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



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OVERVIEW



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



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



The property and casualty insurance business is cyclical and influenced by many
factors, including price competition, economic conditions, natural or man-made
disasters (for example, earthquakes, hurricanes, pandemics and terrorism),
interest rates, state regulations, court decisions and changes in the law. One
of the unique and challenging features of the property and casualty insurance
business is that coverages must be priced before costs have fully developed,
because premiums are charged before claims are incurred. This requires that
liabilities be estimated and recorded in recognition of future loss and
settlement obligations. Due to the inherent uncertainty in estimating these
liabilities, there can be no assurance that actual liabilities will not be more
or less than recorded amounts; if actual liabilities differ from recorded
amounts, there will be an adverse or favorable effect on net earnings.



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



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



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



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



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GAAP, non-GAAP and Performance Measures


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

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





Underwriting Income



Underwriting income or profit represents one measure of the pretax profitability
of our insurance operations and is derived by subtracting losses and settlement
expenses, policy acquisition costs and insurance operating expenses from net
premiums earned, which are all GAAP financial measures. Each of these captions
is presented in the statements of earnings but is not subtotaled. However, this
information is available in total and by segment in note 6 to the unaudited
condensed consolidated interim financial statements in this quarterly report on
Form 10-Q and in note 12 to the consolidated financial statements in our 2019
Annual Report on Form 10-K, regarding operating segment information. The nearest
comparable GAAP measure is earnings before income taxes which, in addition to
underwriting income, includes net investment income, net realized gains or
losses, net unrealized gain or losses on equity securities, general corporate
expenses, debt costs and our portion of earnings from unconsolidated investees.
A reconciliation of net earnings to underwriting income follows:




                                     For the Three-Month Periods         For the Six-Month Periods
                                            Ended June 30,                     Ended June 30,
(in thousands)                         2020               2019              2020             2019
Net earnings                       $       92,166     $       40,467    $      30,899     $   105,940
Income tax expense                         22,713              8,361            4,616          24,629
Earnings before income taxes       $      114,879     $       48,828    $      35,515     $   130,569
Equity in earnings of
unconsolidated investees                  (5,100)            (8,468)          (9,614)        (13,782)
General corporate expenses                  1,994              3,283            3,749           6,559
Interest expense on debt                    1,903              1,861            3,800           3,722
Net unrealized (gains) losses
on equity securities                     (74,705)            (8,810)           55,690        (42,308)
Net realized (gains) losses                 2,109            (4,764)         (13,043)        (13,832)
Net investment income                    (16,917)           (16,998)         (34,695)        (33,563)
Net underwriting income            $       24,163     $       14,932    $      41,402     $    37,365



Combined Ratio



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



Critical Accounting Policies



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



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



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

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

? The discontinuance of a segment of business that may affect future earnings


   potential,

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

? Specific concerns related to the issuer's industry or geographic area of


   operation,

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


   liquidity ratios and

? Downgrades in credit quality by a major rating agency.






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

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





IMPACT OF COVID-19



The coronavirus (COVID-19) pandemic continues to impact individuals, businesses
and the economy. As an employee-owned company, the health and well-being of our
customers, partners and associates is our highest priority. While a large
percentage of our associates are still working from home, our processes and
controls continue to operate effectively and we have been able to maintain the
highest service and support levels possible for our customers.



It is difficult to predict how and to what extent the economic slowdown will
have on our revenues in the coming months. To date, our most impacted product
line has been public transportation. A large number of our passenger
transportation customers have been unable to effectively operate under
social-distancing protocols and stay-at-home orders. For the six-month period
ended June 30, 2020, transportation gross written premium was down $33.3 million
when compared to 2019. We would expect transportation premium to continue to be
down from prior periods until the use of public transportation increases, which
may not be until after there is a vaccine, effective treatment or significant
reduction in cases. Additionally, slowdowns in the construction industry
contributed to premium declines for our general liability and surety products in
the second quarter. A number of our products support the construction industry
and revenues may continue to be impacted to the extent this sector experiences
disruption. However, we have many product lines that may see little to no impact
on the amount of premium we write, including our personal lines products,
management liability products and property businesses.



We have been fair and flexible with our customers in regards to modifying
exposures and payment terms and we are in compliance with any applicable state
regulatory directives on such changes. Insureds continue to make payments in
accordance with the agreed upon schedules and we have not experienced a material
increase in the amount of expense associated with uncollectible receivables.



