Femi Ogunjumo

Company Analysis – RLI Corp. Femi Ogunjumo Femi Ogunjumo Private and Confidential Framework for Analyzing RLI Corp. (“RLI”) Main Topic Key Questions Stock Market Trends − − − − What are key market themes and trends? How has RLI’s stock performed over the last 5 years compared to the S&P 500 and peers/competitors? How is RLI currently valued relative to peers? What are some potential areas of improvement and possible solutions? Industry Trends − − − What are key themes and competitive dynamics in the Excess and Surplus (E&S) and Specialty P&C insurance industry? How does RLI’s operating performance compare with peers? What are some potential areas of improvement and possible solutions? Company Operations − − − What is a high-level view of RLI? What are key components of RLI’s operational strategy? What are some potential areas of improvement and possible solutions? Financial Overview and Commentary − − − − − − − − − − What are key line items on RLI’s balance sheet worth noting? What are key line items on RLI’s income statement worth noting? What is the ideal capital structure for RLI? What is RLI’s appetite for off-balance sheet arrangements? How effectively has RLI been able to grow premiums in recent years? What percentage of GPW is retained and what portion is reinsured? How have RLI’s business segments and product lines performed/grown in the recent past? What are areas of concern related to RLI’s underwriting results? What are RLI’s “core” underwriting ratios (excluding losses from catastrophes and prior-year reserve releases)? What are some potential areas of improvement and possible solutions? 2 Femi Ogunjumo Stock Market Trends Private and Confidential Femi Ogunjumo Private and Confidential U.S. Stock Market – Key Themes Theme Commentary − − MacroEconomic Trends − − Performance Valuation − − S&P 500 Earnings − Economic Growth − U.S. GDP expanded at an average annualized rate of 3.1% over the last four quarters and is forecasted to stay at this level in 2018 (1) − Several economic indicators including real consumer spending, business equipment spending, housing and payroll growth are trending in positive directions Higher Interest Rates − In June 2018, The Federal Reserve raised benchmark interest rates to a range of 1.75% - 2.00%, and signaled two additional rate raises in 2018 and three raises in 2019 • This marked the 7th rate raise since the end of 2015 Evolving Opportunities and Threats − Evolving opportunities that can help the market move higher include benefits from corporate tax reform (including potential for higher profit margins and repatriation of US corporate profits), a more benign regulatory environment and the continued tightening of the labor market − Ongoing threats include growing risks of cyber and data security and geopolitical risks (such as growing backlash against globalization and foreign trade) Quarterly GDP Results/Projections 4.1% 3.0% Q1'18 Q2'18 Q3'18 Actual Over the last five (5) years, the S&P 500 stock index returned a compounded annual growth rate of 10.8% − Leading sectors included Information Technology, Consumer Discretionary, Health Care and Financials with 5-year annualized growth rates of 19.5%, 13.0%, 11.6% and 10.6% respectively − The S&P Insurance Select Industry Index (2), with a 5-year compounded annual growth rate of 11.1% slightly outperformed the S&P 500 index Q4'18 2.5% 2.5% Q1'19 Q2'19 Projected 10.8% 5-year compounded annual growth rate of S&P 500 index 16.7x The forward 12-month P/E ratio for the S&P 500 is 16.7x which is higher than the 5-year average (16.2x) and the 10-year average (14.4x) Earnings Scorecard (3) − For Q2 2018 (with 53% of the companies in the S&P 500 reporting results for the quarter), 83% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise. If 83% is the final number, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008 Earnings Growth (3) − For Q2 2018, the blended earnings growth rate for the S&P 500 is 21.3%. If 21.3% is the actual growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010 (34.1%) − Looking at future quarters, analysts currently project earnings growth to continue at about 20% through the remainder of 2018 and to drop to high single/low double-digit growth rates in the first half of 2019 2.9% 2.3% S&P 500 index P/E ratio Projected Earnings and Revenue Growth 21.2% 18.0% 7.7% Q3'18 10.2% 7.3% 6.0% Q4'18 S&P Earnings 4.8% 5.8% Q1'19 Q2'19 S&P Revenue (1) WSJ surveys a group of more than 60 economists on more than 10 major economic indicators on a monthly basis. (2) Index comprises 50 stocks in the S&P Total Market Index that are classified in the GICS insurance brokers, life & health insurance, multi-line insurance, P&C insurance and reinsurance industries. (3) As of July 27, 2018. Sources: Federal Reserve Press Release, WSJ Economic Forecasting Survey., FactSet, S&P Indices 4 Femi Ogunjumo Private and Confidential 5-year Annualized Stock Price Performance (1) Kinsale Capital Group 80.4% James River Group 23.3% United Fire Group Inc 21.3% American Financial Group 21.2% The Hanover Group 21.1% Assurant 17.7% Markel 17.2% Navigators 16.1% XL Group 14.8% RLI Corp. 14.4% Argo Group 14.3% W.R. Berkley 14.1% Old Republic 13.9% Employers Holdings Inc 13.4% Hartford 13.4% Amerisafe 13.4% Chubb 12.6% Travelers 11.8% S&P Insurance Index 11.1% Arch Capital 11.1% S&P 500 Index 