UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

RLI Corp.

(Exact name of registrant as specified in its charter)

 

ILLINOIS		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)

 

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 ý

No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý

No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of April 23, 2004 the number of shares outstanding of the registrant’s Common Stock was 25,190,854.

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

RLI Corp. & Subsidiaries

Condensed Consolidated Statement of Earnings and Comprehensive Earnings

 

		For the Three-Month Period Ended March 31,
(Unaudited)		2004			2003
Net premiums earned		$	125,898,282		$	109,145,725
Net investment income		12,315,321			10,659,885
Net realized investment gains		2,435,593			408,543
		140,649,196			120,214,153
Losses and settlement expenses		75,231,045			63,286,269
Policy acquisition costs		32,795,328			29,503,660
Insurance operating expenses		7,051,918			6,683,870
Interest expense on debt		1,740,176			243,063
General corporate expenses		1,284,738			1,116,627
		118,103,205			100,833,489
Equity in earnings of uncons. investee		1,234,377			1,175,703
Earnings before income taxes		23,780,368			20,556,367
Income tax expense		6,836,856			6,120,638
Net earnings		$	16,943,512		$	14,435,729
Other comprehensive earnings (loss),net of tax		7,586,860			(5,416,999		)
Comprehensive earnings		$	24,530,372		$	9,018,730
Earnings per share:
Basic:
Basic net earnings per share		$	0.67		$	0.58
Basic comprehensive earnings per share		$	0.97		$	0.36
Diluted:
Diluted net earnings per share		$	0.65		$	0.56
Diluted comprehensive earnings per share		$	0.94		$	0.35
Weighted average number of common shares outstanding
Basic		25,176,221			25,074,389
Diluted		26,118,164			25,653,550
Cash dividends declared per common share		$	0.11		$	0.09

 

The accompanying notes are an integral part of the financial statements.

 

2

 

RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheet

 

		March 31 2004			December 31 2003
		(Unaudited)
ASSETS
Investments
Fixed maturities
Held-to-maturity, at amortized cost		$	177,170,988		$	180,700,429
Trading, at fair value		8,433,068			8,405,629
Available-for-sale, at fair value		871,085,192			835,229,109
Equity securities, at fair value		279,202,635			276,021,362
Short-term investments, at cost		51,674,691			33,003,709
Total investments		1,387,566,574			1,333,360,238
Accrued investment income		13,130,471			12,914,660
Premiums and reinsurance balances receivable		155,006,063			152,859,640
Ceded unearned premium		100,087,540			101,748,341
Reinsurance balances recoverable on unpaid losses		379,322,802			372,047,884
Deferred policy acquisition costs		65,618,273			63,737,449
Property and equipment		18,267,712			18,615,651
Investment in unconsolidated investee		31,884,550			30,683,166
Goodwill and indefinite-lived intangibles		26,214,491			26,214,491
Other assets		14,486,711			22,182,273
TOTAL ASSETS		$	2,191,585,187		$	2,134,363,793
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and settlement expenses		$	943,505,534		903,440,601
Unearned premiums		363,249,467			367,642,210
Reinsurance balances payable		78,303,591			92,382,139
Notes payable, short-term debt		47,560,000			47,560,000
Income taxes-current		12,690,397			7,151,884
Income taxes-deferred		42,008,831			38,818,180
Bonds payable, long-term debt		100,000,000			100,000,000
Other liabilities		28,155,677			23,234,578
TOTAL LIABILITIES		1,615,473,497			1,580,229,592
Shareholders’ Equity
Common stock ($1 par value) (30,975,607 shares issued at 3/31/04) (30,957,837 shares issued at 12/31/03)		30,975,607			30,957,837
Paid-in Capital		179,893,615			179,683,913
Accumulated other comprehensive earnings		105,285,664			97,698,805
Retained Earnings		340,981,556			326,808,157
Deferred compensation		6,454,515			6,069,534
Less: Treasury shares at cost (5,792,753 shares at 3/31/04) (5,792,487 shares at 12/31/03)		(87,479,267		)	(87,084,045		)
TOTAL SHAREHOLDERS’ EQUITY		576,111,690			554,134,201
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,191,585,187		$	2,134,363,793

 

The accompanying notes are an integral part of the financial statements.

 

3

 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Three Month Period Ended March 31,
		2004			2003
Net cash provided by operating activities		$	33,016,784		$	40,774,277
Cash Flows from Investing Activities
Investments purchased		(132,424,946		)	(138,394,335		)
Investments sold		74,549,051			110,107,898
Investments called or matured		35,372,870			18,999,000
Net decrease in short-term investments		(7,538,272		)	(32,746,188		)
Net property and equipment purchased		(424,501		)	(696,995		)
Net cash used in investing activities		(30,465,798		)	(42,730,620		)
Cash Flows from Financing Activities
Cash dividends paid		(2,768,217		)	(2,221,300		)
Payments on debt		0			(6,500,000		)
Proceeds from issuance of debt		0			366,250
Proceeds from issuance of common stock		0			10,047,957
ISO Share issuance		227,472			263,436
Treasury shares purchased		(10,241		)	0
Net cash (used in) provided by financing activities		(2,550,986		)	1,956,343
Net increase in cash		0			0
Cash at the beginning of the year		0			0
Cash at March 31		$	0		$	0

 

The accompanying notes are an integral part of the financial statements.