The loss exposure arising out of the spread of COVID-19 and resulting shutdown
will take time to resolve. We do not offer event cancellation, travel, trade
credit or pandemic-related coverages which would be more directly impacted by
the COVID-19 pandemic. The Company has received a number of claims, the majority
of which relate to business interruption. We are reviewing the individual
circumstances of each claim submitted and will fulfill our obligation to pay if
coverage applies. The derivative implications that COVID-19 has on the economy
may have negative implications on products that are correlated with the credit
cycle, including, but not limited to, some of our executive products and surety
offerings. In the second quarter of 2020, $5.8 million of net reserves were
established to address the increased risk of loss and expense that emanated from
the economic downturn brought on by the pandemic. Combined with the reserves
established in the first quarter

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that addressed the expected increase in costs to investigate and defend business interruption claims, $10.8 million of COVID-19 related net losses have been recognized in the first six months of 2020.





Actuarial models base future emergence on historic experience, with adjustments
for current trends, and the appropriateness of these assumptions involved
greater uncertainty as of June 30, 2020. We expect there will be impacts to the
timing of loss emergence and ultimate loss ratios for certain coverages. The
industry is experiencing new issues, including the postponement of civil court
cases, the extension of various statutes of limitations, changes in settlement
trends and a significant reduction in economic activity and insured exposure in
some classes. Our booked reserves include consideration of these factors, but
the duration and degree to which these issues persist, along with potential
legislative, regulatory or judicial actions, could result in loss reserve
deficiencies and reduce earnings in future periods.



We continue to evaluate opportunities for expense savings and efficiencies and
have taken targeted actions to reduce or defer expenses, including certain
hiring freezes, position consolidations and executive merit increase
suspensions. Travel was limited and any decision on granting share-based
compensation, which normally takes place at our May board meeting, was deferred
until a later date, resulting in a reduced level of compensation expense in the
second quarter. Bonus and profit sharing expense is correlated with company
performance and is responsible for the largest portion of the total expense
decline for the six-month period ended June 30, when compared to 2019. The
performance-related expenses recognized for the 2020 fiscal year will be
dependent on the full year's results and may increase or decrease in the second
half of the year.



Although we have recovered a large portion of the market value declines recorded
in the first quarter, equity securities have not fully returned to levels
recorded at year end. Net after-tax realized and unrealized losses on equity
securities were $33.9 million in the first half of 2020. Conversely, lower
interest rates increased the fair value of the fixed income portfolio, which
resulted in $40.5 million of after-tax other comprehensive earnings for the
six-month period ended June 30, 2020. With the decline in yields, reinvestment
rates are now lower than in previous years, which will cap the portfolio's
ability to generate higher levels of investment income, absent a larger invested
asset base.



Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime)
continued to contribute towards positive net earnings. While earnings for Prime
were modestly higher, Maui Jim results were negatively impacted by the shutdown
much of the traditional retail sector experienced during the second quarter. The
economic downturn may continue to impact the results of these investees,
particularly if there is any lasting impact on the retail sector as it relates
to Maui Jim.



We produced solid operating results in the first half of the year and believe
our financial position has remained strong despite the impact of the COVID-19
pandemic. We generated $83.8 million of net operating cash inflows and believe
we have adequate liquidity. Our revolving credit facility provides for a
borrowing capacity of $60.0 million, which can be increased to $120.0 million
under certain circumstances. Additionally, our membership in the Federal Home
Loan Bank system provides a secured lending facility with an aggregate borrowing
capacity of approximately $30.0 million. There were no amounts outstanding under
any of these facilities as of June 30, 2020. In addition to the $160.7 million
of cash and other investments maturing within one year as of June 30, 2020, we
believe that cash generated from operations, the liquidity of our fixed income
portfolio and our unused lines of credit provide sufficient sources of cash to
meet our anticipated needs over the next 12 to 24 months.



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



RESULTS OF OPERATIONS

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019





Consolidated revenue for the first half of 2020 decreased $85.6 million from the
first half of 2019 as performance in the equity portfolio varied significantly
between the periods. Overall market declines resulted in $55.7 million of
unrealized losses on equity securities in 2020, while positive returns generated
$42.3 million of unrealized gains in our equity portfolio in the first half of
2019. Net premiums earned for the Group increased 3 percent, driven by growth
from our casualty and property segments. Investment income increased 3 percent
due to a larger asset base relative to the prior year. Realized gains during the
first half were $13.0 million and were comprised of $12.8 million of realized
gains on equity securities from rebalancing our portfolio, $2.6 million of
realized gains on the fixed income portfolio and $2.4 million of other realized
losses. This compares

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to $12.3 million of realized gains on the equity portfolio, $1.3 million of realized gains on the fixed income portfolio and $0.2 million of other realized gains for the same period in 2019.

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