10.8% Alleghany Corporation 9.6% CNA 8.5% Axis Capital AIG Aspen (1) 8.0% RLI RLI Peers (Broader P&C) 5.6% 3.6% RLI Peers (E&S Focused) S&P Indices Note: Trading data is as of 7/31/2018. Share prices adjusted for dividends and stock splits. (1) Kinsale Capital Group became a publicly traded company on 7/28/2016; James River became a publicly traded company on 12/21/2014; annualized returns are from IPO date. Sources: Yahoo Finance, S&P Indices 5 Femi Ogunjumo Private and Confidential RLI Trading Comparables Company Chubb Limited American International Group The Travelers Companies The Hartford Financial Services Group Markel Corporation XL Group CNA Financial Corporation Arch Capital Group American Financial Group Alleghany Corporation W. R. Berkley Corporation Assurant Old Republic International Corporation The Hanover Insurance Group AXIS Capital Holdings Aspen Insurance Holdings Argo Group International Holdings The Navigators Group Employers Holdings United Fire Group Kinsale Capital Group James River Group Holdings Amerisafe RLI Corp. Indexes S&P 500 S&P Insurance Index Summary Statistics Max Min Median Max (E&S Peers) Min (E&S Peers) Median (E&S Peers) Market Cap ($M) $65,082 49,561 34,836 18,889 16,246 14,551 12,696 12,448 10,022 9,621 9,227 6,959 6,445 5,335 4,726 2,413 2,120 1,794 1,522 1,503 1,248 1,236 1,210 P/BV 1.3x 0.8x 1.5x 1.5x 1.7x 1.5x 1.1x 1.5x 1.9x 1.2x 1.7x 1.3x 1.3x 1.8x 1.1x 1.0x 1.2x 1.5x 1.6x 1.5x 5.2x 1.8x 2.8x Valuation P/TBV 2.2x 0.8x 1.9x 1.8x 2.5x 2.0x 1.1x 1.6x 2.0x 1.3x 1.7x 1.8x 1.3x 2.0x 1.1x 1.0x 1.4x 1.5x 1.7x 1.6x 5.3x 2.7x 2.8x P/E 12.9x 10.8x 11.9x 11.1x 30.4x 15.2x 11.2x 13.8x 13.9x 17.1x 20.8x 14.6x 12.3x 14.6x 11.6x 11.6x 15.1x 20.7x 19.5x 23.1x 29.2x 16.6x 20.3x YTD -3.3% -6.3% -3.0% -5.5% 2.7% 61.2% -10.8% 1.0% 6.2% 7.4% 6.9% 10.7% 6.7% 17.1% 14.1% 0.8% 16.7% 24.2% 5.7% 33.9% 32.0% 5.1% 2.7% 3.9x 4.2x 33.7x 24.1% 30.6% 40.9% 95.9% 16.7x 5.3% 3.4% 14.0% 4.3% 33.9% 33.3% 67.1% 69.3% 61.2% -10.8% 6.5% 32.0% 2.7% 10.8% 53.0% -15.2% 8.1% 53.0% -9.9% 7.8% 101.7% -10.8% 40.3% 63.7% 6.1% 40.3% 162.7% 19.3% 89.9% 120.8% 46.8% 94.3% $3,315 3.4x - 9.8x - 5.2x 0.8x 1.5x 5.2x 1.1x 1.6x - 5.3x 0.8x 1.8x 5.3x 1.1x 1.6x 33.7x 10.8x 14.8x 30.4x 11.6x 18.9x Stock Price Performance 1-year 3-year -2.6% 38.5% -13.7% -8.2% 3.9% 31.3% -2.4% 17.2% 9.2% 31.5% 29.1% 58.6% -7.9% 28.4% -5.7% 28.5% 16.3% 83.8% 4.4% 31.7% 11.5% 41.7% 7.2% 58.4% 18.6% 50.8% 34.8% 65.5% -9.9% 6.1% -15.2% -10.8% 20.0% 40.3% 6.4% 56.3% 8.9% 101.7% 36.9% 87.4% 53.0% NA 6.4% 63.7% 10.3% 30.5% 5-year Dividend Yield 81.2% 2.1% 31.6% 2.3% 74.7% 2.4% 87.2% 2.3% 120.8% 99.6% 1.6% 50.2% 7.3% 69.2% 161.9% 2.6% 58.5% 93.6% 2.1% 125.6% 2.0% 91.9% 3.7% 160.9% 1.7% 46.8% 2.8% 19.3% 2.4% 94.9% 1.7% 110.8% 0.5% 87.9% 1.7% 162.7% 2.1% NA 0.5% NA 4.1% 87.1% 7.0% 2017 ROE 7.8% -8.5% 8.8% -1.7% 4.4% -4.0% 7.4% 6.4% 9.3% 1.2% 10.5% 12.4% 12.2% 6.9% -6.4% -8.1% 2.8% 3.4% 11.3% 4.7% 11.1% 6.3% 10.5% 3.5% 12.5% 1.9% 13.5% - 7.3% 0.5% 2.3% 4.1% 0.5% 1.9% 12.5% -8.5% 6.7% 11.1% -6.4% 3.9% - Note: Trading data is as of 7/31/2018. Shading denotes data for E&S focused P&C peers. Sources: Capital IQ, S&P Indices, Yahoo Finance 6 Femi Ogunjumo Industry Trends Private and Confidential Femi Ogunjumo Private and Confidential E&S and Specialty Insurance Industry – Key Themes and Trends Trend Commentary − General The E&S and Specialty insurance segment of the industry continues to be the essential market for risks for which typically the standard insurance market does not offer coverage − From extremely hazardous conditions to highly unique business operations and unproven new products, these unconventional risks are often complex and challenging − The E&S market’s challenge is to develop products to cover these exposures utilizing its expertise and freedom of rate and form − Competition tends to focus less on price and more on availability, coverage, service and other value-based considerations and requires extensive knowledge of, and expertise in, very niche product lines − Many of the insured risks are underwritten on an individual basis and tailored coverages are employed in order to respond to distinctive risk characteristics; therefore, continuous product development, quick reaction to market changes, and deep, niche expertise are drivers of sustained profitability Distribution − E&S business is largely produced through the wholesale distribution channel − These wholesale brokers and Managing General Agents are typically product line or business industry focused, therefore providing valuable expertise as part of the transaction Geography − E&S business is highly concentrated by territory as over 50 percent of annual direct written premium is in the states of California, Florida, Texas, New York and Illinois − − − − Size and Growth The 2016 E&S market comprised approximately 7 percent (approximately $41.6 billion) of the US property and casualty market’s direct written premium (DWP) Over the last 25 years, E&S has gained an increasing share of the P&C marketplace; the segment has grown by more than 35% since 2011, despite continued downward pressure on rates in certain segments Increasing demand for solutions to complex risks and new product innovation have been and continue to be key drivers Potential growth areas include: − Environmental and Energy sectors − On-Demand (gig) economy − Driverless vehicles − Nanotech, genomics and micro segments such as robotics (with its myriad manufacturing and service applications) − Health care − Construction (potential significant impact by tech advancement; such as wearables worn by workers, 3-D imaging of worksites, and affordable sensor devices that can record changes in atmospheric conditions) − Cyber coverage (including IOT) − Privatized flood insurance − Drones − Marijuana market Sources: Conning, propertycasualty360.com, Guy Carpenter, Dowling Hales, AmWins 8 Femi Ogunjumo Private and Confidential E&S and Specialty Insurance Industry – Key Themes and Trends (Continued) Trend Commentary − Catastrophes − − − − Pricing − Technology Mergers & Acquisitions The 2017 fiscal year was marked by a significant increase in U.S. catastrophe losses, as Hurricanes Harvey, Irma and Maria all made landfall during the third quarter For the industry, this marked the most active year of U.S. catastrophes in over 20 years, and represented one of the costliest hurricane seasons in U.S. history The catastrophe losses eroded some of the excess capital that entered the marketplace in recent years, and modest increases to property primary and reinsurance rates started to emerge by the end of the year The industry remains well capitalized, and the expectation is that the 2017 catastrophes do not represent a capital event for most insurers. Rather, the losses have been characterized as earnings events that do not call into question the adequacy of the insurance industry’s capital position Some areas of the E&S market have significant capacity and intense competition has caused persistent rate declines − Property remains the softest category by far with the most competition and as a result it has suffered continued rate reductions for several years − Excess executive lines are also under heavy competition − Primary and lead financial lines, medical malpractice liability and casualty are mostly stable In the broader P&C market, a combination of excess capital, low interest rates and slowing organic growth has emboldening primary insurers to take on new risks with expanded resources that typically are better suited to the E&S market by boosting underwriting capacity via M&A, “lift outs” (hiring a whole team), and partnering with MGAs − Data and information management, the need to streamline infrastructure and transact more efficiently, and the rising cost of investing in the right kind of technology remain key challenges, particularly for smaller carriers − Recent M&A activity has blurred many of the traditional lines that have long distinguished E&S providers from carriers in the admitted market − Companies like Cincinnati, Nationwide, Auto Owners and now Great American have all made significant strides through acquisitions and in creating divisions to offer E&S products The desire for growth is driving industry consolidation, with a focus on specialty insurers or niche business lines due to greater growth potential − M&A can help insurers gain a sharper focus and enable the aggregation of resources to take advantage of richer data and analytics tools and provide products and services in line with customers’ rising expectations The scarcity of high-value specialty targets, reflected in rich multiples associated with acquiring such targets, will be a deterrent to M&A Technology, already seen as a driver, also will spur M&A, as insurers seek to gain competitive advantage by acquiring insurers and InsurTech firms with advanced capabilities, rather than develop technology in-house − − − Sources: Conning, propertycasualty360.com, Guy Carpenter, Dowling Hales, AmWins 9 Femi Ogunjumo Private and Confidential RLI Corp. – Peer Benchmarking Premium Growth Combined Ratio 46.7% 105.0% 96.4% 89.5% 92.0% 106.4% 91.9% 113.1% 107.2% 103.2% 96.7% 96.7% 96.2% 95.9% 94.3% 28.9% 84.0% 74.3% 99.2% 94.3% 24.6% 18.4% 14.8% 2.5% 1.2% 12.6% 9.2% 7.9% 6.5% 4.1% -1.2% -0.9% 3.5% RLI 11.8% 8.0% 7.6% MKL Y WRB AXS ARGO NAVG KNSL JRVR RLI MKL Y Retention Ratio 88.8% 88.3% 85.2% 84.9% 84.7% 84.7% 83.4% 87.2% 75.6% 83.7% 75.5% 80.2% 75.6% 74.2% 70.9% 72.5% 66.5% 61.3% 67.5% 48.0% RLI MKL Y WRB AXS WRB AXS ARGO NAVG KNSL JRVR Loss and LAE Ratio ARGO NAVG KNSL JRVR 54.4% 53.0% RLI MKL 79.2% 73.1% 58.6% Y Return on Equity 63.4% 61.1% 59.5% WRB AXS 66.8% 57.4% ARGO 74.9% 68.0% 60.5% NAVG 58.9% 63.1% 53.0% KNSL JRVR Expense Ratio 16.2% 14.0% 12.5% 12.4% 10.5% 11.1% 8.5% 5.6% 4.4% MKL 7.3% 2.8% Y WRB AXS ARGO 10.8% 31.2% 24.3% 3.4% NAVG KNSL JRVR RLI -6.4% 2016 Sources: Capital IQ, Company financial filings 25.1% 21.3% 6.3% 5.9% 1.2% RLI 8.5% 40.4% 41.5% 42.0% 39.0% 36.4% 35.2% 38.8% 37.5% 33.3% 33.3% 36.2% 33.3% 33.2% 33.9% MKL Y WRB AXS ARGO NAVG KNSL JRVR 2017 10 Femi Ogunjumo Company Operations Private and Confidential Femi Ogunjumo Private and Confidential RLI Corp. – Company Overview Business Overview − Overview Insurance Markets − RLI is a publicly-traded (~$3B market cap) U.S.