Executive Summary / Key Takeaways

• RLI Corp. differentiates itself as a specialty insurer through deep underwriting and claim expertise in niche markets, consistently prioritizing underwriting profitability over top-line growth, evidenced by its 29th consecutive year of underwriting profit in 2024.
• First quarter 2025 results demonstrated continued premium growth (10% net earned) and solid investment income (up 12%), though overall earnings were impacted by unrealized losses in the equity portfolio and lower favorable prior year reserve development compared to the prior year quarter.
• The company's diverse portfolio across Casualty, Property, and Surety segments allows it to capitalize on opportunities in disrupted markets, such as Personal Umbrella and Marine, while navigating challenges like increased auto severity and heightened competition in E&S Property.
• RLI leverages technology and in-house expertise (like loss control and dedicated claims teams) to enhance risk selection, improve operational efficiency, and manage complex claims, supporting its competitive edge against larger, more generalized insurers.
• A strong balance sheet and conservative capital management philosophy underpin RLI's ability to return capital to shareholders, highlighted by its 50-year track record of increasing ordinary dividends and periodic special dividends.

A Foundation Built on Specialty and Profitability

RLI Corp., now in its sixty-first year of operation, has carved a distinct identity in the U.S. insurance landscape by focusing intently on select property, casualty, and surety niches. From its founding, the company's strategy has been rooted in deep underwriting and claim expertise, a commitment to exceptional customer service, and, crucially, a steadfast prioritization of underwriting profitability in all market conditions. This disciplined approach has yielded remarkable consistency, most notably its achievement of 29 consecutive years of underwriting profit through 2024, averaging an 88.10 combined ratio over that period. This track record is not merely a historical footnote; it is the bedrock of RLI's investment thesis, driving shareholder returns through underwriting income, net investment income, and equity portfolio appreciation.

The insurance industry is inherently cyclical and currently faces complex challenges, including pervasive legal system abuse, economic uncertainty, and intense competition. Larger, more diversified players like Travelers (TRV), Chubb (CB), and The Hartford (HIG) operate across broader markets, leveraging significant scale and extensive distribution networks. While these competitors often achieve lower operating costs per policy due to volume, RLI differentiates itself through tailored products and specialized risk assessment. Its focus on niche segments, such as specialized surety bonds or specific commercial property exposures, allows for potentially higher pricing power and superior margins compared to the broader market offerings of its larger rivals. However, RLI's smaller scale can result in higher operating costs relative to these giants. Against tech-forward competitors like Progressive (PGR), particularly in auto-related lines, RLI's challenge lies in matching the speed and efficiency gains derived from advanced digital tools, which can translate to faster processing and lower costs per policy for rivals. RLI's strategic response involves leveraging its own expertise and targeted technology investments to maintain its competitive edge in its chosen niches.

Operational Excellence and Technological Support

RLI's business model is structured around three core segments: Casualty, Property, and Surety. Each segment is managed by teams with specialized knowledge, empowered to make discerning risk selections and take remedial action when market conditions deteriorate. This decentralized expertise is a key operational differentiator.

In the Casualty segment, which includes significant exposure to commercial excess, personal umbrella, and transportation, RLI actively manages the risks associated with long development tails and increasing severity, particularly in auto-exposed lines impacted by legal system abuse. While competitors may face significant reserve adequacy concerns, RLI's approach involves a prudent view of loss cost trends, incorporating extended reporting patterns where necessary, and maintaining a strong feedback loop between underwriting, claims, and actuarial teams. This collaborative process informs rate adjustments and underwriting appetite, such as raising required underlying coverage limits in personal umbrella or walking away from underpriced large transportation accounts. The segment saw net premiums earned increase 16% in Q1 2025 compared to Q1 2024, driven by positive rate movement and new business growth in personal umbrella and commercial excess, despite a challenging 99.1% combined ratio in the quarter reflecting lower favorable prior year development and higher initial loss estimates in auto lines.

The Property segment, encompassing commercial fire, hurricane, earthquake, and marine, is highly susceptible to volatile catastrophe events. RLI manages this by limiting net aggregate exposure through policy limits, reinsurance, and modeling. The segment experienced a 6% decrease in gross premiums written in Q1 2025, primarily due to increased competition and declining rates in E&S Property after several years of increases. Aggressive tactics by MGAs in the Florida wind market, including increasing capacity and slashing rates, highlight the competitive intensity. Despite this, RLI believes its portfolio remains well-priced, benefiting from cumulative rate increases of around 200% on Hurricane exposure since 2020. Growth continues in niches like Marine (up 10% in Q1 2025) and Hawaii Homeowners, where competitor pullbacks have created opportunities. The segment posted a strong 57.1% combined ratio in Q1 2025, benefiting from favorable prior year development and earned premium growth.

The Surety segment, specializing in contract, commercial, and transactional bonds, operates in a competitive but often less volatile market than property or casualty. Growth is influenced by economic conditions and construction activity. While Q1 2025 gross premiums were flat overall due to a slowdown in larger public construction bids impacting contract surety, transactional and commercial surety saw growth. RLI's focus on sound risk selection and discipline yielded a strong 68.5% combined ratio in Q1 2025, benefiting from favorable prior year reserve development.