 

4

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial information is prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), and such principles are applied on a basis consistent with those reflected in the 2003 annual report filed with the Securities and Exchange Commission. Management has prepared the financial information included herein without audit by independent certified public accountants.  The condensed consolidated balance sheet as of December 31, 2003 has been derived from, and does not include all the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2003.

 

The information furnished includes all adjustments and normal recurring accrual adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results of operations for the three-month periods ended March 31, 2004 and 2003 are not necessarily indicative of the results of a full year.

 

The accompanying financial data should be read in conjunction with the notes to the financial statements contained in the 2003 Annual Report on Form 10-K.

 

Earnings Per Share: Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders 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 (common stock equivalents) were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is antidilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

 

Pursuant to disclosure requirements contained in Statement 128,”Earnings Per Share,” the following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the financial statements.

 

		For the Three-Month Period Ended March 31, 2004
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common stockholders		$	16,943,512		25,176,221		$	0.67
Effect of Dilutive Securities
Incentive Stock Options		—			941,943
Diluted EPS
Income available to common stockholders		$	16,943,512		26,118,164		$	0.65

 

5

 

		For the Three-Month Period Ended March 31, 2003
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common stockholders		$	14,435,729		25,074,389		0.58
Effect of Dilutive Securities
Incentive Stock Options		—			579,161
Diluted EPS
Income available to common stockholders		$	14,435,729		25,653,550		0.56

 

Other Accounting Standards: In December 2002, the Financial Accounting Standards Board (FASB) published Statement of Financial Accounting Standards (SFAS) 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amended SFAS 123, “Accounting for Stock-Based Compensation” and provided alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation.  In addition, SFAS 148 amended the disclosure requirements of SFAS 123, requiring more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation, including disclosures in interim financial statements. The provisions for interim-period disclosures are summarized in the following stock based compensation section.

 

Stock based compensation:  We grant to officers and directors stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant. We account for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and accordingly recognize no compensation expense for the stock option grants.

 

6

 

Had compensation cost for the plan been determined consistent with SFAS 123, our net income and earnings per share would have been reduced to the following pro forma amounts:

 

				For the Three-Month Period Ended March 31,
				2004			2003
Net income, as reported				$	16,943,512		$	14,435,729
Add:	Stock-based employee compensation expense included in reported income, net of related tax effects			—			—
Deduct: Total stock-based employee compensation expense determined under fair-value-based methods for all methods for all awards, net of related tax methods				(332,184		)	(293,090		)
Pro forma net income				$	16,611,328		$	14,142,639
Earnings per share:
		Basic - as reported		$	0.67		$	0.58
		Basic - pro forma		$	0.66		$	0.56
		Diluted - as reported		$	0.65		$	0.56
		Diluted - pro forma		$	0.64		$	0.55

 

These pro forma amounts may not be representative of the effects of SFAS 123 on pro forma net income for future periods because options vest over several years and additional awards may be granted in the future.

 

Pension Plan:  On December 31, 2003, our pension plan was amended to freeze benefit accruals as of March 1, 2004.  As a result, we expensed the entire unrecognized service cost as of December 31, 2003.  The plan was also closed to new participants after December 31, 2003.  Participants’ benefits may increase in the future based on changes in their final average earnings.  Future pay increases are indexed to a maximum of 5% annually. Increases in excess of 5% will not be reflected in the determination of participants’ final average earnings.  The below table represents to various components of pension expense for the three month periods ended March 31, 2004 and 2003.

 

Pension Expense (in thousand’s)		2004			2003
Service Cost		$	—		$	345
Interest Cost		179			179
Expected Return on Assets		(196		)	(174		)
Prior Service Cost		—			9
Recognition of Transition Asset		(2		)	(8		)
Recognition of (Gains)/Losses		118			148
Net Periodic Cost		$	99		$	499
Estimated Settlement Losses		125			—
Total Pension Cost		$	224		$	499

 

7

 

The decline in pension expense is reflective of the amendment to freeze benefit accruals and closing the plan to new participants.  The ERISA required minimum contribution during the fiscal year ending December 31, 2004, is $0. We have not decided whether to contribute any amount in excess of this.

 

Intangible assets: In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or when there is reason to suspect that their values may have been diminished or impaired. Goodwill and indefinite-lived intangible assets, which relate to our surety segment, are listed separately on the balance sheet and totaled $26.2 million at March 31, 2004 and December 31, 2003.  Through impairment testing performed during 2003, pursuant to the requirements of SFAS 142, these assets do not appear to be impaired.

 

Intangible assets with definite lives continue to be amortized over their estimated useful lives.  Definite-lived intangible assets that continue to be amortized under SFAS 142 relate to our purchase of customer-related and marketing-related intangibles. These intangibles have useful lives ranging from five to 10 years. Amortization of intangible assets was $156,000 for the first three months of 2004, compared to $167,000 for the same period last year. Over the next five years, annual amortization expense on intangible assets will be approximately $600,000 in 2004-2006 and $175,000 for 2007 and 2008. At March 31, 2004, net intangible assets totaled $2.1 million, net of $3.6 million of accumulated amortization, and are included in other assets.  Definite-lived intangibles are subject to review for impairment pursuant to the requirements of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires, among other things, that we review our long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.  A review performed in 2003 indicated no impairment.  As circumstances change, we will continue to monitor the recoverability of this definite-lived intangible asset.

 

2. INDUSTRY SEGMENT INFORMATION - - Selected information by industry segment for the three months ended March 31, 2004 and 2003 is presented below.