-based specialty insurance company servicing diverse niche property, casualty and surety markets Founded in 1961 as a contact lens insurance agency Headquartered in Peoria, IL, RLI is licensed in all 50 states, DC, Puerto Rico, the Virgin Islands, and Guam More than 900 employees − − − Specialty Admitted Insurance Market (~64% of 2017 GPW) E&S Insurance Market (~32% of 2017 GPW) Specialty P&C Reinsurance Market (~4% of 2017 GPW) − Distribute products primarily through branch offices that market to wholesale and retail producers and through independent agents Limited coverages are offered on a direct basis to select insureds, as well as various reinsurance coverages A limited amount of business is produced under agreements with managing general agents under the direction of our product vice presidents − − − Distribution − Business Segments Long-term Track-record Financial Strength − − − Casualty (~61% of 2017 GPW) Property (~24% of 2017 GPW) Surety (~15% of 2017 GPW) − − − − − − 22 consecutive years of combined ratio less than 100% 15% average annual growth in BVPS (including dividends) over last 10 years 13.9% average ROE over last 10 years 42 consecutive years of increased dividend $609M returned to shareholders since 2013 20-year shareholder return of 13.7% − − − A+ (A.M. Best) A+ (S&P) (1) A2 (Moody’s) (1) Key Management Jonathan Michael Craig Kliethermes Thomas Brown Aaron Diefenthaler − − Chairman & CEO Since joining RLI in 1982, Jon has on has held various positions, including president & chief operating officer, executive vice president, and chief financial officer. − − President and COO Craig joined RLI in 2006 from Lockton Companies, where he was Sr. VP and Director of Quantitative Analysis − − Senior Vice President, CFO Brown joined RLI in 2011 from PwC where he was an Audit Engagement Partner − − Vice President, Chief Investment Officer & Treasurer Diefenthaler joined RLI in 2012 from AAM Insurance Investment Management where he served as Principal and Portfolio Manager SWOT Analysis Strengths − − − Superior underwriting discipline Diversified product portfolio focused on selected niche markets Prudent fiscal management Weaknesses − Technology innovation and implementation Opportunities − − − − New product launches including cyber and energy casualty Growth in Surety Segment Partnering with insurtech to increase delivery capabilities Completing build out of country-wide admitted package capability − Large exposure to construction industry (one-third of insurance and surety businesses relate to construction exposures) Increased litigation may cause loss cost inflation Continued adverse loss experience in MPL business (2) Threats − − Note: GPW is Gross Premiums Written. (1) Financial Strength Ratings for RLI Insurance Company, RLI Corp.’s principal insurance subsidiary. (2) Impairment charges related to RLI’s MPL business of $8.8M and $7.2M (in 2017 and 2016 respectively) were assessed against goodwill. Sources: RLI financial filings, Capital IQ, S&P Indices, Yahoo Finance 12 Femi Ogunjumo Private and Confidential RLI Corp. – Operational Strategy Operations − Operating Standards − − − Underwriting − − Recent Actions − − − Response to Market Entrants − − Geographical Distribution Corporate Structure RLI maintains underwriting and marketing standards by not seeking market share at the expense of earnings RLI has a track record of withdrawing from markets when conditions become overly adverse RLI offers new coverages and programs where the opportunity exists to provide needed insurance coverage with exceptional service on a profitable basis RLI Corp RLI Insurance Company Each line of business is supervised by an underwriting officer with decades of experience in managing that product line Underwriters are located throughout the branch office network, providing a localized presence to their customer base RLI’s management team spent a good portion of 2017 repositioning the insurance portfolio by exiting some businesses in the property segment and addressing underperforming autorelated exposures For each of the exited lines, factors such as poor underwriting performance, lack of scale or unfavorable market conditions were key considerations in the decisions to exit − The exception is RLI’s exit from crop reinsurance, which occurred due to the acquisition of the cedant company RLI also invested heavily in new casualty businesses, technology and improving the customer experience RLI is regularly faced with new entrants into the specialty insurance market, which requires a deep understanding and discipline to be successful RLI remains focused on narrow and deep talent in selected niche markets, combined with a disciplined underwriting culture and a compensation plan that reinforces ownership and accountability States in which RLI experienced the largest recent growth in Direct Premiums Earned include Arizona, Illinois, Pennsylvania, Texas, New York, and Hawaii with 3-year CAGRs of 8.5%, 5.3%, 4.1%, 2.8%, 2.6%, and 2.6% respectively Mt. Hawley Insurance Company Contractors Bonding and Insurance Company Investment Portfolio Other 8.7% Structured 18.6% Equities 18.7% Municipal Bonds 29.7% Corporate Bonds 24.2% Total Portfolio Assets: $2,140.8M Sources: RLI financial filings 13 Femi Ogunjumo Financial Overview and Commentary Private and Confidential Femi Ogunjumo Private and Confidential RLI Corp. – Balance Sheet Analysis (Assets) Commentary 1− 2− 3− 4− RLI attempts to keep an 80/20 ratio regarding fixed income/equities split of the investment portfolio; general trend of the investment portfolio has tilted conservative with slightly higher percentages allocated to fixed income portfolio Desire for additional yield has led to increased allocation to other invested assets in each of the last 4 years; other invested