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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 June 30, 2022

or

☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09463

RLI Corp.

(Exact name of registrant as specified in its charter)

Delaware |  | 37-0889946
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
9025 North Lindbergh Drive, Peoria, IL |  | 61615
(Address of principal executive offices) |  | (Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol | Name of each exchange on which registered
Common Stock $0.01 par value | RLI | New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐
|  |  | Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 14, 2022, the number of shares outstanding of the registrant’s Common Stock was 45,368,804.

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 and Six-Month Periods Ended June 30, 2022 and 2021 (unaudited) | 3
|  | Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited) | 4
|  | Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six-Month Periods Ended June 30, 2022 and 2021 (unaudited) | 5
|  | Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2022 and 2021 (unaudited) | 6
|  | Notes to Unaudited Condensed Consolidated Interim Financial Statements | 7
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 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 | 35
Signatures |  | 36

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. | Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
(in thousands, except per share data) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net premiums earned |  | $ | 282,810 |  |  | $ | 241,000 |  |  | $ | 551,962 |  |  | $ | 469,595 |
Net investment income |  |  | 18,472 |  |  |  | 16,661 |  |  |  | 36,355 |  |  |  | 33,085 |
Net realized gains |  |  | 12,804 |  |  |  | 36,463 |  |  |  | 18,392 |  |  |  | 50,613 |
Net unrealized gains (losses) on equity securities |  |  | (100,994 | ) |  |  | 3,956 |  |  |  | (128,804 | ) |  |  | 32,118 |
Consolidated revenue |  | $ | 213,092 |  |  | $ | 298,080 |  |  | $ | 477,905 |  |  | $ | 585,411 |
Losses and settlement expenses |  |  | 117,914 |  |  |  | 107,026 |  |  |  | 223,438 |  |  |  | 211,918 |
Policy acquisition costs |  |  | 89,615 |  |  |  | 77,235 |  |  |  | 174,902 |  |  |  | 152,225 |
Insurance operating expenses |  |  | 19,325 |  |  |  | 20,148 |  |  |  | 38,188 |  |  |  | 38,944 |
Interest expense on debt |  |  | 2,011 |  |  |  | 1,904 |  |  |  | 4,021 |  |  |  | 3,805 |
General corporate expenses |  |  | 2,435 |  |  |  | 3,686 |  |  |  | 5,798 |  |  |  | 7,028 |
Total expenses |  | $ | 231,300 |  |  | $ | 209,999 |  |  | $ | 446,347 |  |  | $ | 413,920 |
Equity in earnings of unconsolidated investees |  |  | 11,654 |  |  |  | 13,940 |  |  |  | 20,413 |  |  |  | 20,364 |
Earnings (loss) before income taxes |  | $ | (6,554 | ) |  | $ | 102,021 |  |  | $ | 51,971 |  |  | $ | 191,855 |
Income tax expense (benefit) |  |  | (4,315 | ) |  |  | 20,206 |  |  |  | 6,287 |  |  |  | 37,028 |
Net earnings (loss) |  | $ | (2,239 | ) |  | $ | 81,815 |  |  | $ | 45,684 |  |  | $ | 154,827 |
Other comprehensive earnings (loss), net of tax |  |  | (97,563 | ) |  |  | 15,177 |  |  |  | (213,144 | ) |  |  | (29,570 | )
Comprehensive earnings (loss) |  | $ | (99,802 | ) |  | $ | 96,992 |  |  | $ | (167,460 | ) |  | $ | 125,257 |
Basic net earnings (loss) per share |  | $ | (0.05 | ) |  | $ | 1.81 |  |  | $ | 1.01 |  |  | $ | 3.43 |
Diluted net earnings (loss) per share |  | $ | (0.05 | ) |  | $ | 1.79 |  |  | $ | 1.00 |  |  | $ | 3.39 |
Weighted average number of common shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 45,354 |  |  |  | 45,226 |  |  |  | 45,330 |  |  |  | 45,202 |
Diluted |  |  | 45,354 |  |  |  | 45,715 |  |  |  | 45,748 |  |  |  | 45,703 |

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

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Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

|  | June 30, |  |  | December 31, |
(in thousands, except share and per share data) |  | 2022 |  |  | 2021 |
ASSETS |  |  |  |  |  |  |  |
Investments and cash: |  |  |  |  |  |  |  |
Fixed income: |  |  |  |  |  |  |  |
Available-for-sale, at fair value |  | $ | 2,280,909 |  |  | $ | 2,409,887 |
(amortized cost of $2,480,480 and allowance for credit losses of $292 at 6/30/22) |  |  |  |  |  |  |  |
(amortized cost of $2,346,267 and allowance for credit losses of $441 at 12/31/21) |  |  |  |  |  |  |  |
Equity securities, at fair value (cost - $327,246 at 6/30/22 and $324,501 at 12/31/21) |  |  | 487,995 |  |  |  | 613,776 |
Other invested assets |  |  | 51,018 |  |  |  | 50,501 |
Cash |  |  | 113,044 |  |  |  | 88,804 |
Total investments and cash |  | $ | 2,932,966 |  |  | $ | 3,162,968 |
Accrued investment income |  |  | 18,465 |  |  |  | 17,505 |
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $18,193 at 6/30/22 and $18,067 at 12/31/21 |  |  | 191,391 |  |  |  | 167,279 |
Ceded unearned premium |  |  | 132,417 |  |  |  | 130,916 |
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,949 at 6/30/22 and $11,188 at 12/31/21 |  |  | 666,730 |  |  |  | 608,086 |
Deferred policy acquisition costs |  |  | 123,055 |  |  |  | 103,553 |
Property and equipment, at cost, net of accumulated depreciation of $71,680 at 6/30/22 and $75,236 at 12/31/21 |  |  | 50,955 |  |  |  | 52,161 |
Investment in unconsolidated investees |  |  | 187,310 |  |  |  | 171,311 |
Goodwill and intangibles |  |  | 53,562 |  |  |  | 53,562 |
Other assets |  |  | 44,912 |  |  |  | 40,961 |
TOTAL ASSETS |  | $ | 4,401,763 |  |  | $ | 4,508,302 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |
Unpaid losses and settlement expenses |  | $ | 2,150,519 |  |  | $ | 2,043,555 |
Unearned premiums |  |  | 754,192 |  |  |  | 680,444 |
Reinsurance balances payable |  |  | 39,291 |  |  |  | 42,851 |
Funds held |  |  | 101,983 |  |  |  | 89,773 |
Income taxes-deferred |  |  | 2,389 |  |  |  | 83,509 |
Bonds payable, long-term debt |  |  | 199,769 |  |  |  | 199,676 |
Accrued expenses |  |  | 68,052 |  |  |  | 98,274 |
Other liabilities |  |  | 41,380 |  |  |  | 40,859 |
TOTAL LIABILITIES |  | $ | 3,357,575 |  |  | $ | 3,278,941 |
Shareholders’ Equity |  |  |  |  |  |  |  |
Common stock ($0.01 par value) |  |  |  |  |  |  |  |
(Shares authorized - 200,000,000) |  |  |  |  |  |  |  |
(68,299,018 shares issued, 45,368,804 shares outstanding at 6/30/22) |  |  |  |  |  |  |  |
(68,219,551 shares issued, 45,289,337 shares outstanding at 12/31/21) |  | $ | 683 |  |  | $ | 682 |
Paid-in capital |  |  | 349,161 |  |  |  | 343,742 |
Accumulated other comprehensive earnings (loss) |  |  | (163,318 | ) |  |  | 49,826 |
Retained earnings |  |  | 1,250,661 |  |  |  | 1,228,110 |
Deferred compensation |  |  | 8,945 |  |  |  | 9,642 |
Less: Treasury shares, at cost (22,930,214 shares at 6/30/22 and 12/31/21) |  |  | (401,944 | ) |  |  | (402,641 | )
TOTAL SHAREHOLDERS’ EQUITY |  | $ | 1,044,188 |  |  | $ | 1,229,361 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |  | $ | 4,401,763 |  |  | $ | 4,508,302 |

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

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Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Total |  |  |  |  |  |  |  |  | Comprehensive |  |  |  |  |  |  |  |  |  |  | Treasury |
|  | Common |  |  | Shareholders’ | Common | Paid-in | Earnings |  |  | Retained | Deferred | Shares |
(in thousands, except share and per share data) |  | Shares |  |  | Equity | Stock | Capital | (Loss) |  |  | Earnings | Compensation | at Cost |
Balance, January 1, 2021 |  |  | 45,142,580 |  |  | $ | 1,135,978 |  |  | $ | 681 |  |  | $ | 335,365 |  |  | $ | 108,714 |  |  | $ | 1,084,217 |  |  | $ | 8,292 |  |  | $ | (401,291 | )
Net earnings (loss) |  |  | — |  |  |  | 73,012 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 73,012 |  |  |  | — |  |  |  | — |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | (44,747 | ) |  |  | — |  |  |  | — |  |  |  | (44,747 | ) |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (366 | ) |  |  | 366 |
Share-based compensation |  |  | 60,858 |  |  |  | 1,392 |  |  |  | — |  |  |  | 1,392 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Dividends and dividend equivalents ($0.24 per share) |  |  | — |  |  |  | (10,849 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (10,849 | ) |  |  | — |  |  |  | — |
Balance, March 31, 2021 |  |  | 45,203,438 |  |  | $ | 1,154,786 |  |  | $ | 681 |  |  | $ | 336,757 |  |  | $ | 63,967 |  |  | $ | 1,146,380 |  |  | $ | 7,926 |  |  | $ | (400,925 | )
Net earnings (loss) |  |  | — |  |  |  | 81,815 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 81,815 |  |  |  | — |  |  |  | — |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | 15,177 |  |  |  | — |  |  |  | — |  |  |  | 15,177 |  |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 325 |  |  |  | (325 | )
Share-based compensation |  |  | 19,905 |  |  |  | 1,343 |  |  |  | 1 |  |  |  | 1,342 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Dividends and dividend equivalents ($0.25 per share) |  |  | — |  |  |  | (11,318 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (11,318 | ) |  |  | — |  |  |  | — |
Balance, June 30, 2021 |  |  | 45,223,343 |  |  | $ | 1,241,803 |  |  | $ | 682 |  |  | $ | 338,099 |  |  | $ | 79,144 |  |  | $ | 1,216,877 |  |  | $ | 8,251 |  |  | $ | (401,250 | )
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Total |  |  |  |  |  |  |  |  | Comprehensive |  |  |  |  |  |  |  |  |  |  | Treasury |
|  | Common |  |  | Shareholders’ | Common | Paid-in | Earnings |  |  | Retained |  |  | Deferred |  |  | Shares |
(in thousands, except share and per share data) |  | Shares |  |  | Equity | Stock | Capital | (Loss) |  |  | Earnings |  |  | Compensation |  |  | at Cost |
Balance, January 1, 2022 |  |  | 45,289,337 |  |  | $ | 1,229,361 |  |  | $ | 682 |  |  | $ | 343,742 |  |  | $ | 49,826 |  |  | $ | 1,228,110 |  |  | $ | 9,642 |  |  | $ | (402,641 | )
Net earnings (loss) |  |  | — |  |  |  | 47,923 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 47,923 |  |  |  | — |  |  |  | — |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | (115,581 | ) |  |  | — |  |  |  | — |  |  |  | (115,581 | ) |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (973 | ) |  |  | 973 |
Share-based compensation |  |  | 26,605 |  |  |  | 3,049 |  |  |  | — |  |  |  | 3,049 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Dividends and dividend equivalents ($0.25 per share) |  |  | — |  |  |  | (11,330 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (11,330 | ) |  |  | — |  |  |  | — |
Balance, March 31, 2022 |  |  | 45,315,942 |  |  | $ | 1,153,422 |  |  | $ | 682 |  |  | $ | 346,791 |  |  | $ | (65,755 | ) |  | $ | 1,264,703 |  |  | $ | 8,669 |  |  | $ | (401,668 | )
Net earnings (loss) |  |  | — |  |  |  | (2,239 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,239 | ) |  |  | — |  |  |  | — |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | (97,563 | ) |  |  | — |  |  |  | — |  |  |  | (97,563 | ) |  |  | — |  |  |  | — |  |  |  | — |
Deferred compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 276 |  |  |  | (276 | )
Share-based compensation |  |  | 52,862 |  |  |  | 2,371 |  |  |  | 1 |  |  |  | 2,370 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Dividends and dividend equivalents ($0.26 per share) |  |  | — |  |  |  | (11,803 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (11,803 | ) |  |  | — |  |  |  | — |
Balance, June 30, 2022 |  |  | 45,368,804 |  |  | $ | 1,044,188 |  |  | $ | 683 |  |  | $ | 349,161 |  |  | $ | (163,318 | ) |  | $ | 1,250,661 |  |  | $ | 8,945 |  |  | $ | (401,944 | )