 

		EARNINGS						REVENUES
SEGMENT DATA (in thousands)		2004			2003			2004			2003
Property		$	7,945		$	11,280		$	25,382		$	27,332
Casualty		2,901			185			89,087			69,461
Surety		(26		)	(1,793		)	11,429			12,353
Net investment income		12,315			10,660			12,315			10,660
Realized gains		2,436			409			2,436			409
General corporate expense and interest on debt		(3,025		)	(1,360		)
Equity in earnings of unconsolidated investee		1,234			1,176
Total segment earnings before income taxes		$	23,780		$	20,557
Income taxes		6,837			6,121
Total		$	16,943		$	14,436		$	140,649		$	120,215

 

8

 

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

 

		For the Three-Month Period Ended March 31,
(in thousands)		2004			2003
Property
Commercial property		$	23,594		$	25,577
Homeowners/residential property		1,788			1,755
Total		$	25,382		$	27,332
Casualty
General liability		$	41,650		$	27,317
Specialty program business		12,090			12,048
Commercial transportation		14,149			12,755
Commercial and personal umbrella		12,593			9,017
Executive products		3,667			3,297
Other		4,938			5,027
Total		$	89,087		$	69,461
Surety		$	11,429		$	12,353
Grand Total		$	125,898		$	109,146

 

9

 

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

 

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This discussion and analysis may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Various risk factors that could affect future results are listed in the Company’s filings with the Securities & Exchange Commission, including the Form 10-K for the year ended December 31, 2003.

 

OVERVIEW

 

We are a holding company that underwrites selected property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group, or the Group. The Group provides property and casualty coverages primarily for commercial risks and has accounted for approximately 90% of our consolidated revenue for the first three months of 2004 compared to 91% for the same period last year.

 

As a ‘‘niche’’ company, we offer specialty insurance products designed to meet specific insurance needs of targeted insured groups. A niche company underwrites a particular type of coverage for certain markets that are underserved by the insurance industry, such as our commercial earthquake coverage or oil and gas surety bonds. A niche company also provides a type of product not generally offered by other companies, such as our stand-alone personal umbrella policy, which we offer without the underlying auto or homeowners coverage. The excess and surplus lines market provides an alternative for customers with hard-to-place risks and risks that admitted insurers specifically refuse to write. When we underwrite within the excess and surplus lines market, we are selective in the lines of business and types of risks we choose to write. Often the development of these specialty insurance products is generated through proposals brought to us by an agent or broker seeking coverage for a specific group of clients. Once a proposal is submitted, underwriters determine whether a proposal would be a viable product in keeping with our business objectives.

 

Management measures the results of our insurance operations by monitoring certain measures of growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written and profitability is analyzed through GAAP (accounting principles generally accepted in the United States of America) combined ratios, which are further subdivided into their respective loss and expense components. The GAAP combined ratios represent the profit generated from our insurance operations.

 

The foundation of our overall business strategy is to underwrite for profit. This drives our ability to provide shareholder returns in three different ways: the underwriting profit itself, investment income from fixed-income portfolios, and long-term growth in our equity portfolio. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on generating total return.

 

10

 

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 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 products 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 exceed recorded amounts; if actual liabilities do exceed recorded amounts, there will be an adverse effect. In evaluating the objective performance measures previously mentioned, it is important to consider the following individual characteristics of each major insurance segment.

 

Our property segment primarily underwrites commercial fire, earthquake, builders’ risk, difference in conditions, other inland marine coverages and, in the state of Hawaii, select personal lines policies. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, as approximately 39% of first quarter 2004’s total property premiums were written in California. We limit our net aggregate exposure to a catastrophic event by purchasing reinsurance and through extensive use of computer-assisted modeling techniques. These techniques provide estimates of the concentration of risks exposed to catastrophic events.

 

The casualty portion of our business consists largely of general liability, transportation, multi-peril program business, commercial umbrella, personal umbrella, executive products and other specialty coverages. In addition, we provide employers indemnity and in-home business owners coverage. The casualty book of business is subject to the risk of accurately estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty line may also be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

 

The surety segment specializes in writing small to large commercial and small contract surety products, as well as those for the energy (plugging and abandonment), petrochemical and refining industries. The commercial surety products usually involve a statutory requirement for bonds. This industry has historically maintained a relatively low loss ratio. Losses may fluctuate, however, due to adverse economic conditions that may affect the financial viability of an insured. The contract surety market guarantees the construction work of a commercial contractor for a specific project. As such, this line has historically produced marginally higher loss ratios than other surety lines. Generally, losses occur due to adverse economic conditions, inclement weather conditions or the deterioration of a contractor’s financial condition.

 

11

 

Critical Accounting Policies

 

GAAP and non-GAAP Financial Performance Metrics

 

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the GAAP presentation of net income and certain statutory reporting information, we show certain non-GAAP financial measures that are valuable in managing our business, including gross revenues, gross written premiums, net written premiums and combined ratios.

 

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.

 

Gross revenues

 

This is an RLI-defined metric equaling the sum of gross premiums written, net investment income and realized gains (losses). It is used by our management as an overall gauge of gross business volume across all operating segments.

 

Gross premiums written

 

While net premiums earned is the related GAAP measure used in the statement of earnings, gross premiums written is the component of net premiums earned that measures insurance business produced before the impact of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an overall gauge of gross business volume in our insurance underwriting operations with some indication of profit potential subject to the levels of our retentions, expenses and loss costs.

