,605)
Percent to Total	37.20%
Debt securities | NAIC Rating 2 | BBB | Baa
Fair value
Total Fair Value	$ 80,759
Cost or amortized Cost
Total Cost or Amortized Cost	85,785
Unrealized Loss
Total Unrealized Loss	$ (5,026)
Percent to Total	17.60%
Debt securities | NAIC Rating 3 | BB | Ba
Fair value
Total Fair Value	$ 59,398
Cost or amortized Cost
Total Cost or Amortized Cost	65,256
Unrealized Loss
Total Unrealized Loss	$ (5,858)
Percent to Total	20.50%
Debt securities | NAIC Rating 4 | B | B
Fair value
Total Fair Value	$ 44,392
Cost or amortized Cost
Total Cost or Amortized Cost	50,630
Unrealized Loss
Total Unrealized Loss	$ (6,238)
Percent to Total	21.90%
Debt securities | NAIC Rating 5 | CCC | Caa
Fair value
Total Fair Value	$ 1,872
Cost or amortized Cost
Total Cost or Amortized Cost	2,674
Unrealized Loss
Total Unrealized Loss	$ (802)
Percent to Total	2.80%
U.S. government
Fair value
Less than 12 months		2,505
12 months and greater		8,463
Total Fair Value		10,968
Cost or amortized Cost
Amortized cost, less than 12 months		2,506
12 months and greater		8,494
Total Cost or Amortized Cost		11,000
Unrealized Loss
Less than 12 months		(1)
12 months and greater		(31)
Total Unrealized Loss		(32)
U.S. Agency
Fair value
Less than 12 months		6,794
Total Fair Value		6,794
Cost or amortized Cost
Amortized cost, less than 12 months		6,836
Total Cost or Amortized Cost		6,836
Unrealized Loss
Less than 12 months		(42)
Total Unrealized Loss		(42)
Non-U.S. govt. & agency
Fair value
Less than 12 months	$ 3,011
Total Fair Value	3,011
Cost or amortized Cost
Amortized cost, less than 12 months	3,124
Total Cost or Amortized Cost	3,124
Unrealized Loss
Less than 12 months	(113)
Total Unrealized Loss	(113)
Agency MBS
Fair value
Less than 12 months	249	21,548
12 months and greater	1,296	41,718
Total Fair Value	1,545	63,266
Cost or amortized Cost
Amortized cost, less than 12 months	249	21,664
12 months and greater	1,315	42,165
Total Cost or Amortized Cost	1,564	63,829
Unrealized Loss
Less than 12 months		(116)
12 months and greater	(19)	(447)
Total Unrealized Loss	(19)	(563)
ABS/CMBS
Fair value
Less than 12 months	126,540	74,968
12 months and greater	15,405	18,036
Total Fair Value	141,945	93,004
Cost or amortized Cost
Amortized cost, less than 12 months	134,660	75,332
12 months and greater	16,401	18,148
Total Cost or Amortized Cost	151,061	93,480
Unrealized Loss
Less than 12 months	(8,120)	(364)
12 months and greater	(996)	(112)
Total Unrealized Loss	(9,116)	(476)
Corporate Debt
Fair value
Less than 12 months	220,349	16,478
12 months and greater	4,182	9,348
Total Fair Value	224,531	25,826
Cost or amortized Cost
Amortized cost, less than 12 months	238,510	16,950
12 months and greater	5,226	9,694
Total Cost or Amortized Cost	243,736	26,644
Unrealized Loss
Less than 12 months	(18,161)	(472)
12 months and greater	(1,044)	(346)
Total Unrealized Loss	(19,205)	(818)
Municipal
Fair value
Less than 12 months	7,301	47,018
Total Fair Value	7,301	47,018
Cost or amortized Cost
Amortized cost, less than 12 months	7,377	47,740
Total Cost or Amortized Cost	7,377	47,740
Unrealized Loss
Less than 12 months	(76)	(722)
Total Unrealized Loss	$ (76)	$ (722)

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HISTORICAL LOSS AND LAE DEVELOPMENT