assets includes investments in a global credit fund, a BDC, a real estate fund and membership stock in FHLB of Chicago Unconsolidated Affiliates has grown by a CAGR of 16% from-; and percentage of total assets has grown to 3.1%; RLI owns 40% of Maui Jim, a manufacturer of high quality sunglasses and 23% of Prime Holdings Insurance, a specialty E&S company Goodwill impairments in 2016 and 2017 were related to RLI’s MPL line of business $ in thousands Fixed Income - Available-for-sale, at fair value (1) 2013 2014 2015 2016 $1,440,703 $1,495,087 $1,538,110 $1,605,209 $1,672,239 418,654 410,642 375,424 369,219 400,492 23,232 16,339 6,262 5,015 9,980 33,808 Equity securities available-for-sale, at fair value Short-term investments, at cost which approximates fair value Other invested assets 2 0 11,597 20,666 24,115 39,469 30,620 11,081 18,269 24,271 $1,922,058 $1,964,285 $1,951,543 $2,021,827 $2,140,790 Cash Total investments and cash 2017 Accrued investment income 15,710 14,629 14,878 14,593 15,166 152,509 154,573 143,662 126,387 134,351 60,407 53,961 52,833 52,173 57,928 354,924 335,106 297,844 288,224 301,991 Deferred policy acquisition costs, net 61,508 65,123 69,829 73,147 77,716 Property and equipment 40,261 42,549 47,102 54,606 55,849 49,793 60,046 70,784 72,240 90,067 74,876 72,695 71,294 64,371 59,302 8,264 12,575 15,696 10,065 14,084 $2,740,310 $2,775,542 $2,735,465 $2,777,633 $2,947,244 76.5% 77.3% 79.3% 80.1% 79.0% 22.2% 21.2% 19.3% 18.4% 18.9% 1.2% 0.8% 0.3% 0.3% 0.5% 0.0% 0.6% 1.1% 1.2% 1.6% 2.2% -0.6% 3.6% 5.9% 70.8% 71.3% 72.8% 72.6% 20.6% 17.9% 2.1% 24.7% 2.2% 2.6% 2.6% 3.1% Premiums and reinsurance balances receivable Ceded unearned premiums Reinsurance balances recoverable on unpaid losses and settlement expenses 3 Unconsolidated Affiliates Goodwill and intangibles 4 Other assets Total Assets Ratio Analysis Fixed Income/Total Investments (%) Equity/Total Investments (%) 1 Short-term investments/Total Investments (%) Other Invested Assets/Total Investments (%) 2 Total Investments & Cash Growth (%) Total Investments & Cash/Total Assets (%) 70.1% Unconsolidated Affiliates Growth (%) Unconsolidated Affiliates/Total Assets (%) (1) 2013 includes held-to-maturity amount of $651,000. Sources: RLI financial filings 3 1.8% 15 Femi Ogunjumo Private and Confidential RLI Corp. – Balance Sheet Analysis (Liabilities and Equity) Commentary 1− 2− 3− 4− 5− Reinsurance related assets for L&LAE and unearned premiums have both trended down as a percentage of total reserves over the last 5 years either indicating a compression in reinsurance rates or reduced reliance on reinsurance RLI’s capital structure strategy emphasizes dividend distributions over share buybacks RLI maintains rabbi trusts for deferred compensation plans for directors, key employees and executive officers through which RLI shares are purchased Shareholders’ equity growth was relatively flat from- only growing by a CAGR of 0.7% during that period Amount paid in dividends to shareholders exceeded net earnings in 2016 and 2017 $ in thousands 2013 2014 2015 2016 Unpaid losses and settlement expenses Unearned premiums Reinsurance balances payable Funds held Income taxes - deferred Bonds payable, long-term debt Accrued expenses Other liabilities Total liabilities $1,129,433 392,081 47,334 61,656 57,801 149,582 59,596 13,861 $1,911,344 $1,121,040 401,412 38,013 51,481 82,285 149,625 63,148 23,476 $1,930,480 $1,103,785 422,094 37,556 54,254 63,993 148,554 55,742 26,018 $1,911,996 $1,139,337 433,777 17,928 72,742 64,494 148,741 51,992 25,050 $1,954,061 $1,271,503 451,449 21,624 74,560 53,768 148,928 52,848 18,966 $2,093,646 65,913 208,705 136,027 811,320 11,562 (404,561) $828,966 66,033 213,737 171,383 786,908 13,769 (406,768) $845,062 66,474 221,345 123,774 804,875 10,647 (403,646) $823,469 66,875 229,779 122,610 797,307 11,496 (404,495) $823,572 67,079 233,077 157,919 788,522 8,640 (401,639) $853,598 $2,740,310 0.00 $2,775,542 0.00 $2,735,465 0.00 $2,777,633 0.00 $2,947,244 0.00 31.4% 15.4% 29.9% 13.4% 27.0% 12.5% 25.3% 12.0% 23.8% 12.8% 58.8% 57.1% 56.6% 56.4% 59.4% 79.2% 55.5% 74.2% 25.8% 77.5% 54.9% 73.6% 26.4% 78.2% 55.8% 72.3% 27.7% 77.8% 56.6% 72.4% 27.6% 80.5% 58.5% 73.8% 26.2% 1.9% -2.6% 0.0% 3.6% 0.7% Common Stock Paid-in Capital Accumulated Other Comprehensive Earnings, net of tax Retained Earnings 5 3 Deferred Compensation 2 Treasury Stock, at cost Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity Balance check: Ratio Analysis Reinsurance recoverable/Unpaid L&LAE Ceded Unearned Premiums/Unearned Premiums 1 Unpaid losses and settlement expenses/Total Investments Reserves(1)/Total Total Investments & Cash (%) Total Reserves(1)/Total Assets (%) Unpaid L&LAE/Total Reserves Unearned Premiums/Total Reserves Shareholder s’ Equity Growth (%) Shareholders’ Equity CAGR (%) (1) Total reserves is defined as Unpaid Losses and Settlement Expenses plus Unearned Premiums. Sources: RLI financial filings 4 2017 16 Femi Ogunjumo Private and Confidential RLI Corp. – Income Statement Analysis Commentary 1− 2− 3− 4− 5− RLI has been able to continue to grow earned premiums in a very challenging underwriting environment Top line revenue in 2017 negatively impacted (primarily) by significant drop in net realized gains driven by reduced gains from the equity portfolio Reduced operating margin and growth in expenses driven by elevated