RLI's operational effectiveness is increasingly supported by targeted technology investments. While not detailing revolutionary proprietary insurance technology in the same vein as a manufacturing process, the company invests in technology to enhance ease of use for producers and customers, streamline policy issuance, and improve claim handling efficiency. Initiatives include redoing application processes for user-friendliness, implementing systems to allow policies to flow through with fewer manual touches, and providing tools that enable claims staff to resolve claims more effectively. The recent partnership with TruckerCloud for RLI Transportation is a concrete example of leveraging external technology to potentially enhance risk selection and operational insights in a key segment. Furthermore, RLI utilizes computer-assisted modeling for property catastrophe exposure management and employs in-house loss control services for businesses like transportation, visiting insureds to assess safety practices and inform underwriting. These technological and operational tools are aimed at supporting RLI's core expertise, improving efficiency, and ultimately contributing to profitable growth and better claim outcomes, providing a competitive advantage in their specific niches.

Financial Strength and Shareholder Returns

RLI's financial performance reflects its disciplined strategy. In Q1 2025, net premiums earned grew 10% to $398.3 million, primarily from the Casualty segment. Net investment income increased 12% to $36.7 million, benefiting from a larger asset base and higher reinvestment rates (fixed income purchase yields averaged 5% in Q2 and Q4 2024, and 4.9% in Q3 2024). However, net earnings for Q1 2025 totaled $63.2 million ($0.68 per diluted share), down from $127.9 million ($1.39 per diluted share) in Q1 2024. This decline was largely attributable to a $42.3 million unrealized loss on equity securities in Q1 2025 compared to a $45.3 million gain in Q1 2024, alongside lower underwriting income ($71 million vs. $78 million) and reduced favorable prior year reserve development ($31 million vs. $42 million). Despite these factors, comprehensive earnings, which include unrealized gains/losses on the fixed income portfolio, were $93.2 million in Q1 2025, up from $115.2 million in Q1 2024, as lower interest rates increased the fair value of fixed income holdings.

The company maintains a healthy balance sheet with $1.60 billion in shareholders' equity and $100 million in debt as of March 31, 2025, representing a modest 6% of total capital. Liquidity is strong, with $103.5 million in operating cash flow generated in Q1 2025. RLI has access to a $100 million revolving credit facility and can borrow from the Federal Home Loan Bank of Chicago, supported by pledged investments. The holding company relies on dividends from its insurance subsidiaries, which are subject to state regulatory restrictions, but maintains sufficient unrestricted funds ($107 million liquid assets at March 31, 2025) and access to capital markets to meet its obligations and pay shareholder dividends.

RLI is deeply committed to returning value to shareholders. It has increased its ordinary cash dividend for 50 consecutive years, paying $0.15 per share in Q1 2025 and announcing a $0.16 per share dividend for Q2 2025. This consistent payout is complemented by periodic special dividends, with nearly $1.5 billion returned to shareholders in the last 10 years through 2024, including a $2 per share special dividend announced in Q4 2024. The decision for special dividends is based on capital adequacy relative to rating agency benchmarks and internal risk assessments, reflecting a conservative capital stewardship philosophy that balances shareholder returns with financial strength.

Risks and Outlook

While RLI's disciplined approach has historically mitigated risks, it is not immune to industry headwinds. The pervasive issue of legal system abuse and increasing auto severity remains a significant challenge, requiring ongoing rate increases and vigilant underwriting and claim handling. Competition, particularly from aggressive MGAs in certain property lines and standard markets in casualty, is impacting growth rates in some areas. Catastrophe exposure, while managed through reinsurance and diversification, remains a potential source of volatility, as demonstrated by recent hurricane losses. Economic uncertainty could impact surety demand and insureds' financial viability. Investment performance is subject to market fluctuations, as seen with equity unrealized losses in Q1 2025.

Looking ahead, RLI's outlook is framed by its commitment to its core strategy. Management expects to continue pursuing rate increases in auto-exposed lines through 2025 and beyond. They anticipate continued competition in property markets, hoping recent catastrophe events might lead to some stabilization after a period of softening. Opportunities are expected to persist in niches where competitors are pulling back or where RLI's specialized expertise is valued, such as Personal Umbrella, Marine, and certain Casualty and Surety subsegments. The company will continue to invest in its people, relationships, and technology to drive profitable organic growth and enhance operational efficiency. While specific quantitative guidance is not provided, the focus remains on achieving underwriting profitability, generating consistent investment income, and prudently managing capital to deliver long-term value to shareholders.

Conclusion

RLI Corp.'s investment thesis is firmly rooted in its differentiated strategy as a specialty insurer. By prioritizing underwriting profitability through deep niche expertise, disciplined risk selection, and proactive claim management, RLI has built a remarkable track record of consistent financial performance. While facing industry-wide challenges like legal system abuse and navigating competitive market dynamics, the company leverages its operational strengths, targeted technology investments, and strong balance sheet to find profitable growth opportunities and manage risk effectively. The commitment to returning capital to shareholders, highlighted by its long history of increasing dividends, underscores its financial health and confidence in its long-term prospects. For investors seeking exposure to a well-managed, profitable insurer with a proven ability to thrive in specialized markets, RLI's unique approach and consistent execution present a compelling case.