3 Months Ended

Mar. 31, 2020

HISTORICAL LOSS AND LAE DEVELOPMENT

HISTORICAL LOSS AND LAE DEVELOPMENT

3. HISTORICAL LOSS AND LAE DEVELOPMENT

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

	For the Three-Month Periods
	Ended March 31,
(in thousands)	2020		2019
Unpaid losses and LAE at beginning of year
Gross	$	1,574,352	$	1,461,348
Ceded		(384,517)		(364,999)
Net	$	1,189,835	$	1,096,349
Adoption impact of ASU 2016-13 on reinsurance balances recoverable	$	(1,345)	$	—
Increase (decrease) in incurred losses and LAE
Current accident year	$	126,194	$	113,930
Prior accident years		(15,173)		(19,633)
Total incurred	$	111,021	$	94,297
Loss and LAE payments for claims incurred
Current accident year	$	(9,295)	$	(5,531)
Prior accident years		(81,897)		(70,145)
Total paid	$	(91,192)	$	(75,676)
Net unpaid losses and LAE at March 31	$	1,208,319	$	1,114,970
Unpaid losses and LAE at March 31
Gross	$	1,574,760	$	1,479,344
Ceded		(366,441)		(364,374)
Net	$	1,208,319	$	1,114,970

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including reinsurance balances recoverable, to be presented at the net amount expected to be collected. We previously maintained an allowance for uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we released $1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes have and ongoing modifications will continue to be recorded. See note 1. B. for more information on the adoption of the ASU.

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

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

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

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LEASES

3 Months Ended

Mar. 31, 2020

Leases

LEASES

7. LEASES

Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s operating lease obligations are for branch office facilities. Our leases have remaining lease terms of 1 to 15 years. The components of lease expense and other lease information as of and during the three-month periods ended March 31, 2020 and 2019 are as follows:

	For the Three-Month Period Ended
(in thousands)	March 31, 2020		March 31, 2019
Operating lease cost	$	1,406	$	1,481
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases	$	1,486	$	1,395
Right-of-use assets obtained in exchange for new operating lease liabilities	$	15	$	719
Other non-cash reductions to right-of-use assets	$	1,192	$	-

(in thousands)	March 31, 2020			December 31, 2019
Operating lease right-of-use assets	$	19,889		$	22,335
Operating lease liabilities	$	23,141		$	24,475
Weighted-average remaining lease term - operating leases		4.48	years		4.69	years
Weighted-average discount rate - operating leases		2.34	%		2.33	%

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

(in thousands)	March 31, 2020
2020	$	4,505
2021		5,976
2022		5,904
2023		4,386
2024		2,334
Thereafter		1,365
Total future minimum lease payments	$	24,470
Less imputed interest		(1,329)
Total operating lease liability	$	23,141

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HISTORICAL LOSS AND LAE DEVELOPMENT (Tables)

3 Months Ended

Mar. 31, 2020

HISTORICAL LOSS AND LAE DEVELOPMENT

Schedule of reconciliation of unpaid losses and settlement expenses (LAE)

	For the Three-Month Periods
	Ended March 31,
(in thousands)	2020		2019
Unpaid losses and LAE at beginning of year
Gross	$	1,574,352	$	1,461,348
Ceded		(384,517)		(364,999)
Net	$	1,189,835	$	1,096,349
Adoption impact of ASU 2016-13 on reinsurance balances recoverable	$	(1,345)	$	—
Increase (decrease) in incurred losses and LAE
Current accident year	$	126,194	$	113,930
Prior accident years		(15,173)		(19,633)
Total incurred	$	111,021	$	94,297
Loss and LAE payments for claims incurred
Current accident year	$	(9,295)	$	(5,531)
Prior accident years		(81,897)		(70,145)
Total paid	$	(91,192)	$	(75,676)
Net unpaid losses and LAE at March 31	$	1,208,319	$	1,114,970
Unpaid losses and LAE at March 31
Gross	$	1,574,760	$	1,479,344
Ceded		(366,441)		(364,374)
Net	$	1,208,319	$	1,114,970