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

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RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

|  | For the Six Months |
|  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |
Net cash provided by operating activities |  | $ | 170,645 |  |  | $ | 164,509 |
Cash Flows from Investing Activities |  |  |  |  |  |  |  |
Purchase of: |  |  |  |  |  |  |  |
Fixed income securities, available-for-sale |  | $ | (292,056 | ) |  | $ | (376,690 | )
Equity securities |  |  | (36,605 | ) |  |  | (110,148 | )
Property and equipment |  |  | (3,024 | ) |  |  | (3,188 | )
Other |  |  | (6,326 | ) |  |  | (8,638 | )
Proceeds from sale of: |  |  |  |  |  |  |  |
Fixed income securities, available-for-sale |  |  | 20,892 |  |  |  | 31,808 |
Equity securities |  |  | 53,525 |  |  |  | 152,170 |
Other |  |  | 1,172 |  |  |  | 1,110 |
Proceeds from call or maturity of: |  |  |  |  |  |  |  |
Fixed income securities, available-for-sale |  |  | 137,476 |  |  |  | 204,960 |
Net cash used in investing activities |  | $ | (124,946 | ) |  | $ | (108,616 | )
Cash Flows from Financing Activities |  |  |  |  |  |  |  |
Cash dividends paid |  | $ | (23,115 | ) |  | $ | (22,144 | )
Proceeds from (payments related to) stock option exercises |  |  | 1,656 |  |  |  | (509 | )
Net cash used in financing activities |  | $ | (21,459 | ) |  | $ | (22,653 | )
Net increase (decrease) in cash |  | $ | 24,240 |  |  | $ | 33,240 |
Cash at the beginning of the period |  |  | 88,804 |  |  |  | 62,217 |
Cash at June 30 |  | $ | 113,044 |  |  | $ | 95,457 |

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all 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 2021 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 June 30, 2022 and the results of operations of RLI Corp. (the Company) 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

No new accounting standards applicable in 2022 materially impact our financial statements.

C. PROSPECTIVE ACCOUNTING STANDARDS

There are no prospective accounting standards which would have a material impact on our financial statements as of June 30, 2022.

D. REINSURANCE

Ceded unearned premiums and reinsurance balances recoverable on unpaid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of our liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continually monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review reinsurers’ annual financial statements and Securities and Exchange Commission filings for those that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. In addition, we subject our reinsurance recoverables to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, which assists the Company in assessing the sufficiency of its allowance. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of each of our reinsurance placements.

Our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover. Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through use of our allowance for estimated unrecoverable amounts from reinsurers. When we write-off such a balance, it is done in full. We then re-evaluate the overall allowance and determine whether the balance is sufficient and, if needed, an additional allowance is recognized.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $16.1 million and $10.9 million, respectively, at June 30, 2022. At December 31, 2021, the amounts were $16.1 million and $11.2 million, respectively. Changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings. No write-offs were applied to the allowances in the first six months of 2022 and less than $0.1 million was recovered. We have no receivables with a due date that extends beyond one year that are not included in our allowance for uncollectible amounts.

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E. INTANGIBLE ASSETS

The composition of goodwill and intangible assets at June 30, 2022 and December 31, 2021 is detailed in the following table:

|  | June 30, |  |  | December 31, |
(in thousands) |  | 2022 |  |  | 2021 |
Goodwill |  |  |  |  |  |  |  |
Surety |  | $ | 40,816 |  |  | $ | 40,816 |
Casualty |  |  | 5,246 |  |  |  | 5,246 |
Total goodwill |  | $ | 46,062 |  |  | $ | 46,062 |
Intangibles |  |  |  |  |  |  |  |
Indefinite-lived intangibles - state insurance licenses |  |  | 7,500 |  |  |  | 7,500 |
Total goodwill and intangibles |  | $ | 53,562 |  |  | $ | 53,562 |

Annual impairment assessments were performed on our goodwill and state insurance license indefinite-lived intangible asset during the second quarter of 2022. Based upon these reviews, none of the assets were impaired. In addition, there were no triggering events as of June 30, 2022 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

F. EARNINGS PER SHARE

Basic earnings per share (EPS) 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 these items 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 these items. 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 Months |  |  | For the Three Months |
|  | Ended June 30, 2022 |  |  | Ended June 30, 2021 |
|  | Income |  |  | Shares |  |  | Per Share |  |  | Income |  |  | Shares |  |  | Per Share |
(in thousands, except per share data) |  | (Numerator) |  |  | (Denominator) |  |  | Amount |  |  | (Numerator) |  |  | (Denominator) |  |  | Amount |
Basic EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings (loss) available to common shareholders |  | $ | (2,239 | ) |  |  | 45,354 |  |  | $ | (0.05 | ) |  | $ | 81,815 |  |  |  | 45,226 |  |  | $ | 1.81 |
Effect of Dilutive Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock options and restricted stock units |  |  | — |  |  |  | — |  |  |  |  |  |  |  | — |  |  |  | 489 |  |  |  |  |
Diluted EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings (loss) available to common shareholders |  | $ | (2,239 | ) |  |  | 45,354 |  |  | $ | (0.05 | ) |  | $ | 81,815 |  |  |  | 45,715 |  |  | $ | 1.79 |
Anti-dilutive securities excluded from diluted EPS |  |  |  |  |  |  | 736 |  |  |  |  |  |  |  |  |  |  |  | 169 |  |  |  |  |
|  | For the Six Months |  |  | For the Six Months |
|  | Ended June 30, 2022 |  |  | Ended June 30, 2021 |
|  | Income |  |  | Shares |  |  | Per Share |  |  | Income |  |  | Shares |  |  | Per Share |
(in thousands, except per share data) |  | (Numerator) |  |  | (Denominator) |  |  | Amount |  |  | (Numerator) |  |  | (Denominator) |  |  | Amount |
Basic EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings (loss) available to common shareholders |  | $ | 45,684 |  |  |  | 45,330 |  |  | $ | 1.01 |  |  | $ | 154,827 |  |  |  | 45,202 |  |  | $ | 3.43 |
Effect of Dilutive Securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock options and restricted stock units |  |  | — |  |  |  | 418 |  |  |  |  |  |  |  | — |  |  |  | 501 |  |  |  |  |
Diluted EPS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Earnings (loss) available to common shareholders |  | $ | 45,684 |  |  |  | 45,748 |  |  | $ | 1.00 |  |  | $ | 154,827 |  |  |  | 45,703 |  |  | $ | 3.39 |
Anti-dilutive securities excluded from diluted EPS |  |  |  |  |  |  | 436 |  |  |  |  |  |  |  |  |  |  |  | 169 |  |  |  |  |

G. COMPREHENSIVE EARNINGS (LOSS)

Our comprehensive earnings (loss) include net earnings (loss) plus after-tax unrealized gains and losses on our available-for-sale fixed income portfolio. In reporting the components of comprehensive earnings (loss), we used the federal statutory tax

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rate of 21 percent. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax benefit of $25.9 million for the second quarter of 202 2, compared to $4.0 million of tax expense fo r the same period in 2021. For the six-month period ended June 30, 2022, other comprehensive earnings (loss) is net of tax benefit of $56.7 million, compared to $7.9 million for the same period in 2021.

Unrealized losses, net of tax, recognized in other comprehensive earnings (loss) were $213.1 million for the first six months of 2022, compared to $29.6 million during the same period last year. The unrealized losses were attributable to increased interest rates in both periods, which decreased the fair value of securities held in the fixed income portfolio.

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

(in thousands) |  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
Unrealized Gains/Losses on Available-for-Sale Securities |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Beginning balance |  | $ | (65,755 | ) |  | $ | 63,967 |  |  | $ | 49,826 |  |  | $ | 108,714 |
Other comprehensive earnings (loss) before reclassifications |  |  | (97,894 | ) |  |  | 15,601 |  |  |  | (213,636 | ) |  |  | (28,194 | )
Amounts reclassified from accumulated other comprehensive earnings |  |  | 331 |  |  |  | (424 | ) |  |  | 492 |  |  |  | (1,376 | )
Net current-period other comprehensive earnings (loss) |  | $ | (97,563 | ) |  | $ | 15,177 |  |  | $ | (213,144 | ) |  | $ | (29,570 | )
Ending balance |  | $ | (163,318 | ) |  | $ | 79,144 |  |  | $ | (163,318 | ) |  | $ | 79,144 |
Balance of securities for which an allowance for credit losses has been recognized in net earnings |  |  |  |  |  |  |  |  |  | $ | 1,083 |  |  | $ | 321 |

Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings (loss) to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings (loss) by the respective line items of net earnings are presented in the following table:

|  | Amount Reclassified from Accumulated Other |  |  |
(in thousands) |  | Comprehensive Earnings (Loss) |  |  |
|  | For the Three Months |  |  | For the Six Months |  |  |
Component of Accumulated |  | Ended June 30, |  |  | Ended June 30, |  |  | Affected line item in the
Other Comprehensive Earnings (Loss) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |  |  | Statement of Earnings
Unrealized gains and losses on available-for-sale securities |  | $ | (722 | ) |  | $ | 366 |  |  | $ | (772 | ) |  | $ | 1,549 |  |  | Net realized gains (losses)
|  |  | 303 |  |  |  | 171 |  |  |  | 149 |  |  |  | 193 |  |  | Credit gains presented within net realized gains
|  | $ | (419 | ) |  | $ | 537 |  |  | $ | (623 | ) |  | $ | 1,742 |  |  | Earnings (loss) before income taxes
|  |  | 88 |  |  |  | (113 | ) |  |  | 131 |  |  |  | (366 | ) |  | Income tax (expense) benefit
|  | $ | (331 | ) |  | $ | 424 |  |  | $ | (492 | ) |  | $ | 1,376 |  |  | Net earnings (loss)

H. FAIR VALUE MEASUREMENTS

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

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

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

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.

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

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

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities are 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, pre-payment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

Regulation D Private Placement Securities: All Regulation D privately-placed bonds are classified as corporate securities and deemed Level 3. The pricing vendor evaluation methodology for these securities includes a combination of observable and unobservable inputs. Observable inputs include public corporate spread matrices classified by sector, rating and average life, as well as investment and non-investment grade matrices created from fixed income indices. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company. An increase to the credit spread assumptions would result in a lower fair value.

For all of our fixed income securities classified as Level 2, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. If discrepancies are found in our comparisons, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 fixed income securities provided by our pricing services are reasonable.

Equity Securities: As of June 30, 2022, nearly all of our equity holdings were traded on an exchange. Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). Pricing for the equity securities not traded on an exchange is provided by a third-party pricing source using observable inputs are classified as Level 2. Pricing for one equity security not traded on an exchange relies on one or more unobservable inputs and is classified as Level 3.

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

I. RISKS AND UNCERTAINTIES

Certain risks and uncertainties are inherent to our day-to-day operations. Adverse changes in the economy, including inflation; rising interest rates; volatile equity markets; and ongoing supply chain disruptions, could lower demand for our insurance products, result in increased levels of loss costs that we could not anticipate at the time we priced our coverages, or negatively impact our investment results, all of which could have an adverse effect on the profitability of our operations. The COVID-19 pandemic may result in significant disruptions in economic activity and financial markets or exacerbate the impact of other economic trends. The cumulative effects of any public health outbreak could reduce demand for our insurance policies; result in increased level of losses, settlement expenses or other operating costs; reduce the market value of invested assets held by the Company or negatively impact the fair value of our goodwill.

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Catastrophe Exposures

Our catastrophe reinsurance treaty renewed on January 1, 2022. We purchased limits of $600 million in excess of $25 million first-dollar retention for earthquakes in California, $625 million in excess of $25 million first-dollar retention for earthquakes outside of California and $475 million in excess of $25 million first-dollar retention for all other perils, including wind. These amounts are subject to certain co-participations by the Company on losses in excess of the $25 million retentions. On May 1, 2022, we purchased $150 million of additional catastrophe reinsurance protection on top of the previously described coverage. This increases the limits to $750 million for earthquakes in California, $775 million for earthquakes outside of California and $625 million for all other perils, including wind, all of which are still subject to $25 million first-dollar retentions and certain co-participations in excess of the retentions.