 

Net premiums written

 

While net premiums earned is the related GAAP measure used in the statement of earnings, net premiums written is the component of net premiums earned that measures the difference between gross premiums written and the impact of ceding reinsurance premiums, but without respect to when those premiums will be recognized as actual revenue. We use this measure as an indication of retained or net business volume in our insurance underwriting operations. It is an indicator of future earnings potential subject to our expenses and loss costs.

 

Combined ratios

 

This ratio is a common industry measure of profitability for any underwriting operation, and is calculated in two segments. First, the expense ratio reflects the sum of policy acquisition costs and insurance operating expenses, divided by net premiums earned. The second component, the loss ratio, is losses and settlement expenses divided by net premiums earned.  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 profit or loss.

 

12

 

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

 

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, recoverability of reinsurance balances and deferred policy acquisition costs.

 

Unpaid Losses and Settlement Expenses

 

The liability for unpaid losses and settlement expenses represents estimates of amounts needed to pay reported and unreported claims and related expenses. The estimates are based on certain actuarial and other assumptions related to the ultimate cost to settle such claims. Such assumptions are subject to occasional changes due to evolving economic, social and political conditions. All estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are determined.

 

Generally, we have not experienced significant development, favorable or unfavorable, either with the liability in total or within industry segments. Additional information with respect to reserve development patterns for individual calendar year-end liabilities can be found on pages 11-14 of our 2003 Annual Report on Form 10K. Adding to the complexities inherent in the reserving process are issues related to coverage, expansion of coverage, and reinsurance program applicability.

 

We have insignificant exposure to asbestos and environmental policy liabilities, as a result of entering liability lines after the industry had already recognized it as a problem. What exposure does exist is through our commercial umbrella, general liability, and discontinued assumed reinsurance lines of business. The majority of that exposure is in the excess layers of our commercial umbrella and assumed reinsurance books of business. Although our asbestos and environmental exposure is limited, management cannot determine our ultimate liability with any reasonable degree of certainty. This ultimate liability is difficult to assess due to evolving legislation on such issues as joint and several liability, retroactive liability, and standards of cleanup. Additionally, we participate primarily in the excess layers, making it even more difficult to assess the ultimate impact.

 

Investment Valuation

 

Throughout each year, our external investment managers buy and sell securities to maximize overall investment returns in accordance with investment policies established and monitored by our board of directors and officers. This includes selling individual securities that have unrealized losses when the investment manager believes future performance can be surpassed by buying other securities deemed to offer superior long-term return potential.

 

13

 

We classify our investments in debt and equity securities with readily determinable fair values into one of three categories: held-to-maturity securities are carried at amortized cost, while both available-for-sale securities and trading securities are carried at fair value.

 

Management regularly evaluates our fixed maturity and equity securities portfolio to determine impairment losses for other-than-temporary declines in the fair value of the investments. Criteria considered during this process include, but are not limited to:     the current fair value as compared to the cost (amortized, in certain cases) of the security, degree and duration of the security’s fair value being below cost, credit ratings, current economic conditions, the anticipated speed of cost recovery, and our decisions to hold or divest a security. Impairment losses result in a reduction of the underlying investment’s cost basis. Significant changes in these factors could result in a considerable charge for impairment losses as reported in the consolidated financial statements.

 

Part of our evaluation of whether particular securities are other than temporarily impaired involves assessing whether we have both the intent and ability to continue to hold securities in an unrealized loss position. We have not sold any securities for the purpose of generating cash over the last several years to pay claims, dividends or any other expense or obligation. Accordingly, we believe that our sale activity supports our ability to continue to hold securities in an unrealized loss position until our cost may be recovered.

 

Recoverability of Reinsurance Balances

 

Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, rather than being netted with the appropriate liabilities, since reinsurance does not relieve us of our legal liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. Additionally, the same uncertainties associated with estimating unpaid losses and settlement expenses impact the estimates for the ceded portion of such liabilities. We continually monitor the financial condition of our reinsurers. Our policy is to periodically charge to earnings an estimate of unrecoverable amounts from troubled or insolvent reinsurers. Further discussion of the security of our recoverable reinsurance balances can be found in note 5 to the financial statements included in our 2003 Annual Report on Form 10-K.

 

Deferred Policy Acquisition Costs

 

We defer commissions, premium taxes and certain other costs related to the acquisition of insurance contracts. These costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This would also give effect to the premiums to be earned, related investment income, anticipated losses and settlement expenses as well as certain other costs expected to be incurred as the premium is earned. Judgments as to ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with the premiums written.

 

14

 

THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

 

Consolidated gross revenues, as displayed in the table that follows, totaled $197.7 million for the first three months of 2004 compared to $185.0 million for the same period in 2003.

 

		For the Three-Month Period Ended March 31,
Gross revenues (In thousands)		2004			2003
Gross premiums written		$	182,912		$	173,924
Net Investment income		12,315			10,660
Net realized investment gains		2,436			409
Total gross revenues		$	197,663		$	184,993

 

Gross premium writings of the Group improved 5% over 2003 levels due to growth in the casualty segment, as market conditions remained firm in general liability and umbrella.  Net investment income improved 16% to $12.3 million. This growth is attributable to increased cash flows from operations and the infusion of new capital from the December 2003 bond offering.  Additionally, the sale of certain securities during the first three months of 2004 resulted in the recognition of $2.4 million in realized gains.