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Reconciliation of income tax expense reported to amount computed by applying the U.S. federal tax rate
Provision for income taxes at the statutory federal tax rate	$ (16,666)	$ 17,166
Excess tax benefit on share-based compensation	(1,029)	(741)
Tax-exempt interest income	(313)	(345)
Dividends received deduction	(271)	(203)
ESOP dividends paid deduction	(132)	(137)
Nondeductible expenses	203	509
Other items, net	111	19
Income tax expense (benefit)	$ (18,097)	$ 16,268
Reconciliation of income tax expense rate to the U.S. federal tax rate
U.S. federal tax rate (as a percent)	21.00%	21.00%
Excess tax benefit on share-based compensation (as a percent)	1.30%	(0.90%)
Effective rate reduction due to tax exempt interest income (as a percent)	0.40%	(0.40%)
Effective rate reduction due to dividend received (as a percent)	0.30%	(0.20%)
Effective rate reduction due to dividend paid to ESOP (as a percent)	0.20%	(0.20%)
Effective rate reduction due to nondeductible expenses (as a percent)	(0.30%)	0.60%
Effective rate reduction due to other items, net (as a percent)	(0.10%)	0.00%
Effective Income Tax Rate Reconciliation, Percent, Total	22.80%	19.90%

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INVESTMENTS - Allowance for Credit Losses, Unrealized Losses on Securities (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) security	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Securities in unrealized loss positions
Allowance for credit losses	$ 878		$ 0
Debt securities
Securities in unrealized loss positions
Number of debt securities for which there is an allowance for credit losses | security	39
Allowance for credit losses	$ 900
Number of debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded | security	381
Number of unrealized loss positions | security	420
Number of securities in unrealized loss positions for 12 months or longer | security	30
Unrealized loss	$ 28,500
Unrealized losses as percentage of fixed income portfolio cost basis	1.50%
Unrealized losses relative to total invested assets (as a percent)	1.20%
Other-than-temporary Impairment Loss, Debt Securities, Available-for-sale, Recognized in Earnings		$ 0
Equity securities
Securities in unrealized loss positions
Unrealized gains (losses) on equity securities still held	$ (115,200)	$ 41,900

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INCOME TAXES (Tables)

3 Months Ended

Mar. 31, 2020

INCOME TAXES

Schedule of reconciliation of income tax expense attributable to income from operations with amounts computed by applying the U.S. federal tax rate to pretax income from continuing operations

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

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INCOME TAXES

3 Months Ended

Mar. 31, 2020

INCOME TAXES

INCOME TAXES

4. INCOME TAXES

Our effective tax rate for the three-month period ended March 31, 2020 was 22.8 percent, compared to 19.9 percent for the same period in 2019. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher for the three-month period in 2020 as tax-favored adjustments increased the tax benefit realized on pretax losses.

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

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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 of 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 2019 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 March 31, 2020 and the results of operations of RLI Corp. 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 2019 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.

ADOPTED ACCOUNTING STANDARDS

B. ADOPTED ACCOUNTING STANDARDS

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost.

We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the Company’s balance sheet accounts: available-for-sale fixed income securities, premiums receivable and reinsurance balances recoverable. The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds (85 percent rated A or better at March 31, 2020 and December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances. In total, the cumulative-effect adjustment made to the balance sheet as of the beginning of the year resulted in a $1.1 million increase to retained earnings and an increase to accumulated other comprehensive earnings of less than $0.1 million.

REINSURANCE

C. REINSURANCE

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

We subject our reinsurance recoverables to detailed recoverable tests, including a segment-based analysis using the average default rating percentage by S&P rating. Our policy is to charge to earnings, in the form of a credit allowance, an estimate of unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such

as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $15.7 million and $8.5 million, respectively, at March 31, 2020. At December 31, 2019, the amounts were $15.7 million and $9.4 million, respectively. Adoption of ASU 2016-03 resulted in a $1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other changes 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 quarter of 2020.