2. INVESTMENTS

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

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date. The following is a summary of the disposition of fixed income and equity securities for the six-month periods ended June 30, 2022 and 2021:

Sales |  | Proceeds |  |  | Gross Realized |  |  | Net Realized |
(in thousands) |  | From Sales |  |  | Gains |  |  | Losses |  |  | Gain (Loss) |
2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities - available-for-sale |  | $ | 19,390 |  |  | $ | 215 |  |  | $ | (432 | ) |  | $ | (217 | )
Equity securities |  |  | 53,525 |  |  |  | 19,244 |  |  |  | (15 | ) |  |  | 19,229 |
2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities - available-for-sale |  | $ | 31,928 |  |  | $ | 1,252 |  |  | $ | (46 | ) |  | $ | 1,206 |
Equity securities |  |  | 152,170 |  |  |  | 50,656 |  |  |  | (1,784 | ) |  |  | 48,872 |

Calls/Maturities |  |  |  |  |  | Gross Realized |  |  | Net Realized |
(in thousands) |  | Proceeds |  |  | Gains |  |  | Losses |  |  | Gain (Loss) |
2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities - available-for-sale |  | $ | 137,499 |  |  | $ | 76 |  |  | $ | (55 | ) |  | $ | 21 |
2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities - available-for-sale |  | $ | 204,960 |  |  | $ | 406 |  |  | $ | (63 | ) |  | $ | 343 |

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 are summarized below:

| As of June 30, 2022 |
|  | Quoted Prices in |  |  | Significant Other |  |  | Significant |  |  |  |  |
|  | Active Markets for |  |  | Observable |  |  | Unobservable |  |  |  |  |
|  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  |  |  |
(in thousands) |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Fixed income securities - available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government |  | $ | — |  |  | $ | 181,678 |  |  | $ | — |  |  | $ | 181,678 |
U.S. agency |  |  | — |  |  |  | 33,573 |  |  |  | — |  |  |  | 33,573 |
Non-U.S. government & agency |  |  | — |  |  |  | 6,068 |  |  |  | — |  |  |  | 6,068 |
Agency MBS |  |  | — |  |  |  | 312,721 |  |  |  | — |  |  |  | 312,721 |
ABS/CMBS/MBS* |  |  | — |  |  |  | 246,345 |  |  |  | — |  |  |  | 246,345 |
Corporate |  |  | — |  |  |  | 886,114 |  |  |  | 55,615 |  |  |  | 941,729 |
Municipal |  |  | — |  |  |  | 558,795 |  |  |  | — |  |  |  | 558,795 |
Total fixed income securities - available-for-sale |  | $ | — |  |  | $ | 2,225,294 |  |  | $ | 55,615 |  |  | $ | 2,280,909 |
Equity securities |  |  | 486,780 |  |  |  | 42 |  |  |  | 1,173 |  |  |  | 487,995 |
Total |  | $ | 486,780 |  |  | $ | 2,225,336 |  |  | $ | 56,788 |  |  | $ | 2,768,904 |

* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

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| As of December 31, 2021 |
|  | Quoted Prices in |  |  | Significant Other |  |  | Significant |  |  |  |  |
|  | Active Markets for |  |  | Observable |  |  | Unobservable |  |  |  |  |
|  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  |  |  |
(in thousands) |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Fixed income securities - available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government |  | $ | — |  |  | $ | 134,554 |  |  | $ | — |  |  | $ | 134,554 |
U.S. agency |  |  | — |  |  |  | 32,760 |  |  |  | — |  |  |  | 32,760 |
Non-U.S. government & agency |  |  | — |  |  |  | 8,481 |  |  |  | — |  |  |  | 8,481 |
Agency MBS |  |  | — |  |  |  | 367,187 |  |  |  | — |  |  |  | 367,187 |
ABS/CMBS/MBS* |  |  | — |  |  |  | 264,054 |  |  |  | — |  |  |  | 264,054 |
Corporate |  |  | — |  |  |  | 913,577 |  |  |  | 43,518 |  |  |  | 957,095 |
Municipal |  |  | — |  |  |  | 645,756 |  |  |  | — |  |  |  | 645,756 |
Total fixed income securities - available-for-sale |  | $ | — |  |  | $ | 2,366,369 |  |  | $ | 43,518 |  |  | $ | 2,409,887 |
Equity securities |  |  | 613,712 |  |  |  | 64 |  |  |  | — |  |  |  | 613,776 |
Total |  | $ | 613,712 |  |  | $ | 2,366,433 |  |  | $ | 43,518 |  |  | $ | 3,023,663 |

* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table summarizes changes in the balance of securities whose fair value was measured using significant unobservable inputs (Level 3).

(in thousands) |  | Level 3 Securities |
Balance as of January 1, 2022 |  | $ | 43,518 |
Net realized and unrealized gains (losses) |  |  |  |
Included in net earnings as a part of: |  |  |  |
Net investment income |  |  | (506 | )
Net realized gains |  |  | (433 | )
Included in other comprehensive earnings (loss) |  |  | (6,623 | )
Total net realized and unrealized gains (losses) |  | $ | (7,562 | )
Purchases |  |  | 21,701 |
Transfers out of Level 3 |  |  | (869 | )
Balance as of June 30, 2022 |  | $ | 56,788 |
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains |  | $ | (433 | )
Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss) |  | $ | (6,623 | )

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of June 30, 2022 were as follows:

|  | June 30, 2022 |
(in thousands) |  | Amortized Cost |  |  | Fair Value |
Due in one year or less |  | $ | 48,305 |  |  | $ | 48,372 |
Due after one year through five years |  |  | 790,904 |  |  |  | 765,266 |
Due after five years through 10 years |  |  | 516,860 |  |  |  | 477,956 |
Due after 10 years |  |  | 514,144 |  |  |  | 430,249 |
ABS/CMBS/MBS* |  |  | 610,267 |  |  |  | 559,066 |
Total available-for-sale |  | $ | 2,480,480 |  |  | $ | 2,280,909 |

* | Asset-backed, commercial mortgage-backed and mortgage-backed securities

The amortized cost and fair value of available-for-sale securities at June 30, 2022 and December 31, 2021 are presented in the tables below. Amortized cost does not include the $17.5 million and $16.4 million of accrued interest receivable as of June 30, 2022 and December 31, 2021, respectively.

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|  | June 30, 2022 |
|  | Cost or |  |  | Allowance |  |  | Gross |  |  | Gross |  |  |  |  |
|  | Amortized |  |  | for Credit |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
(in thousands) |  | Cost |  |  | Losses |  |  | Gains |  |  | Losses |  |  | Value |
U.S. government |  | $ | 183,368 |  |  | $ | — |  |  | $ | 220 |  |  | $ | (1,910 | ) |  | $ | 181,678 |
U.S. agency |  |  | 34,220 |  |  |  | — |  |  |  | 190 |  |  |  | (837 | ) |  |  | 33,573 |
Non-U.S. government & agency |  |  | 6,797 |  |  |  | — |  |  |  | - |  |  |  | (729 | ) |  |  | 6,068 |
Agency MBS |  |  | 338,639 |  |  |  | — |  |  |  | 591 |  |  |  | (26,509 | ) |  |  | 312,721 |
ABS/CMBS/MBS* |  |  | 271,628 |  |  |  | (10 | ) |  |  | 82 |  |  |  | (25,355 | ) |  |  | 246,345 |
Corporate |  |  | 1,011,726 |  |  |  | (282 | ) |  |  | 428 |  |  |  | (70,143 | ) |  |  | 941,729 |
Municipal |  |  | 634,102 |  |  |  | — |  |  |  | 1,860 |  |  |  | (77,167 | ) |  |  | 558,795 |
Total Fixed Income |  | $ | 2,480,480 |  |  | $ | (292 | ) |  | $ | 3,371 |  |  | $ | (202,650 | ) |  | $ | 2,280,909 |

|  | December 31, 2021 |
|  | Cost or |  |  | Allowance |  |  | Gross |  |  | Gross |  |  |  |  |
|  | Amortized |  |  | for Credit |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
(in thousands) |  | Cost |  |  | Losses |  |  | Gains |  |  | Losses |  |  | Value |
U.S. government |  | $ | 127,752 |  |  | $ | — |  |  | $ | 6,846 |  |  | $ | (44 | ) |  | $ | 134,554 |
U.S. agency |  |  | 30,403 |  |  |  | — |  |  |  | 2,374 |  |  |  | (17 | ) |  |  | 32,760 |
Non-U.S. government & agency |  |  | 8,297 |  |  |  | — |  |  |  | 338 |  |  |  | (154 | ) |  |  | 8,481 |
Agency MBS |  |  | 362,861 |  |  |  | — |  |  |  | 9,277 |  |  |  | (4,951 | ) |  |  | 367,187 |
ABS/CMBS/MBS* |  |  | 264,273 |  |  |  | — |  |  |  | 2,120 |  |  |  | (2,339 | ) |  |  | 264,054 |
Corporate |  |  | 925,394 |  |  |  | (441 | ) |  |  | 37,247 |  |  |  | (5,105 | ) |  |  | 957,095 |
Municipal |  |  | 627,287 |  |  |  | — |  |  |  | 22,750 |  |  |  | (4,281 | ) |  |  | 645,756 |
Total Fixed Income |  | $ | 2,346,267 |  |  | $ | (441 | ) |  | $ | 80,952 |  |  | $ | (16,891 | ) |  | $ | 2,409,887 |

* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities

A reversable allowance for credit losses is recognized on available-for-sale fixed income securities. Several criteria are reviewed to determine if securities in the fixed income portfolio 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 security’s fair value is below amortized cost. As of June 30, 2022, the discounted cash flow analysis resulted in an allowance for credit losses on 14 securities. The following table presents changes in the allowance for expected credit losses on available-for-sale securities:

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|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Beginning balance |  | $ | 594 |  |  | $ | 375 |  |  | $ | 441 |  |  | $ | 397 |
Increase to allowance from securities for which credit losses were not previously recorded |  |  | 149 |  |  |  | - |  |  |  | 223 |  |  |  | - |
Reduction from securities sold during the period |  |  | (433 | ) |  |  | - |  |  |  | (433 | ) |  |  |  |
Reductions from intent to sell securities |  |  | - |  |  |  | - |  |  |  | (17 | ) |  |  | - |
Net increase (decrease) from securities that had an allowance at the beginning of the period |  |  | (18 | ) |  |  | (171 | ) |  |  | 78 |  |  |  | (193 | )
Balance as of June 30, |  | $ | 292 |  |  | $ | 204 |  |  | $ | 292 |  |  | $ | 204 |

During 2022, net realized gains included $0.1 million of losses on fixed income securities for which we no longer had the intent to hold until recovery and the cost basis was written down to fair value. No such losses were recognized during the first six months of 2021.

As of June 30, 2022, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 1,341 securities with an unrealized loss position for which an allowance for credit losses had not been recorded. The $202.7 million in associated unrealized losses represents 8.2 percent of the fixed income portfolio’s cost basis and 6.9 percent of total invested assets. Isolated to these securities, unrealized losses increased through the first six months of 2022, as interest rates increased during the period. Of the total 1,341 securities, 133 have been in an unrealized loss position for 12 consecutive months or longer. The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of June 30, 2022 and December 31, 2021 after factoring in the allowance for credit losses. All fixed income securities continue to pay the expected coupon payments and we believe we will recover the amortized cost basis of available-for-sale securities that remain in an unrealized loss position.

