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 September 30, 2014

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)

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

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section13 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 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 and post such files).Yes  ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company☐
(Do not check if a smaller reporting company)

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 October 13, 2014, the number of shares outstanding of the registrant’s Common Stock was 43,027,044.

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 September 30, 2014 and 2013 (unaudited)		3
	Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Nine-Month Periods Ended September 30, 2014 and 2013 (unaudited)		4
	Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013		5
	Condensed Consolidated Statements of Cash Flows (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	20
	Item 3.	Quantitative and qualitative disclosures about market risk	34
	Item 4.	Controls and procedures	34
Part II - Other Information			35
	Item 1.	Legal proceedings	35
	Item 1a.	Risk factors	35
	Item 2.	Unregistered sales of equity securities and use of proceeds	35
	Item 3.	Defaults upon senior securities	35
	Item 4.	Mine safety disclosures	35
	Item 5.	Other information	35
	Item 6.	Exhibits	36
Signatures			37

2

PARTI - 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 September 30,
(in thousands, except per share data)	2014		2013
Net premiums earned	$	177,747	$	163,702
Net investment income		14,200		13,598
Net realized investment gains		5,708		10,999
Consolidated revenue	$	197,655	$	188,299
Losses and settlement expenses		76,019		64,246
Policy acquisition costs		58,180		54,176
Insurance operating expenses		13,120		13,462
Interest expense on debt		1,857		1,513
General corporate expenses		2,800		2,157
Total expenses	$	151,976	$	135,554
Equity in earnings of unconsolidated investees		2,915		2,564
Earnings before income taxes	$	48,594	$	55,309
Income tax expense		15,340		17,662
Net earnings	$	33,254	$	37,647
Other comprehensive earnings (loss), net of tax		(12,353)		(1,946)
Comprehensive earnings	$	20,901	$	35,701
Earnings per share:
Basic:
Basic net earnings per share	$	0.77	$	0.88
Basic comprehensive earnings per share	$	0.49	$	0.83
Diluted:
Diluted net earnings per share	$	0.76	$	0.86
Diluted comprehensive earnings per share	$	0.48	$	0.82
Weighted average number of common shares outstanding
Basic		43,026		42,843
Diluted		43,712		43,546
Cash dividends paid per common share	$	0.18	$	0.17

See accompanying notesto the unaudited condensed consolidated interim financial statements.

3

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

	For the Nine-Month Periods
	Ended September 30,
(in thousands, except per share data)	2014		2013
Net premiums earned	$	507,483	$	462,406
Net investment income		41,764		39,331
Net realized investment gains		22,640		18,425
Consolidated revenue	$	571,887	$	520,162
Losses and settlement expenses		220,380		191,301
Policy acquisition costs		168,387		156,014
Insurance operating expenses		39,187		37,916
Interest expense on debt		5,582		4,538
General corporate expenses		7,547		6,235
Total expenses	$	441,083	$	396,004
Equity in earnings of unconsolidated investees		12,204		10,696
Earnings before income taxes	$	143,008	$	134,854
Income tax expense		45,060		42,458
Net earnings	$	97,948	$	92,396
Other comprehensive earnings (loss), net of tax		25,318		(17,874)
Comprehensive earnings	$	123,266	$	74,522
Earnings per share:
Basic:
Basic net earnings per share	$	2.28	$	2.17
Basic comprehensive earnings per share	$	2.87	$	1.75
Diluted:
Diluted net earnings per share	$	2.24	$	2.13
Diluted comprehensive earnings per share	$	2.82	$	1.72
Weighted average number of common shares outstanding
Basic		43,004		42,673
Diluted		43,692		43,330
Cash dividends paid per common share	$	0.53	$	0.50

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

4

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,		December 31,
(in thousands, except share data)	2014		2013
ASSETS
Investments
Fixed income
Available-for-sale, at fair value	$	1,545,530	$	1,440,052
Held-to-maturity, at amortized cost		650		651
Equity securities, at fair value		419,022		418,654
Short-term investments, at cost		10,063		23,232
Other invested assets		11,688		-
Cash		77,037		39,469
Total investments and cash	$	2,063,990	$	1,922,058
Accrued investment income		13,595		15,710
Premiums and reinsurance balances receivable		175,293		152,509
Ceded unearned premium		62,646		60,407
Reinsurance balances recoverable on unpaid losses		353,228		354,924
Deferred policy acquisition costs		68,372		61,508
Property and equipment		42,400		40,261
Investment in unconsolidated investees		67,250		49,793
Goodwill and intangibles		74,172		74,876
Other assets		12,537		8,264
TOTAL ASSETS	$	2,933,483	$	2,740,310
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and settlement expenses	$	1,152,413	$	1,129,433
Unearned premiums		429,867		392,081
Reinsurance balances payable		37,683		47,334
Funds held		53,834		61,656
Income taxes-deferred		77,086		57,801
Bonds payable, long-term debt		149,615		149,582
Accrued expenses		52,392		59,596
Other liabilities		47,080		13,861
TOTAL LIABILITIES	$	1,999,970	$	1,911,344
Shareholders’ Equity
Common stock ($1 par value, 100,000,000 shares authorized)
(65,957,258 shares issued, 43,027,044 shares outstanding at 9/30/14)
(65,912,638 shares issued, 42,982,424 shares outstanding at 12/31/13)	$	65,957	$	65,913
Paid-in capital		212,733		208,705
Accumulated other comprehensive earnings		161,345		136,027
Retained earnings		886,477		811,320
Deferred compensation		11,687		11,562
Less: Treasury shares at cost
(22,930,214 shares at 9/30/14 and 12/31/13)		(404,686)		(404,561)
TOTAL SHAREHOLDERS’ EQUITY	$	933,513	$	828,966
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,933,483	$	2,740,310

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 Nine-Month Periods
	Ended September 30,
(in thousands)	2014		2013
Net cash provided by operating activities	$	85,894	$	81,736
Cash Flows from Investing Activities
Investments purchased	$	(422,287)	$	(358,510)
Investments sold		285,886		221,133
Investments called or matured		77,611		114,929
Net change in short-term investments		40,027		10,869
Net property and equipment purchased		(5,543)		(10,766)
Investment in equity method investee		(5,301)		-
Net cash used in investing activities	$	(29,607)	$	(22,345)
Cash Flows from Financing Activities
Cash dividends paid	$	(22,791)	$	(21,354)
Stock plan share issuance		3,672		159
Excess tax benefit from exercise of stock options		400		4,888
Net cash used in financing activities	$	(18,719)	$	(16,307)
Net increase in cash	$	37,568	$	43,084
Cash at the beginning of the period	$	39,469	$	44,314
Cash at September 30	$	77,037	$	87,398

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

6

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 2013 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 September 30, 2014 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.

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 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects

This ASU permits an entity to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  The proportional amortization method requires an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense.

We elected to early adopt this ASU during the third quarter of 2014 in conjunction with our investment in Federal Low Income Housing Tax Credits.  A discussion of our investment and the required disclosures of this accounting standards update are included in Note 2 to these unaudited condensed consolidated interim financial statements.

C.  PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would impact our financial statements as of September 30, 2014.

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangibles totaled $74.2 million at September 30, 2014.

Goodwill resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $32.0 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $8.8 million. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2014. Based upon these reviews, none of the assets were impaired. In addition, as of September 30, 2014, there were no triggering events that occurred that would suggest an updated review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.8 million, net of amortization, as of September 30, 2014.

7

The remaining $16.0 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining $3.6 million relates to definite-lived intangible assets, net of amortization, as of September 30, 2014. Impairment testing was performed on this goodwill asset during the third quarter of 2014 as actual premium production has fallen below levels anticipated at acquisition. We used a quantitative analysis to determine the impact of the difference and concluded that the asset was not impaired.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the third quarter of 2014, and $0.7 million for the nine months ended September 30, 2014.

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 September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	33,254	43,026	$	0.77	$	37,647	42,843	$	0.88
Effect of Dilutive Securities
Stock options		-	686				-	703
Diluted EPS
Income available to common shareholders	$	33,254	43,712	$	0.76	$	37,647	43,546	$	0.86
	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	97,948	43,004	$	2.28	$	92,396	42,673	$	2.17
Effect of Dilutive Securities
Stock options		-	688				-	657
Diluted EPS
Income available to common shareholders	$	97,948	43,692	$	2.24	$	92,396	43,330	$	2.13

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 35 percent. The following table illustrates the changes in the balance of each component of

8

accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Unrealized Gains/Losses on Available-for-Sale Securities
Beginning balance	$	173,698	$	127,242	$	136,027	$	143,170
Other comprehensive earnings before reclassifications		(8,642)		5,203		40,032		(5,354)
Amounts reclassified from accumulated other comprehensive earnings		(3,711)		(7,149)		(14,714)		(12,520)
Net current-period other comprehensive earnings	$	(12,353)	$	(1,946)	$	25,318	$	(17,874)
Ending balance	$	161,345	$	125,296	$	161,345	$	125,296

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
	Comprehensive Earnings
(in thousands)	For the Three-Month				For the Nine-Month
Component of Accumulated	Periods Ended September 30,				Periods Ended September 30,				Affected line item in the
Other Comprehensive Earnings	2014		2013		2014		2013		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	5,709	$	10,998	$	22,637	$	19,261	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	5,709	$	10,998	$	22,637	$	19,261	Earnings before income taxes
		(1,998)		(3,849)		(7,923)		(6,741)	Income tax expense
	$	3,711	$	7,149	$	14,714	$	12,520	Net earnings

2.INVESTMENTS

Our investments include fixed income debt securities and common stock equity securities. As disclosed in our 2013 Annual Report on Form 10-K, we present our investments in these classes as available-for-sale and held-to-maturity. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

The following tables show the amortized cost, unrealized gains/losses, fair value and contractual maturities for our available-for-sale and held-to-maturity securities.

9

Available-for-Sale Securities

The amortized cost and fair value of available-for-sale securities at September 30, 2014 and December 31, 2013 were as follows:

Available-for-sale
(in thousands)
	9/30/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	6,383	$	147	$	(14)	$	6,516
Corporate		563,120		23,639		(2,603)		584,156
Mtge/ABS/CMBS*		392,687		9,627		(3,294)		399,020
Non-U.S. govt. & agency		9,861		696		-		10,557
U.S. government		32,082		120		(39)		32,163
Municipal		498,371		15,392		(645)		513,118
Total Fixed Income	$	1,502,504	$	49,621	$	(6,595)	$	1,545,530
Equity	$	214,239	$	205,253	$	(470)	$	419,022
Available-for-sale
(in thousands)
	12/31/2013
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	10,513	$	22	$	(237)	$	10,298
Corporate		511,748		22,302		(8,012)		526,038
Mtge/ABS/CMBS*		350,187		8,188		(7,650)		350,725
Non-U.S. govt. & agency		13,306		437		(65)		13,678
U.S. government		17,086		217		-		17,303
Municipal		528,209		6,495		(12,694)		522,010
Total Fixed Income	$	1,431,049	$	37,661	$	(28,658)	$	1,440,052
Equity	$	218,848	$	200,081	$	(275)	$	418,654

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

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of September 30, 2014:

	9/30/2014
AFS	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	17,680	$	17,855
Due after one year through five years		242,863		253,882
Due after five years through 10 years		594,841		612,167
Due after 10 years		254,433		262,606
Mtge/ABS/CMBS*		392,687		399,020
Total available-for-sale	$	1,502,504	$	1,545,530

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

10

Held-to-Maturity Debt Securities

The carrying value and fair value of held-to-maturity securities was $0.7 million at September 30, 2014 and December 31, 2013. Held-to-maturity securities are carried on the unaudited condensed consolidated balance sheets at amortized cost and changes in the fair value of these securities, other than impairment charges, are not reported on the financial statements. Unrecognized gains on our held-to-maturity securities were less than $0.1 million at September 30, 2014 and December 31, 2013. As of September 30, 2014, the carrying value and fair value of all debt securities held-to-maturity had a contractual maturity date of less than one year.

Unrealized Losses

We conduct and document periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of securities that were in an unrealized loss position as of September 30, 2014 and December 31, 2013. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of September 30, 2014 unrealized losses, as shown in the following tables, were 0.3 percent of total invested assets. Unrealized losses decreased in 2014, as interest rates declined during the first three quarters of the year.

11

	September 30,  2014						December 31,  2013
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	18,556	$	—	$	18,556	$	—	$	—	$	—
Cost or amortized cost		18,595		—		18,595		—		—		—
Unrealized Loss	$	(39)	$	—	$	(39)	$	—	$	—	$	—
U.S. Agency
Fair value	$	1,871	$	—	$	1,871	$	5,760	$	—	$	5,760
Cost or amortized cost		1,885		—		1,885		5,997		—		5,997
Unrealized Loss	$	(14)	$	—	$	(14)	$	(237)	$	—	$	(237)
Non-U.S. government
Fair value	$	—	$	—	$	—	$	1,825	$	—	$	1,825
Cost or amortized cost		—		—		—		1,890		—		1,890
Unrealized Loss	$	—	$	—	$	—	$	(65)	$	—	$	(65)
Mortgage-backed
Fair value	$	27,741	$	70,754	$	98,495	$	118,283	$	—	$	118,283
Cost or amortized cost		27,848		73,223		101,071		124,034		—		124,034
Unrealized Loss	$	(107)	$	(2,469)	$	(2,576)	$	(5,751)	$	—	$	(5,751)
ABS/CMBS*
Fair value	$	46,758	$	19,100	$	65,858	$	54,115	$	—	$	54,115
Cost or amortized cost		47,038		19,538		66,576		56,014		—		56,014
Unrealized Loss	$	(280)	$	(438)	$	(718)	$	(1,899)	$	—	$	(1,899)
Corporate
Fair value	$	157,718	$	22,591	$	180,309	$	190,470	$	2,245	$	192,715
Cost or amortized cost		159,729		23,183		182,912		198,250		2,477		200,727
Unrealized Loss	$	(2,011)	$	(592)	$	(2,603)	$	(7,780)	$	(232)	$	(8,012)
Municipal
Fair value	$	30,321	$	49,615	$	79,936	$	309,407	$	943	$	310,350
Cost or amortized cost		30,378		50,203		80,581		322,095		949		323,044
Unrealized Loss	$	(57)	$	(588)	$	(645)	$	(12,688)	$	(6)	$	(12,694)
Subtotal, fixed income
Fair value	$	282,965	$	162,060	$	445,025	$	679,860	$	3,188	$	683,048
Cost or amortized cost		285,473		166,147		451,620		708,280		3,426		711,706
Unrealized Loss	$	(2,508)	$	(4,087)	$	(6,595)	$	(28,420)	$	(238)	$	(28,658)
Equity securities
Fair value	$	11,635	$	—	$	11,635	$	2,394	$	—	$	2,394
Cost or amortized cost		12,105		—		12,105		2,669		—		2,669
Unrealized Loss	$	(470)	$	—	$	(470)	$	(275)	$	—	$	(275)
Total
Fair value	$	294,600	$	162,060	$	456,660	$	682,254	$	3,188	$	685,442
Cost or amortized cost		297,578		166,147		463,725		710,949		3,426		714,375
Unrealized Loss	$	(2,978)	$	(4,087)	$	(7,065)	$	(28,695)	$	(238)	$	(28,933)

* Asset-backed and commercial mortgage-backed

12

The following table shows the composition of the fixed income securities in unrealized loss positions at September 30, 2014 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	$	354,379	$	349,481	$	(4,898)	74.3	%
2	BBB	Baa		37,566		37,081		(485)	7.4	%
3	BB	Ba		35,807		35,139		(668)	10.1	%
4	B	B		22,598		22,120		(478)	7.2	%
5	CCC orlower	Caa or lower		1,270		1,204		(66)	1.0	%
6				—		—		—	—
		Total	$	451,620	$	445,025	$	(6,595)	100.0	%

Other Invested Assets

Other invested assets shown on the balance sheet as of September 30, 2014 include an investment in a low income housing tax credit partnership as well as membership in the Federal Home Loan Bank Chicago (FHLBC).  During the third quarter of 2014, we recorded an interest in a low income housing tax credit partnership totaling $10.0 million.  The interest had a balance of $9.9 million at September 30, 2014 and recognized a total tax benefit of $0.1 million during the quarter.  Our investment in FHLBC stock totaled $1.8 million at the end of the third quarter.