 

Consolidated net revenue for the first three months of 2004 increased $20.4 million or 17% from the same period in 2003. Net premiums earned, the main driver of this measurement, jumped 15%, benefiting from increased retentions in certain product lines and the momentum gained from last year’s written premium growth in the casualty segment.

 

Net after-tax earnings for the first three months of 2004 totaled $16.9 million, $0.65 per diluted share, compared to $14.4 million, $0.56 per diluted share, for the same period in 2003.  Improved underwriting income on the casualty and surety segments, coupled with growth in investment income and increased realized investment gains, favorably impacted 2004 earnings.

 

Results for the first three months of 2004 include realized gains of $2.4 million, $0.06 per diluted share, compared to $409,000, $0.01 per diluted share for the same period last year.  Increased gains in 2004 relate primarily to the sale of certain equity securities that had reached high valuation metrics.

 

Comprehensive earnings, which include net earnings plus unrealized gains/losses net of tax, totaled $24.5 million, $0.94 per diluted share, for the first three months of 2004, compared to comprehensive earnings of $9.0 million, $0.35 per diluted share, for the same period in 2003. Unrealized gains, net of tax, for the first three months of 2004 were $7.6 million, $0.29 per diluted share, compared to unrealized losses of $5.4 million, $0.21 per diluted share, for the same period in 2003.  2003 results were negatively impacted by the volatility experienced in the equity markets.

 

15

 

RLI INSURANCE GROUP

 

As indicated earlier, gross premiums written for the Group increased to $182.9 million for the first three months of 2004, compared to $173.9 million reported for the same period in 2003.  Improved pricing and various growth initiatives in certain casualty products positively impacted gross premiums written.  Gross writings for the property segment advanced 3%, as selected opportunities were available despite a continued trend of rate softening.  The surety segment posted a 5% decline in writings, as we continue to maintain stringent underwriting standards for this segment.  Underwriting income improved to a pre-tax profit of $10.8 million for the first three months of 2004 compared to $9.7 million for the same period in 2003.  The GAAP combined ratio totaled 91.5 for the first three months of 2004, compared to 91.2 for the same period in 2003.  While up from the extraordinary 58.7 combined ratio posted in the first quarter of 2003, the property segment led the way posting an impressive 68.7 combined ratio.  On a 96.7 combined ratio, the casualty segment recorded improved earnings from last year, while the surety segment posted near breakeven results, well ahead of last year’s results.

 

		For the Three-Month Period Ended March 31,
		2004			2003
Gross premiums written (in thousands)
Property		$	49,819		$	48,159
Casualty		120,171			112,206
Surety		12,922			13,559
Total		$	182,912		$	173,924
Underwriting profits (losses) (in thousands)
Property		7,945			11,280
Casualty		2,901			185
Surety		(26		)	(1,793		)
Total		$	10,820		$	9,672
Combined ratio
Property		68.7			58.7
Casualty		96.7			99.8
Surety		100.3			114.5
Total		91.5			91.2

 

Gross premiums written for the Group’s property segment increased $1.7 million, or 3% from the same period last year.  For the first three months of 2004, gross property premiums totaled $49.8 million.  Rate softening, which began in 2003 continued during the first quarter of 2004 in our domestic fire and California earthquake business.  Increased competition and market capacity continue to drive down pricing.  While pricing in these lines declined, rates for construction business remained firm during the first quarter of 2004.

 

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Increased pricing on renewal business and new growth opportunities resulted in a $4.4 million increase in construction writings, offsetting the declines experienced in commercial fire and California earthquake.  Net premiums written and net premiums earned declined in the quarter, primarily due to the continued decline in California earthquake writings, coupled with the purchase of additional catastrophe protection and other reinsurance cessions designed to reduce our overall earthquake exposure.  Underwriting profit for the property segment was $7.9 million for the first three months of 2004, compared to $11.3 million for the same period in 2003.  The GAAP combined ratio increased to 68.7, compared to 58.7 for the same period last year.  Current year results reflect a more normal return for this segment.  The loss ratio, at 32.2, increased 8.5 points from last year’s extraordinary posting.  The builder’s risk construction product experienced some adverse development on prior losses, and two wind events in the quarter negatively impacted our Hawaii personal lines product.  The expense ratio increased to 36.5 compared to last year’s 35.0, primarily due to the decline in net premiums relative to the fixed nature of certain expenses.

 

The casualty segment posted gross premiums written of $120.2 million for the first three months of 2004, up $8.0 million, or 7%, from 2003.  Premium growth is coming from our general liability and umbrella products, where the rate environment remains favorable.  General liability writings advanced $13.6 million, while umbrella was up $3.1 million.  We remain focused on growing areas that provide the best return.  Other casualty products are seeing rates flatten and, in some instances, begin to decline, as competition has increased. The result of increased competition and an adherence to tight underwriting standards has resulted in the loss of some accounts, particularly in executive products and commercial transportation.  The casualty segment posted an underwriting profit of $2.9 million, compared to a profit of $185,000 for the same period last year. These results translate into a combined ratio of 96.7 in the first quarter of 2004 versus 99.8 for the same period in 2003.  A shift in mix of business toward products with lower loss ratios has resulted in a 2.5 point drop in the loss ratio and has accounted for the majority of this improvement.  The expense ratio declined slightly to 26.4 in 2004, compared to 27.0 in 2003.