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|  | June 30, 2022 |  |  | December 31, 2021 |
(in thousands) |  | < 12 Mos. |  |  | 12 Mos. & Greater |  |  | Total |  |  | < 12 Mos. |  |  | 12 Mos. & Greater |  |  | Total |
U.S. government |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 142,944 |  |  | $ | — |  |  | $ | 142,944 |  |  | $ | 2,942 |  |  | $ | — |  |  | $ | 2,942 |
Amortized cost |  |  | 144,854 |  |  |  | — |  |  |  | 144,854 |  |  |  | 2,986 |  |  |  | — |  |  |  | 2,986 |
Unrealized loss |  | $ | (1,910 | ) |  | $ | — |  |  | $ | (1,910 | ) |  | $ | (44 | ) |  | $ | — |  |  | $ | (44 | )
U.S. agency |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 15,788 |  |  | $ | — |  |  | $ | 15,788 |  |  | $ | 1,498 |  |  | $ | — |  |  | $ | 1,498 |
Amortized cost |  |  | 16,625 |  |  |  | — |  |  |  | 16,625 |  |  |  | 1,515 |  |  |  | — |  |  |  | 1,515 |
Unrealized loss |  | $ | (837 | ) |  | $ | — |  |  | $ | (837 | ) |  | $ | (17 | ) |  | $ | — |  |  | $ | (17 | )
Non-U.S. government |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 3,731 |  |  | $ | 2,337 |  |  | $ | 6,068 |  |  | $ | 4,346 |  |  | $ | — |  |  | $ | 4,346 |
Amortized cost |  |  | 3,797 |  |  |  | 3,000 |  |  |  | 6,797 |  |  |  | 4,500 |  |  |  | — |  |  |  | 4,500 |
Unrealized Loss |  | $ | (66 | ) |  | $ | (663 | ) |  | $ | (729 | ) |  | $ | (154 | ) |  | $ | — |  |  | $ | (154 | )
Agency MBS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 221,563 |  |  | $ | 68,070 |  |  | $ | 289,633 |  |  | $ | 102,145 |  |  | $ | 62,669 |  |  | $ | 164,814 |
Amortized cost |  |  | 236,671 |  |  |  | 79,471 |  |  |  | 316,142 |  |  |  | 104,336 |  |  |  | 65,429 |  |  |  | 169,765 |
Unrealized loss |  | $ | (15,108 | ) |  | $ | (11,401 | ) |  | $ | (26,509 | ) |  | $ | (2,191 | ) |  | $ | (2,760 | ) |  | $ | (4,951 | )
ABS/CMBS/MBS* |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 214,266 |  |  | $ | 22,312 |  |  | $ | 236,578 |  |  | $ | 150,997 |  |  | $ | 3,935 |  |  | $ | 154,932 |
Amortized cost |  |  | 236,298 |  |  |  | 25,635 |  |  |  | 261,933 |  |  |  | 153,235 |  |  |  | 4,036 |  |  |  | 157,271 |
Unrealized loss |  | $ | (22,032 | ) |  | $ | (3,323 | ) |  | $ | (25,355 | ) |  | $ | (2,238 | ) |  | $ | (101 | ) |  | $ | (2,339 | )
Corporate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 762,770 |  |  | $ | 78,901 |  |  | $ | 841,671 |  |  | $ | 217,791 |  |  | $ | 53,818 |  |  | $ | 271,609 |
Amortized cost |  |  | 821,145 |  |  |  | 90,669 |  |  |  | 911,814 |  |  |  | 221,010 |  |  |  | 55,704 |  |  |  | 276,714 |
Unrealized loss |  | $ | (58,375 | ) |  | $ | (11,768 | ) |  | $ | (70,143 | ) |  | $ | (3,219 | ) |  | $ | (1,886 | ) |  | $ | (5,105 | )
Municipal |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 387,833 |  |  | $ | 30,986 |  |  | $ | 418,819 |  |  | $ | 162,998 |  |  | $ | 15,037 |  |  | $ | 178,035 |
Amortized cost |  |  | 454,930 |  |  |  | 41,056 |  |  |  | 495,986 |  |  |  | 166,602 |  |  |  | 15,714 |  |  |  | 182,316 |
Unrealized loss |  | $ | (67,097 | ) |  | $ | (10,070 | ) |  | $ | (77,167 | ) |  | $ | (3,604 | ) |  | $ | (677 | ) |  | $ | (4,281 | )
Total fixed income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value |  | $ | 1,748,895 |  |  | $ | 202,606 |  |  | $ | 1,951,501 |  |  | $ | 642,717 |  |  | $ | 135,459 |  |  | $ | 778,176 |
Amortized cost |  |  | 1,914,320 |  |  |  | 239,831 |  |  |  | 2,154,151 |  |  |  | 654,184 |  |  |  | 140,883 |  |  |  | 795,067 |
Unrealized loss |  | $ | (165,425 | ) |  | $ | (37,225 | ) |  | $ | (202,650 | ) |  | $ | (11,467 | ) |  | $ | (5,424 | ) |  | $ | (16,891 | )

* | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2022 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 |  | $ | 1,658,961 |  |  | $ | 1,499,693 |  |  | $ | (159,268 | ) |  |  | 78.6 |  | %
2 |  | BBB |  | Baa |  |  | 350,114 |  |  |  | 319,538 |  |  |  | (30,576 | ) |  |  | 15.1 |  | %
3 |  | BB |  | Ba |  |  | 86,132 |  |  |  | 78,065 |  |  |  | (8,067 | ) |  |  | 4.0 |  | %
4 |  | B |  | B |  |  | 56,650 |  |  |  | 52,186 |  |  |  | (4,464 | ) |  |  | 2.2 |  | %
5 |  | CCC |  | Caa |  |  | 2,294 |  |  |  | 2,019 |  |  |  | (275 | ) |  |  | 0.1 |  | %
6 |  | CC or lower |  | Ca or lower |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.0 |  | %
|  |  |  | Total |  | $ | 2,154,151 |  |  | $ | 1,951,501 |  |  | $ | (202,650 | ) |  |  | 100.0 |  | %

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Other Invested Assets

We had $51.0 million of other invested assets at June 30, 2022, compared to $50.5 million at December 31, 2021. Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), and investments in private funds. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value.

Our LIHTC interests had a balance of $15.1 million at June 30, 2022, compared to $16.6 million at December 31, 2021, and recognized a total tax benefit of $0.9 million during the second quarters of 2022 and 2021. For the six-months ended June 30, 2022, our LIHTC interests recognized a total benefit of $1.7 million, compared to $1.8 million for the same period in 2021. Our unfunded commitment for our LIHTC investments totaled $1.3 million at June 30, 2022 and will be paid out in installments through 2035.

As of June 30, 2022, $58.2 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of June 30, 2022, $50.0 million of borrowings were outstanding with the FHLBC.

Our investments in private funds totaled $30.3 million at June 30, 2022, compared to $28.6 million at December 31, 2021, and we had $5.9 million of associated unfunded commitments at June 30, 2022. Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities, and the timed dissolution of the partnerships would trigger redemption.

Investments in Unconsolidated Investees

We had $187.3 million of investments in unconsolidated investees at June 30, 2022, compared to $171.3 million at December 31, 2021. Our investments accounted for under the equity method are primarily related to Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime). At June 30, 2022 our investment in Maui Jim was $127.4 million and our investment in Prime was $47.6 million. Other investments in unconsolidated investees totaled $12.3 million at June 30, 2022 and had unfunded commitments of $8.6 million.

Cash

Cash consists of uninvested balances in bank accounts. We had a cash balance of $113.0 million at June 30, 2022, compared to $88.8 million at December 31, 2021.

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3. HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first six months of 2022 and 2021:

|  | For the Six Months |
|  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |
Unpaid losses and LAE at beginning of year |  |  |  |  |  |  |  |
Gross |  | $ | 2,043,555 |  |  | $ | 1,750,049 |
Ceded |  |  | (608,086 | ) |  |  | (443,729 | )
Net |  | $ | 1,435,469 |  |  | $ | 1,306,320 |
Increase (decrease) in incurred losses and LAE |  |  |  |  |  |  |  |
Current accident year |  | $ | 293,158 |  |  | $ | 279,380 |
Prior accident years |  |  | (69,720 | ) |  |  | (67,462 | )
Total incurred |  | $ | 223,438 |  |  | $ | 211,918 |
Loss and LAE payments for claims incurred |  |  |  |  |  |  |  |
Current accident year |  | $ | (21,628 | ) |  | $ | (28,991 | )
Prior accident years |  |  | (153,490 | ) |  |  | (116,723 | )
Total paid |  | $ | (175,118 | ) |  | $ | (145,714 | )
Net unpaid losses and LAE at June 30 |  | $ | 1,483,789 |  |  | $ | 1,372,524 |
Unpaid losses and LAE at June 30 |  |  |  |  |  |  |  |
Gross |  | $ | 2,150,519 |  |  | $ | 1,917,609 |
Ceded |  |  | (666,730 | ) |  |  | (545,085 | )
Net |  | $ | 1,483,789 |  |  | $ | 1,372,524 |

For the first six months of 2022, incurred losses and LAE included $69.7 million of favorable development on prior years’ loss reserves. General liability, professional services, transportation, marine and surety were drivers of the favorable development. No products experienced significant adverse development.

For the first six months of 2021, incurred losses and LAE included $67.5 million of favorable development on prior years’ loss reserves. General liability, transportation, professional services, small commercial, personal umbrella and marine were drivers of the favorable development. No products experienced significant adverse development.

Actuarial models base future emergence on historical experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of June 30, 2022. We expect the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite will be affected as a result of COVID-19 and the related economic impact. The industry is experiencing new issues, including the postponement of civil court cases, the extension of various statutes of limitations and changes in settlement trends. Our recorded 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.

4. INCOME TAXES

Our effective tax rate for the three and six months ended June 30, 2022 was 65.8 percent and 12.1 percent, respectively, compared to 19.8 percent and 19.3 percent, respectively, for the same period in 2021. Effective rates are dependent upon components of pretax earnings and the related tax effects. Tax-favored adjustments acting on a pretax loss, caused by unrealized losses on the equity portfolio, resulted in a higher effective tax rate for the second quarter of 2022. The effective tax rate was lower for the six-month period in 2022, as lower pretax income increased the percentage impact of tax-favored adjustments.

Income tax expense attributable to income from operations for the three and six-month periods ended June 30, 2022 and 2021 differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income by the items detailed in the below table. In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line.

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|  | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
(in thousands) |  | Amount |  |  | % |  |  |  | Amount |  |  | % |  |  |  | Amount |  |  | % |  |  |  | Amount |  |  | % |  |
Provision for income taxes at the statutory rate of 21% |  | $ | (1,376 | ) |  |  | 21.0 |  | % |  | $ | 21,424 |  |  |  | 21.0 |  | % |  | $ | 10,914 |  |  |  | 21.0 |  | % |  | $ | 40,290 |  |  |  | 21.0 |  | %
Increase (reduction) in taxes resulting from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Excess tax benefit on share-based compensation |  |  | (761 | ) |  |  | 11.6 |  | % |  |  | (270 | ) |  |  | (0.3 | ) | % |  |  | (2,175 | ) |  |  | (4.2 | ) | % |  |  | (2,194 | ) |  |  | (1.1 | ) | %
Tax exempt interest income |  |  | (288 | ) |  |  | 4.4 |  | % |  |  | (310 | ) |  |  | (0.3 | ) | % |  |  | (570 | ) |  |  | (1.1 | ) | % |  |  | (629 | ) |  |  | (0.3 | ) | %
Dividends received deduction |  |  | (163 | ) |  |  | 2.5 |  | % |  |  | (248 | ) |  |  | (0.2 | ) | % |  |  | (434 | ) |  |  | (0.8 | ) | % |  |  | (484 | ) |  |  | (0.3 | ) | %
Investment tax credit |  |  | (1,182 | ) |  |  | 18.0 |  | % |  |  | (801 | ) |  |  | (0.8 | ) | % |  |  | (2,363 | ) |  |  | (4.5 | ) | % |  |  | (1,603 | ) |  |  | (0.8 | ) | %
ESOP dividends paid deduction |  |  | (138 | ) |  |  | 2.1 |  | % |  |  | (137 | ) |  |  | (0.1 | ) | % |  |  | (268 | ) |  |  | (0.5 | ) | % |  |  | (267 | ) |  |  | (0.1 | ) | %
Nondeductible expenses |  |  | 258 |  |  |  | (3.9 | ) | % |  |  | 826 |  |  |  | 0.8 |  | % |  |  | 574 |  |  |  | 1.1 |  | % |  |  | 1,237 |  |  |  | 0.6 |  | %
Other items, net |  |  | (665 | ) |  |  | 10.1 |  | % |  |  | (278 | ) |  |  | (0.3 | ) | % |  |  | 609 |  |  |  | 1.1 |  | % |  |  | 678 |  |  |  | 0.3 |  | %
Total tax expense |  | $ | (4,315 | ) |  |  | 65.8 |  | % |  | $ | 20,206 |  |  |  | 19.8 |  | % |  | $ | 6,287 |  |  |  | 12.1 |  | % |  | $ | 37,028 |  |  |  | 19.3 |  | %

5. STOCK BASED COMPENSATION

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

In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Since the plan’s approval in 2015, we have granted 3,213,225 awards under the 2015 LTIP, including 312,805 thus far in 2022.