INTANGIBLE ASSETS

D. INTANGIBLE ASSETS

Goodwill and intangible assets totaled $54.0 million and $54.1 million at March 31, 2020 and December 31, 2019, respectively, as detailed in the following table:

Goodwill and Intangible Assets		March 31,		December 31,
(in thousands)		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110
Small commercial		5,246		5,246
Total goodwill	$	46,062	$	46,062
Intangibles
Indefinite-lived intangibles - state insurance licenses		7,500		7,500
Definite-lived intangibles, net of accumulated amortization of $3,572 at 3/31/20 and $3,470 at 12/31/19		463		565
Total intangibles	$	7,963	$	8,065
Total goodwill and intangibles	$	54,025	$	54,127

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

Annual impairment assessment was performed on our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and state insurance license indefinite-lived intangible asset during 2019. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of March 31, 2020 that would suggest our goodwill and intangible assets should be tested for impairment.

EARNINGS PER SHARE

E. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:

	For the Three-Month Period					For the Three-Month Period
	Ended March 31, 2020					Ended March 31, 2019
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,536	$	1.47
Effect of Dilutive Securities
Stock options		-	-				-	351
Diluted EPS
Earnings (loss) available to common shareholders	$	(61,267)	44,920	$	(1.36)	$	65,473	44,887	$	1.46

COMPREHENSIVE EARNINGS

F. COMPREHENSIVE EARNINGS

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

Unrealized gains (losses), net of tax, on the fixed income portfolio were $(13.0) million for the first three months of 2020, compared to $29.3 million during the same period last year. Unrealized losses in the first three months of 2020 were attributable to widening credit spreads, which more than offset declines in interest rates and decreased the fair value of securities held in the fixed income portfolio. In contrast, declining interest rates increased the fair value of securities held in the fixed income portfolio in the first three months of 2019.

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

(in thousands)	For the Three-Month Periods
	Ended March 31,
Unrealized Gains/Losses on Available-for-Sale Securities	2020		2019
Beginning balance	$	52,473	$	(14,572)
Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.)		22		-
Adjusted beginning balance	$	52,495	$	(14,572)
Other comprehensive earnings before reclassifications		(11,880)		29,795
Amounts reclassified from accumulated other comprehensive earnings		(1,151)		(494)
Net current-period other comprehensive earnings (loss)	$	(13,031)	$	29,301
Ending balance	$	39,464	$	14,729
Balance of securities for which an allowance for credit losses has been recognized in net earnings	$	5,727	$	-

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

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month
Component of Accumulated	Periods Ended March 31,				Affected line item in the
Other Comprehensive Earnings	2020		2019		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	2,306	$	625	Net realized gains
		(849)		-	Credit losses presented within net realized gains
	$	1,457	$	625	Earnings (loss) before income taxes
		(306)		(131)	Income tax benefit (expense)
	$	1,151	$	494	Net earnings (loss)

FAIR VALUE MEASUREMENTS

G. FAIR VALUE MEASUREMENTS

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluations of the tranches (non-volatile, volatile or credit sensitivity) are based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is used to determine the cash flows for each tranche, benchmark yields, prepayment 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 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 measurement.

For all of our fixed income securities classified as Level 2, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, if discrepancies are found, 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 securities provided by our pricing services are reasonable.

Common Stock: As of March 31, 2020, all of our common stock holdings are 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).

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.

RISKS AND UNCERTAINTIES

H. RISKS AND UNCERTAINTIES

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

Catastrophe Exposures

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

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Accounting Standards (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Retained earnings	$ 943,509	$ 1,014,046
Accumulated other comprehensive earnings	$ 39,464	$ 52,473
Percentage Of Fixed Income Portfolio Rated A Or Better	85.00%	85.00%
Accounting Standards Update 2016-13 | Restatement Adjustment
Retained earnings		$ 1,100
Accounting Standards Update 2016-13 | Restatement Adjustment | Maximum
Accumulated other comprehensive earnings		$ 100

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Catastrophe Exposures (Details) - USD ($) $ in Millions		2 Months Ended	10 Months Ended
	Mar. 01, 2020	Feb. 29, 2020	Dec. 31, 2020
Catastrophe Exposures
First-dollar retention		$ 25	$ 25
Additional catastrophe reinsurance	$ 100
California earthquake
Catastrophe Exposures
Catastrophe reinsurance		400
First-dollar retention		25
Total catastrophe reinsurance			500
Non-California earthquake
Catastrophe Exposures
Catastrophe reinsurance		425
First-dollar retention		25
Total catastrophe reinsurance			525
Other perils
Catastrophe Exposures
Catastrophe reinsurance		275
First-dollar retention		$ 25
Total catastrophe reinsurance			$ 375