 

The surety segment posted gross premiums written of $12.9 million for the first quarter of 2004, down 5% from 2003’s $13.6 million.  This decrease is primarily related to the continuation of tighter underwriting standards on contract surety.  We are encouraged by the significant improvement in underwriting income during the first quarter of 2004, as the segment posted near breakeven results.  Underwriting loss for the first quarter totaled $26,000, compared to a loss of $1.8 million during 2003.  2003 results were impacted by adverse loss experience on contract bonds written in 2002 and prior.  The combined ratio for the surety segment totaled 100.3 in 2004, versus 114.5 for the same period in 2003. The segment’s loss ratio was 38.7 for 2004, compared to 50.8 for 2003, reflective of the decline in claim frequency, particularly on the contract book.  The expense ratio improved to 61.6 in 2004 compared to 63.7 in 2003.

 

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We are in litigation regarding certain commercial surety bond claims arising out of a specific bond program.  We are currently investigating and evaluating our obligations due to a variety of complex coverage issues.  A detailed discussion on this litigation can be found on page 23 of our 2003 Annual Report on Form 10K.  No additional information is available as of the first quarter of 2004.

 

INVESTMENT INCOME AND REALIZED CAPITAL GAINS

 

During the first three months of 2004, net investment income increased by 15.5% over that reported for the same period in 2003.  The improvement in income is due to increased cash flow from operating and financing activities allocated to fixed-income investments. On an after-tax basis, investment income increased by 16.4%. Operating cash flows were $33.0 million in the first quarter of 2004, down from $40.8 million in the first quarter of 2003. Cash flows in excess of current needs were used to purchase fixed-income securities, which continue to be comprised primarily of high-grade, tax-exempt, corporate and U.S. government/agency issues. The average annual yields on our investments were as follows for the first quarter of 2004 and 2003.

 

Pretax yield		2004		2003
Taxable		4.75	%	5.25	%
Tax-Exempt		4.19	%	4.49	%
After-tax yield
Taxable		3.09	%	3.41	%
Tax-Exempt		3.97	%	4.25	%

 

During the first quarter of 2004, the average after-tax yield of the fixed-income portfolio decreased due to decreases in both taxable and tax-exempt yields on new purchases. The decline in yields is primarily due to fluctuations in interest rates and the subsequent reinvestment of called and matured bonds at lower yields. Despite the lower yields, the overall impact on investment income has been limited due to the continued growth in operational cash flow and the investment of the proceeds from our December 2003 debt offering. During the first quarter in 2004, we focused on purchasing high-quality investments, including corporate bonds, municipal bonds, mortgage-backed securities and asset-backed securities, primarily in the 0-15 year part of the yield curve.

 

The fixed-income portfolio increased by $32.4 million during the first quarter of 2004. This portfolio had a tax-adjusted total return on a mark-to-market basis of 2.4%. Our equity portfolio increased by $3.2 million during the first quarter of 2004, to $279.2 million. The equity portfolio had a quarterly total return of 1.8%.

 

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We maintain an equity investment in a private mortgage banking company. As of March 31, 2004, our equity investment, which consisted of common shares and warrants to acquire common shares, had a carrying value and estimated market value of $6.8 million. We recorded a loss of $128,000 in net investment income during the first three months of 2004 in accordance with Statement of Financial Accounting Standards (SFAS) 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133 requires that we recognize the change in fair value of stock warrants received with the purchase of a note receivable. This compares to income of $601,000 recognized in the first quarter of 2003. We employ a consistent valuation formula to recognize investment income or loss each quarter and to adjust the carrying value of our investment. This formula is based on the investee’s book value, the volume of mortgages originated and profitability.  Income in 2004 was negatively impacted by reduced mortgage origination volume as a result of reduced demand for refinance loans.

 

We realized a total of $2.4 million in capital gains in the first quarter of 2004, compared to capital gains of $409,000 in the first quarter of 2003. The increase in net realized gains is due in part to the timing of the sale of individual securities.

 

We regularly evaluate the quality of our investment portfolio. When we believe that a specific security has suffered an other-than-temporary decline in value, the investment’s value is adjusted by reclassifying the decline from unrealized to realized losses. This has no impact on shareholders’ equity. There were no losses associated with the other-than-temporary impairment of securities in 2003 or 2004.

 

The following table is used as part of our impairment analysis and illustrates certain industry-level measurements relative to our equity portfolio as of March 31, 2004, including market value, cost basis, and unrealized gains and losses.

 

		Cost			3/31/04			Gross Unrealized									Unrealized (1)
(dollars in thousands)		Basis			Mkt Value			Gains			Losses			Net			Gain/Loss%
Consumer Discretionary		$	9,942		$	14,759		$	4,817		$	—		$	4,817		48.5	%
Consumer Staples		16,677			37,516			20,839			—			20,839			125.0	%
Energy		7,434			16,491			9,057			—			9,057			121.8	%
Financials		11,444			40,933			29,489			—			29,489			257.7	%
Healthcare		9,283			26,129			16,959			(113		)	16,846			181.5	%
Industrials		16,950			35,551			18,601			—			18,601			109.7	%
Materials		9,180			13,785			4,605			—			4,605			50.2	%
Information Technology		9,843			14,548			4,834			(129		)	4,705			47.8	%
Telecommunications		8,878			13,871			4,993			—			4,993			56.2	%
Utilities		40,283			58,816			18,541			(8		)	18,533			46.0	%
Private Investments		6,804			6,804			—			—			—			—
		$	146,718		$	279,203		$	132,735		$	(250	)	$	132,485		90.3	%

 

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

 

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The following table is also used as part of our impairment analysis and illustrates the total value of securities that were in an unrealized loss position as of March 31, 2004. It segregates the securities based on type, noting the fair value, cost (or amortized cost), and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.