Compensation expense is based on the probable number of awards expected to vest. The total compensation expense related to equity awards was $2.3 million and $3.7 million in the three and six-month periods ended June 30, 2022, respectively, compared to $1.7 million and $3.2 million, respectively, for the same period in 2021. The total income tax benefit was $0.4 million and $0.6 million for the three and six-month periods ended June 30, 2022, compared to $0.3 million and $0.5 million, respectively, for the same period in 2021. Total unrecognized compensation expense relating to outstanding and unvested awards was $10.1 million, which will be recognized over the weighted average vesting period of 2.27 years.

Stock Options

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

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

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The following tables summarize option activity for the six-month period ended June 30, 2022:

|  |  |  |  |  |  |  |  |  | Weighted |  |  | Aggregate |
|  |  |  |  |  | Weighted |  |  | Average |  |  | Intrinsic |
|  |  |  |  |  | Average |  |  | Remaining |  |  | Value |
|  | Options |  |  | Exercise Price |  |  | Contractual Life |  |  | (in 000’s) |
Outstanding options at January 1, 2022 |  |  | 1,669,325 |  |  | $ | 78.63 |  |  |  |  |  |  |  |  |
Options granted |  |  | 296,100 |  |  |  | 115.65 |  |  |  |  |  |  |  |  |
Options exercised |  |  | (88,047 | ) |  |  | 59.38 |  |  |  |  |  |  |  |  |
Options canceled/forfeited |  |  | (7,590 | ) |  |  | 90.80 |  |  |  |  |  |  |  |  |
Outstanding options at June 30, 2022 |  |  | 1,869,788 |  |  | $ | 85.35 |  |  |  | 5.06 |  |  | $ | 58,408 |
Exercisable options at June 30, 2022 |  |  | 905,015 |  |  | $ | 69.91 |  |  |  | 3.58 |  |  | $ | 42,245 |

The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $5.0 million and $7.3 million during the first six months of 2022 and 2021, respectively.

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 June 30:

|  | 2022 |  | 2021
Weighted-average fair value of grants |  | $ | 21.05 |  |  |  | $ | 17.00 |  |
Risk-free interest rates |  |  | 2.84 |  | % |  |  | 0.69 |  | %
Dividend yield |  |  | 2.50 |  | % |  |  | 2.07 |  | %
Expected volatility |  |  | 22.89 |  | % |  |  | 22.73 |  | %
Expected option life |  |  | 5.06 |  | years |  |  | 4.97 |  | years

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

Restricted Stock Units

In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. For employees, these units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75. For directors, these units vest on the earlier of one year from the date of grant or the next annual shareholders meeting. In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period. The total fair value of restricted stock units that vested was $2.5 million and $2.2 million during the first six months of 2022 and 2021, respectively.

|  |  |  |  |  | Weighted |
|  |  |  |  |  | Average |
|  |  |  |  |  | Grant Date |
|  | RSUs |  |  | Fair Value |
Nonvested at January 1, 2022 |  |  | 45,068 |  |  | $ | 97.67 |
Granted |  |  | 16,705 |  |  |  | 116.60 |
Reinvested |  |  | 197 |  |  |  | 108.86 |
Vested |  |  | (21,380 | ) |  |  | 93.07 |
Forfeited |  |  | (1,030 | ) |  |  | 96.30 |
Nonvested at June 30, 2022 |  |  | 39,560 |  |  | $ | 108.24 |

6. OPERATING SEGMENT INFORMATION

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

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|  | For the Three Months |  |  | For the Six Months |
Revenues |  | Ended June 30, |  |  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Casualty |  | $ | 177,123 |  |  | $ | 156,195 |  |  | $ | 348,879 |  |  | $ | 304,965 |
Property |  |  | 74,690 |  |  |  | 55,865 |  |  |  | 142,130 |  |  |  | 107,507 |
Surety |  |  | 30,997 |  |  |  | 28,940 |  |  |  | 60,953 |  |  |  | 57,123 |
Net premiums earned |  | $ | 282,810 |  |  | $ | 241,000 |  |  | $ | 551,962 |  |  | $ | 469,595 |
Net investment income |  |  | 18,472 |  |  |  | 16,661 |  |  |  | 36,355 |  |  |  | 33,085 |
Net realized gains |  |  | 12,804 |  |  |  | 36,463 |  |  |  | 18,392 |  |  |  | 50,613 |
Net unrealized gains (losses) on equity securities |  |  | (100,994 | ) |  |  | 3,956 |  |  |  | (128,804 | ) |  |  | 32,118 |
Total consolidated revenue |  | $ | 213,092 |  |  | $ | 298,080 |  |  | $ | 477,905 |  |  | $ | 585,411 |
Net Earnings |  |  |  |  |  |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Casualty |  | $ | 21,442 |  |  | $ | 26,438 |  |  | $ | 49,089 |  |  | $ | 51,305 |
Property |  |  | 26,105 |  |  |  | 8,879 |  |  |  | 48,581 |  |  |  | 7,874 |
Surety |  |  | 8,409 |  |  |  | 1,274 |  |  |  | 17,764 |  |  |  | 7,329 |
Net underwriting income |  | $ | 55,956 |  |  | $ | 36,591 |  |  | $ | 115,434 |  |  | $ | 66,508 |
Net investment income |  |  | 18,472 |  |  |  | 16,661 |  |  |  | 36,355 |  |  |  | 33,085 |
Net realized gains |  |  | 12,804 |  |  |  | 36,463 |  |  |  | 18,392 |  |  |  | 50,613 |
Net unrealized gains (losses) on equity securities |  |  | (100,994 | ) |  |  | 3,956 |  |  |  | (128,804 | ) |  |  | 32,118 |
General corporate expense and interest on debt |  |  | (4,446 | ) |  |  | (5,590 | ) |  |  | (9,819 | ) |  |  | (10,833 | )
Equity in earnings of unconsolidated investees |  |  | 11,654 |  |  |  | 13,940 |  |  |  | 20,413 |  |  |  | 20,364 |
Earnings (loss) before income taxes |  | $ | (6,554 | ) |  | $ | 102,021 |  |  | $ | 51,971 |  |  | $ | 191,855 |
Income tax expense (benefit) |  |  | (4,315 | ) |  |  | 20,206 |  |  |  | 6,287 |  |  |  | 37,028 |
Net earnings (loss) |  | $ | (2,239 | ) |  | $ | 81,815 |  |  | $ | 45,684 |  |  | $ | 154,827 |

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

|  | For the Three Months |  |  | For the Six Months |
Net Premiums Earned |  | Ended June 30, |  |  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Casualty |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial excess and personal umbrella |  | $ | 62,463 |  |  | $ | 53,448 |  |  | $ | 122,535 |  |  | $ | 105,002 |
General liability |  |  | 25,106 |  |  |  | 22,053 |  |  |  | 48,846 |  |  |  | 44,460 |
Commercial transportation |  |  | 23,941 |  |  |  | 21,525 |  |  |  | 47,569 |  |  |  | 38,355 |
Professional services |  |  | 23,861 |  |  |  | 21,966 |  |  |  | 47,416 |  |  |  | 43,694 |
Small commercial |  |  | 16,813 |  |  |  | 16,279 |  |  |  | 33,458 |  |  |  | 32,001 |
Executive products |  |  | 7,075 |  |  |  | 5,083 |  |  |  | 13,652 |  |  |  | 10,324 |
Other casualty |  |  | 17,864 |  |  |  | 15,841 |  |  |  | 35,403 |  |  |  | 31,129 |
Total |  | $ | 177,123 |  |  | $ | 156,195 |  |  | $ | 348,879 |  |  | $ | 304,965 |
Property |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial property |  | $ | 38,929 |  |  | $ | 25,093 |  |  | $ | 72,218 |  |  | $ | 47,805 |
Marine |  |  | 28,178 |  |  |  | 24,363 |  |  |  | 54,907 |  |  |  | 47,321 |
Specialty personal |  |  | 6,100 |  |  |  | 5,264 |  |  |  | 11,996 |  |  |  | 10,298 |
Other property |  |  | 1,483 |  |  |  | 1,145 |  |  |  | 3,009 |  |  |  | 2,083 |
Total |  | $ | 74,690 |  |  | $ | 55,865 |  |  | $ | 142,130 |  |  | $ | 107,507 |
Surety |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 11,663 |  |  | $ | 11,040 |  |  | $ | 23,366 |  |  | $ | 22,053 |
Miscellaneous |  |  | 11,587 |  |  |  | 10,845 |  |  |  | 22,940 |  |  |  | 21,480 |
Contract |  |  | 7,747 |  |  |  | 7,055 |  |  |  | 14,647 |  |  |  | 13,590 |
Total |  | $ | 30,997 |  |  | $ | 28,940 |  |  | $ | 60,953 |  |  | $ | 57,123 |
Grand Total |  | $ | 282,810 |  |  | $ | 241,000 |  |  | $ | 551,962 |  |  | $ | 469,595 |

7. LEASES

Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet. We determine if a contract contains a lease at inception and recognize

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operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease cost is expensed in the period in which the obligation is incurred. Sublease income is recognized on a straight-line basis over the sublease term.

The Company’s operating lease obligations are for branch office facilities. The components of lease expense and other lease information as of and during the three and six-month periods ended June 30, 2022 and 2021 were as follows:

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Operating lease cost |  | $ | 1,256 |  |  | $ | 1,328 |  |  | $ | 2,414 |  |  | $ | 2,679 |
Variable lease cost |  |  | 349 |  |  |  | 357 |  |  |  | 695 |  |  |  | 741 |
Sublease income |  |  | (139 | ) |  |  | (123 | ) |  |  | (277 | ) |  |  | (246 | )
Total lease cost |  | $ | 1,466 |  |  | $ | 1,562 |  |  | $ | 2,832 |  |  | $ | 3,174 |
Cash paid for amounts included in measurement of lease liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating cash outflows from operating leases |  | $ | 1,278 |  |  | $ | 1,477 |  |  | $ | 2,600 |  |  | $ | 2,965 |
ROU assets obtained in exchange for new operating lease liabilities |  | $ | 2,431 |  |  | $ | 206 |  |  | $ | 2,431 |  |  | $ | 265 |
Reduction to ROU assets resulting from reduction to lease liabilities |  | $ | — |  |  | $ | 1,191 |  |  | $ | — |  |  | $ | 1,250 |
Other non-cash reductions to ROU assets |  | $ | — |  |  | $ | — |  |  | $ | 73 |  |  | $ | — |

(in thousands) |  | June 30, 2022 |  | December 31, 2021
Operating lease ROU assets |  | $ | 14,881 |  |  |  | $ | 14,765 |  |
Operating lease liabilities |  | $ | 16,902 |  |  |  | $ | 16,905 |  |
Weighted-average remaining lease term - operating leases |  | 4.40 |  | years |  | 4.52 |  | years
Weighted-average discount rate - operating leases |  |  | 2.08 |  | % |  |  | 2.02 |  | %

Future minimum lease payments under non-cancellable leases as of June 30, 2022 were as follows:

(in thousands) |  | June 30, 2022 |
2022 |  | $ | 2,778 |
2023 |  |  | 5,529 |
2024 |  |  | 3,552 |
2025 |  |  | 2,138 |
2026 |  |  | 1,285 |
2027 |  |  | 826 |
Thereafter |  |  | 1,589 |
Total future minimum lease payments |  | $ | 17,697 |
Less imputed interest |  |  | (795 | )
Total operating lease liability |  | $ | 16,902 |

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I tem 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors. These assumptions 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, 2021 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.