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	Apr. 20, 2020
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Mar. 31, 2020
Entity File Number	001-09463
Entity Registrant Name	RLI Corp
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	37-0889946
Entity Address, Address Line One	9025 North Lindbergh Drive
Entity Address, City or Town	Peoria
Entity Address, State or Province	IL
Entity Address, Postal Zip Code	61615
City Area Code	309
Local Phone Number	692-1000
Title of 12(b) Security	Common Stock $0.01 par value
Trading Symbol	RLI
Security Exchange Name	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		44,922,656
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Entity Central Index Key	0000084246
Amendment Flag	false

XML

Condensed Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Common stock	Paid-in Capital	Accumulated Other Comprehensive Earnings (Loss)	Retained Earnings	Deferred Compensation	Treasury Stock at Cost	Total
Stockholders' Equity Attributable to Parent, Beginning Balance at Dec. 31, 2018	$ 674	$ 305,660	$ (14,572)	$ 908,079	$ 8,354	$ (401,353)	$ 806,842
Shares, Outstanding, Beginning Balance at Dec. 31, 2018	44,504,043
Increase (Decrease) in Shareholders' Equity
Net earnings (loss)				65,473			65,473
Other comprehensive earnings (loss), net of tax			29,301				29,301
Deferred compensation					(1,039)	1,039
Share-based compensation	$ 1	2,891					2,892
Share-based compensation (in shares)	50,213
Dividends and dividend equivalents				(9,803)			(9,803)
Stockholders' Equity Attributable to Parent, Ending Balance at Mar. 31, 2019	$ 675	308,551	14,729	963,749	7,315	(400,314)	894,705
Shares, Outstanding, Ending Balance at Mar. 31, 2019	44,554,256
Increase (Decrease) in Shareholders' Equity
Cumulative-effect adjustment from ASU 2016-13			22	1,073			1,095
Stockholders' Equity Attributable to Parent, Beginning Balance at Dec. 31, 2019	$ 678	321,190	52,473	1,014,046	7,980	(400,979)	995,388
Shares, Outstanding, Beginning Balance at Dec. 31, 2019	44,869,015
Increase (Decrease) in Shareholders' Equity
Net earnings (loss)				(61,267)			(61,267)
Other comprehensive earnings (loss), net of tax			(13,031)				(13,031)
Deferred compensation					(1,010)	1,010
Share-based compensation	$ 1	3,862					3,863
Share-based compensation (in shares)	53,641
Dividends and dividend equivalents				(10,343)			(10,343)
Stockholders' Equity Attributable to Parent, Ending Balance at Mar. 31, 2020	$ 679	$ 325,052	$ 39,464	$ 943,509	$ 6,970	$ (399,969)	$ 915,705
Shares, Outstanding, Ending Balance at Mar. 31, 2020	44,922,656

XML

INVESTMENTS

3 Months Ended

Mar. 31, 2020

INVESTMENTS

INVESTMENTS

2. INVESTMENTS

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

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

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

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

FAIR VALUE MEASUREMENTS

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

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

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

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

As of March 31, 2020, we had $4.8 million of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3). The following table summarizes changes in the balance of these Level 3 securities.

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

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

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

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

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

Available-for-sale	March 31, 2020
(in thousands)	Cost or		Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
Asset Class	Cost		Losses		Gains		Losses		Value
U.S. government	$	171,026	$	-	$	15,948	$	-	$	186,974
U.S. agency		32,236		-		4,806		-		37,042
Non-U.S. govt. & agency		7,324		-		105		(113)		7,316
Agency MBS		396,474		-		17,807		(19)		414,262
ABS/CMBS*		230,830		(21)		1,908		(9,116)		223,601
Corporate		685,116		(857)		23,364		(19,205)		688,418
Municipal		389,845		-		16,203		(76)		405,972
Total Fixed Income	$	1,912,851	$	(878)	$	80,141	$	(28,529)	$	1,963,585

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

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

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

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

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

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

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

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

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

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

● Downgrades in credit quality by a major rating agency.