 

Investment Positions with Unrealized Losses

Segmented by Type and Period of Continuous

Unrealized Loss at March 31, 2004

 

(dollars in thousands)		0-12 Mos.			> 12 Mos.			Total
U.S Government
Fair value		$	1,830		$	0		$	1,830
Cost or Amortized Cost		1,839			0			1,839
Unrealized Loss		(9		)	(0		)	(9		)
Corporate
Fair value		$	107,156		$	0		$	107,156
Cost or Amortized Cost		108,903			0			108,903
Unrealized Loss		(1,747		)	(0		)	(1,747		)
States, political subdivisions & revenues
Fair value		$	26,853		$	0		$	26,853
Cost or Amortized Cost		27,023			0			27,023
Unrealized Loss		(170		)	(0		)	(170		)
Subtotal, debt securities
Fair value		$	135,839		$	0		$	135,839
Cost or Amortized Cost		137,765			0			137,765
Unrealized Loss		(1,926		)	(0		)	(1,926		)
Common Stock
Fair value		$	3,752		$	0		$	3,752
Cost or Amortized Cost		4,002			0			4,002
Unrealized Loss		(250		)	(0		)	(250		)
Total
Fair value		$	139,591		$	0		$	139,591
Cost or Amortized Cost		141,767			0			141,767
Unrealized Loss		(2,176		)	(0		)	(2,176		)

 

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The following table shows the fixed income securities at a loss position by Moody’s ratings.

 

(dollars in thousands)

 

Moody’s Rating		Book Value			Mkt. Value			Unrealized Loss			Percent to Total
Aaa		$	65,463		$	65,073		$	(390	)	20.2	%
Aa		13,860			13,637			(223		)	11.6	%
A		41,912			41,037			(875		)	45.4	%
Baa		16,530			16,092			(438		)	22.7	%
Ba or Lower		—			—			—			0.0	%
Total		$	137,765		$	135,839		$	(1,926	)	100	%

 

As of March 31, 2004, we held no equity or fixed income securities that individually had an unrealized loss greater than 11%.  As of March 31, 2004, we held three common stock positions that were in an unrealized loss position. The total unrealized loss on these securities was $250,000.  All securities have been in an unrealized loss position for less than six months.

 

The fixed income portfolio contained 49 positions at a loss as of March 31, 2004. All of the fixed income positions were at a loss for less than 12 months. The fixed income unrealized losses can primarily be attributed to an increase in medium and long-term interest rates since the purchase of many of these fixed income securities. After a lengthy period of downward pressure on medium and long-term interest rates, this trend started to reverse in June 2003. This upward trend in interest rates created unrealized losses for many fixed income investors. As interest rates rise, the prices of many of the fixed income securities in our portfolio will decline, generating increasing levels of unrealized losses. We continually monitor the credit quality of our fixed income investments to gauge our ability to be repaid principal and interest. We consider price declines of securities in our other-than-temporary-impairment analysis where such price declines provide evidence of declining credit quality, and we distinguish between price changes caused by credit deterioration, as opposed to rising interest rates.

 

Interest and fees on debt obligations increased to $1.7 million for the first three months of 2004, an increase of $1.5 million from the same period in 2003.  The increased expense is the result of the December 12, 2003 issuance of $100 million in senior notes at an effective rate of 6.02%.  As of March 31, 2004, outstanding debt balances totaled $147.6 million, compared to $48.2 million at March 31, 2003.  The March 31, 2004 debt balance is comprised of the $100 million in senior notes and $47.6 million in reverse repurchase agreements.  The March 31, 2003 balance of $48.2 consisted only of reverse repurchase agreements. The Company has incurred interest expense on debt at the following average interest rates for the three month periods ended March 31, 2004 and 2003:

 

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		2004		2003
Line of credit		NA		2.55	%
Reverse repurchase agreements		1.28	%	1.72	%
Total short-term debt		1.28	%	1.73	%
Senior Notes		6.02	%	NA
Total Debt		4.61	%	1.73	%

 

INCOME TAXES

 

Our effective tax rate for the first three months of 2004 was 29%, compared to 30% for the same period in 2003.  Effective rates are dependent upon components of pretax earnings and the related tax effects.  Income tax expense attributable to income from operations differed from the amounts computed by applying the U.S. federal tax rate of 35% to pretax income for the first three months of 2004 and 2003 as a result of the following:

 

		2004					2003
		Amount			%		Amount			%
Provision for income taxes at the Statutory rate of 35%		$	8,323,129		35	%	$	7,194,728		35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(1,186,964		)	(5	)%	(945,754		)	(5	)%
Dividends received deduction		(408,254		)	(2	)%	(379,080		)	(2	)%
Dividends paid deduction		(84,088		)	—		(80,969		)	—
Other items, net		193,033			1	%	331,713			2	%
Total tax expense		$	6,836,856		29	%	$	6,120,638		30	%

 

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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 changes in debt and shares outstanding.