OVERVIEW

RLI Corp. is a U.S.-based, specialty insurance company that underwrites select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group (Group). Our focus is on niche markets and developing unique products that are tailored to customers’ needs. We hire underwriters and claim examiners with deep expertise and provide exceptional customer service and support. We maintain a highly diverse product portfolio and underwrite for profit in all market conditions. In 2021, we achieved our 26th consecutive year of underwriting profitability. Over the 26-year period, we averaged an 88.4 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, and 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 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

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

GAAP, non-GAAP and Performance Measures

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

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 2021 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 gains 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 Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
(in thousands) |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net earnings (loss) |  | $ | (2,239 | ) |  | $ | 81,815 |  |  | $ | 45,684 |  |  | $ | 154,827 |
Income tax expense (benefit) |  |  | (4,315 | ) |  |  | 20,206 |  |  |  | 6,287 |  |  |  | 37,028 |
Earnings (loss) before income taxes |  | $ | (6,554 | ) |  | $ | 102,021 |  |  | $ | 51,971 |  |  | $ | 191,855 |
Equity in earnings of unconsolidated investees |  |  | (11,654 | ) |  |  | (13,940 | ) |  |  | (20,413 | ) |  |  | (20,364 | )
General corporate expenses |  |  | 2,435 |  |  |  | 3,686 |  |  |  | 5,798 |  |  |  | 7,028 |
Interest expense on debt |  |  | 2,011 |  |  |  | 1,904 |  |  |  | 4,021 |  |  |  | 3,805 |
Net unrealized (gains) losses on equity securities |  |  | 100,994 |  |  |  | (3,956 | ) |  |  | 128,804 |  |  |  | (32,118 | )
Net realized gains |  |  | (12,804 | ) |  |  | (36,463 | ) |  |  | (18,392 | ) |  |  | (50,613 | )
Net investment income |  |  | (18,472 | ) |  |  | (16,661 | ) |  |  | (36,355 | ) |  |  | (33,085 | )
Net underwriting income |  | $ | 55,956 |  |  | $ | 36,591 |  |  | $ | 115,434 |  |  | $ | 66,508 |

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

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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 2021 Annual Report on Form 10-K.

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

IMPACT OF COVID-19

Our processes and controls continue to operate effectively and we have been able to maintain our high service and support levels for our customers throughout the COVID-19 pandemic. As of June 30, 2022, our premium production was unaffected by the direct impacts of the pandemic. However, actuarial models base future emergence on historical experience, with adjustments for current trends, and the appropriateness of these assumptions still involves greater uncertainty. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages. The industry experienced new issues throughout the pandemic, including the postponement of civil court cases, the extension of various statutes of limitations and changes in settlement trends. 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 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 environment and any remaining uncertainty.

RESULTS OF OPERATIONS

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Net premiums earned for the Group increased 18 percent, driven by growth from our casualty and property segments. Overall market declines resulted in $128.8 million of unrealized losses on equity securities in the first six months of 2022, while positive market performance resulted in $32.1 million of unrealized gains in our equity portfolio in 2021. Investment income was up 10 percent, due to an increased average asset base relative to the prior year. Realized gains during the first six months of 2022 were comprised of $19.2 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $0.8 million of realized losses on the fixed income portfolio and less than $0.1 million of other realized loss. This compares to $48.9 million of realized gains on the equity portfolio, $1.5 million of realized gains on the fixed income portfolio and $0.2 million of other realized gains for the same period in 2021.

|  | For the Six Months |
|  | Ended June 30, |
Consolidated Revenues (in thousands) |  | 2022 |  |  | 2021 |
Net premiums earned |  | $ | 551,962 |  |  | $ | 469,595 |
Net investment income |  |  | 36,355 |  |  |  | 33,085 |
Net realized gains |  |  | 18,392 |  |  |  | 50,613 |
Net unrealized gains (losses) on equity securities |  |  | (128,804 | ) |  |  | 32,118 |
Total consolidated revenue |  | $ | 477,905 |  |  | $ | 585,411 |

Net earnings for the first six months of 2022 totaled $45.7 million, compared to $154.8 million for the same period in 2021. The decrease in earnings for 2022 was primarily attributed to $86.6 million of net after-tax realized and unrealized losses on equity securities, compared to $64.0 million of after-tax realized and unrealized gains in 2021. Underwriting results for 2022 were impacted by $5.0 million of pretax storm losses, compared to $24.0 million of pretax storm losses in the first six months of 2021. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $69.7 million in the first six months of 2022, compared to $67.5 million in 2021.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.

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Underwriting income was $115.4 million on a 79.1 combined ratio for the first six months of 2022, compared to $66.5 million on an 85.8 combined ratio in the same period of 2021. The loss ratio decreased to 40.5 from 45.1, due to lower levels of storm losses and a higher level of favorable development in 2022. The Group’s expense ratio decreased to 38.6 from 40.7, with 2022 benefiting from a larger earned premium base.

Our equity in earnings of unconsolidated investees primarily relate to our investments in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, and Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company. In the first six months of 2022, $14.9 million of investee earnings were recorded for Maui Jim and $6.4 million of investee earnings were recorded for Prime. Comparatively, the first six months of 2021 reflected investee earnings of $14.3 million and $7.3 million from Maui Jim and Prime, respectively.

Comprehensive loss totaled $167.5 million for the first six months of 2022, compared to $125.3 million of comprehensive earnings for the first six months of 2021. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive loss of $213.1 million in the first six months of 2022 was attributable to increased interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $29.6 million of other comprehensive loss was recognized in 2021 as interest rates increased.

Premiums

Gross premiums written for the Group increased $124.1 million for the first six months of 2022 when compared to the same period of 2021. Growth was achieved in all three segments, though the increase was driven by products in the property and casualty segments. Net premiums earned increased $82.4 million, also driven by products in our casualty and property segments.

|  | Gross Premiums Written |  | Net Premiums Earned
|  | For the Six Months Ended June 30, |  |  |  |  |  |  |  | For the Six Months Ended June 30, |  |  |  |  |  |
(in thousands) |  | 2022 |  |  | 2021 |  |  | % Change |  | 2022 |  |  | 2021 |  |  | % Change
Casualty |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial excess and personal umbrella |  | $ | 163,298 |  |  | $ | 139,232 |  |  |  | 17 |  | % |  | $ | 122,535 |  |  | $ | 105,002 |  |  |  | 17 |  | %
General liability |  |  | 59,192 |  |  |  | 52,304 |  |  |  | 13 |  | % |  |  | 48,846 |  |  |  | 44,460 |  |  |  | 10 |  | %
Commercial transportation |  |  | 60,592 |  |  |  | 50,302 |  |  |  | 20 |  | % |  |  | 47,569 |  |  |  | 38,355 |  |  |  | 24 |  | %
Professional services |  |  | 52,390 |  |  |  | 48,528 |  |  |  | 8 |  | % |  |  | 47,416 |  |  |  | 43,694 |  |  |  | 9 |  | %
Small commercial |  |  | 36,937 |  |  |  | 35,211 |  |  |  | 5 |  | % |  |  | 33,458 |  |  |  | 32,001 |  |  |  | 5 |  | %
Executive products |  |  | 45,622 |  |  |  | 56,905 |  |  |  | (20 | ) | % |  |  | 13,652 |  |  |  | 10,324 |  |  |  | 32 |  | %
Other casualty |  |  | 46,105 |  |  |  | 42,743 |  |  |  | 8 |  | % |  |  | 35,403 |  |  |  | 31,129 |  |  |  | 14 |  | %
Total |  | $ | 464,136 |  |  | $ | 425,225 |  |  |  | 9 |  | % |  | $ | 348,879 |  |  | $ | 304,965 |  |  |  | 14 |  | %
Property |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial property |  | $ | 162,148 |  |  | $ | 94,782 |  |  |  | 71 |  | % |  | $ | 72,218 |  |  | $ | 47,805 |  |  |  | 51 |  | %
Marine |  |  | 64,996 |  |  |  | 56,132 |  |  |  | 16 |  | % |  |  | 54,907 |  |  |  | 47,321 |  |  |  | 16 |  | %
Specialty personal |  |  | 13,821 |  |  |  | 11,680 |  |  |  | 18 |  | % |  |  | 11,996 |  |  |  | 10,298 |  |  |  | 16 |  | %
Other property |  |  | 4,481 |  |  |  | 3,854 |  |  |  | 16 |  | % |  |  | 3,009 |  |  |  | 2,083 |  |  |  | 44 |  | %
Total |  | $ | 245,446 |  |  | $ | 166,448 |  |  |  | 47 |  | % |  | $ | 142,130 |  |  | $ | 107,507 |  |  |  | 32 |  | %
Surety |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 25,230 |  |  | $ | 23,383 |  |  |  | 8 |  | % |  | $ | 23,366 |  |  | $ | 22,053 |  |  |  | 6 |  | %
Miscellaneous |  |  | 25,814 |  |  |  | 23,967 |  |  |  | 8 |  | % |  |  | 22,940 |  |  |  | 21,480 |  |  |  | 7 |  | %
Contract |  |  | 17,322 |  |  |  | 14,856 |  |  |  | 17 |  | % |  |  | 14,647 |  |  |  | 13,590 |  |  |  | 8 |  | %
Total |  | $ | 68,366 |  |  | $ | 62,206 |  |  |  | 10 |  | % |  | $ | 60,953 |  |  | $ | 57,123 |  |  |  | 7 |  | %
Grand Total |  | $ | 777,948 |  |  | $ | 653,879 |  |  |  | 19 |  | % |  | $ | 551,962 |  |  | $ | 469,595 |  |  |  | 18 |  | %

Casualty

Gross premiums written for the casualty segment were up $38.9 million in the first six months of 2022. Gross premiums from commercial excess and personal umbrella increased $24.1 million, due to rate increases and an expanded distribution base. Increases in new construction projects led to the increase in general liability. Commercial transportation premium increased by $10.3 million, driven by our public transportation line, where customers put vehicles back in service on policies that were suspended throughout the first two years of the pandemic. Executive products premium was down as a result of the exit from our large account cyber and representations and warranties programs.

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Property

Gross premiums written for the property segment were up $79.0 million in the first six months of 2022. Our commercial property business was up $67.4 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to modestly increase market share while strengthening terms and conditions. Rate increases, improved retention and new opportunities in the inland marine space led to $8.9 million of premium growth for our marine product.

Surety

Gross premiums written for the surety segment were up $6.2 million for the first six months of 2022. Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices. The growth in miscellaneous surety is broad based and has been aided by our focus on being easy to do business with and technology. The expansion of existing accounts and new business resulted in increased premium for commercial surety.

Underwriting Income

|  | For the Six Months |
|  | Ended June 30, |
|  | 2022 |  |  | 2021 |
Underwriting Income (in thousands) |  |  |  |  |  |  |  |
Casualty |  | $ | 49,089 |  |  | $ | 51,305 |
Property |  |  | 48,581 |  |  |  | 7,874 |
Surety |  |  | 17,764 |  |  |  | 7,329 |
Total |  | $ | 115,434 |  |  | $ | 66,508 |
Combined Ratio |  |  |  |  |  |  |  |
Casualty |  |  | 85.9 |  |  |  | 83.2 |
Property |  | 65.8 |  |  |  | 92.7 |
Surety |  | 70.9 |  |  | 87.2 |
Total |  | 79.1 |  |  |  | 85.8 |

Casualty

The casualty segment recorded underwriting income of $49.1 million in the first six months of 2022, compared to $51.3 million for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by $44.9 million, primarily on accident years 2018 through 2021. Favorable development was widespread, with notable amounts from general liability, professional services and transportation. In comparison, $57.6 million of reserves were released in the first six months of 2021. General liability, transportation, professional services, small commercial and personal umbrella were drivers of the favorable development. Offsetting the favorable development, storm losses on casualty-oriented package policies that include property coverage resulted in $0.5 million of losses in 2022 and $2.4 million of losses in 2021.

The combined ratio for the casualty segment was 85.9 in 2022, compared to 83.2 in 2021. The segment’s loss ratio was 51.0 in 2022, up from 47.4 in 2021. Current accident year losses are slightly improved, but lower levels of reserve releases on prior accident years resulted in the higher loss ratio in 2022. The expense ratio for the casualty segment was 34.9, down from 35.8 for the same period last year.

Property

The property segment recorded underwriting income of $48.6 million for the first six months of 2022, compared to $7.9 million for the same period last year. Underwriting results for 2022 included $17.3 million of favorable development on prior years’ loss and catastrophe reserves across all products and $4.5 million of storm losses. Comparatively, the 2021 underwriting results included $9.9 million of favorable development on prior years’ loss and catastrophe reserves and $21.6 million of storm losses.

Underwriting results for the first six months of 2022 translated into a combined ratio of 65.8, compared to 92.7 for the same period last year. The segment’s loss ratio was 28.7 in 2022, down from 52.0 in 2021, due to lower levels of storm losses and larger reserve releases. The segment’s expense ratio decreased to 37.1 in 2022 from 40.7 in the prior year, with 2022 benefiting from a larger earned premium base.

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Surety

The surety segment recorded underwriting income of $17.8 million for the first six months of 2022, compared to $7.3 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for 2022 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $7.5 million. Comparatively, 2021 results included favorable development on prior accident years’ loss reserves, which decreased the segment’s loss and settlement expenses by $0.1 million.