Cash and Short-term Investments

Cash consists of uninvested balances in bank accounts. We had a cash balance of $77.0 million at the end of the third quarter of 2014, compared to $39.5 million at the end of 2013. Short-term investments are carried at cost, which approximates fair value. The balance at September 30, 2014 was $10.1 million compared to $23.2 million at December 31, 2013.

Evaluating Investments for OTTI

The fixed income portfolio contained 290 securities in an unrealized loss position as of September 30, 2014. The $6.6 million in associated unrealized losses for these 290 securities represents 0.4 percent of the fixed income portfolio’s cost basis. Of these 290 securities, 74 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings in the periods presented on the fixed income portfolio.

As of September 30, 2014, we held three common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $0.5 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. No equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

13

3.FAIR VALUE MEASUREMENTS

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

Financial assets are classified based upon the lowest level of significant input that is used to determine 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:

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 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 thesetechniques 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. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, 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.

Common Stock: Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All of our common stock holdings are deemed Level 1.

For the Level 2 securities, 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. Second, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, when discrepancies are

14

found, we compare our prices to actual reported trade data for like securities. Based on this assessment, we determined that the fair values of our Level 2 securities provided by our pricing services are reasonable.

For common stock, we receive prices from a nationally recognized pricing service. Prices are based on observable inputs in an active market and are therefore disclosed as Level 1. Based on this assessment, we determined that the fair values of our Level 1 securities provided by our pricing service are reasonable.

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.

Assets measured at fair value in the accompanying unaudited condensed consolidated interim financial statements on a recurring basis are summarized below:

	As of September 30,  2014
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	6,516	$	—	$	6,516
Corporate		—		584,156		—		584,156
Mortgage-backed		—		260,902		—		260,902
ABS/CMBS*		—		138,118		—		138,118
Non-U.S. govt. & agency		—		10,557		—		10,557
U.S. government		—		32,163		—		32,163
Municipal		—		513,118		—		513,118
Equity		419,022		—		—		419,022
Total available-for-sale securities	$	419,022	$	1,545,530	$	—	$	1,964,552
Total	$	419,022	$	1,545,530	$	—	$	1,964,552

*Asset-backed and commercial mortgage-backed

	As of December 31,  2013
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	10,298	$	—	$	10,298
Corporate		—		526,038		—		526,038
Mortgage-backed		—		244,416		—		244,416
ABS/CMBS*		—		106,309		—		106,309
Non-U.S. govt. & agency		—		13,678		—		13,678
U.S. government		—		17,303		—		17,303
Municipal		—		522,010		—		522,010
Equity		418,654		—		—		418,654
Total available-for-sale securities	$	418,654	$	1,440,052	$	—	$	1,858,706
Total	$	418,654	$	1,440,052	$	—	$	1,858,706

*Asset-backed and commercial mortgage-backed

As noted in the above table, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. Additionally, there were no securities transferred in or out of levels 1 or 2 during the nine-month period ended September 30, 2014.

4.  STOCK BASED COMPENSATION

Our RLI Corp. Omnibus Stock Plan (omnibus plan) was in place from 2005 to 2010. The omnibus plan provided for equity-based compensation, including stock options, up to a maximum of 3,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2005 and 2010, we granted 2,457,644 stock options under this plan, including incentive stock options (ISOs), which were adjusted as part of the special dividends paid in 2013 and prior years.

During the second quarter of 2010, our shareholders approved the RLI Corp. Long-Term Incentive Plan (LTIP), which provides for equity-based compensation and replaced the omnibus plan. In conjunction with the adoption of the LTIP, effective May 6, 2010, options were no longer granted under the omnibus plan. Awards under the LTIP may be in the form of restricted stock, stock options (non-qualified only), stock appreciation rights, performance units, as well as other stock-based awards. Eligibility under the LTIP is limited to employees or directors of the company or any affiliate. The granting of awards under the LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since 2010, we have granted 2,777,000 stock options under the LTIP, including 464,500 thus far in 2014.

Under the LTIP, as under the omnibus plan, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant. Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

In most instances, 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.

16

The following tables summarize option activity for the periods ended September 30, 2014 and 2013:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	464,500	$	42.90
Options exercised	(47,412)	$	17.95		$	1,250
Options canceled/forfeited	(740)	$	16.51
Outstanding options at September 30,  2014	3,011,432	$	28.77	5.25	$	43,850
Exercisable options at September 30,  2014	1,351,312	$	22.29	3.99	$	28,382
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2013	2,945,204	$	22.23
Options granted	582,200	$	36.31
Options exercised	(761,362)	$	17.18		$	17,211
Options canceled/forfeited	(44,880)	$	25.93
Outstanding options at September 30,  2013	2,721,162	$	26.59	5.65	$	46,590
Exercisable options at September 30,  2013	1,060,662	$	21.09	4.35	$	23,995

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.

Thus far in 2014, 464,500 stock options were granted with a weighted average exercise price of $42.90 and a weighted average fair value of $7.76. We recognized $0.9 million of expense in the third quarter of 2014, and $2.9 million in the first nine months of 2014, related to options vesting. Since options granted under our LTIP are non-qualified, we recorded a tax benefit of $0.3 million in the third quarter of 2014, and $1.0 million in the first nine months of 2014, related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $5.2 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.0 million of expense in the third quarter of 2013, and $2.8 million of expense in the first nine months of 2013. We recorded a tax benefit of $0.3 million in the third quarter of 2013, and $1.0 million in the first nine months of 2013, related to this compensation expense.

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 September 30:

	2014			2013
Weighted-average fair value of grants	$	7.76		$	6.58
Risk-free interest rates		1.70	%		0.80	%
Dividend yield		1.94	%		2.00	%
Expected volatility		23.19	%		25.41	%
Expected option life		5.17	years		5.23	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 calculated based on the average annualized dividends paid during the most recent five-year period. It excluded the special dividends paid in the fourth quarters of 2013 and prior years. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. In previous years, expected volatility was calculated based on the mean reversion of RLI’s stock. The expected option life was determined based on historical

17

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.

In 2013 and 2014, each outside director received $10,000 worth of restricted common shares as part of annual director compensation. The shares were issued annually from the LTIP during the first quarter of each year.  The shares were directly owned by each director on the date of issuance and included a one-year restriction on the sale or transfer of such shares. In the first quarter of 2014, we issued a total of 2,097 restricted shares and recognized $0.1 million of compensation expense. This restricted share program has been terminated and no further restricted shares will be issued going forward.

5.  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.

SEGMENT DATA (in thousands)

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
	REVENUES				REVENUES
	2014		2013		2014		2013
Net premiums earned:
Casualty	$	96,181	$	83,966	$	281,518	$	235,307
Property		54,143		52,705		146,252		147,305
Surety		27,423		27,031		79,713		79,794
Segment totals before income taxes	$	177,747	$	163,702	$	507,483	$	462,406
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
Total consolidated revenue	$	197,655	$	188,299	$	571,887	$	520,162
	NET EARNINGS				NET EARNINGS
	2014		2013		2014		2013
Casualty	$	13,786	$	20,799	$	36,331	$	39,517
Property		7,498		6,468		19,469		19,614
Surety		9,144		4,551		23,729		18,044
Net underwriting income	$	30,428	$	31,818	$	79,529	$	77,175
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
General corporate expense and interest on debt		(4,657)		(3,670)		(13,129)		(10,773)
Equity in earnings of unconsolidated investees		2,915		2,564		12,204		10,696
Total earnings before income taxes	$	48,594	$	55,309	$	143,008	$	134,854
Income tax expense		15,340		17,662		45,060		42,458
Total net earnings	$	33,254	$	37,647	$	97,948	$	92,396

18

The following table further summarizes revenues (net premiums earned) by major product type within each operating segment:

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Casualty
Commercial and personal umbrella	$	25,256	$	22,247	$	75,036	$	61,803
General liability		20,095		20,342		60,550		61,139
Commercial transportation		14,677		13,463		44,193		35,594
Professional services		15,227		11,021		41,927		30,092
P&C package business		8,969		7,643		25,747		22,671
Executive products		4,760		4,933		14,165		14,300
Medical professional liability		3,546		2,674		10,970		5,136
Other casualty		3,651		1,643		8,930		4,572
Total	$	96,181	$	83,966	$	281,518	$	235,307
Property
Commercial property	$	20,188	$	18,938	$	60,675	$	57,813
Marine		12,115		14,242		37,278		43,898
Crop reinsurance		11,802		11,846		18,671		19,501
Property reinsurance		2,997		2,848		9,745		12,503
Other property		7,041		4,831		19,883		13,590
Total	$	54,143	$	52,705	$	146,252	$	147,305
Surety
Miscellaneous	$	9,868	$	9,590	$	28,948	$	28,559
Contract		6,879		7,025		19,896		20,137
Commercial		6,521		5,857		18,968		17,285
Oil and Gas		4,155		4,559		11,901		13,813
Total	$	27,423	$	27,031	$	79,713	$	79,794
Grand Total	$	177,747	$	163,702	$	507,483	$	462,406

6.  ACQUISITION

On February 5, 2014, we invested $5.3 million for a 20 percent equity ownership interest in Prime Holdings Insurance Services, Inc. (Prime), an Illinois domiciled insurance carrier based in Salt Lake City, Utah. Prime is a privately-held excess and surplus lines insurance company operating in 49 states through a network of wholesale brokers and specializing in hard-to-place risks. The investment in Prime is reflected on our balance sheet as an investment in unconsolidated investee. Under the equity method of accounting we recognize our proportionate share of Prime’s income as equity in earnings of unconsolidated investees. Our share of Prime’s earnings amounted to $0.1 million in the third quarter of 2014 and $0.4 million in the first nine months of 2014.

Additionally, we entered into a 25 percent quota share reinsurance treaty with Prime, effective January 1, 2014. We assumed gross premiums of $2.4 million related to this quota share agreement in the third quarter of 2014 and $7.4 million in the first nine months of 2014.

19

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

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This discussion and analysis may contain 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 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Various risk factors that could affect future results are listed in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2013.

OVERVIEW

We underwrite selected property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group (the Group). We conduct operations principally through four insurance companies. These companies are organized in a vertical structure beneath RLI Corp. with RLI Insurance Company (RLI Ins.) as the first-level, or principal, insurance subsidiary. RLI Ins. writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia and Puerto Rico. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. RLI Indemnity Company (RIC), a subsidiary of Mt. Hawley, has authority to write multiple lines of insurance on an admitted basis in 48 states and the District of Columbia. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., has authority to write multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois, with the exception of CBIC, which is domiciled in Washington. We are an Illinois corporation that was organized in 1965.

As a specialty company with a niche focus, we offer insurance coverages in both the specialty admitted and excess and surplus markets. Coverages in the specialty admitted market, such as our oil and gas surety bonds, are for risks that are unique or hard-to-place in the standard market, but must remain with an admitted insurance company for regulatory or marketing reasons. In addition, our coverages in the specialty admitted market may be designed to meet specific insurance needs of targeted insured groups, such as our professional liability and package coverages for design professionals and our stand-alone personal umbrella policy. The specialty admitted market is subject to more state regulation than the excess and surplus market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. We also underwrite coverages in the excess and surplus market. The excess and surplus market, unlike the standard admitted market, is less regulated and more flexible in terms of policy forms and premium rates. This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard admitted market. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. When we underwrite within the excess and surplus market, we are selective in the lines of business and type of risks we choose to write. Using our non-admitted status in this market allows us to tailor terms and conditions to manage these exposures effectively. Often, the development of these coverages is generated through proposals brought to us by an agent or broker seeking coverage for a specific group of clients or loss exposures. Once a proposal is submitted, our underwriters determine whether it would be a viable product based on our business objectives.

The foundation of our overall business strategy is to underwrite for profit in all market conditions and we achieved this for 18 consecutive years, averaging an 87.6 combined ratio over that period of time. This foundation 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. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on generating total return. The fixed income portfolio consists primarily of highly-rated, diversified, liquid investment-grade securities. Consistent underwriting income allows a portion of our shareholders’ equity to be invested in equity securities. Our equity portfolio consists of a core stock portfolio weighted toward dividend-paying stocks, as well as exchange traded funds (ETFs). Our minority equity ownership in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, has also enhanced overall returns. We have a diversified investment portfolio and monitor our investment risks. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed significantly to our historic growth in book value.

20

We measure the results of our insurance operations by monitoring certain measures of 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 and terrorism), interest rates, state regulations, court decisions and changes in the law.

One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will 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. In evaluating the objective performance measures previously mentioned, it is important to consider the following individual characteristics of each major insurance segment.

The casualty portion of our business consists largely of general liability, personal umbrella, transportation, executive products and commercial umbrella coverages, as well as package business and other specialty coverages, such as professional liability and workers compensation for office-based professionals. We offer fidelity and crime coverage for commercial insureds and select financial institutions and recently expanded our casualty offerings to include medical professional liability coverage in the excess and surplus market. We also assume select casualty business written by Prime under a reinsurance treaty. 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, marine, and facultative and treaty reinsurance including crop. We also offer select personal lines policies, such as recreational vehicle and Hawaii homeowners coverages. While our marine and facultative reinsurance coverages are predominantly domestic risks, these portfolios do contain a relatively small portion of foreign risks. Property insurance and reinsurance 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 hurricanes 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 us carefully manage the concentration of risks exposed to catastrophic events. Our assumed multi-peril crop and hail treaty reinsurance business covers revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects and disease. Significant aggregation of these losses is mitigated by the U.S. Federal Government reinsurance program that provides stop loss protection inuring to our benefit.

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

Rates increased moderately on most coverages through 2013, a year in which abnormally low catastrophe activity led to improved financial results across the industry. This led to softer reinsurance pricing in the first nine months of 2014, which will likely impact primary rates for the remainder of the year. As a result, the insurance marketplace remains intensely competitive. Despite these competitive pressures, 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.

21

In the third quarter of 2014, we received provisional notice of cancellation on the largest portion of our assumed crop business along with notice of a 50 percent reduction on our remaining coverage.  While the cancellations are expected to reduce top line premium to less than $10 million in 2015 from $50 million through the third quarter 2014, the impact on underwriting income is expected to be minimal. 

GAAP and non-GAAP Financial Performance Metrics

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the GAAP presentation of net income, we show certain statutory reporting information and other non-GAAP financial measures that we believe are valuable in managing our business and drawing comparisons to our peers. These measures are underwriting income, combined ratios and net unpaid loss and settlement expenses.

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. Each of these captions is presented in the statements of earnings, but not subtotaled. However, this information is available in total and by segment in note 11 to the consolidated financial statements in our 2013 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains/losses on investments, general corporate expenses, debt costs and earnings from unconsolidated investees.

Combined Ratio

This ratio is a common industry measure of profitability for any underwriting operation 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 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. For example, a combined ratio of 85 implies that for every $100 of premium we earn, we record $15 of underwriting income.

Net Unpaid Loss and Settlement Expenses

Unpaid losses and settlement expenses, as shown in the liabilities section of our 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 condensed consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation and OTTI, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2013 Annual Report on Form 10-K. There have been no significant changes to any of these policies during the current year.

22

NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2013

Consolidated revenues, as displayed in the table that follows, totaled $571.9 million for the first nine months of 2014 compared to $520.2 million for the same period in 2013.

	Forthe Nine-MonthPeriods
	Ended September 30,
	2014		2013
Consolidated revenues (in thousands)
Net premiums earned	$	507,483	$	462,406
Net investment income		41,764		39,331
Net realized investment gains		22,640		18,425
Total consolidated revenue	$	571,887	$	520,162

Consolidated revenue for the first nine months of 2014 increased $51.7 million, or 10 percent, from the same period in 2013. Net premiums earned for the Group increased 10 percent, led by growth in our casualty segment which was up 20 percent. Net premiums earned from our surety and property segments declined slightly from the prior year. Net investment income increased 6 percent to $41.8 million due to a larger invested asset base and reinvestment rates that remain near the average yield of the portfolio. We realized net investment gains of $22.6 million in the first nine months of 2014, compared to $18.4 million during the same period of 2013.