loss costs from CAT activity as well as investments to reposition certain product lines Unconsolidated affiliates grew substantially in 2017 and contributed a significant percentage to pre-tax earnings Tax benefit driven by reevaluation of certain deferred tax items based on the new tax law $ in thousands, except per share data 2013 Net premiums earned Net investment income 2 Net realized gains Other-than-temporary-impairment losses on investments Consolidated revenue 2014 2015 2016 2017 $630,802 52,763 22,036 0 $705,601 $687,375 55,608 32,182 0 $775,165 $700,161 54,644 39,829 0 $794,634 $728,608 53,075 34,740 (95) $816,328 $737,937 54,876 6,970 (2,559) $797,224 259,801 210,651 53,557 8,095 8,746 $540,850 296,609 229,283 54,464 7,438 10,222 $598,016 299,045 241,078 51,480 7,426 9,837 $608,866 349,778 249,612 53,093 7,426 10,170 $670,079 401,584 252,515 56,994 7,426 11,340 $729,859 10,915 12,338 10,914 10,833 17,224 Earnings before income taxes $175,666 $189,487 $196,682 $157,082 $84,589 Income tax expense (benefit): Current Deferred 5 Income tax expense (benefit): 43,346 6,065 $49,411 48,596 5,446 $54,042 52,104 7,034 $59,138 41,034 1,128 $42,162 9,302 (29,741) ($20,439) $126,255 $135,445 $137,544 $114,920 $105,028 9.0% 5.4% 9.9% 10.6% 2.9% 4.6% 13.0% 6.5% 7.3% 43.2% 41.3% 84.4% $177,149 22.9% 1.9% -1.7% 2.5% 1.8% 2.8% 4.9% -11.5% 5.5% 1.5% 42.7% 41.8% 84.5% $185,768 23.4% 4.1% -2.9% 2.7% 10.1% 2.7% 4.5% -0.7% 6.9% -16.4% 48.0% 41.5% 89.6% $146,249 17.9% 1.3% 3.4% -2.3% 8.9% 2.7% 3.0% 59.0% 20.4% -8.6% 54.4% 41.9% 96.4% $67,365 8.4% Losses and settlement expenses Policy acquisition costs Insurance operating expenses Interest expense on debt General corporate expenses Total expenses 3 Equity in Earnings of Unconsolidated Affiliates Net earnings Ratio Analysis Net Premiums Earned Growth (%) Net Investment Income Growth (%) Consolidated Revenue Growth (%) Total Expenses Growth Net Investment Yield (%) Net Investment Return (%) Earnings from Unconsolidated Affiliates Growth (%) Unconsolidated Affiliates/Pre-tax Earnings (%) Net Earnings Growth (%) GAAP L&LAE Ratio GAAP Expense Ratio GAAP Combined Ratio Operating Earnings ($) Operating Margin (%) 1 2 6.2% 41.2% 41.9% 83.1% $164,751 23.3% 3 3 3 Note: Net Investment Yield is calculated as net investment income divided by average investments (less cash); Net Investment Return is calculated as net investment income plus net realized gains divided by average investments (less cash). Sources: RLI financial filings 4 17 Femi Ogunjumo Private and Confidential RLI Corp. – Capital Structure Analysis Commentary 1− 2− 3− 4− 10-year bond issued in October 2013 at 4.875%; S&P rating on the bond was BBB+; as of 7/31/2018, bond was trading slightly above par at 101.018 Other unfunded commitments are presented here undiscounted and represent contractual capital commitments that are assumed to be enforceable by law While the Debt/Equity ratio for RLI appears flat over the last 3 years, the inclusion of off-balance sheet commitments shows that this ratio has risen by 370 basis points since 2015 Likewise, Debt/Total Capital for RLI has risen by 240 basis points since 2015 when off-balance sheet commitments are included in the analysis $ in thousands Bonds payable, long-term debt 2015 1 Capitalized Operating Leases Other Unfunded Commitments: 2016 2017 $148,554 $148,741 $148,928 18,505 23,945 27,752 2 Related to Investment in a BDC 17,700 Related to Investment in a Global Credit Fund 7,200 Related to Investment in Low Income Housing Tax Credits 3,100 Total Unfunded Commitments $28,000 Total Debt (including Operating Leases and Unfunded Commitments) $167,059 $172,686 $204,680 823,469 823,572 853,598 Total Capital (excluding Leases and Other Unfunded Commitments) $972,023 $972,313 $1,002,526 Total Capital (including Leases and Other Unfunded Commitments) $990,528 $996,258 $1,058,278 $11,081 $18,269 $24,271 18.0% 18.1% 17.4% 16.7% 14.4% 16.1% 15.3% 15.3% 14.9% 14.1% 13.4% 12.4% 20.3% 21.0% 24.0% 18.9% 18.7% 21.1% 16.9% 17.3% 19.3% 15.7% 15.5% 17.0% Total Equity Memo: Cash Ratio Analysis Ratios below exclude Operating Leases and Other Unfunded Commitments: Debt/Equity 3 Net Debt/Equity Debt/Total Capital 4 Net Debt/Total Capital Ratios below include Operating Leases and Other Unfunded Commitments: Debt/Equity 3 Net Debt/Equity Debt/Total Capital Net Debt/Total Capital 4 Sources: RLI financial filings, Damodaran Online, Treasury.gov, Capital IQ 18 Femi Ogunjumo Private and Confidential RLI Corp. – Capital Structure Analysis (Additional Schedules) Commentary Operating Leases Schedule (2017) $ in thousands 1− 2− 3− 4− Discounted using the pretax cost of debt Yield of a 10-year treasury bond as of 7/31/2018 Estimate of the spread of a BBB+ rated bond over a risk free rate using comparably-rated bonds Assumption is that current spread based on bond’s rating is a better indicator of the future cost of RLI’s debt than referencing debt that was issued in the past 2017 Operating Lease $6,800 Present Value of Operating Leases Debt Value of Leases (FYE 2017) Other Unfunded Commitments Total 1 $5,589 $5,238 $5,138 $5,026 2023 and thereafter $4,991 $6,644 $5,338 $4,777 $4,475 $4,181 $3,965 2018 2019 2020 2021 2022 $5,016 $27,752 $28,000 $55,752 Operating Leases Schedule (2016) $ in thousands 2016 Operating Lease $6,400 Present Value of Operating Leases Debt Value of Leases (FYE 2016) Other Unfunded Commitments Total 1 $5,064 $4,468 $3,897 $3,818 2022 and thereafter $3,688 $7,398 $4,836 $4,075 $3,394 $3,176 $2,930 2017 2018 2019 2020 2021 $5,534 $23,945 $0 $23,945 Operating Leases Schedule (2015) $ in thousands 2015 Operating Lease $6,100 Present Value of Operating Leases Debt Value of Leases (FYE 2015) Other Unfunded Commitments Total Cost of Debt Schedule Risk-free Rate (10yr Treasury Bond) S&P Rating for Bond Estimated spread Estimated Cost of Debt Rate of Current Outstanding Bond Scenario selected 4 Cost of Debt for RLI 1 $4,487 $3,940 $3,132 $2,472 2021 and thereafter $2,370 $5,267 $4,285 $3,594 $2,728 $2,056 $1,883 2016 2017 2018 2019 2020 $3,959 $18,505 $0 $18,505 2.96% 2 BBB+ 1.75% 3 4.71% 4.875% 1 1=Estimated using risk-free rate and spread 2=Rate of Current Outstanding Bond 4.71% Sources: RLI financial filings, Damodaran Online, Treasury.gov, Capital IQ 19 Femi Ogunjumo Private and Confidential RLI Corp. – Premium Analysis Commentary 1− 2− 3− 4− Gross Premiums Written grew by 1.2% in 2017 fueled by RLI’s Casualty business, which was up ~4.5% from 2016 Net Premiums Earned grew by CAGR of 4% since 2013; 2017 growth of 1.3% was fueled by the Casualty segment which was up by 5.2% over 2016; 2016 growth of 4.1% was driven by the Casualty and Surety segments which grew by 10.3% and 3.9% respectively over 2015 Percentage of premiums ceded to reinsurers has remained relatively flat over the last 3 years RLI’s statutory underwriting leverage has remained relatively flat over the last 5 years at an average of 0.83x $ in thousands 2013 2014 2015 2016 2017 WRITTEN Direct $770,142 Reinsurance Assumed $787,267 $819,130 $844,430 $848,153 73,053 76,581 34,456 30,434 37,159 Reinsurance Ceded (176,873) (160,696) (131,615) (133,912) (135,458) Net $666,322 $703,152 $721,971 $740,952 $749,854 $741,569 $781,640 $797,180 $835,294 $835,118 78,891 72,878 35,724 27,886 32,521 (189,658) (167,143) (132,743) (134,572) (129,702) $630,802 $687,375 $700,161 $728,608 $737,937 1 $843,195 $863,848 $853,586 $874,864 $885,312 Statutory NPW 666,322 703,152 722,189 740,952 749,854 Statutory Surplus 859,221 849,297 865,268 859,976 864,554 EARNED Direct Reinsurance Assumed Reinsurance Ceded 2 Net Analysis GPW GPW Growth (%) 1 2.4% -1.2% 2.5% 1.2% DPW Growth (%) 2.2% 4.0% 3.1% 0.4% NPW Growth (%) 5.5% 2.7% 2.6% 1.2% NPE Growth (%) Retention ratio (%) 2 3 Reinsurance Assumed/Gross Premiums Written (%) NPE/NPW (%) Stat NPW/Stat Surplus 4 79.0% 9.0% 1.9% 4.1% 1.3% 81.4% 84.6% 84.7% 84.7% 8.7% 8.9% 4.0% 3.5% 4.2% 94.7% 97.8% 97.0% 98.3% 98.4% 0.78x 0.83x 0.83x 0.86x 0.87x Sources: RLI financial filings 20 Femi Ogunjumo Private and Confidential RLI Corp. – Premium Analysis by Segment and Line of Business Commentary 1− 2− 3− 4− 5− 6− Professional Services continues to benefit from improved pricing, in particular from architects and engineers lines Commercial Transportation was negatively impacted by commercial auto; reunderwriting actions were taken including rate increases and exits from underperforming classes Executive Products GPW growth due to cyber; however, LOB has experienced low single-digit rate declines in each of last 3 years Tremendous growth in Other Casualty includes assumed reinsurance business with Prime and recently launched General Binding Authority business Specialty Personal includes coverage for Hawaii homeowners; other than exited RV line, this LOB had growth in 2017 Large decline in Other Property was due to product exits $ in thousands Commercial and personal umbrella General liability Professional services 1 Commercial transportation 2 Small commercial Executive products 3 Medical professional liability 4 Other casualty Total Casualty Segment Commercial property Marine Specialty personal 5 Other property 6 Total Property Segment Miscellaneous Contract Commercial Energy Total Surety Segment Total RLI Premiums Analysis: Growth Rates Commercial and personal umbrella General liability Professional services Commercial transportation Small commercial Executive products Medical professional liability Other casualty Total Casualty Segment Commercial property Marine Specialty personal Other property Total Property Segment Miscellaneous Contract Commercial Energy Total Surety Segment Gross Premiums Written- $128,343 $134,000 $137,265 87,099 91,557 95,217 80,199 83,672 84,019 91,237 105,697 92,449 47,926 51,391 53,302 52,106 51,291 55,598 13,992 21,060 21,847 18,768 21,680 45,752 $519,670 $560,348 $585,449 $106,048 $96,701 $96,770 53,685 52,638 59,663 26,470 25,867 17,804 22,167 10,931 1,301 $208,370 $186,137 $175,538 $44,328 $48,184 $46,461 29,118 30,540 29,441 32,597 30,098 29,954 19,503 19,557 18,469 $125,546 $128,379 $124,325 $853,586 $874,864 $885,312 1 3 4 5 4.4% 5.1% 4.3% 15.8% 7.2% -1.6% 50.5% 15.5% 7.8% -8.8% -2.0% -2.3% -50.7% -10.7% 8.7% 4.9% -7.7% 0.3% 2.3% 2 6 2.4% 4.0% 0.4% -12.5% 3.7% 8.4% 3.7% 111.0% 4.5% 0.1% 13.3% -31.2% -88.1% -5.7% -3.6% -3.6% -0.5% -5.6% -3.2% Net Premiums Earned- $104,598 $111,079 $115,543 84,165 86,853 90,283 71,034 75,872 78,508 65,564 81,402 78,061 40,410 45,660 49,601 17,892 18,755 18,086 12,292 17,449 17,072 16,293 17,773 31,449 $412,248 $454,843 $478,603 $75,749 $68,165 $63,117 47,016 48,301 50,931 26,395 24,981 20,793 21,764 10,720 3,505 $170,924 $152,167 $138,346 $42,372 $46,235 $47,237 28,269 28,240 28,573 29,529 29,105 27,625 