The combined ratio for the surety segment totaled 70.9 for the first six months of 2022, compared to 87.2 for the same period in 2021. The segment’s loss ratio was 7.4 in 2022, down from 19.8 in 2021 due to larger reserve releases and improved current accident year losses. The expense ratio was 63.5, down from 67.4 in the prior year, as 2022 had a higher earned premium base.

Investment Income

Our investment portfolio generated net investment income of $36.4 million during the first six months of 2022, an increase of 9.9 percent from that reported for the same period in 2021. The increase in investment income was largely due to an increased average asset base relative to the prior year.

Yields on our fixed income investments for the first six months of 2022 and 2021 were as follows:

|  | 2022 |  |  |  | 2021 |  |
Pretax Yield |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2.75 |  | % |  |  | 2.81 |  | %
Tax-Exempt |  |  | 2.66 |  | % |  |  | 2.63 |  | %
After-Tax Yield |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2.17 |  | % |  |  | 2.22 |  | %
Tax-Exempt |  |  | 2.52 |  | % |  |  | 2.49 |  | %

The following table depicts the composition of our investment portfolio at June 30, 2022 as compared to December 31, 2021:

(in thousands) |  | June 30, 2022 |  |  |  | December 31, 2021 |  |
Fixed income |  | $ | 2,280,909 |  |  |  | 77.8 |  | % |  | $ | 2,409,887 |  |  |  | 76.2 |  | %
Equity securities |  |  | 487,995 |  |  |  | 16.6 |  | % |  |  | 613,776 |  |  |  | 19.4 |  | %
Other invested assets |  |  | 51,018 |  |  |  | 1.7 |  | % |  |  | 50,501 |  |  |  | 1.6 |  | %
Cash |  |  | 113,044 |  |  |  | 3.9 |  | % |  |  | 88,804 |  |  |  | 2.8 |  | %
Total investments and cash |  | $ | 2,932,966 |  |  |  | 100.0 |  | % |  | $ | 3,162,968 |  |  |  | 100.0 |  | %

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

The fixed income portfolio decreased by $129.0 million in the first six months of 2022. The decline was due to increased interest rates, which decreased the fair value of securities held in the fixed income portfolio. Average fixed income duration was 5.1 years at June 30, 2022, reflecting our current liability structure and sound capital position. The equity portfolio decreased by $125.8 million during the first six months of 2022, as we reduced our risk asset profile and equity markets declined over the first half of the year.

Income Taxes

Our effective tax rate for the first six months of 2022 was 12.1 percent, compared to 19.3 percent for the same period in 2021. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective rate was lower for the first six months of 2022, as lower pretax income increased the percentage impact of tax-favored adjustments.

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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Net premiums earned for the Group increased 17 percent, driven by growth from our casualty and property segments. Overall market declines resulted in $101.0 million of unrealized losses on equity securities in the second quarter of 2022, while positive market performance resulted in $4.0 million of unrealized gains in our equity portfolio in 2021. Investment income was up 11 percent, due to an increased asset base and higher interest rates relative to the prior year. Realized gains during the second quarter of 2022 were comprised of $13.3 million of realized gains on equity securities, primarily due to rebalancing within our equity strategies, $0.7 million of realized losses on the fixed income portfolio and $0.2 million of other realized gains. This compares to $35.8 million of realized gains on the equity portfolio, $0.4 million of realized gains on the fixed income portfolio and $0.3 million of other realized gains for the same period in 2021.

|  | For the Three Months |
|  | Ended June 30, |
Consolidated Revenues (in thousands) |  | 2022 |  |  | 2021 |
Net premiums earned |  | $ | 282,810 |  |  | $ | 241,000 |
Net investment income |  |  | 18,472 |  |  |  | 16,661 |
Net realized gains |  |  | 12,804 |  |  |  | 36,463 |
Net unrealized gains (losses) on equity securities |  |  | (100,994 | ) |  |  | 3,956 |
Total consolidated revenue |  | $ | 213,092 |  |  | $ | 298,080 |

Net loss for the second quarter of 2022 totaled $2.2 million, compared to $81.8 million of net earnings for the same period in 2021. The decrease in earnings for 2022 was primarily attributed to $69.3 million of net after-tax realized and unrealized losses on equity securities, compared to $28.4 million of after-tax realized and unrealized gains in 2021. Underwriting results for 2022 were impacted by $3.0 million of pretax storm losses, compared to $8.0 million of pretax storm losses in the second quarter of 2021. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $24.2 million in the second quarter of 2022, compared to $30.3 million in 2021.

Bonus and profit-sharing amounts earned by executives, managers and associates are predominantly influenced by corporate performance, including operating earnings, combined ratio and return on capital. Favorable development and other drivers of growth in book value will increase bonus and profit-sharing expenses, while catastrophe losses, adverse development and decreased investment portfolio returns would lead to expense reductions. These performance-related expenses affect policy acquisition, insurance operating and general corporate expenses.

Underwriting income was $56.0 million on an 80.2 combined ratio for the second quarter of 2022, compared to $36.6 million on an 84.8 combined ratio in the same period of 2021. The loss ratio decreased to 41.7 from 44.4, due to increased earned premium on low loss ratio products. The Group’s expense ratio decreased to 38.5 from 40.4, with 2022 benefiting from a larger earned premium base.

In the second quarter of 2022, $8.5 million of investee earnings were recorded for Maui Jim and $3.6 million of investee earnings were recorded for Prime. Comparatively, the second quarter of 2021 reflected investee earnings of $10.6 million and $3.6 million from Maui Jim and Prime, respectively.

Comprehensive loss totaled $99.8 million for the second quarter of 2022, compared to $97.0 million of comprehensive earnings for the same period in 2021. Other comprehensive earnings (loss) primarily included net after-tax unrealized gains and losses from the fixed income portfolio. Other comprehensive loss of $97.6 million in the second quarter of 2022 was attributable to increased interest rates, which decreased the fair value of securities held in the fixed income portfolio. Comparatively, $15.2 million of other comprehensive earnings was recognized in 2021 as interest rates declined slightly.

Premiums

Gross premiums written for the Group increased $59.8 million for the second quarter of 2022 when compared to the same period of 2021. Growth was achieved in all three segments, though the increase was driven by products in the property and casualty segments. Net premiums earned increased $41.8 million, also driven by products in our casualty and property segments.

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|  | Gross Premiums Written |  | Net Premiums Earned
|  | For the Three Months Ended June 30, |  |  |  |  |  |  |  | For the Three Months Ended June 30, |  |  |  |  |  |
(in thousands) |  | 2022 |  |  | 2021 |  |  | % Change |  | 2022 |  |  | 2021 |  |  | % Change
Casualty |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial excess and personal umbrella |  | $ | 85,512 |  |  | $ | 74,509 |  |  |  | 15 |  | % |  | $ | 62,463 |  |  | $ | 53,448 |  |  |  | 17 |  | %
General liability |  |  | 31,298 |  |  |  | 29,095 |  |  |  | 8 |  | % |  |  | 25,106 |  |  |  | 22,053 |  |  |  | 14 |  | %
Commercial transportation |  |  | 38,291 |  |  |  | 33,864 |  |  |  | 13 |  | % |  |  | 23,941 |  |  |  | 21,525 |  |  |  | 11 |  | %
Professional services |  |  | 27,880 |  |  |  | 26,121 |  |  |  | 7 |  | % |  |  | 23,861 |  |  |  | 21,966 |  |  |  | 9 |  | %
Small commercial |  |  | 18,799 |  |  |  | 18,833 |  |  |  | (0 | ) | % |  |  | 16,813 |  |  |  | 16,279 |  |  |  | 3 |  | %
Executive products |  |  | 24,941 |  |  |  | 34,135 |  |  |  | (27 | ) | % |  |  | 7,075 |  |  |  | 5,083 |  |  |  | 39 |  | %
Other casualty |  |  | 21,594 |  |  |  | 19,772 |  |  |  | 9 |  | % |  |  | 17,864 |  |  |  | 15,841 |  |  |  | 13 |  | %
Total |  | $ | 248,315 |  |  | $ | 236,329 |  |  |  | 5 |  | % |  | $ | 177,123 |  |  | $ | 156,195 |  |  |  | 13 |  | %
Property |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial property |  | $ | 93,068 |  |  | $ | 54,646 |  |  |  | 70 |  | % |  | $ | 38,929 |  |  | $ | 25,093 |  |  |  | 55 |  | %
Marine |  |  | 32,913 |  |  |  | 29,279 |  |  |  | 12 |  | % |  |  | 28,178 |  |  |  | 24,363 |  |  |  | 16 |  | %
Specialty personal |  |  | 7,380 |  |  |  | 6,018 |  |  |  | 23 |  | % |  |  | 6,100 |  |  |  | 5,264 |  |  |  | 16 |  | %
Other property |  |  | 2,487 |  |  |  | 1,968 |  |  |  | 26 |  | % |  |  | 1,483 |  |  |  | 1,145 |  |  |  | 30 |  | %
Total |  | $ | 135,848 |  |  | $ | 91,911 |  |  |  | 48 |  | % |  | $ | 74,690 |  |  | $ | 55,865 |  |  |  | 34 |  | %
Surety |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | $ | 12,567 |  |  | $ | 10,082 |  |  |  | 25 |  | % |  | $ | 11,663 |  |  | $ | 11,040 |  |  |  | 6 |  | %
Miscellaneous |  |  | 12,452 |  |  |  | 11,993 |  |  |  | 4 |  | % |  |  | 11,587 |  |  |  | 10,845 |  |  |  | 7 |  | %
Contract |  |  | 9,607 |  |  |  | 8,669 |  |  |  | 11 |  | % |  |  | 7,747 |  |  |  | 7,055 |  |  |  | 10 |  | %
Total |  | $ | 34,626 |  |  | $ | 30,744 |  |  |  | 13 |  | % |  | $ | 30,997 |  |  | $ | 28,940 |  |  |  | 7 |  | %
Grand Total |  | $ | 418,789 |  |  | $ | 358,984 |  |  |  | 17 |  | % |  | $ | 282,810 |  |  | $ | 241,000 |  |  |  | 17 |  | %

Casualty

Gross premiums written for the casualty segment were up $12.0 million in the second quarter of 2022. Gross premiums from commercial excess and personal umbrella increased $11.0 million, due to rate increases and an expanded distribution base. Commercial transportation premium increased by $4.4 million, driven by our commercial specialty auto line, where realignment of our distribution channels allowed us to capitalize on changing market conditions. Executive products premium was down as a result of the exit from our large account cyber and representations and warranties programs.

Property

Gross premiums written for the property segment were up $43.9 million in the second quarter of 2022. Our commercial property business was up $38.4 million, as rates on wind exposures continued to increase, building valuations rose and market disruption provided an opportunity to increase market share while strengthening terms and conditions. Rate increases and new opportunities in the inland marine space led to $3.6 million of premium growth for our marine product.

Surety

Gross premiums written for the surety segment were up $3.9 million for the second quarter of 2022. Commercial surety premium increased as a result of new business and the expansion of existing accounts. Contract surety benefited from new construction opportunities and larger contract values, driven by the inflation of material prices.

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Underwriting Income

|  | For the Three Months |
|  | Ended June 30, |
|  | 2022 |  |  | 2021 |
Underwriting Income (in thousands) |  |  |  |  |  |  |  |
Casualty |  | $ | 21,442 |  |  | $ | 26,438 |
Property |  |  | 26,105 |  |  |  | 8,879 |
Surety |  |  | 8,409 |  |  |  | 1,274 |
Total |  | $ | 55,956 |  |  | $ | 36,591 |
Combined Ratio |  |  |  |  |  |  |  |
Casualty |  |  | 87.9 |  |  |  | 83.1 |
Property |  |  | 65.0 |  |  |  | 84.1 |
Surety |  |  | 72.9 |  |  |  | 95.6 |
Total |  |  | 80.2 |  |  |  | 84.8 |

Casualty

The casualty segment recorded underwriting income of $21.4 million in the second quarter of 2022, compared to $26.4 million for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by $17.3 million, primarily on accident years 2018 through 2020. Products which generated the majority of the favorable development included general liability, professional services and transportation. In comparison, $29.3 million of reserves were released in the second quarter of 2021. General liability, transportation, commercial excess and professional services were drivers of the favorable development. Offsetting the favorable development, winter storm losses on casualty-oriented package policies that include property coverage resulted in $0.5 million of losses in 2022 and $1.3 million of losses in 2021.