Net after-tax earnings for the first nine months of 2014 totaled $97.9 million, $2.24 per diluted share, compared to $92.4 million, $2.13 per diluted share, for the same period in 2013. In 2014, favorable development on prior years’ loss and catastrophe reserves resulted in additional pretax earnings of $60.3 million. Partially offsetting this favorable development was $1.3 million of reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves.  From a comparative standpoint, results for 2013 included favorable development on prior years’ loss and catastrophe reserves which resulted in additional pretax earnings of $63.4 million. In addition, losses from spring storms impacted results for both periods, with losses totaling $7.3 million in the first nine months of 2014 compared to $10.0 million for the same period last year. Hurricane Iselle and the American Canyon Earthquake were non-events from a loss standpoint on the 2014 accident year, impacting results by less than $0.5 million.  Bonus and profit sharing-related expenses associated with these specific items totaled $7.4 million in 2014, compared to $7.3 million in 2013. 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 nine months of 2014, equity in earnings of unconsolidated investees totaled $12.2 million. This amount includes $11.8 million from Maui Jim and $0.4 million from Prime Holdings Insurance Services, Inc. (Prime). Refer to Note 6, Acquisitions, for more information regarding our February 2014 investment in Prime. Comparatively, the first nine months of 2013 reflected $10.7 million of Maui Jim earnings.

Comprehensive earnings, which include net earnings plus other comprehensive earnings (primarily the change in unrealized gains/losses, net of tax), was $123.3 million, $2.82 per diluted share, for the first nine months of 2014, compared to $74.5 million, $1.72 per diluted share, for the same period last year. Unrealized gains, net of tax, for the first nine months of 2014 were $25.3 million, compared to unrealized losses, net of tax, of $17.9 million for the same period in 2013. Unrealized gains in the current year were largely from the fixed income portfolio, as interest rates declined during the first three quarters of 2014.

RLI INSURANCE GROUP

As reflected in the table below, gross premiums written for the Group increased 3 percent to $669.4 million for the first nine months of 2014. Our casualty and surety segments each showed growth, up 6 percent and 3 percent, respectively, which offset a 3 percent decline from the property segment. Expansion efforts and new product initiatives have contributed to the overall growth in premiums, as production has increased despite heightened competition in the marketplace. From a pricing standpoint, trends seen during the current year have varied across our product portfolio. The positive pricing momentum seen within our casualty segment during the prior year has largely slowed, while rates on

23

most surety products and property coverages have remained flat or declined. Net premiums written advanced 6 percent in the first nine months of 2014, and outpaced growth in gross premiums written due largely to cost savings realized on our 2014 reinsurance renewals. During the first half of 2014, we renewed all material reinsurance treaties which resulted in over $16.0 million of annual savings. Reinsurance structures are largely unchanged with the exception of surety, where we purchased additional limit, and professional liability for office-based professionals, where we increased our retention. On a net premiums earned basis, premiums increased $45.0 million, or 10 percent, due to overall growth experienced in recent periods and increased retentions in 2013 on certain casualty products. The casualty segment has contributed significantly to this growth, with net premiums written up 10 percent, and net premiums earned up 20 percent from the first nine months of last year. Underwriting income for the Group totaled $79.5 million for the first nine months of 2014, compared to $77.2 million in 2013. Both periods benefited from favorable development on prior years’ loss and catastrophe reserves, though the benefit in 2014 was $3.3 million lower than the prior year. Spring storm losses also impacted results for each period, with $6.2 million and $8.8 million recognized in 2014 and 2013, respectively. The GAAP combined ratio totaled 84.3 in 2014, compared to 83.3 in 2013. The Group’s loss ratio increased to 43.4, from 41.4, while the Group’s expense ratio improved one point to 40.9.

	For the Nine-Month Periods
	Ended September 30,
	2014		2013
Gross premiums written (in thousands)
Casualty	$	364,027	$	343,179
Property		216,499		222,190
Surety		88,864		86,129
Total	$	669,390	$	651,498
Underwriting income (in thousands)
Casualty	$	36,331	$	39,517
Property		19,469		19,614
Surety		23,729		18,044
Total	$	79,529	$	77,175
Combined ratio
Casualty		87.1		83.2
Property		86.7		86.6
Surety		70.2		77.4
Total		84.3		83.3

Casualty

Gross premiums written for the casualty segment totaled $364.0 million for the first nine months of 2014, an increase of $20.8 million, or 6 percent, from the same period last year. A majority of the products within this segment, including both mature products and newer product initiatives, have contributed to this growth, aided by modest rate increases on select lines. On an overall basis, however, pricing momentum for the segment has slowed. Our professional services product, which includes offerings to architects and engineers, posted gross premiums written of $55.5 million, up $11.8 million, or 27 percent, from the first nine months of 2013. Our P&C package business delivered solid results, with gross premiums written growth of 11 percent, while other notable contributions included umbrella, up $2.0 million (2 percent) and security guards coverage, up $1.1 million (49 percent). Our new assumed casualty reinsurance business posted premiums of $7.4 million in the first nine months of 2014. This business relates to the reinsurance agreement which accompanied our minority investment in Prime. On an annual basis, we expect to assume premiums of $8 million to $10 million from this reinsurance treaty. Gross premiums written by general liability were flat, while transportation was down $4.6 million or 7 percent.  The decline in transportation follows a 72 percent increase achieved during the comparable period of 2013.

The casualty segment recorded underwriting income of $36.3 million for the first nine months of 2014, compared to $39.5 million for the same period last year. Results for both periods included favorable development on prior years’ loss and catastrophe reserves. Products with favorable development in 2014 included general liability, umbrella, P&C package, transportation, professional services and executive products. From an accident year standpoint, the majority of the favorable development occurred on the 2006 through 2013 accident years, with the more recent years accounting for

24

a larger percentage. Due to positive emergence, during the first nine months of 2014 we released reserves which improved the segment’s underwriting results by $40.5 million. Results were also impacted by spring storms losses, which reduced underwriting income for the segment by $1.9 million. From a comparative standpoint, 2013 results included favorable development on prior accident years’ loss reserves, primarily for general liability, umbrella, P&C package and executive products, which improved the segment’s underwriting results by $46.2 million. Losses from spring storms were minimal, impacting results by $0.1 million.

Overall, the combined ratio for the casualty segment was 87.1 for 2014 compared to 83.2 in 2013. The segment’s loss ratio was 51.6 in 2014 compared to 46.4 in 2013. The increase was driven by the lower reserve releases on prior years’ loss and catastrophe reserves in 2014. The expense ratio for the casualty segment was 35.5 for the first nine months of 2014, compared to 36.8 in the prior year, due to improved leveraging of our expense base. Increased retentions elected during the prior year, and cost savings realized during the 2014 reinsurance renewal also contributed to the expense ratio decline.

Property

Gross premiums written for the Group’s property segment totaled $216.5 million for the first nine months of 2014, a decrease of $5.7 million, or 3 percent, from the same period last year. Premium production for the segment has declined as a result of action taken to re-underwrite certain underperforming business and continued competitive pressures on rates for E&S property coverages. Our catastrophe-exposed assumed reinsurance programs decreased $2.7 million, or 20 percent, from the same period last year, as we continued to exit certain underperforming programs within this book. Difference in conditions (DIC) premiums have decreased $3.0 million as a result of increased competition and lower rates resulting from largely benign catastrophe activity in recent periods. Marine business declined $6.0 million, or 13 percent, due to re-underwriting efforts, while crop reinsurance premiums were down 3 percent to $50.3 million. Partially offsetting these decreases, our recreational vehicles program posted $5.0 million of premium growth. Premiums from our fire and Hawaii homeowners coverages also improved, up 4 percent and 2 percent, respectively.

Underwriting income for the segment was $19.5 million for the first nine months of 2014, compared to $19.6 million for the same period in 2013. Results for 2014 were impacted by favorable development on prior years’ loss and catastrophe reserves, primarily on marine business, which improved the segment’s underwriting results by $0.8 million. This favorable development was more than offset by losses recorded on 2014 spring storms and the American Canyon Earthquake, which reduced the segment’s underwriting results by $4.5 million. From a comparative standpoint, underwriting results for 2013 included a $5.4 million benefit from favorable development on prior years’ loss and catastrophe reserves, and $8.7 million in losses on 2013 spring storms.

Segment results for 2014 translated into a combined ratio of 86.7 compared to 86.6 for the same period last year. The segment’s loss ratio was 49.0 in 2014 compared to 48.0 in 2013, while the segment’s expense ratio was 37.7 for 2014 compared to 38.6 in 2013.

Surety

The surety segment recorded gross premiums written of $88.9 million for the first nine months of 2014, an increase of $2.7 million, or 3 percent, from the same period last year. Premium growth was achieved despite flat pricing across many surety products, which has resulted from ongoing intense competition in this market. Increased construction activity led to $22.2 million of gross premiums written for commercial surety, up 18 percent, while miscellaneous and contract surety also improved slightly. These increases more than offset a decline from our oil and gas product, which decreased $2.2 million, or 15 percent.

The surety segment recorded underwriting income of $23.7 million, compared to $18.0 million for the same period last year. Solid current accident year results were bolstered by favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $11.3 million in 2014. This favorable development was partially offset by reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves which reduced underwriting income by $1.1 million. From a comparative standpoint, 2013 results included favorable loss development which improved the segment’s underwriting results by $4.3 million.

The combined ratio for the surety segment was 70.2 in the first nine months of 2014, versus 77.4 for the same period in 2013. The segment’s loss ratio was 4.3 for 2014, compared to 14.3 for 2013, due largely to the increased benefit from

25

favorable development in 2014. The expense ratio was 65.9 for 2014, compared to 63.1 in 2013. The increase was a result of the impact of the above-mentioned reinstatement premium, and shifts in mix toward products with higher acquisition expense rates.

INVESTMENT INCOME AND REALIZED CAPITAL GAINS

During the first nine months of 2014, net investment income increased 6.2 percent from that reported for the same period in 2013. The increase in investment income was due to a larger invested asset base and reinvestment rates that remain near the average yield of the portfolio. On an after-tax basis, investment income increased by 6.6 percent.

	9/30/2014				12/31/2013
	Financial				Financial
(in thousands)	Stmt Value		%		StmtValue		%
Fixed income	$	1,546,180	74.9	%	$	1,440,703	74.9	%
Equity securities		419,022	20.3	%		418,654	21.8	%
Other invested assets		11,688	0.6	%		—	0.0	%
Cash and short-term investments		87,100	4.2	%		62,701	3.3	%
Total	$	2,063,990	100.0	%	$	1,922,058	100.0	%

Our current equity allocation represents 20 percent of our total investment portfolio.

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 average yields on our fixed income investments (excluding short-term investments) for the first nine months of 2014 and 2013 were as follows:

	2014		2013
Pretax Yield
Taxable	3.61	%	3.67	%
Tax-Exempt	2.77	%	2.70	%
After-Tax Yield
Taxable	2.35	%	2.39	%
Tax-Exempt	2.62	%	2.56	%

The fixed income portfolio increased by $105.5 million in the first nine months of 2014. The increase is due to allocating the majority of cash flows to the fixed income portfolio. This portfolio had a tax-adjusted total return on a mark-to-market basis of 5.3 percent. Average fixed income duration was 4.6 years at September 30, 2014, reflecting our current liability structure and sound capital position.

The equity portfolio increased by $0.4 million during the first nine months of 2014, to $419.0 million, and had a total return of 8.1 percent through September 30, 2014.

We recognized $22.6 million in realized gains in the first nine months of 2014, compared to realized gains of $18.4 million in the same period of 2013. Realized gains were primarily derived from equity sales as we rebalanced into fixed income assets. We did not record any realized losses associated with OTTI of securities during the first nine months of 2014.

26

The following table is used as part of our impairment analysis and illustrates certain industry-level measurements relative to our equity portfolio as of September 30, 2014, including fair value, cost basis and unrealized gains and losses.

	9/30/2014
	Cost				Unrealized						Unrealized
(in thousands)	Basis		Fair Value		Gains		Losses		Net		Gain/Loss% (1)
Consumer discretionary	$	15,582	$	28,772	$	13,190	$	—	$	13,190	84.6	%
Consumer staples		14,456		36,588		22,230		(98)		22,132	153.1	%
Energy		12,521		31,986		19,633		(168)		19,465	155.5	%
Financials		24,054		44,593		20,539		—		20,539	85.4	%
Healthcare		7,606		27,203		19,597		—		19,597	257.7	%
Industrials		19,207		36,961		17,754		—		17,754	92.4	%
Information technology		19,062		34,661		15,599		—		15,599	81.8	%
Materials		2,249		6,354		4,105		—		4,105	182.5	%
Telecommunications		8,541		17,281		8,740		—		8,740	102.3	%
Utilities		36,896		64,281		27,385		—		27,385	74.2	%
ETF		54,065		90,342		36,481		(204)		36,277	67.1	%
	$	214,239	$	419,022	$	205,253	$	(470)	$	204,783	95.6	%

(1) Calculated as the percentage of net unrealized gain (loss) to cost basis.

INCOME TAXES

Our effective tax rate was 32 percent for the first nine months of 2014 and 31 percent for the first nine months of 2013. Effective rates are dependent upon components of pretax earnings and the related tax effects.  The effective rate for the first nine months of 2014 was slightly higher than 2013 due to an increase in underwriting income relative to tax favored investment income.

Income tax expense attributable to income from operations differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income for the first nine months of 2014 and 2013 as a result of the following:

	2014				2013
(in thousands)	Amount		%		Amount		%
Provision for income taxes at the Statutory rate of 35%	$	50,053	35	%	$	47,199	35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(3,115)	(2)	%		(2,717)	(2)	%
Dividends received deduction		(1,764)	(1)	%		(1,871)	(2)	%
ESOP dividends paid deduction		(639)	—	%		(592)	—	%
Other items, net		525	—	%		439	—	%
Total tax expense	$	45,060	32	%	$	42,458	31	%

27

THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2013

Consolidated revenues, as displayed in the table that follows, totaled $197.7 million for the third quarter of 2014 compared to $188.3 million for the same period in 2013.

	For the Three-Month Periods
	Ended September 30,
	2014		2013
Consolidated revenues (in thousands)
Net premiums earned	$	177,747	$	163,702
Net investment income		14,200		13,598
Net realized investment gains		5,708		10,999
Total consolidated revenue	$	197,655	$	188,299

Consolidated revenue for the third quarter of 2014 increased $9.4 million, or 5 percent, from the same period in 2013. Net premiums earned for the Group increased 9 percent for the quarter, led by growth in our casualty segment, which was up 15 percent. Our property and surety segments also grew, though to a lesser extent, up 3 percent and 1 percent, respectively. Net investment income increased 4 percent to $14.2 million due to a larger invested asset base and steady reinvestment rates. Net realized investment gains totaled $5.7 million in the third quarter of 2014, compared to $11.0 million in 2013.

Net after-tax earnings for the third quarter of 2014 totaled $33.3 million, $0.76 per diluted share, compared to $37.6 million, $0.86 per diluted share, for the same period in 2013. Both periods reflect favorable current accident year results that were aided by a lack of catastrophe losses.  From a prior accident year standpoint, favorable development on prior years’ loss and catastrophe reserves resulted in additional pretax earnings of $18.0 million in the third quarter of 2014. Comparatively, in the third quarter of 2013, favorable development on prior years’ loss reserves resulted in additional pretax earnings of $23.4 million. Bonus and profit sharing-related expenses related to these specific items totaled $2.8 million in 2014, compared to $3.7 million in 2013.

During the third quarter of 2014, equity in earnings of unconsolidated investees totaled $2.9 million. This amount includes $2.8 million from Maui Jim and $0.1 million from Prime. Comparatively, the third quarter of 2013 reflected $2.6 million of Maui Jim earnings. Prior year figures reflect only Maui Jim results, as our equity investment in Prime occurred in the first quarter of 2014.

Comprehensive earnings, which include net earnings plus other comprehensive earnings (primarily the change in unrealized gains/losses net of tax), totaled $20.9 million, $0.48 per diluted share, for the third quarter of 2014, compared to $35.7 million, $0.82 per diluted share, for the third quarter of 2013. Unrealized losses, net of tax, for the third quarter of 2014 were $12.4 million, compared to $1.9 million for the same period in 2013. Unrealized losses in the quarter were primarily due to a decline in the equity portfolio during the third quarter of 2014.