16,819 18,018 17,553 $116,989 $121,598 $120,988 $700,161 $728,608 $737,937 1 3 4 5 6.2% 4.0% 3.2% 3.9% 6.8% 3.5% 24.2% 2 -4.1% 13.0% 8.6% 4.8% -3.6% 42.0% -2.2% 9.1% 76.9% 10.3% 5.2% -10.0% -7.4% 2.7% 5.4% -5.4% -16.8% -50.7% 6 -67.3% -11.0% -9.1% 9.1% 2.2% -0.1% 1.2% -1.4% -5.1% 7.1% -2.6% 3.9% -0.5% Sources: RLI financial filings 21 Femi Ogunjumo Private and Confidential RLI Corp. – GAAP Underwriting Analysis Commentary 1− 2− 3− 4− RLI’s combined ratio has risen in each of the last 3 years, primarily driven by CAT losses in the Property segment RLI maintains a very conservative reserving policy due to the nature of protecting hard-to-place risks; as such, it is fairly common for the company to have favorable developments on previous accident year reserves; RLI has released $284M in reserves since 2013 Excluding the impact of favorable PYD, RLI’s L&LAE ratio would have been 5.3% higher in 2017, 5.8% higher in 2016, and 9.3% higher in 2015 In 2017, one-time additional incentive and profit-sharing expenses were recognized in connection with tax reform benefits and included in the expense ratio; the adjusted expense ratio as defined here adjusts for this one-time impact $ in thousands; ratios expressed as % RLI Loss Ratio RLI Expense Ratio RLI Combined Ratio 2015 2016 2017 42.7% 41.8% 84.5% 48.0% 41.5% 89.5% 54.4% 42.0% 96.4% $12,100 65,427 700,161 $16,300 41,994 728,608 $39,800 38,868 737,937 $299,045 42.7% $364,472 52.1% $352,372 50.3% $349,778 48.0% $391,772 53.8% $375,472 51.5% $401,584 54.4% $440,452 59.7% $400,652 54.3% 41.8% 41.5% 41.0% 84.5% 93.8% 92.1% 89.5% 95.3% 93.1% 95.4% 100.6% 95.3% 53.0% 40.9% 9.2% 57.1% 46.9% 15.2% 63.9% 61.5% 9.0% Expense Ratio Casualty Segment Property Segment Surety Segment 35.8% 42.2% 62.3% 34.9% 44.7% 62.6% 35.3% 47.1% 62.2% Combined Ratio Casualty Segment Property Segment Surety Segment 88.8% 83.0% 71.6% 92.0% 91.6% 77.8% 99.2% 108.6% 71.2% 1 Memo: Total CAT Expenses ($) Memo: Total Prior-year Development (PYD)($) Memo: Net Premiums Earned ($) L&LAE ($) L&LAE Ratio L&LAE (including CAT, excluding PYD) ($) L&LAE Ratio (including CAT, excluding PYD) L&LAE, (excluding CAT and PYD) ($) L&LAE Ratio (excluding CAT and PYD) Adjusted Expense Ratio 2 3 4 Adjusted Combined Ratio (Reported L&LAE) Adjusted Combined Ratio (including CAT, excluding PYD) Adjusted Combined Ratio (excluding CAT and PYD) Segment Underwriting Ratios: Loss & LAE Ratio Casualty Segment Property Segment Surety Segment 3 1 Sources: RLI financial filings 22 Femi Ogunjumo Private and Confidential RLI Corp. – GAAP Underwriting Analysis Commentary 1− 2− 3− 4− 5− 6− Losses in Casualty segment trended upwards due to shifts in product mix and higher loss ratio selections as well as lower benefit from favorable PYD Expense ratio for Casualty segment trended lower in each of the last 3 years as increase in premiums has allowed for leveraging of the expense base “Core” Operating Combined Ratio excludes the impact of CAT and prior year reserve releases and better shows the profitability of underlying operations CAT severely impacted the Property segment in 2017 adding almost 28 points to the L&LAE ratio (worst wind loss in RLI’s history) Expense ratio in the Property segment trended higher largely due to decline in NPE and relative fixed nature of certain expenses Expense ratio in Surety segment saw slight improvement in 2017 due to shifts in product mix and reduced reinsurance reinstatement premiums (Continued) $ in thousands; ratios expressed as % Casualty Segment Loss and LAE Ratio (Reported) CAT Impact ($) CAT Impact on L&LAE Ratio (%) (Favorable)/Unfavorable Prior Year Development (PYD) Impact ($) (Favorable)/Unfavorable PYD Impact on L&LAE Ratio (%) Loss Ratio (excluding CAT and PYD) Expense Ratio Incentive & Profit sharing (One-time Adjustment) ($) Corresponding Expense Ratio Impact (%) Adjusted Expense Ratio 2 3 “Core” Operating Combined Ratio 2015 2016 2017 53.0% $300 0.1% ($45,654) (11.1)% 64.0% 35.8% $0 0.0% 35.8% 99.8% 57.1% $500 0.1% ($32,401) (7.1)% 64.1% 34.9% $0 0.0% 34.9% 99.0% 63.9% $1,400 0.3% ($17,462) (3.6)% 67.3% 35.3% $3,900 0.8% 34.5% 101.7% Property Segment Loss and LAE Ratio (Reported) CAT Impact ($) CAT Impact on L&LAE Ratio (%) (Favorable)/Unfavorable Prior Year Development (PYD) Impact ($) (Favorable)/Unfavorable PYD Impact on L&LAE Ratio (%) Loss Ratio (excluding CAT and PYD) Expense Ratio Incentive & Profit sharing (One-time Adjustment) ($) Corresponding Expense Ratio Impact (%) Adjusted Expense Ratio 3 “Core” Operating Combined Ratio 40.9% $11,800 6.9% ($11,848) (6.9)% 40.9% 42.2% $0 0.0% 5 42.2% 83.1% 46.9% $15,800 10.4% ($4,793) (3.1)% 39.7% 44.7% $0 0.0% 44.7% 84.4% 61.5% $38,400 27.8% ($12,134 ) (8.8)% 42.5% 47.1% $1,800 1.3% 45.8% 88.3% Surety Segment Loss and LAE Ratio (Reported) CAT Impact ($) CAT Impact on L&LAE Ratio (%) (Favorable)/Unfavorable Prior Year Development (PYD) Impact ($) (Favorable)/Unfavorable PYD Impact on L&LAE Ratio (%) Loss Ratio (excluding CAT and PYD) Expense Ratio Incentive & Profit sharing (One-time Adjustment) ($) Corresponding Expense Ratio Impact (%) Adjusted Expense Ratio 3 “Core” Operating Combined Ratio 9.2% $0 0.0% ($7,925) (6.8)% 16.0% 62.3% $0 0.0% 62.3% 78.3% 15.2% $0 0.0% ($4,800) (3.9)% 19.1% 62.6% $0 0.0% 62.6% 81.7% 1 1 4 6 9.0% $0 0.0% ($9,272) (7.7)% 16.7% 62.2% $1,400 1.2% 61.0% 77.7% Sources: RLI financial filings 23