The combined ratio for the casualty segment was 87.9 in 2022, compared to 83.1 in 2021. The segment’s loss ratio was 53.2 in 2022, up from 47.6 in 2021. Current accident year losses are slightly improved, but lower levels of reserve releases on prior accident years resulted in the higher loss ratio in 2022. The expense ratio for the casualty segment was 34.7, down from 35.5 for the same period last year.

Property

The property segment recorded underwriting income of $26.1 million for the second quarter of 2022, compared to $8.9 million for the same period last year. Underwriting results for 2022 included $3.9 million of favorable development on prior years’ loss and catastrophe reserves across all products and $2.5 million of storm losses. Comparatively, the 2021 underwriting results included $3.8 million of favorable development on prior years’ loss and catastrophe reserves and $6.7 million of storm losses.

Underwriting results for the second quarter of 2022 translated into a combined ratio of 65.0, compared to 84.1 for the same period last year. The segment’s loss ratio was 27.4 in 2022, down from 43.5 in 2021, due to lower levels of storm losses and improved current accident year losses. The segment’s expense ratio decreased to 37.6 in 2022 from 40.6 in the prior year, with 2022 benefiting from a larger earned premium base.

Surety

The surety segment recorded underwriting income of $8.4 million for the second quarter of 2022, compared to $1.3 million for the same period last year. Both periods reflected positive current accident year underwriting performance. Results for 2022 included favorable development on prior accident years’ reserves, which decreased loss and settlement expenses for the segment by $3.0 million. Comparatively, 2021 results included $2.7 million of unfavorable development on prior accident years’ loss reserves, as a number of bankruptcy filings in the energy sector of our commercial surety business led to the strengthening of our incurred but not reported reserves.

The combined ratio for the surety segment totaled 72.9 for the second quarter of 2022, compared to 95.6 for the same period in 2021. The segment’s loss ratio was 10.3 in 2022, down from 28.7 in 2021 due to differences in prior accident year reserve development. The expense ratio was 62.6, down from 66.9 in the prior year, as 2022 had a higher earned premium base.

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Investment Income

Our investment portfolio generated net investment income of $18.5 million during the second quarter of 2022, an increase of 10.9 percent from that reported for the same period in 2021. The increase in investment income was largely due to an increased asset base and higher interest rates relative to the prior year.

Yields on our fixed income investments for the second quarter of 2022 and 2021 were as follows:

|  | 2022 |  |  |  | 2021 |  |
Pretax Yield |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2.79 |  | % |  |  | 2.73 |  | %
Tax-Exempt |  |  | 2.69 |  | % |  |  | 2.63 |  | %
After-Tax Yield |  |  |  |  |  |  |  |  |  |
Taxable |  |  | 2.20 |  | % |  |  | 2.16 |  | %
Tax-Exempt |  |  | 2.55 |  | % |  |  | 2.49 |  | %

Income Taxes

Our effective tax rate for the second quarter of 2022 was 65.8 percent, compared to 19.8 percent for the same period in 2021. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. Tax-favored adjustments acting on a pretax loss, caused by unrealized losses on the equity portfolio, resulted in a higher effective rate for the second quarter of 2022.

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 six-month periods ended June 30, 2022 and 2021:

(in thousands) |  | 2022 |  |  | 2021 |
Operating cash flows |  | $ | 170,645 |  |  | $ | 164,509 |
Investing cash flows |  |  | (124,946 | ) |  |  | (108,616 | )
Financing cash flows |  |  | (21,459 | ) |  |  | (22,653 | )
Total |  | $ | 24,240 |  |  | $ | 33,240 |

Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities can vary among periods due to the timing in which these payments are made or received. Operating cash flows in the first six months of 2022 benefited from increased premium receipts relative to the first six months of 2021, but were partially offset by increased levels of loss and settlement expense payments.

We have $199.8 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 notes at June 30, 2022 was $151.4 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities. Additionally, RLI Insurance Company borrowed $50.0 million from the Federal Home Loan Bank of Chicago (FHLBC) on November 10, 2021. The borrowing matures on November 10, 2023 and has an option to be paid off early on November 10, 2022. Interest is paid monthly at an annualized rate of 0.84 percent.

As of June 30, 2022, we had cash and other investments maturing within one year of approximately $161.6 million and an additional $798.5 million maturing between one to five years. Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

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We also maintain a revolving line of credit with Bank of Montreal, Chicago Branch, which permits us to borrow up to an aggregate principal amount of $60.0 million. This facility was entered into during the first quarter of 2020 and replaced the previous $50.0 million facility with JP Morgan Chase Bank N.A., which was set to expire on May 24, 2020. Under certain conditions, the line may be increased up to an aggregate principal amount of $120.0 million. The facility has a three-year term that expires on March 27, 2023. As of and during the six-month period ended June 30, 2022, no amounts were outstanding on either facility.

Additionally, two of our insurance companies, RLI Insurance Company (RLI Ins.) and Mt. Hawley Insurance Company, are members of the FHLBC. Membership in the Federal Home Loan Bank system provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of June 30, 2022, $58.2 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility.

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

We 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. Invested assets at June 30, 2022 have decreased $230.0 million from December 31, 2021. As of June 30, 2022, our investment portfolio had the following asset allocation breakdown:

|  | Cost or |  |  | Fair |  |  | Unrealized |  |  | % of Total |  |  |  |
(in thousands) |  | Amortized Cost |  |  | Value |  |  | Gain/(Loss) |  |  | Fair Value |  |  |  | Quality*
U.S. government |  | $ | 183,368 |  |  | $ | 181,678 |  |  | $ | (1,690 | ) |  |  | 6.2 |  | % |  | AAA
U.S. agency |  |  | 34,220 |  |  |  | 33,573 |  |  |  | (647 | ) |  |  | 1.1 |  | % |  | AAA
Non-U.S. government & agency |  |  | 6,797 |  |  |  | 6,068 |  |  |  | (729 | ) |  |  | 0.2 |  | % |  | BBB+
Agency MBS |  |  | 338,639 |  |  |  | 312,721 |  |  |  | (25,918 | ) |  |  | 10.7 |  | % |  | AAA
ABS/CMBS/MBS** |  |  | 271,628 |  |  |  | 246,345 |  |  |  | (25,283 | ) |  |  | 8.4 |  | % |  | AA
Corporate |  |  | 1,011,726 |  |  |  | 941,729 |  |  |  | (69,997 | ) |  |  | 32.1 |  | % |  | BBB+
Municipal |  |  | 634,102 |  |  |  | 558,795 |  |  |  | (75,307 | ) |  |  | 19.1 |  | % |  | AA
Total fixed income |  | $ | 2,480,480 |  |  | $ | 2,280,909 |  |  | $ | (199,571 | ) |  |  | 77.8 |  | % |  | AA-
Equity |  |  | 327,246 |  |  |  | 487,995 |  |  |  | 160,749 |  |  |  | 16.6 |  | % |  |
Other invested assets |  |  | 45,231 |  |  |  | 51,018 |  |  |  | 5,787 |  |  |  | 1.7 |  | % |  |
Cash |  |  | 113,044 |  |  |  | 113,044 |  |  |  | — |  |  |  | 3.9 |  | % |  |
Total portfolio |  | $ | 2,966,001 |  |  | $ | 2,932,966 |  |  | $ | (33,035 | ) |  |  | 100.0 |  | % |  |

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

** | Non-agency asset-backed, commercial mortgage-backed and mortgage-backed securities

Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of June 30, 2022, our fixed income portfolio had the following rating distribution:

AAA |  |  | 36.0 |  | %
AA |  |  | 20.4 |  | %
A |  |  | 21.3 |  | %
BBB |  |  | 13.3 |  | %
BB |  |  | 3.6 |  | %
B |  |  | 2.1 |  | %
CCC |  |  | 0.1 |  | %
NR |  |  | 3.2 |  | %
Total |  |  | 100.0 |  | %

As of June 30, 2022, our fixed income portfolio remained well diversified, with 1,609 individual issues.

Our investment portfolio has limited exposure to structured asset-backed securities. As of June 30, 2022, we had $124.2 million in ABS, which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

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As of June 30, 2022, we had $122.1 million in commercial mortgage-backed securities and $312.7 million in mortgage-backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the GSE-backed MBS, our exposure to ABS and CMBS was 8.4 percent of our investment portfolio at quarter end.

We had $941.7 million in corporate fixed income securities as of June 30, 2022, which includes $96.9 million invested in a high-yield credit strategy. This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

The municipal portfolio includes approximately 53 percent taxable securities and 47 percent tax-exempt securities. Approximately 88 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 99 percent of the municipal bond portfolio is rated ‘A’ or better.

Securities within the equity portfolio are well diversified and are primarily invested in broad index exchange traded funds (ETFs). Our actively managed equity strategy has a preference for dividend income and value oriented security selection with low turnover, which minimizes transaction costs and taxes throughout our long investment horizon.

As of June 30, 2022, our equity portfolio had a dividend yield of 2.1 percent, compared to 1.7 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 92 individual securities and four ETF positions. No single company exposure in the equity portfolio represents more than 1 percent of invested assets.

Other invested assets include investments in low income housing tax credit partnerships, membership in the FHLBC and investments in private funds.

We had $187.3 million of investments in unconsolidated investees at June 30, 2022, compared to $171.3 million at December 31, 2021. At June 30, 2022 our investment in Maui Jim was $127.4 million and our investment in Prime was $47.6 million. During the first quarter, we announced that we have agreed to sell our minority interest in Maui Jim. Our net after-tax purchase price proceeds from the sale will be approximately $500 million, with the final proceeds to be determined at closing, based on adjustments to the purchase price for working capital and other items. A successful completion of the sale will result in capital generated to our benefit. As always, our top priority is to ensure we have adequate capital to support our business. However, we have demonstrated discipline in returning capital to shareholders if it exceeds our near-term needs.

Our investment portfolio does not have any exposure to derivatives.

Our capital structure is comprised of equity and debt outstanding. As of June 30, 2022, our capital structure consisted of $199.8 million in long-term debt and $1.0 billion of shareholders’ equity. Debt outstanding comprised 16.1 percent of total capital as of June 30, 2022. Interest and fees on debt obligations totaled $4.0 million for the first six months of 2022, compared to $3.8 million during the same period of 2021. We incurred interest expense on debt at an average annual interest rate of 3.89 percent during the first six months of 2022, compared to 4.91 percent for the same time period during 2021.

We paid a regular quarterly cash dividend of $0.26 per share on June 21, 2022, an increase of $0.01 from the prior quarter. We have increased dividends in each of the last 47 years.

Our three insurance companies are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance company. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance 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 June 30, 2022, our holding company had $1.0 billion 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 $71.0 million in liquid assets, which exceeds our normal annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.

Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend

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distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first six months of 202 2, RLI Ins. paid $13.0 million in ordinary dividends to RLI Corp. In 202 1, our principal insurance subsidiary paid ordinary dividends totaling $70.0 million and extraordinary dividends totaling $110.0 million. As of June 3 0, 202 2, $60.1 million of the net assets of our principal insurance subsidiary were not restricted and could be distributed to RLI Corp. as ordinary dividends without prior approval from the IDOI. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies in determining amounts available for distribution.

I tem 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 78 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 2021 Annual Report on Form 10-K.

I tem 4. | Controls and Procedures

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

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.

No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. | Legal Proceedings – There were no material changes to report.

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

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

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

In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares during 2022. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be suspended or discontinued at any time without prior notice.

Item 3. | Defaults Upon Senior Securities - Not Applicable.

Item 4. | Mine Safety Disclosures - Not Applicable.

Item 5. | Other Information - Not Applicable.

Item 6. | Exhibits

Exhibit No. |  | Description of Document |  | Reference
31.1 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Attached as Exhibit 31.1.
31.2 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Attached as Exhibit 31.2.
32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Attached as Exhibit 32.1.
32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Attached as Exhibit 32.2.
101 |  | iXBRL-Related Documents |  | Attached as Exhibit 101.
104 |  | Cover Page Interactive Data File |  | Embedded in Inline XBRL and contained in Exhibit 101.

*Certain exhibits and schedules have been omitted pursuant to Item 601 of Regulation S-K and will be provided to the Securities and Exchange Commission upon request.

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SIGNATURES

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

|  | RLI Corp.
|  | /s/ Todd W. Bryant
|  | Todd W. Bryant
|  | Chief Financial Officer
|  | (Principal Financial and Chief Accounting Officer)
Date: July 22, 2022 |  |

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