RLI INSURANCE GROUP

As reflected in the table below, gross premiums written for the Group increased 3 percent to $207.8 million for the third quarter of 2014 from $201.7 million in the third quarter of 2013. Growth was achieved in all three segments with casualty up 3 percent, property up 2 percent and surety up 6 percent. Expansion efforts and newer product initiatives across all three segments have contributed to increased premium production. Net premiums written advanced 8 percent in the quarter, outpacing growth in gross premiums written due largely to cost savings realized during our 2014 reinsurance renewals. On a net premiums earned basis, premiums increased $14.0 million, or 9 percent, overall, led by a 15 percent increase from our casualty segment. The increase resulted from the overall growth experienced in recent periods and increased retentions in 2013 on certain casualty products. Underwriting income for the Group decreased $1.4 million to $30.4 million for the third quarter of 2014. Results for 2014 reflect favorable development of $15.3

28

million on prior years’ loss and catastrophe reserves, compared to favorable development of $19.7 million on prior years’ loss and catastrophe reserves in 2013. The GAAP combined ratio totaled 82.9 in 2014 and 80.5 in 2013.

	Forthe Three-Month Periods
	Ended September 30,
	2014		2013
Gross premiums written (in thousands)
Casualty	$	119,789	$	116,242
Property		56,611		55,716
Surety		31,422		29,708
Total	$	207,822	$	201,666
Underwriting income (in thousands)
Casualty	$	13,786	$	20,799
Property		7,498		6,468
Surety		9,144		4,551
Total	$	30,428	$	31,818
Combined ratio
Casualty		85.6		75.3
Property		86.1		87.7
Surety		66.7		83.2
Total		82.9		80.5

Casualty

Gross premiums written for the casualty segment increased 3 percent, to $119.8 million for the third quarter of 2014, as a number of products within the segment have advanced top-line production. While pricing momentum has slowed relative to the improvements seen in the previous year, the rate environment for our casualty products has been more favorable than that of our property and surety coverages. Premium growth was most notable from our professional services group, up $4.8 million (31 percent), and our P&C package business, which advanced $1.8 million (20 percent) to $10.7 million.  Umbrella coverages also delivered solid results, with gross premiums written up $1.2 million (4 percent). Our assumed casualty reinsurance business, which relates to our new quota share reinsurance treaty with Prime, posted $2.4 million of premium in the quarter. Growth from these products offset a $6.3 million  (27 percent) decline from transportation and a $1.0 million (27 percent) decline from our medical professional liability business.  The decline in transportation follows significant growth in this book over the past two years, including a 61 percent increase achieved during the comparable quarter of 2013.

The casualty segment recorded underwriting income of $13.8 million in the third quarter of 2014, compared to $20.8 million for the same period last year. Both periods produced positive underwriting income in the current accident year that were improved by favorable development on prior years’ loss and catastrophe reserves. During the third quarter of 2014, we released reserves which improved the segment’s underwriting results by $11.2 million.  Products with favorable development included general liability, umbrella, P&C package and transportation. From an accident year standpoint, the majority of the favorable development occurred on more recent accident years (2006-2013). From a comparative standpoint, 2013 results included favorable development on prior accident years’ loss reserves, primarily for general liability, umbrella and P&C package, which improved the segment’s underwriting results by $17.5 million.

Overall, the combined ratio for the casualty segment was 85.6 for 2014 compared to 75.3 in 2013. The segment’s loss ratio was 49.7 in 2014 compared to 38.5 in 2013. The loss ratio increase was due to the decreased level of favorable development on prior years’ reserves in 2014 combined with a slight increase in the current accident year loss ratio.  The expense ratio for the casualty segment was 35.9 for the third quarter of 2014 compared to 36.8 for the same period in 2013.

Property

Gross premiums written for the Group’s property segment totaled $56.6 million for the third quarter of 2014, a 2 percent increase from the same period last year. Premium production from these coverages continues to be impacted by

29

competitive pressures on pricing, and by actions we have taken with respect to certain underperforming products within this book. Our fire and catastrophe-exposed assumed reinsurance programs contributed $0.9 million and $0.5 million of growth to gross premiums written respectively.  Partially offsetting these increases, our DIC product declined 8 percent from the prior year as a result of increased competition and lower rates resulting from largely benign catastrophe activity in recent periods. Marine premiums also decreased, down 4 percent from the prior year.  The decline in marine has slowed relative to that seen in more recent quarters as efforts to re-underwrite this book were largely completed by the end of September. 

Underwriting income for the segment was $7.5 million for the third quarter of 2014, compared to $6.5 million for the same period in 2013. Both periods benefited from positive underwriting income for the current accident year that were aided by benign catastrophe seasons. Current accident year results for 2014, while profitable on an overall basis, included $2.3 million in losses related to an increase in the loss booking ratio for our recreational vehicle business. From a prior accident year standpoint, 2014 results were minimally impacted by development on prior years’ loss and catastrophe reserves, while 2013 results included favorable development of $3.1 million.

Segment results for the third quarter of 2014 translate into a combined ratio of 86.1 compared to 87.7 for the same period last year. The segment’s loss ratio increased to 51.6 in 2014 from 50.7 in 2013. From an expense standpoint, the segment’s expense ratio for the third quarter was 34.5 for 2014, compared to 37.0 in 2013.

Surety

The surety segment recorded gross premiums written of $31.4 million for the second quarter of 2014, an increase of 6 percent from the same period last year. Increased construction activity led to $1.4 million of premium growth on our commercial surety line, offsetting a 10 percent decline on our oil and gas surety product.

The surety segment recorded underwriting income of $9.1 million, compared to $4.6 million for the same period last year. Results for 2014 included favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $4.3 million. From a comparative standpoint, 2013 results included favorable development on prior accident years’ loss reserves which had a minimal impact on the segment’s underwriting results.

The combined ratio for the surety segment totaled 66.7 for the third quarter of 2014, versus 83.2 for the same period in 2013. The segment’s loss ratio was 0.9 for 2014, compared to 19.4 for 2013. The loss ratio decrease was due to the combined effect of increased favorable development on prior years’ reserves and moderate improvement in the current accident year loss ratio. The expense ratio for the second quarter was 65.8 for 2014, compared to 63.8 in 2013.

INVESTMENT INCOME AND REALIZED CAPITAL GAINS

Our investment portfolio generated net investment income of $14.2 million during the third quarter of 2014, an increase of 4.4 percent from that reported for the same period in 2013. The increase in investment income was due to a larger invested asset base and steady reinvestment rates. On an after-tax basis, investment income increased by 4.0 percent.

Yields on our fixed income investments for the third quarter of 2014 and 2013 were as follows:

	3Q 2014		3Q 2013
Pretax Yield
Taxable	3.48	%	3.75	%
Tax-Exempt	2.81	%	2.70	%
After-Tax Yield
Taxable	2.26	%	2.44	%
Tax-Exempt	2.66	%	2.56	%

We recognized $5.7 million in realized gains in the third quarter of 2014, compared to realized gains of $11.0 million in the third quarter of 2013. Investment gains during the quarter were taken primarily in the equity portfolio as we rebalanced into fixed income assets. We did not record any realized losses associated with OTTI of securities during the third quarter of 2014.

30

INCOME TAXES

Our effective tax rate was 32 percent for the third quarter of 2014 and 2013. Effective rates are dependent upon components of pretax earnings and the related tax effects.  The effective rate for the third quarter of 2014 was the same due to a similar ratio of tax-favored investment income to underwriting income.

Income tax expense attributable to income from operations differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income for the third quarter of 2014 and 2013 as a result of the following:

	2014				2013
(in thousands)	Amount		%		Amount		%
Provision for income taxes at the Statutory rate of 35%	$	17,008	35	%	$	19,358	35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(1,033)	(2)	%		(991)	(2)	%
Dividends received deduction		(633)	(1)	%		(708)	(1)	%
ESOP dividends paid deduction		(218)	—	%		(199)	—	%
Other items, net		216	—	%		202	—	%
Total tax expense	$	15,340	32	%	$	17,662	32	%

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 nine-month periods ended September 30, 2014 and 2013:

	2014		2013
	(in thousands)
Operating cash flows	$	85,894	$	81,736
Investing cash flows	$	(29,607)	$	(22,345)
Financing cash flows	$	(18,719)	$	(16,307)
Total	$	37,568	$	43,084

Operating activities generated positive cash flows of $85.9 million in the first nine months of 2014, compared to $81.7 million in the same period last year. The increase in operating cash flows is due largely to reduced levels of paid losses relative to the prior year. The majority of cash outflows from investing activities related to purchases of fixed income securities with a focus on an allocation to high yield credit.

We have $149.6 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 September 30, 2014 was $158.7 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

As of September 30, 2014, we had cash, short-term investments and other investments maturing within one year of approximately $105.6 million and an additional $269.8 million maturing between one to five years. As of September 30, 2014, our short-term investments were held primarily in government/agency funds. All funds are NAIC-rated, AAA-rated, and maintain average weighted maturities of less than 60 days. Holdings within each of these funds comply with regulatory limitations.

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.

31

We also maintain a revolving line of credit with JP Morgan Chase Bank N.A., which permits us to borrow up to an aggregate principal amount of $40.0 million. This facility was entered into during the second quarter of 2014 and replaced the previous $25.0 million facility which expired on May 31, 2014. Under certain conditions, the line may be increased up to an aggregate principal amount of $65.0 million. The facility has a four-year term that expires on May 28, 2018. As of and during the quarter ended September 30, 2014 no amounts were outstanding on this facility.

Additionally, during the third quarter of 2014, two of our insurance companies, RLI Ins. and Mt. Hawley, became members of the Federal Home Loan Bank of Chicago (FHLBC).  Membership in the Federal Home Loan Bank System will provide 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 the end of the third quarter, there were no outstanding borrowing amounts with FHLBC.

We believe that cash generated by operations, by investments and by cash available from financing activities will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months.

We have not had any liquidity issues affecting our operations as we have sufficient cash flow to support operations. In addition to our bank credit facility, FHLBC membership, our highly liquid investment portfolio and reverse repurchase debt capacity provide additional sources 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 September 30, 2014, our investment portfolio had a balance sheet value of $2.1 billion. Invested assets at September 30, 2014, have increased $141.9 million from December 31, 2013.

As of September 30, 2014, our investment portfolio had the following asset allocation breakdown:

Portfolio Allocation

(in thousands)

	Costor		Fair		Unrealized		% of Total
Asset class	Amortized Cost		Value		Gain/(Loss)		Fair Value		Quality*
U.S. agency	$	6,383	$	6,516	$	133	0.3	%	AA
Corporate		563,120		584,156		21,036	28.3	%	BBB
Mortgage-backed		255,382		260,902		5,520	12.6	%	AA
ABS/CMBS**		137,305		138,118		813	6.7	%	AAA
Non-U.S. govt. & agency		9,861		10,557		696	0.5	%	A
U.S. government		32,082		32,163		81	1.6	%	AA
Municipal		499,021		513,779		14,758	24.9	%	AA
Total Fixed Income	$	1,503,154	$	1,546,191	$	43,037	74.9	%	AA
Equity	$	214,239	$	419,022	$	204,783	20.3	%
Other Invested Assets	$	11,688	$	11,688	$	—	0.6	%
Cash and short-term investments	$	87,100	$	87,100	$	—	4.2	%
Total Portfolio	$	1,816,181	$	2,064,001	$	247,820	100.0	%

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

**Asset-backed and commercial mortgage-backed securities

Our investment portfolio does not have any exposure to derivatives.

32

As of September 30, 2014, our fixed income portfolio had the following rating distribution:

AAA	17.3	%
AA	44.1	%
A	23.5	%
BBB	9.9	%
BB	3.1	%
B	1.9	%
CCC	0.1	%
NR	0.1	%
Total	100.0	%

As of September 30, 2014, the duration of the fixed income portfolio was 4.6 years. Our fixed income portfolio remained well diversified, with 886 individual issues as of September 30, 2014.

Our investment portfolio has limited exposure to structured asset-backed securities (ABS). As of September 30, 2014, we had $50.7 million in ABS which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and similar obligations. The majority of our asset-backed portfolio is comprised of rate reduction utility bonds.

As of September 30, 2014 we had $87.5 million in commercial mortgage backed securities (CMBS) and $260.9 million in residential 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 6.7 percent of our investment portfolio at quarter end.

We had $584.2 million in corporate fixed income securities as of September 30, 2014. During 2014, we initiated an investment allocation to high yield credit. This 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. As of September 30, 2014, we had $51.2 million invested in the strategy.

We also maintain an allocation to municipal fixed income securities. As of September 30, 2014, we had $513.8 million in municipal securities. As of September 30, 2014, approximately 90 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 100 percent of the municipal bond portfolio is rated ‘A’ or better.

At September 30, 2014, our equity portfolio had a fair value of $419.0 million and is also a source of liquidity. The securities within the equity portfolio remain primarily invested in large-cap issues with strong dividend performance. In the equity portfolio, the strategy remains one of value investing, with security selection taking precedence over market timing. We use a buy-and-hold strategy, minimizing both transactional costs and taxes.

As of September 30, 2014, our equity portfolio had a dividend yield of 2.7 percent compared to 2.0 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 14.2 percent on dividends, compared to 35.0 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 82 individual names and no single stock exposure greater than 2 percent of the equity portfolio.

Other invested assets shown on the balance sheet as of September 30, 2014 include an investment in a low income housing tax credit partnership as well as membership in the Federal Home Loan Bank Chicago.  During the third quarter of 2014, we recorded an interest in a low income housing tax credit partnership totaling $10.0 million.  The interest had a balance of $9.9 million at September 30, 2014 and recognized a total tax benefit of $0.1 million during the quarter.  Our investment in FHLBC stock totaled $1.8 million at the end of the third quarter.

Our capital structure is comprised of equity and debt outstanding. As of September 30, 2014, our capital structure consisted of $149.6 million in 10-year maturity senior notes maturing in 2023 (debt) and $933.5 million of shareholders’ equity. Debt outstanding comprised 13.8 percent of total capital as of September 30, 2014. Interest and fees on debt obligations totaled $5.6 million during the first nine months of 2014 compared to $4.5 million for the same period in 2013. We have incurred interest expense on debt at an average interest rate of 4.91 percent for the first nine months of 2014 compared to 6.02 percent for the same period in the prior year.

33

We paid a quarterly cash dividend of $0.18 per share on September 19, 2014, the same amount as the prior quarter. We have paid dividends for 153 consecutive quarters and increased dividends in each of the last 39 years.

Our insurance subsidiaries are organized in a vertical structure with RLI Ins. as the first-level, or principal, insurance subsidiary of RLI Corp. 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 September 30, 2014, our holding company had $933.5 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 $66.3 million in liquid assets. 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 issuances of common stock and debt.

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. In the first nine months of 2014, RLI Ins. paid a total of $50.0 million in ordinary dividends to RLI Corp. In 2013, our principal insurance subsidiary paid ordinary dividends totaling $40.0 million to RLI Corp. No extraordinary dividends were paid during 2013. As of September 30, 2014, $155.9 million of the net assets of our principal insurance subsidiary are not restricted and could be distributed to RLI Corp. as ordinary dividends. Because the limitations are based upon a rolling 12-month period, the presence, amount and impact of these restrictions vary over time.

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 December 31, 2013 Annual Report on Form10-K.

ITEM 4. Controls and Procedures

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

34

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.

PARTII - OTHER INFORMATION

Item1. Legal Proceedings –

In July 2014, the Belmont Massachusetts Contributory Retirement System filed a putative class action and shareholder derivative lawsuit against RLI Corp. and its Board of Directors in Illinois state court.  The lawsuit alleges breach of contract and breach of fiduciary duty by its directors relating to adjustments made to the exercise price of outstanding stock options under our equity-based incentive plans, as a result of extraordinary cash dividends paid by us in 2011, 2012 and 2013.  The lawsuit seeks, among other things, to subject these adjustments to a vote of our shareholders and does not seek monetary damages or compensation for shareholders, but does seek payment for plaintiff’s attorney fees.  We believe that such allegations are without merit, that we have valid defenses and will vigorously contest this action.  Because of the uncertainty and costs incident to litigating this matter, RLI may seek to settle or otherwise resolve this matter on terms we deem to be in the best interests of the company and its shareholders.  While it is not possible to predict the ultimate disposition of this matter and whether it will be resolved consistent with our positions,  RLI’s management expects that the outcome will not have a material adverse effect on our financial condition, results of operations or cash flows.