 

While still strong, cash flows from operating activities declined in the first quarter of 2004, primarily due to increased paid loss activity and the timing of certain reinsurance payments.  We would expect full-year 2004 operating cash flow to track favorably with the prior two years.  The following table summarizes these cash flows for the three month periods ended March 31, 2004 and 2003.

 

(in thousands)		2004			2003
Cash flows from operating activities		$	33,017		$	40,774
Cash flows from investing activities		$	(30,466	)	$	(42,730	)
Cash flows from (used in) financing activities		$	(2,551	)	$	1,956
Total		$	—		$	—

 

Our largest contractual obligation relates to long-term debt outstanding. On December 12, 2003, we completed a public debt offering, issuing $100 million in senior notes maturing January 15, 2014 (a 10-year maturity), and paying interest semi-annually at the rate of 5.95%. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $98.9 million. As of March 31, 2004, we were party to seven reverse repurchase agreements (short-term debt) totaling $47.6 million. We are not party to any off-balance sheet arrangements.

 

At March 31, 2004, we had short-term investments, cash and other investments maturing within one year, of approximately $65.2 million and additional investments of $316.6 maturing within five years. We maintain a $40.0 million revolving line of credit with two financial institutions. The facility has a three-year term that expires on May 31, 2005. As of March 31, 2004, no amounts were outstanding on this facility.

 

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

 

We maintain a well-diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. As of March 31, 2004, our portfolio had a book value of $1.4 billion. Invested assets at March 31, 2004, increased by $54.1 million, or 4%, from December 31, 2003.

 

We regularly evaluate our asset allocation among stocks and bonds, and may choose to invest new cash into stocks in the future. Our fixed income portfolio consists entirely of bonds rated investment grade by Standard &

 

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Poor’s and Moody’s. As of March 31, 2004, our fixed-income portfolio had the following rating distribution:

 

AAA		61	%
AA		15	%
A		16	%
BBB		8	%
Total		100	%

 

As of March 31, 2004, the average duration of our fixed-income portfolio was 5.0 years. Our fixed-income portfolio remained well diversified, with 897 individual issues as of March 31, 2004. During the first quarter of 2004, the total return on our bond portfolio on a tax-equivalent, mark-to-market basis was 2.4%.

 

In addition, at March 31, 2004, our equity portfolio had a value of $279.2 million, all of which is classified as available-for-sale and is also a source of liquidity. The securities within the equity portfolio remain primarily invested in large-cap issues with strong dividend performance. The strategy remains one of value investing, with security selection taking precedence over market timing. A buy-and-hold strategy is used, minimizing both transactional costs and taxes.

 

As of March 31, 2004, our portfolio had a dividend yield of 2.8% compared to 1.6% 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 only 14.2% on dividends, compared to 35.0% on taxable interest income and 5.0% on municipal bond interest income. As with our bond portfolio, we maintain a well-diversified group of 107 equity securities. During the first quarter of 2004, the total return on our equity portfolio on a mark-to-market basis was 1.8%.

 

Our capital structure is comprised of equity and debt outstanding. As of March 31, 2004, our capital structure consisted of $100.0 million in 10-year maturity senior notes (long-term debt), $47.6 million in reverse repurchase debt agreements (short-term debt), and $576 million of shareholders’ equity. Debt outstanding comprised 20% of total capital as of March 31, 2004.

 

Our 111th consecutive dividend payment was declared in the first quarter of 2004 and paid on April 15, 2004, in the amount of $0.11 per share.  Since the inception of cash dividends in 1976, we have increased our annual dividend every year. In its annual “Handbook of Dividend Achievers,” Mergent FIS (formerly a division of Moody’s) ranked us 186th of more than 11,000 U.S. public companies in dividend growth over the last decade.

 

Dividend payments to us from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the regulatory authority of Illinois. The maximum dividend distribution is limited by Illinois law to the greater of 10% of RLI Insurance Company’s policyholder surplus as of December 31 of the preceding year or its net income for the 12-month period ending December 31 of the preceding year. Therefore, the maximum dividend distribution that can be paid by RLI Insurance Company during 2004 without prior approval is $54.7 million. The actual amount paid in 2003 was $5.5 million.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities whose estimated fair values are subject to market risk. The primary market risks are equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. From time to time, equity prices and interest rates fluctuate causing an effect on our investment portfolio. We have no exposure to foreign exchange risk and no direct commodity risk.

 

Our market risk exposures at March 31, 2004, have not materially changed from those identified in the our Annual Report on Form 10-K at December 31, 2003.

 

ITEM 4. Controls and Procedures

 

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

 

PART II - OTHER INFORMATION

 

Item 1.                                   Legal Proceedings – There were no changes during the quarter.

 

Item 2.                                   Change in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities – Not Applicable

 

Item 3.                                   Defaults Upon Senior Securities - Not Applicable

 

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Item 4.            Submission of Matters to a Vote of Security Holders – Not Applicable

 

Item 5.            Other Information - - Not Applicable

 

Item 6.            Exhibits and Reports on Form 8-K

 

(a)          Exhibit 31.1 Certification Pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934

 

Exhibit 31.2 Certification Pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934

 

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         On January 22, 2004, the Company filed a report on Form 8-K which furnished a copy of its press release announcing the financial results for the fourth quarter of 2003.

 

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/ Joseph E. Dondanville
	Joseph E. Dondanville
	Sr. Vice President, Chief Financial Officer
	(Duly authorized and Principal
	Financial and Accounting Officer)
Date: April 30, 2004

 

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