If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the securities fair value is below amortized cost.

As of March 31, 2020, the discounted cash flow analysis resulted in an allowance for credit losses on 39 securities totaling $0.9 million. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Based on our analysis, we believe we will recover the amortized cost basis on the available-for-sale securities not included in the allowance for credit losses. We do not intend to sell the available-for-sale securities in an unrealized loss position and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost basis. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest.

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

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

declines in interest rates during the period. Of the total 420 securities, 30 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of March 31, 2020, after factoring in the allowance for credit losses, and December 31, 2019.

	March 31, 2020						December 31, 2019
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. government
Fair value	$	—	$	—	$	—	$	2,505	$	8,463	$	10,968
Amortized cost		—		—		—		2,506		8,494		11,000
Unrealized Loss	$	—	$	—	$	—	$	(1)	$	(31)	$	(32)
U.S. agency
Fair value	$	—	$	—	$	—	$	6,794	$	—	$	6,794
Amortized cost		—		—		—		6,836		—		6,836
Unrealized Loss	$	—	$	—	$	—	$	(42)	$	—	$	(42)
Non-U.S. government
Fair value	$	3,011	$	—	$	3,011	$	—	$	—	$	—
Amortized cost		3,124		—		3,124		—		—		—
Unrealized Loss	$	(113)	$	—	$	(113)	$	—	$	—	$	—
Agency MBS
Fair value	$	249	$	1,296	$	1,545	$	21,548	$	41,718	$	63,266
Amortized cost		249		1,315		1,564		21,664		42,165		63,829
Unrealized Loss	$	—	$	(19)	$	(19)	$	(116)	$	(447)	$	(563)
ABS/CMBS*
Fair value	$	126,540	$	15,405	$	141,945	$	74,968	$	18,036	$	93,004
Amortized cost		134,660		16,401		151,061		75,332		18,148		93,480
Unrealized Loss	$	(8,120)	$	(996)	$	(9,116)	$	(364)	$	(112)	$	(476)
Corporate
Fair value	$	220,349	$	4,182	$	224,531	$	16,478	$	9,348	$	25,826
Amortized cost		238,510		5,226		243,736		16,950		9,694		26,644
Unrealized Loss	$	(18,161)	$	(1,044)	$	(19,205)	$	(472)	$	(346)	$	(818)
Municipal
Fair value	$	7,301	$	—	$	7,301	$	47,018	$	—	$	47,018
Amortized cost		7,377		—		7,377		47,740		—		47,740
Unrealized Loss	$	(76)	$	—	$	(76)	$	(722)	$	—	$	(722)
Total fixed income
Fair value	$	357,450	$	20,883	$	378,333	$	169,311	$	77,565	$	246,876
Amortized cost		383,920		22,942		406,862		171,028		78,501		249,529
Unrealized Loss	$	(26,470)	$	(2,059)	$	(28,529)	$	(1,717)	$	(936)	$	(2,653)

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

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

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	202,517	$	191,912	$	(10,605)	37.2	%
2	BBB	Baa		85,785		80,759		(5,026)	17.6	%
3	BB	Ba		65,256		59,398		(5,858)	20.5	%
4	B	B		50,630		44,392		(6,238)	21.9	%
5	CCC	Caa		2,674		1,872		(802)	2.8	%
6	CC or lower	Ca or lower		-		-		-	-	%
		Total	$	406,862	$	378,333	$	(28,529)	100.0	%

Unrealized Gains and Losses on Equity Securities

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

Other Invested Assets

We had $53.6 million of other invested assets at March 31, 2020, compared to $70.4 million at the end of 2019. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), investments in private funds and investments in restricted stock. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value. Restricted stock is carried at quoted market prices, as the restrictions expire within one year.

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

As of March 31, 2020, $15.1 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the three-month period ended March 31, 2020, there were no outstanding borrowings with the FHLBC.

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

Cash

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