Item1A.	Risk Factors - There were no material changes to report.
Item2.	Unregistered Sales of Equity Securities and Use of Proceeds  -

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

Our current $100 million share repurchase program was implemented by our Board of Directors in May2010. The repurchase program may be suspended or discontinued at any time without prior notice. During the third quarter of 2014, no repurchases were made. We have not repurchased shares under this program since the third quarter of 2011. We have $87.5 million of remaining capacity from the repurchase program.

Item3.	Defaults Upon Senior Securities - Not Applicable.
Item4.	Mine Safety Disclosures - Not Applicable.
Item5.	Other Information - Not Applicable.

35

Item6.	Exhibits
	Exhibit31.1 Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002
	Exhibit31.2 Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002
	Exhibit32.1 Certification Pursuant to 18 U.S.C. Section1350, asAdopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002
	Exhibit32.2 Certification Pursuant to 18 U.S.C. Section1350, asAdopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002
	Exhibit101 XBRL-Related Documents

36

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/Thomas L. Brown
	Thomas L. Brown
	Vice President, Chief Financial Officer
	(Principal Financial and Chief Accounting Officer)
Date: October 27, 2014

37

EX-31.1

Exhibit31.1

CERTIFICATION

Chief Executive Officer Certification pursuant to Section302 of the Sarbanes-Oxley Act of 2002

I, Jonathan E. Michael, certify that:

I have reviewed this quarterly report on Form10-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 Rules13a-15(e)and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules13a-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:October27, 2014

/s/ Jonathan E. Michael

Jonathan E. Michael

Chairman & CEO

EX-31.2

Exhibit31.2

CERTIFICATION

Chief Financial Officer Certification pursuant to Section302 of the Sarbanes-Oxley Act of 2002

I, Thomas L. Brown, certify that:

I have reviewed this quarterly report on Form10-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 Rules13a-15(e)and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules13a-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:October27, 2014

/s/ Thomas L. Brown

Thomas L. Brown

VP, Chief Financial Officer

EX-32.1

Exhibit32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form10-Q for the period ending September 30, 2014 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

October 27, 2014

EX-32.2

Exhibit32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form10-Q for the period ending September30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),I, Thomas L. Brown, 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/ Thomas L. Brown

Thomas L. Brown

VP, Chief Financial Officer

October 27, 2014

XML

FAIR VALUE MEASUREMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Transfers in (out of) level 1	$ 0
Transfers in (out of) level 2	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	419,022	418,654
Total assets at fair value	419,022	418,654
Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,545,530	1,440,052
Total assets at fair value	1,545,530	1,440,052
Significant Unobservable Inputs (Level 3) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total assets at fair value	0
Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,964,552	1,858,706
Total assets at fair value	1,964,552	1,858,706
U.S. Agency | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	6,516	10,298
U.S. Agency | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	6,516	10,298
Corporate Bond Securities [Member] | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	584,156	526,038
Corporate Bond Securities [Member] | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	584,156	526,038
Mortgage-backed | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	260,902	244,416
Mortgage-backed | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	260,902	244,416
ABS/CMBS | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	138,118	106,309
ABS/CMBS | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	138,118	106,309
Non-U.S. govt. & agency | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	10,557	13,678
Non-U.S. govt. & agency | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	10,557	13,678
U.S. government | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	32,163	17,303
U.S. government | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	32,163	17,303
Municipal | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	513,118	522,010
Municipal | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	513,118	522,010
Equity securities | Quoted Prices in Active Markets for Identical Assets (Level 1) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	419,022	418,654
Equity securities | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	$ 419,022	$ 418,654

XML

STOCK BASED COMPENSATION

9 Months Ended

Sep. 30, 2014

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

4.  STOCK BASED COMPENSATION

Our RLI Corp. Omnibus Stock Plan (omnibus plan) was in place from 2005 to 2010. The omnibus plan provided for equity-based compensation, including stock options, up to a maximum of 3,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2005 and 2010, we granted 2,457,644 stock options under this plan, including incentive stock options (ISOs), which were adjusted as part of the special dividends paid in 2013 and prior years.

During the second quarter of 2010, our shareholders approved the RLI Corp. Long-Term Incentive Plan (LTIP), which provides for equity-based compensation and replaced the omnibus plan. In conjunction with the adoption of the LTIP, effective May 6, 2010, options were no longer granted under the omnibus plan. Awards under the LTIP may be in the form of restricted stock, stock options (non-qualified only), stock appreciation rights, performance units, as well as other stock-based awards. Eligibility under the LTIP is limited to employees or directors of the company or any affiliate. The granting of awards under the LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since 2010, we have granted 2,777,000 stock options under the LTIP, including 464,500 thus far in 2014.

Under the LTIP, as under the omnibus plan, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant. Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

In most instances, 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 periods ended September 30, 2014 and 2013:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	464,500	$	42.90
Options exercised	(47,412)	$	17.95		$	1,250
Options canceled/forfeited	(740)	$	16.51
Outstanding options at September 30,  2014	3,011,432	$	28.77	5.25	$	43,850
Exercisable options at September 30,  2014	1,351,312	$	22.29	3.99	$	28,382
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2013	2,945,204	$	22.23
Options granted	582,200	$	36.31
Options exercised	(761,362)	$	17.18		$	17,211
Options canceled/forfeited	(44,880)	$	25.93
Outstanding options at September 30,  2013	2,721,162	$	26.59	5.65	$	46,590
Exercisable options at September 30,  2013	1,060,662	$	21.09	4.35	$	23,995

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.

Thus far in 2014, 464,500 stock options were granted with a weighted average exercise price of $42.90 and a weighted average fair value of $7.76. We recognized $0.9 million of expense in the third quarter of 2014, and $2.9 million in the first nine months of 2014, related to options vesting. Since options granted under our LTIP are non-qualified, we recorded a tax benefit of $0.3 million in the third quarter of 2014, and $1.0 million in the first nine months of 2014, related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $5.2 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.0 million of expense in the third quarter of 2013, and $2.8 million of expense in the first nine months of 2013. We recorded a tax benefit of $0.3 million in the third quarter of 2013, and $1.0 million in the first nine months of 2013, related to this compensation expense.

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 September 30:

	2014			2013
Weighted-average fair value of grants	$	7.76		$	6.58
Risk-free interest rates		1.70	%		0.80	%
Dividend yield		1.94	%		2.00	%
Expected volatility		23.19	%		25.41	%
Expected option life		5.17	years		5.23	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 calculated based on the average annualized dividends paid during the most recent five-year period. It excluded the special dividends paid in the fourth quarters of 2013 and prior years. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. In previous years, expected volatility was calculated based on the mean reversion of RLI’s stock. 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.

In 2013 and 2014, each outside director received $10,000 worth of restricted common shares as part of annual director compensation. The shares were issued annually from the LTIP during the first quarter of each year.  The shares were directly owned by each director on the date of issuance and included a one-year restriction on the sale or transfer of such shares. In the first quarter of 2014, we issued a total of 2,097 restricted shares and recognized $0.1 million of compensation expense. This restricted share program has been terminated and no further restricted shares will be issued going forward.

XML

ACQUISITION (Details) (USD $)	3 Months Ended		9 Months Ended		0 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Feb. 05, 2014 Prime Holdings Insurance Services, Inc. (Prime) [Member]	Sep. 30, 2014 Prime Holdings Insurance Services, Inc. (Prime) [Member] state	Sep. 30, 2014 Prime Holdings Insurance Services, Inc. (Prime) [Member] state
Business acquisition
Amount of investment			$ 5,301,000		$ 5,300,000
Equity ownership interest (as a percent)					20.00%
Number of states in which entity operates						49	49
Percentage of quota share reinsurance treaty, effective January 1, 2014							25.00%
Equity in earnings of unconsolidated investee	2,915,000	2,564,000	12,204,000	10,696,000		100,000	400,000
Reinsurance assumed						$ 2,400,000	$ 7,400,000

XML

OPERATING SEGMENT INFORMATION Major Products (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue by major product
Net premiums earned	$ 177,747	$ 163,702	$ 507,483	$ 462,406
Casualty segment
Revenue by major product
Net premiums earned	96,181	83,966	281,518	235,307
Casualty segment | Commercial and personal umbrella
Revenue by major product
Net premiums earned	25,256	22,247	75,036	61,803
Casualty segment | General liability
Revenue by major product
Net premiums earned	20,095	20,342	60,550	61,139
Casualty segment | Commercial transportation
Revenue by major product
Net premiums earned	14,677	13,463	44,193	35,594
Casualty segment | P&C package business
Revenue by major product
Net premiums earned	8,969	7,643	25,747	22,671
Casualty segment | Executive products
Revenue by major product
Net premiums earned	4,760	4,933	14,165	14,300
Casualty segment | Professional services
Revenue by major product
Net premiums earned	15,227	11,021	41,927	30,092
Casualty segment | Medical professional liability
Revenue by major product
Net premiums earned	3,546	2,674	10,970	5,136
Casualty segment | Other casualty
Revenue by major product
Net premiums earned	3,651	1,643	8,930	4,572
Property segment
Revenue by major product
Net premiums earned	54,143	52,705	146,252	147,305
Property segment | Commercial products
Revenue by major product
Net premiums earned	20,188	18,938	60,675	57,813
Property segment | Marine
Revenue by major product
Net premiums earned	12,115	14,242	37,278	43,898
Property segment | Crop reinsurance business
Revenue by major product
Net premiums earned	11,802	11,846	18,671	19,501
Property segment | Property reinsurance
Revenue by major product
Net premiums earned	2,997	2,848	9,745	12,503
Property segment | Other property
Revenue by major product
Net premiums earned	7,041	4,831	19,883	13,590
Surety segment
Revenue by major product
Net premiums earned	27,423	27,031	79,713	79,794
Surety segment | Miscellaneous
Revenue by major product
Net premiums earned	9,868	9,590	28,948	28,559
Surety segment | Contract
Revenue by major product
Net premiums earned	6,879	7,025	19,896	20,137
Surety segment | Commercial
Revenue by major product
Net premiums earned	6,521	5,857	18,968	17,285
Surety segment | Oil and Gas
Revenue by major product
Net premiums earned	$ 4,155	$ 4,559	$ 11,901	$ 13,813

XML

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2014

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

3.FAIR VALUE MEASUREMENTS

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

Financial assets are classified based upon the lowest level of significant input that is used to determine 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:

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 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. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, 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.

Common Stock: Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All of our common stock holdings are deemed Level 1.

For the Level 2 securities, 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. Second, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, when discrepancies are found, we compare our prices to actual reported trade data for like securities. Based on this assessment, we determined that the fair values of our Level 2 securities provided by our pricing services are reasonable.

For common stock, we receive prices from a nationally recognized pricing service. Prices are based on observable inputs in an active market and are therefore disclosed as Level 1. Based on this assessment, we determined that the fair values of our Level 1 securities provided by our pricing service are reasonable.

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.

Assets measured at fair value in the accompanying unaudited condensed consolidated interim financial statements on a recurring basis are summarized below:

	As of September 30,  2014
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	6,516	$	—	$	6,516
Corporate		—		584,156		—		584,156
Mortgage-backed		—		260,902		—		260,902
ABS/CMBS*		—		138,118		—		138,118
Non-U.S. govt. & agency		—		10,557		—		10,557
U.S. government		—		32,163		—		32,163
Municipal		—		513,118		—		513,118
Equity		419,022		—		—		419,022
Total available-for-sale securities	$	419,022	$	1,545,530	$	—	$	1,964,552
Total	$	419,022	$	1,545,530	$	—	$	1,964,552

*Asset-backed and commercial mortgage-backed

	As of December 31,  2013
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	10,298	$	—	$	10,298
Corporate		—		526,038		—		526,038
Mortgage-backed		—		244,416		—		244,416
ABS/CMBS*		—		106,309		—		106,309
Non-U.S. govt. & agency		—		13,678		—		13,678
U.S. government		—		17,303		—		17,303
Municipal		—		522,010		—		522,010
Equity		418,654		—		—		418,654
Total available-for-sale securities	$	418,654	$	1,440,052	$	—	$	1,858,706
Total	$	418,654	$	1,440,052	$	—	$	1,858,706

*Asset-backed and commercial mortgage-backed

As noted in the above table, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. Additionally, there were no securities transferred in or out of levels 1 or 2 during the nine-month period ended September 30, 2014.

XML

Condensed Consolidated Statements of Earnings and Comprehensive Earnings (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Net premiums earned	$ 177,747	$ 163,702	$ 507,483	$ 462,406
Net investment income	14,200	13,598	41,764	39,331
Net realized investment gains	5,708	10,999	22,640	18,425
Consolidated revenue	197,655	188,299	571,887	520,162
Losses and settlement expenses	76,019	64,246	220,380	191,301
Policy acquisition costs	58,180	54,176	168,387	156,014
Insurance operating expenses	13,120	13,462	39,187	37,916
Interest expense on debt	1,857	1,513	5,582	4,538
General corporate expenses	2,800	2,157	7,547	6,235
Total expenses	151,976	135,554	441,083	396,004
Equity in earnings of unconsolidated investee	2,915	2,564	12,204	10,696
Earnings before income taxes	48,594	55,309	143,008	134,854
Income tax expense	15,340	17,662	45,060	42,458
Net earnings	33,254	37,647	97,948	92,396
Other comprehensive earnings (loss)	(12,353)	(1,946)	25,318	(17,874)
Comprehensive earnings	$ 20,901	$ 35,701	$ 123,266	$ 74,522
Basic:
Basic net earnings per share (in dollars per share)	$ 0.77	$ 0.88	$ 2.28	$ 2.17
Basic comprehensive earnings per share (in dollars per share)	$ 0.49	$ 0.83	$ 2.87	$ 1.75
Diluted:
Diluted net earnings per share (in dollars per share)	$ 0.76	$ 0.86	$ 2.24	$ 2.13
Diluted comprehensive earnings per share (in dollars per share)	$ 0.48	$ 0.82	$ 2.82	$ 1.72
Weighted average number of common shares outstanding
Basic (in shares)	43,026	42,843	43,004	42,673
Diluted (in shares)	43,712	43,546	43,692	43,330
Cash dividends paid per common share (in dollars per share)	$ 0.18	$ 0.17	$ 0.53	$ 0.50

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

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 2013 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 September 30, 2014 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.

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 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects

This ASU permits an entity to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  The proportional amortization method requires an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense.

We elected to early adopt this ASU during the third quarter of 2014 in conjunction with our investment in Federal Low Income Housing Tax Credits.  A discussion of our investment and the required disclosures of this accounting standards update are included in Note 2 to these unaudited condensed consolidated interim financial statements.

C.  PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would impact our financial statements as of September 30, 2014.

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangibles totaled $74.2 million at September 30, 2014.

Goodwill resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $32.0 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $8.8 million. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2014. Based upon these reviews, none of theassets were impaired. In addition, as of September 30, 2014, there were no triggering events that occurred that would suggest an updated review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.8 million, net of amortization, as of September 30, 2014.

The remaining $16.0 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining$3.6 million relates to definite-lived intangible assets, net of amortization, as of September 30, 2014. Impairment testing was performed on this goodwill asset during the third quarter of 2014 as actual premium production has fallen below levels anticipated at acquisition. We used a quantitative analysis to determine the impact of the difference and concluded that the asset was not impaired.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the third quarter of 2014, and $0.7 million for the nine months ended September 30, 2014.

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 September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	33,254	43,026	$	0.77	$	37,647	42,843	$	0.88
Effect of Dilutive Securities
Stock options		-	686				-	703
Diluted EPS
Income available to common shareholders	$	33,254	43,712	$	0.76	$	37,647	43,546	$	0.86
	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	97,948	43,004	$	2.28	$	92,396	42,673	$	2.17
Effect of Dilutive Securities
Stock options		-	688				-	657
Diluted EPS
Income available to common shareholders	$	97,948	43,692	$	2.24	$	92,396	43,330	$	2.13

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of35 percent. The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Unrealized Gains/Losses on Available-for-Sale Securities
Beginning balance	$	173,698	$	127,242	$	136,027	$	143,170
Other comprehensive earnings before reclassifications		(8,642)		5,203		40,032		(5,354)
Amounts reclassified from accumulated other comprehensive earnings		(3,711)		(7,149)		(14,714)		(12,520)
Net current-period other comprehensive earnings	$	(12,353)	$	(1,946)	$	25,318	$	(17,874)
Ending balance	$	161,345	$	125,296	$	161,345	$	125,296

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
	Comprehensive Earnings
(in thousands)	For the Three-Month				For the Nine-Month
Component of Accumulated	Periods Ended September 30,				Periods Ended September 30,				Affected line item in the
Other Comprehensive Earnings	2014		2013		2014		2013		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	5,709	$	10,998	$	22,637	$	19,261	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	5,709	$	10,998	$	22,637	$	19,261	Earnings before income taxes
		(1,998)		(3,849)		(7,923)		(6,741)	Income tax expense
	$	3,711	$	7,149	$	14,714	$	12,520	Net earnings

XML

INVESTMENTS Held to Maturity (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Held-to-Maturity Debt Securities
Fair value of held-to-maturity securities, due in one year or less	$ 0.7	$ 0.7
Carrying value of held-to-maturity securities, due in one year or less	0.7	0.7
Maximum
Held-to-Maturity Debt Securities
Gross Unrecognized Gains	$ 0.1	$ 0.1

XML

INVESTMENTS Debt and Common Stock Securities (Details) (USD $)	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Fixed income securities in unrealized loss positions
Investment in low income housing tax credit partnership	$ 10,000,000
Other Investments	11,688,000
Total tax benefit on investments in housing tax credit partnership	100,000
Investment in FHLBC	1,800,000
Unrealized Loss	7,065,000	28,933,000
Other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings	0
Debt securities
Fixed income securities in unrealized loss positions
Number of unrealized loss positions	290
Unrealized Loss	6,600,000
Unrealized losses as percentage of fixed income portfolio cost basis	0.40%
Number of securities in unrealized loss positions for 12 months or longer	74
Common stock security
Fixed income securities in unrealized loss positions
Number of unrealized loss positions	3
Number of securities in unrealized loss positions for 12 months or longer	0
Common stock security | Maximum
Fixed income securities in unrealized loss positions
Unrealized Loss	500,000
Investment In Low Income Housing Tax Credit Partnership Net Of Amortization Member
Fixed income securities in unrealized loss positions
Other Investments	$ 9,900,000

XML

INVESTMENTS

9 Months Ended

Sep. 30, 2014

INVESTMENTS

INVESTMENTS

2.INVESTMENTS

Our investments include fixed income debt securities and common stock equity securities. As disclosed in our 2013 Annual Report on Form 10-K, we present our investments in these classes as available-for-sale and held-to-maturity. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

The following tables show the amortized cost, unrealized gains/losses, fair value and contractual maturities for our available-for-sale and held-to-maturity securities.

Available-for-Sale Securities

The amortized cost and fair value of available-for-sale securities at September 30, 2014 and December 31, 2013 were as follows:

Available-for-sale
(in thousands)
	9/30/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	6,383	$	147	$	(14)	$	6,516
Corporate		563,120		23,639		(2,603)		584,156
Mtge/ABS/CMBS*		392,687		9,627		(3,294)		399,020
Non-U.S. govt. & agency		9,861		696		-		10,557
U.S. government		32,082		120		(39)		32,163
Municipal		498,371		15,392		(645)		513,118
Total Fixed Income	$	1,502,504	$	49,621	$	(6,595)	$	1,545,530
Equity	$	214,239	$	205,253	$	(470)	$	419,022
Available-for-sale
(in thousands)
	12/31/2013
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	10,513	$	22	$	(237)	$	10,298
Corporate		511,748		22,302		(8,012)		526,038
Mtge/ABS/CMBS*		350,187		8,188		(7,650)		350,725
Non-U.S. govt. & agency		13,306		437		(65)		13,678
U.S. government		17,086		217		-		17,303
Municipal		528,209		6,495		(12,694)		522,010
Total Fixed Income	$	1,431,049	$	37,661	$	(28,658)	$	1,440,052
Equity	$	218,848	$	200,081	$	(275)	$	418,654

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

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of September 30, 2014:

	9/30/2014
AFS	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	17,680	$	17,855
Due after one year through five years		242,863		253,882
Due after five years through 10 years		594,841		612,167
Due after 10 years		254,433		262,606
Mtge/ABS/CMBS*		392,687		399,020
Total available-for-sale	$	1,502,504	$	1,545,530

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

Held-to-Maturity Debt Securities

The carrying value and fair value of held-to-maturity securities was $0.7 million at September 30, 2014 and December 31, 2013. Held-to-maturity securities are carried on the unaudited condensed consolidated balance sheets at amortized cost and changes in the fair value of these securities, other than impairment charges, are not reported on the financial statements. Unrecognized gains on our held-to-maturity securities were less than $0.1 million at September 30, 2014 and December 31, 2013. As of September 30, 2014, the carrying value and fair value of all debt securities held-to-maturity had a contractual maturity date of less than one year.

Unrealized Losses

We conduct and document periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of securities that were in an unrealized loss position as of September 30, 2014 and December 31, 2013. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of September 30, 2014 unrealized losses, as shown in the following tables, were 0.3 percent of total invested assets. Unrealized losses decreased in 2014, as interest rates declined during the first three quarters of the year.

	September 30,  2014						December 31,  2013
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	18,556	$	—	$	18,556	$	—	$	—	$	—
Cost or amortized cost		18,595		—		18,595		—		—		—
Unrealized Loss	$	(39)	$	—	$	(39)	$	—	$	—	$	—
U.S. Agency
Fair value	$	1,871	$	—	$	1,871	$	5,760	$	—	$	5,760
Cost or amortized cost		1,885		—		1,885		5,997		—		5,997
Unrealized Loss	$	(14)	$	—	$	(14)	$	(237)	$	—	$	(237)
Non-U.S. government
Fair value	$	—	$	—	$	—	$	1,825	$	—	$	1,825
Cost or amortized cost		—		—		—		1,890		—		1,890
Unrealized Loss	$	—	$	—	$	—	$	(65)	$	—	$	(65)
Mortgage-backed
Fair value	$	27,741	$	70,754	$	98,495	$	118,283	$	—	$	118,283
Cost or amortized cost		27,848		73,223		101,071		124,034		—		124,034
Unrealized Loss	$	(107)	$	(2,469)	$	(2,576)	$	(5,751)	$	—	$	(5,751)
ABS/CMBS*
Fair value	$	46,758	$	19,100	$	65,858	$	54,115	$	—	$	54,115
Cost or amortized cost		47,038		19,538		66,576		56,014		—		56,014
Unrealized Loss	$	(280)	$	(438)	$	(718)	$	(1,899)	$	—	$	(1,899)
Corporate
Fair value	$	157,718	$	22,591	$	180,309	$	190,470	$	2,245	$	192,715
Cost or amortized cost		159,729		23,183		182,912		198,250		2,477		200,727
Unrealized Loss	$	(2,011)	$	(592)	$	(2,603)	$	(7,780)	$	(232)	$	(8,012)
Municipal
Fair value	$	30,321	$	49,615	$	79,936	$	309,407	$	943	$	310,350
Cost or amortized cost		30,378		50,203		80,581		322,095		949		323,044
Unrealized Loss	$	(57)	$	(588)	$	(645)	$	(12,688)	$	(6)	$	(12,694)
Subtotal, fixed income
Fair value	$	282,965	$	162,060	$	445,025	$	679,860	$	3,188	$	683,048
Cost or amortized cost		285,473		166,147		451,620		708,280		3,426		711,706
Unrealized Loss	$	(2,508)	$	(4,087)	$	(6,595)	$	(28,420)	$	(238)	$	(28,658)
Equity securities
Fair value	$	11,635	$	—	$	11,635	$	2,394	$	—	$	2,394
Cost or amortized cost		12,105		—		12,105		2,669		—		2,669
Unrealized Loss	$	(470)	$	—	$	(470)	$	(275)	$	—	$	(275)
Total
Fair value	$	294,600	$	162,060	$	456,660	$	682,254	$	3,188	$	685,442
Cost or amortized cost		297,578		166,147		463,725		710,949		3,426		714,375
Unrealized Loss	$	(2,978)	$	(4,087)	$	(7,065)	$	(28,695)	$	(238)	$	(28,933)

* Asset-backed and commercial mortgage-backed

The following table shows the composition of the fixed income securities in unrealized loss positions at September 30, 2014 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	$	354,379	$	349,481	$	(4,898)	74.3	%
2	BBB	Baa		37,566		37,081		(485)	7.4	%
3	BB	Ba		35,807		35,139		(668)	10.1	%
4	B	B		22,598		22,120		(478)	7.2	%
5	CCC orlower	Caa or lower		1,270		1,204		(66)	1.0	%
6				—		—		—	—
		Total	$	451,620	$	445,025	$	(6,595)	100.0	%

Other Invested Assets

Other invested assets shown on the balance sheet as of September 30, 2014 include an investment in a low income housing tax credit partnership as well as membership in the Federal Home Loan Bank Chicago (FHLBC).  During the third quarter of 2014, we recorded an interest in a low income housing tax credit partnership totaling $10.0 million.  The interest had a balance of $9.9 million at September 30, 2014 and recognized a total tax benefit of $0.1 million during the quarter.  Our investment in FHLBC stock totaled $1.8 million at the end of the third quarter.

Cash and Short-term Investments

Cash consists of uninvested balances in bank accounts. We had a cash balance of $77.0million at the end of the third quarter of 2014, compared to $39.5 million at the end of 2013. Short-term investments are carried at cost, which approximates fair value. The balance at September 30, 2014 was $10.1 million compared to $23.2 million at December 31, 2013.

Evaluating Investments for OTTI

The fixed income portfolio contained 290 securities in an unrealized loss position as of September 30, 2014. The $6.6 million in associated unrealized losses for these 290 securities represents 0.4 percent of the fixed income portfolio’s cost basis. Of these 290 securities, 74 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings in the periods presented on the fixed income portfolio.

As of September 30, 2014, we held three common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $0.5 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. No equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

XML

Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Fixed income:
Available-for-sale, at fair value	$ 1,545,530	$ 1,440,052
Held-to-maturity, at amortized cost	650	651
Equity securities, at fair value	419,022	418,654
Short-term investments, at cost	10,063	23,232
Other Investments	11,688
Cash	77,037	39,469
Total investments and cash	2,063,990	1,922,058
Accrued investment income	13,595	15,710
Premiums and reinsurance balances receivable	175,293	152,509
Ceded unearned premium	62,646	60,407
Reinsurance balances recoverable on unpaid losses	353,228	354,924
Deferred policy acquisition costs	68,372	61,508
Property and equipment	42,400	40,261
Investment in unconsolidated investee	67,250	49,793
Goodwill and intangibles	74,172	74,876
Other assets	12,537	8,264
TOTAL ASSETS	2,933,483	2,740,310
Liabilities:
Unpaid losses and settlement expenses	1,152,413	1,129,433
Unearned premiums	429,867	392,081
Reinsurance balances payable	37,683	47,334
Funds held	53,834	61,656
Income taxes - deferred	77,086	57,801
Bonds payable, long-term debt	149,615	149,582
Accrued expenses	52,392	59,596
Other liabilities	47,080	13,861
TOTAL LIABILITIES	1,999,970	1,911,344
Shareholders' Equity
Common stock ($1 par value, 100,000,000 shares authorized) (65,957,258 shares issued, 43,027,044 shares outstanding at 9/30/14) (65,912,638 shares issued, 42,982,424 shares outstanding at 12/31/13)	65,957	65,913
Paid-in capital	212,733	208,705
Accumulated other comprehensive earnings	161,345	136,027
Retained earnings	886,477	811,320
Deferred compensation	11,687	11,562
Less: Treasury shares at cost (22,930,214 shares at 9/30/14 and 12/31/13)	(404,686)	(404,561)
TOTAL SHAREHOLDERS' EQUITY	933,513	828,966
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 2,933,483	$ 2,740,310

XML

OPERATING SEGMENT INFORMATION (Tables)

9 Months Ended

Sep. 30, 2014

OPERATING SEGMENT INFORMATION

Schedule of revenues and net earnings by segment

SEGMENT DATA (in thousands)

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
	REVENUES				REVENUES
	2014		2013		2014		2013
Net premiums earned:
Casualty	$	96,181	$	83,966	$	281,518	$	235,307
Property		54,143		52,705		146,252		147,305
Surety		27,423		27,031		79,713		79,794
Segment totals before income taxes	$	177,747	$	163,702	$	507,483	$	462,406
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
Total consolidated revenue	$	197,655	$	188,299	$	571,887	$	520,162
	NET EARNINGS				NET EARNINGS
	2014		2013		2014		2013
Casualty	$	13,786	$	20,799	$	36,331	$	39,517
Property		7,498		6,468		19,469		19,614
Surety		9,144		4,551		23,729		18,044
Net underwriting income	$	30,428	$	31,818	$	79,529	$	77,175
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
General corporate expense and interest on debt		(4,657)		(3,670)		(13,129)		(10,773)
Equity in earnings of unconsolidated investees		2,915		2,564		12,204		10,696
Total earnings before income taxes	$	48,594	$	55,309	$	143,008	$	134,854
Income tax expense		15,340		17,662		45,060		42,458
Total net earnings	$	33,254	$	37,647	$	97,948	$	92,396

Schedule of net premiums earned by major product type

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Casualty
Commercial and personal umbrella	$	25,256	$	22,247	$	75,036	$	61,803
General liability		20,095		20,342		60,550		61,139
Commercial transportation		14,677		13,463		44,193		35,594
Professional services		15,227		11,021		41,927		30,092
P&C package business		8,969		7,643		25,747		22,671
Executive products		4,760		4,933		14,165		14,300
Medical professional liability		3,546		2,674		10,970		5,136
Other casualty		3,651		1,643		8,930		4,572
Total	$	96,181	$	83,966	$	281,518	$	235,307
Property
Commercial property	$	20,188	$	18,938	$	60,675	$	57,813
Marine		12,115		14,242		37,278		43,898
Crop reinsurance		11,802		11,846		18,671		19,501
Property reinsurance		2,997		2,848		9,745		12,503
Other property		7,041		4,831		19,883		13,590
Total	$	54,143	$	52,705	$	146,252	$	147,305
Surety
Miscellaneous	$	9,868	$	9,590	$	28,948	$	28,559
Contract		6,879		7,025		19,896		20,137
Commercial		6,521		5,857		18,968		17,285
Oil and Gas		4,155		4,559		11,901		13,813
Total	$	27,423	$	27,031	$	79,713	$	79,794
Grand Total	$	177,747	$	163,702	$	507,483	$	462,406

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 13, 2014
Document and Entity Information
Entity Registrant Name	RLI CORP
Entity Central Index Key	0000084246
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		43,027,044
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended			3 Months Ended	9 Months Ended		1 Months Ended		3 Months Ended	9 Months Ended	1 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2014 CBIC and Rockbridge	Sep. 30, 2014 CBIC and Rockbridge	Sep. 30, 2014 Surety segment Acquisitions prior to 2011	Apr. 30, 2011 Surety segment Contractors Bonding and Insurance Company	Apr. 30, 2011 Casualty and Surety segment Contractors Bonding and Insurance Company	Sep. 30, 2014 Casualty and Surety segment Contractors Bonding and Insurance Company	Sep. 30, 2014 Casualty and Surety segment Contractors Bonding and Insurance Company	Apr. 30, 2011 Casualty segment Contractors Bonding and Insurance Company	Sep. 30, 2013 Casualty segment Rockbridge	Sep. 30, 2014 Casualty segment Rockbridge
INTANGIBLE ASSETS
Goodwill and intangibles	$ 74,172,000		$ 74,172,000		$ 74,876,000						$ 32,000,000	$ 32,000,000			$ 16,000,000
Goodwill								26,200,000							12,400,000
Goodwill acquired									15,100,000				5,300,000
Indefinite Lived Intangible Assets Acquired										8,800,000
Goodwill, Impairment Loss											0	0		0
Impairment of indefinite-lived intangible assets											0	0
Definite-lived intangible assets, net of amortization											2,800,000	2,800,000			3,600,000
Amortization of intangible assets						200,000	700,000
Basic EPS, Income (Numerator)
Income available to common shareholders	33,254,000	37,647,000	97,948,000	92,396,000
Diluted EPS, Income (Numerator)
Income available to common shareholders	$ 33,254,000	$ 37,647,000	$ 97,948,000	$ 92,396,000
Basic EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	43,026	42,843	43,004	42,673
Effect of Dilutive Securities, Shares (Denominator)
Stock options (in shares)	686	703	688	657
Diluted EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	43,712	43,546	43,692	43,330
Basic EPS, Per Share Amount
Basic net earnings per share (in dollars per share)	$ 0.77	$ 0.88	$ 2.28	$ 2.17
Diluted EPS, Per Share Amount
Diluted earnings per share (in dollars per share)	$ 0.76	$ 0.86	$ 2.24	$ 2.13

XML

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Condensed Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	65,957,258	65,912,638
Common stock, shares outstanding (in shares)	43,027,044	42,982,424
Treasury stock, shares (in shares)	22,930,214	22,930,214

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2014

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 2013 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 September 30, 2014 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.

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.

INTANGIBLE ASSETS

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangibles totaled $74.2 million at September 30, 2014.

Goodwill resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $32.0 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $8.8 million. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2014. Based upon these reviews, none of theassets were impaired. In addition, as of September 30, 2014, there were no triggering events that occurred that would suggest an updated review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.8 million, net of amortization, as of September 30, 2014.

The remaining $16.0 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining$3.6 million relates to definite-lived intangible assets, net of amortization, as of September 30, 2014. Impairment testing was performed on this goodwill asset during the third quarter of 2014 as actual premium production has fallen below levels anticipated at acquisition. We used a quantitative analysis to determine the impact of the difference and concluded that the asset was not impaired.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the third quarter of 2014, and $0.7 million for the nine months ended September 30, 2014.

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 September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	33,254	43,026	$	0.77	$	37,647	42,843	$	0.88
Effect of Dilutive Securities
Stock options		-	686				-	703
Diluted EPS
Income available to common shareholders	$	33,254	43,712	$	0.76	$	37,647	43,546	$	0.86
	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	97,948	43,004	$	2.28	$	92,396	42,673	$	2.17
Effect of Dilutive Securities
Stock options		-	688				-	657
Diluted EPS
Income available to common shareholders	$	97,948	43,692	$	2.24	$	92,396	43,330	$	2.13

COMPREHENSIVE EARNINGS

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of35 percent. The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Unrealized Gains/Losses on Available-for-Sale Securities
Beginning balance	$	173,698	$	127,242	$	136,027	$	143,170
Other comprehensive earnings before reclassifications		(8,642)		5,203		40,032		(5,354)
Amounts reclassified from accumulated other comprehensive earnings		(3,711)		(7,149)		(14,714)		(12,520)
Net current-period other comprehensive earnings	$	(12,353)	$	(1,946)	$	25,318	$	(17,874)
Ending balance	$	161,345	$	125,296	$	161,345	$	125,296

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
	Comprehensive Earnings
(in thousands)	For the Three-Month				For the Nine-Month
Component of Accumulated	Periods Ended September 30,				Periods Ended September 30,				Affected line item in the
Other Comprehensive Earnings	2014		2013		2014		2013		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	5,709	$	10,998	$	22,637	$	19,261	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	5,709	$	10,998	$	22,637	$	19,261	Earnings before income taxes
		(1,998)		(3,849)		(7,923)		(6,741)	Income tax expense
	$	3,711	$	7,149	$	14,714	$	12,520	Net earnings

XML

ACQUISITION

9 Months Ended

Sep. 30, 2014

ACQUISITION

ACQUISITION

6.  ACQUISITION

On February 5, 2014, we invested $5.3 million for a 20 percent equity ownership interest in Prime Holdings Insurance Services, Inc. (Prime), an Illinois domiciled insurance carrier based in Salt Lake City, Utah. Prime is a privately-held excess and surplus lines insurance company operating in 49 states through a network of wholesale brokers and specializing in hard-to-place risks. The investment in Prime is reflected on our balance sheet as an investment in unconsolidated investee. Under the equity method of accounting we recognize our proportionate share of Prime’s income as equity in earnings of unconsolidated investees. Our share of Prime’s earnings amounted to $0.1 million in the third quarter of 2014 and $0.4 million in the first nine months of 2014.

Additionally, we entered into a 25 percent quota share reinsurance treaty with Prime, effective January 1, 2014. We assumed gross premiums of $2.4 million related to this quota share agreement in the third quarter of 2014 and $7.4 million in the first nine months of 2014.

XML

INVESTMENTS Unrealized Losses (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Dec. 31, 2012
Investment positions with unrealized losses
Unrealized losses relative to total invested assets (as a percent)	0.30%
Fair value
Less than 12 months	$ 294,600	$ 682,254
12 Months and Greater	162,060	3,188
Total Fair value	456,660	685,442
Cost or amortized Cost
Less than 12 months	297,578	710,949
12 months and greater	166,147	3,426
Total Cost or Amortized Cost	463,725	714,375
Unrealized Loss
Less than 12 months	(2,978)	(28,695)
12 Months and Greater	(4,087)	(238)
Total Unrealized Loss	(7,065)	(28,933)
Cash and Short-term Investments
Cash	77,037	39,469	87,398	44,314
Short-term investments, at cost which approximates fair value	10,063	23,232
Debt securities
Fair value
Less than 12 months	282,965	679,860
12 Months and Greater	162,060	3,188
Total Fair value	445,025	683,048
Cost or amortized Cost
Less than 12 months	285,473	708,280
12 months and greater	166,147	3,426
Total Cost or Amortized Cost	451,620	711,706
Unrealized Loss
Less than 12 months	(2,508)	(28,420)
12 Months and Greater	(4,087)	(238)
Total Unrealized Loss	(6,595)	(28,658)
Percent to Total	100.00%
Debt securities | NAIC Rating 1 | AAA/AA/A | Aaa/Aa/A
Fair value
Total Fair value	349,481
Cost or amortized Cost
Total Cost or Amortized Cost	354,379
Unrealized Loss
Total Unrealized Loss	(4,898)
Percent to Total	74.30%
Debt securities | NAIC Rating 2 | BBB | Baa
Fair value
Total Fair value	37,081
Cost or amortized Cost
Total Cost or Amortized Cost	37,566
Unrealized Loss
Total Unrealized Loss	(485)
Percent to Total	7.40%
Debt securities | NAIC Rating 3 | BB | Ba
Fair value
Total Fair value	35,139
Cost or amortized Cost
Total Cost or Amortized Cost	35,807
Unrealized Loss
Total Unrealized Loss	(668)
Percent to Total	10.10%
Debt securities | NAIC Rating 4 | B
Fair value
Total Fair value	22,120
Cost or amortized Cost
Total Cost or Amortized Cost	22,598
Unrealized Loss
Total Unrealized Loss	(478)
Percent to Total	7.20%
Debt securities | NAIC Rating 5 | CCC or lower
Fair value
Total Fair value	1,204
Cost or amortized Cost
Total Cost or Amortized Cost	1,270
Unrealized Loss
Total Unrealized Loss	(66)
Percent to Total	1.00%
U.S. government
Fair value
Less than 12 months	18,556
Total Fair value	18,556
Cost or amortized Cost
Less than 12 months	18,595
Total Cost or Amortized Cost	18,595
Unrealized Loss
Less than 12 months	(39)
Total Unrealized Loss	(39)
U.S. Agency
Fair value
Less than 12 months	1,871	5,760
Total Fair value	1,871	5,760
Cost or amortized Cost
Less than 12 months	1,885	5,997
Total Cost or Amortized Cost	1,885	5,997
Unrealized Loss
Less than 12 months	(14)	(237)
Total Unrealized Loss	(14)	(237)
Non-U.S. govt. & agency
Fair value
Less than 12 months		1,825
Total Fair value		1,825
Cost or amortized Cost
Less than 12 months		1,890
Total Cost or Amortized Cost		1,890
Unrealized Loss
Less than 12 months		(65)
Total Unrealized Loss		(65)
Mortgage-backed
Fair value
Less than 12 months	27,741	118,283
12 Months and Greater	70,754
Total Fair value	98,495	118,283
Cost or amortized Cost
Less than 12 months	27,848	124,034
12 months and greater	73,223
Total Cost or Amortized Cost	101,071	124,034
Unrealized Loss
Less than 12 months	(107)	(5,751)
12 Months and Greater	(2,469)
Total Unrealized Loss	(2,576)	(5,751)
ABS/CMBS
Fair value
Less than 12 months	46,758	54,115
12 Months and Greater	19,100
Total Fair value	65,858	54,115
Cost or amortized Cost
Less than 12 months	47,038	56,014
12 months and greater	19,538
Total Cost or Amortized Cost	66,576	56,014
Unrealized Loss
Less than 12 months	(280)	(1,899)
12 Months and Greater	(438)
Total Unrealized Loss	(718)	(1,899)
Corporate Debt
Fair value
Less than 12 months	157,718	190,470
12 Months and Greater	22,591	2,245
Total Fair value	180,309	192,715
Cost or amortized Cost
Less than 12 months	159,729	198,250
12 months and greater	23,183	2,477
Total Cost or Amortized Cost	182,912	200,727
Unrealized Loss
Less than 12 months	(2,011)	(7,780)
12 Months and Greater	(592)	(232)
Total Unrealized Loss	(2,603)	(8,012)
Municipal
Fair value
Less than 12 months	30,321	309,407
12 Months and Greater	49,615	943
Total Fair value	79,936	310,350
Cost or amortized Cost
Less than 12 months	30,378	322,095
12 months and greater	50,203	949
Total Cost or Amortized Cost	80,581	323,044
Unrealized Loss
Less than 12 months	(57)	(12,688)
12 Months and Greater	(588)	(6)
Total Unrealized Loss	(645)	(12,694)
Equity securities
Fair value
Less than 12 months	11,635	2,394
Total Fair value	11,635	2,394
Cost or amortized Cost
Less than 12 months	12,105	2,669
Total Cost or Amortized Cost	12,105	2,669
Unrealized Loss
Less than 12 months	(470)	(275)
Total Unrealized Loss	$ (470)	$ (275)

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unrealized Gains and Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Changes in the balance of each component of accumulated other comprehensive earnings
Tax rate used (as a percent)			35.00%
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance			$ 136,027
Net current-period other comprehensive earnings (loss)	(12,353)	(1,946)	25,318	(17,874)
Ending balance	161,345		161,345
Unrealized Gains and Losses on Available-for-Sale Securities
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	173,698	127,242	136,027	143,170
Other comprehensive earnings before reclassifications	(8,642)	5,203	40,032	(5,354)
Amounts reclassified from accumulated other comprehensive earnings	(3,711)	(7,149)	(14,714)	(12,520)
Net current-period other comprehensive earnings (loss)	(12,353)	(1,946)	25,318	(17,874)
Ending balance	$ 161,345	$ 125,296	$ 161,345	$ 125,296

XML

FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2014

FAIR VALUE MEASUREMENTS

Schedule of assets measured at fair value on recurring basis

	As of September 30,  2014
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	6,516	$	—	$	6,516
Corporate		—		584,156		—		584,156
Mortgage-backed		—		260,902		—		260,902
ABS/CMBS*		—		138,118		—		138,118
Non-U.S. govt. & agency		—		10,557		—		10,557
U.S. government		—		32,163		—		32,163
Municipal		—		513,118		—		513,118
Equity		419,022		—		—		419,022
Total available-for-sale securities	$	419,022	$	1,545,530	$	—	$	1,964,552
Total	$	419,022	$	1,545,530	$	—	$	1,964,552

*Asset-backed and commercial mortgage-backed

	As of December 31,  2013
	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
Total trading securities	$	—	$	—	$	—	$	—
Available-for-sale securities
U.S. agency	$	—	$	10,298	$	—	$	10,298
Corporate		—		526,038		—		526,038
Mortgage-backed		—		244,416		—		244,416
ABS/CMBS*		—		106,309		—		106,309
Non-U.S. govt. & agency		—		13,678		—		13,678
U.S. government		—		17,303		—		17,303
Municipal		—		522,010		—		522,010
Equity		418,654		—		—		418,654
Total available-for-sale securities	$	418,654	$	1,440,052	$	—	$	1,858,706
Total	$	418,654	$	1,440,052	$	—	$	1,858,706

*Asset-backed and commercial mortgage-backed

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	33,254	43,026	$	0.77	$	37,647	42,843	$	0.88
Effect of Dilutive Securities
Stock options		-	686				-	703
Diluted EPS
Income available to common shareholders	$	33,254	43,712	$	0.76	$	37,647	43,546	$	0.86
	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30,  2014					Ended September 30,  2013
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	97,948	43,004	$	2.28	$	92,396	42,673	$	2.17
Effect of Dilutive Securities
Stock options		-	688				-	657
Diluted EPS
Income available to common shareholders	$	97,948	43,692	$	2.24	$	92,396	43,330	$	2.13

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

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Unrealized Gains/Losses on Available-for-Sale Securities
Beginning balance	$	173,698	$	127,242	$	136,027	$	143,170
Other comprehensive earnings before reclassifications		(8,642)		5,203		40,032		(5,354)
Amounts reclassified from accumulated other comprehensive earnings		(3,711)		(7,149)		(14,714)		(12,520)
Net current-period other comprehensive earnings	$	(12,353)	$	(1,946)	$	25,318	$	(17,874)
Ending balance	$	161,345	$	125,296	$	161,345	$	125,296

Schedule of effects of reclassifications out of accumulated other comprehensive earnings

	Amount Reclassified from Accumulated Other
	Comprehensive Earnings
(in thousands)	For the Three-Month				For the Nine-Month
Component of Accumulated	Periods Ended September 30,				Periods Ended September 30,				Affected line item in the
Other Comprehensive Earnings	2014		2013		2014		2013		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	5,709	$	10,998	$	22,637	$	19,261	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	5,709	$	10,998	$	22,637	$	19,261	Earnings before income taxes
		(1,998)		(3,849)		(7,923)		(6,741)	Income tax expense
	$	3,711	$	7,149	$	14,714	$	12,520	Net earnings

XML

INVESTMENTS (Tables)

9 Months Ended

Sep. 30, 2014

INVESTMENTS

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

	September 30,  2014						December 31,  2013
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	18,556	$	—	$	18,556	$	—	$	—	$	—
Cost or amortized cost		18,595		—		18,595		—		—		—
Unrealized Loss	$	(39)	$	—	$	(39)	$	—	$	—	$	—
U.S. Agency
Fair value	$	1,871	$	—	$	1,871	$	5,760	$	—	$	5,760
Cost or amortized cost		1,885		—		1,885		5,997		—		5,997
Unrealized Loss	$	(14)	$	—	$	(14)	$	(237)	$	—	$	(237)
Non-U.S. government
Fair value	$	—	$	—	$	—	$	1,825	$	—	$	1,825
Cost or amortized cost		—		—		—		1,890		—		1,890
Unrealized Loss	$	—	$	—	$	—	$	(65)	$	—	$	(65)
Mortgage-backed
Fair value	$	27,741	$	70,754	$	98,495	$	118,283	$	—	$	118,283
Cost or amortized cost		27,848		73,223		101,071		124,034		—		124,034
Unrealized Loss	$	(107)	$	(2,469)	$	(2,576)	$	(5,751)	$	—	$	(5,751)
ABS/CMBS*
Fair value	$	46,758	$	19,100	$	65,858	$	54,115	$	—	$	54,115
Cost or amortized cost		47,038		19,538		66,576		56,014		—		56,014
Unrealized Loss	$	(280)	$	(438)	$	(718)	$	(1,899)	$	—	$	(1,899)
Corporate
Fair value	$	157,718	$	22,591	$	180,309	$	190,470	$	2,245	$	192,715
Cost or amortized cost		159,729		23,183		182,912		198,250		2,477		200,727
Unrealized Loss	$	(2,011)	$	(592)	$	(2,603)	$	(7,780)	$	(232)	$	(8,012)
Municipal
Fair value	$	30,321	$	49,615	$	79,936	$	309,407	$	943	$	310,350
Cost or amortized cost		30,378		50,203		80,581		322,095		949		323,044
Unrealized Loss	$	(57)	$	(588)	$	(645)	$	(12,688)	$	(6)	$	(12,694)
Subtotal, fixed income
Fair value	$	282,965	$	162,060	$	445,025	$	679,860	$	3,188	$	683,048
Cost or amortized cost		285,473		166,147		451,620		708,280		3,426		711,706
Unrealized Loss	$	(2,508)	$	(4,087)	$	(6,595)	$	(28,420)	$	(238)	$	(28,658)
Equity securities
Fair value	$	11,635	$	—	$	11,635	$	2,394	$	—	$	2,394
Cost or amortized cost		12,105		—		12,105		2,669		—		2,669
Unrealized Loss	$	(470)	$	—	$	(470)	$	(275)	$	—	$	(275)
Total
Fair value	$	294,600	$	162,060	$	456,660	$	682,254	$	3,188	$	685,442
Cost or amortized cost		297,578		166,147		463,725		710,949		3,426		714,375
Unrealized Loss	$	(2,978)	$	(4,087)	$	(7,065)	$	(28,695)	$	(238)	$	(28,933)

* 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	$	354,379	$	349,481	$	(4,898)	74.3	%
2	BBB	Baa		37,566		37,081		(485)	7.4	%
3	BB	Ba		35,807		35,139		(668)	10.1	%
4	B	B		22,598		22,120		(478)	7.2	%
5	CCC orlower	Caa or lower		1,270		1,204		(66)	1.0	%
6				—		—		—	—
		Total	$	451,620	$	445,025	$	(6,595)	100.0	%

Available for sale securities

INVESTMENTS

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

Available-for-sale
(in thousands)
	9/30/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	6,383	$	147	$	(14)	$	6,516
Corporate		563,120		23,639		(2,603)		584,156
Mtge/ABS/CMBS*		392,687		9,627		(3,294)		399,020
Non-U.S. govt. & agency		9,861		696		-		10,557
U.S. government		32,082		120		(39)		32,163
Municipal		498,371		15,392		(645)		513,118
Total Fixed Income	$	1,502,504	$	49,621	$	(6,595)	$	1,545,530
Equity	$	214,239	$	205,253	$	(470)	$	419,022
Available-for-sale
(in thousands)
	12/31/2013
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. agency	$	10,513	$	22	$	(237)	$	10,298
Corporate		511,748		22,302		(8,012)		526,038
Mtge/ABS/CMBS*		350,187		8,188		(7,650)		350,725
Non-U.S. govt. & agency		13,306		437		(65)		13,678
U.S. government		17,086		217		-		17,303
Municipal		528,209		6,495		(12,694)		522,010
Total Fixed Income	$	1,431,049	$	37,661	$	(28,658)	$	1,440,052
Equity	$	218,848	$	200,081	$	(275)	$	418,654

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

Schedule of contractual maturity of securities

	9/30/2014
AFS	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	17,680	$	17,855
Due after one year through five years		242,863		253,882
Due after five years through 10 years		594,841		612,167
Due after 10 years		254,433		262,606
Mtge/ABS/CMBS*		392,687		399,020
Total available-for-sale	$	1,502,504	$	1,545,530

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

XML

STOCK BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2014

STOCK BASED COMPENSATION

Schedule of stock option activity

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	464,500	$	42.90
Options exercised	(47,412)	$	17.95		$	1,250
Options canceled/forfeited	(740)	$	16.51
Outstanding options at September 30,  2014	3,011,432	$	28.77	5.25	$	43,850
Exercisable options at September 30,  2014	1,351,312	$	22.29	3.99	$	28,382
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2013	2,945,204	$	22.23
Options granted	582,200	$	36.31
Options exercised	(761,362)	$	17.18		$	17,211
Options canceled/forfeited	(44,880)	$	25.93
Outstanding options at September 30,  2013	2,721,162	$	26.59	5.65	$	46,590
Exercisable options at September 30,  2013	1,060,662	$	21.09	4.35	$	23,995

Schedule of stock option assumptions for fair value estimate

	2014			2013
Weighted-average fair value of grants	$	7.76		$	6.58
Risk-free interest rates		1.70	%		0.80	%
Dividend yield		1.94	%		2.00	%
Expected volatility		23.19	%		25.41	%
Expected option life		5.17	years		5.23	years

XML

INVESTMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Amortized Cost
Due in one year or less	$ 17,680
Due after one year through five years	242,863
Due after five years through 10 years	594,841
Due after 10 years	254,433
Total	1,502,504
Fair Value
Due in one year or less	17,855
Due after one year through five years	253,882
Due after five years through 10 years	612,167
Due after 10 years	262,606
Total	1,545,530	1,440,052
Fair value measured on recurring basis | Significant Unobservable Inputs (Level 3)
INVESTMENTS
Total assets at fair value	0
Debt securities
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	1,502,504	1,431,049
Gross Unrealized Gains	49,621	37,661
Gross Unrealized Losses	(6,595)	(28,658)
Fair Value	1,545,530	1,440,052
U.S. Agency
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	6,383	10,513
Gross Unrealized Gains	147	22
Gross Unrealized Losses	(14)	(237)
Fair Value	6,516	10,298
Corporate Debt
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	563,120	511,748
Gross Unrealized Gains	23,639	22,302
Gross Unrealized Losses	(2,603)	(8,012)
Fair Value	584,156	526,038
Mtge/ABS/CMBS
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	392,687	350,187
Gross Unrealized Gains	9,627	8,188
Gross Unrealized Losses	(3,294)	(7,650)
Fair Value	399,020	350,725
Non-U.S. govt. & agency
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	9,861	13,306
Gross Unrealized Gains	696	437
Gross Unrealized Losses		(65)
Fair Value	10,557	13,678
U.S. government
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	32,082	17,086
Gross Unrealized Gains	120	217
Gross Unrealized Losses	(39)
Fair Value	32,163	17,303
Municipal
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	498,371	528,209
Gross Unrealized Gains	15,392	6,495
Gross Unrealized Losses	(645)	(12,694)
Fair Value	513,118	522,010
Equity securities
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	214,239	218,848
Gross Unrealized Gains	205,253	200,081
Gross Unrealized Losses	(470)	(275)
Fair Value	$ 419,022	$ 418,654

XML

STOCK BASED COMPENSATION (Details) (USD $)	3 Months Ended		9 Months Ended					9 Months Ended	3 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 RLI Corp. Long-Term Incentive Plan (LTIP) and Omnibus Stock Plan	Sep. 30, 2014 Omnibus Stock Plan	Dec. 31, 2005 Omnibus Stock Plan	Sep. 30, 2014 RLI Corp. Long-Term Incentive Plan (LTIP)	Mar. 31, 2014 RLI Corp. Long-Term Incentive Plan (LTIP) Outside director	Mar. 31, 2013 RLI Corp. Long-Term Incentive Plan (LTIP) Outside director	Mar. 31, 2014 Outside Directors' Stock Option Plan (the director's plan)	Mar. 31, 2013 Outside Directors' Stock Option Plan (the director's plan)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for grant							3,000,000	4,000,000
Stock options granted to date (in shares)						2,457,644		2,777,000
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
Weighted Number of Options Outstanding
Outstanding options at the beginning of the period (in shares)			2,595,084	2,945,204
Options granted (in shares)			464,500	582,200				464,500
Options exercised (in shares)			(47,412)	(761,362)
Options canceled/forfeited (in shares)			(740)	(44,880)
Outstanding options at the end of the period (in shares)	3,011,432	2,721,162	3,011,432	2,721,162
Exercisable options at the end of the period (in shares)	1,351,312	1,060,662	1,351,312	1,060,662
Weighted Average Exercise Price
Outstanding options at the beginning of the period (in dollars per share)			$ 26.04	$ 22.23
Options granted (in dollars per share)			$ 42.90	$ 36.31
Options exercised (in dollars per share)			$ 17.95	$ 17.18
Options canceled/forfeited (in dollars per share)			$ 16.51	$ 25.93
Outstanding options at the end of the period (in dollars per share)	$ 28.77	$ 26.59	$ 28.77	$ 26.59
Exercisable options at the end of the period (in dollars per share)	$ 22.29	$ 21.09	$ 22.29	$ 21.09
Weighted Average Remaining Contractual Life
Weighted-average remaining contractual term of options outstanding			5 years 3 months	5 years 7 months 24 days
Weighted-average remaining contractual term of exercisable options			3 years 11 months 27 days	4 years 4 months 6 days
Aggregate Intrinsic Value
Options exercised (in dollars)			$ 1,250,000	$ 17,211,000
Outstanding options at the end of the period (in dollars)	43,850,000	46,590,000	43,850,000	46,590,000
Exercisable options at the end of the period (in dollars)	28,382,000	23,995,000	28,382,000	23,995,000
Weighted-average fair value of grants (in dollars per share)			$ 7.76	$ 6.58
Stock-based compensation expenses (in dollars)	900,000	1,000,000	2,900,000	2,800,000							100,000
Income tax benefit from stock-based compensation (in dollars)	300,000	300,000	1,000,000	1,000,000
Unrecognized stock-based compensation expense (in dollars)	5,200,000		5,200,000
Weighted average grant date assumptions and weighted average fair value
Weighted-average fair value of grants (in dollars per share)			$ 7.76	$ 6.58
Risk-free interest rates (as a percent)			1.70%	0.80%
Dividend yield (as a percent)			1.94%	2.00%
Expected volatility (as a percent)			23.19%	25.41%
Expected option life			5 years 2 months 1 day	5 years 2 months 23 days
Period for which annualized dividends is considered to calculate dividend yield			5 years
Restricted shares issued per recipient (in dollars)									$ 10,000	$ 10,000
Restriction period											1 year	1 year
Restricted shares issued											2,097

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Condensed Consolidated Statements of Cash Flows
Net cash provided by operating activities	$ 85,894	$ 81,736
Cash Flows from Investing Activities
Investments purchased	(422,287)	(358,510)
Investments sold	285,886	221,133
Investments called or matured	77,611	114,929
Net change in short-term investments	40,027	10,869
Net property and equipment purchased	(5,543)	(10,766)
Investment in equity method investee	(5,301)
Net cash used in investing activities	(29,607)	(22,345)
Cash Flows from Financing Activities
Cash dividends paid	(22,791)	(21,354)
Stock plan share issuance	3,672	159
Excess tax benefit from exercise of stock options	400	4,888
Net cash used in financing activities	(18,719)	(16,307)
Net increase in cash	37,568	43,084
Cash at the beginning of the period	39,469	44,314
Cash at September 30	$ 77,037	$ 87,398

XML

OPERATING SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2014

OPERATING SEGMENT INFORMATION

OPERATING SEGMENT INFORMATION

5.  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.

SEGMENT DATA (in thousands)

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
	REVENUES				REVENUES
	2014		2013		2014		2013
Net premiums earned:
Casualty	$	96,181	$	83,966	$	281,518	$	235,307
Property		54,143		52,705		146,252		147,305
Surety		27,423		27,031		79,713		79,794
Segment totals before income taxes	$	177,747	$	163,702	$	507,483	$	462,406
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
Total consolidated revenue	$	197,655	$	188,299	$	571,887	$	520,162
	NET EARNINGS				NET EARNINGS
	2014		2013		2014		2013
Casualty	$	13,786	$	20,799	$	36,331	$	39,517
Property		7,498		6,468		19,469		19,614
Surety		9,144		4,551		23,729		18,044
Net underwriting income	$	30,428	$	31,818	$	79,529	$	77,175
Net investment income		14,200		13,598		41,764		39,331
Net realized gains		5,708		10,999		22,640		18,425
General corporate expense and interest on debt		(4,657)		(3,670)		(13,129)		(10,773)
Equity in earnings of unconsolidated investees		2,915		2,564		12,204		10,696
Total earnings before income taxes	$	48,594	$	55,309	$	143,008	$	134,854
Income tax expense		15,340		17,662		45,060		42,458
Total net earnings	$	33,254	$	37,647	$	97,948	$	92,396

The following table further summarizes revenues (net premiums earned) by major product type within each operating segment:

	For the Three-Month Periods				For the Nine-Month Periods
	Ended September 30,				Ended September 30,
(in thousands)	2014		2013		2014		2013
Casualty
Commercial and personal umbrella	$	25,256	$	22,247	$	75,036	$	61,803
General liability		20,095		20,342		60,550		61,139
Commercial transportation		14,677		13,463		44,193		35,594
Professional services		15,227		11,021		41,927		30,092
P&C package business		8,969		7,643		25,747		22,671
Executive products		4,760		4,933		14,165		14,300
Medical professional liability		3,546		2,674		10,970		5,136
Other casualty		3,651		1,643		8,930		4,572
Total	$	96,181	$	83,966	$	281,518	$	235,307
Property
Commercial property	$	20,188	$	18,938	$	60,675	$	57,813
Marine		12,115		14,242		37,278		43,898
Crop reinsurance		11,802		11,846		18,671		19,501
Property reinsurance		2,997		2,848		9,745		12,503
Other property		7,041		4,831		19,883		13,590
Total	$	54,143	$	52,705	$	146,252	$	147,305
Surety
Miscellaneous	$	9,868	$	9,590	$	28,948	$	28,559
Contract		6,879		7,025		19,896		20,137
Commercial		6,521		5,857		18,968		17,285
Oil and Gas		4,155		4,559		11,901		13,813
Total	$	27,423	$	27,031	$	79,713	$	79,794
Grand Total	$	177,747	$	163,702	$	507,483	$	462,406

XML

OPERATING SEGMENT INFORMATION (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
REVENUES
Segment totals before income taxes	$ 177,747	$ 163,702	$ 507,483	$ 462,406
Net investment income	14,200	13,598	41,764	39,331
Net realized gains	5,708	10,999	22,640	18,425
Consolidated revenue	197,655	188,299	571,887	520,162
NET EARNINGS (LOSSES)
Net underwriting income	30,428	31,818	79,529	77,175
Net investment income	14,200	13,598	41,764	39,331
Net realized gains	5,708	10,999	22,640	18,425
General corporate expense and interest on debt	(4,657)	(3,670)	(13,129)	(10,773)
Equity in earnings of unconsolidated investee	2,915	2,564	12,204	10,696
Earnings before income taxes	48,594	55,309	143,008	134,854
Income tax expense	15,340	17,662	45,060	42,458
Net earnings	33,254	37,647	97,948	92,396
Casualty segment
REVENUES
Segment totals before income taxes	96,181	83,966	281,518	235,307
NET EARNINGS (LOSSES)
Net underwriting income	13,786	20,799	36,331	39,517
Property segment
REVENUES
Segment totals before income taxes	54,143	52,705	146,252	147,305
NET EARNINGS (LOSSES)
Net underwriting income	7,498	6,468	19,469	19,614
Surety segment
REVENUES
Segment totals before income taxes	27,423	27,031	79,713	79,794
NET EARNINGS (LOSSES)
Net underwriting income	$ 9,144	$ 4,551	$ 23,729	$ 18,044

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reclassification (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Amount Reclassified from Accumulated Other Comprehensive Earnings
Net realized investment gains	$ 5,708	$ 10,999	$ 22,640	$ 18,425
Earnings before income taxes	48,594	55,309	143,008	134,854
Income tax expense	(15,340)	(17,662)	(45,060)	(42,458)
Net earnings	33,254	37,647	97,948	92,396
Reclassifications out of accumulated other comprehensive earnings | Unrealized Gains and Losses on Available-for-Sale Securities
Amount Reclassified from Accumulated Other Comprehensive Earnings
Net realized investment gains	5,709	10,998	22,637	19,261
Earnings before income taxes	5,709	10,998	22,637	19,261
Income tax expense	(1,998)	(3,849)	(7,923)	(6,741)
Net earnings	$ 3,711	$ 7,149	$ 14,714	$ 12,520