RLI US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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OVERVIEW

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RLI Corp. is a U.S. based, specialty insurance company that underwrites select property, casualty and surety products through three 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 2024, we achieved our 29th consecutive year of underwriting profitability. Over the 29-year period, we averaged an 88.1 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.

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On December 15, 2025, RLI Corp. effected a two-for-one split of its common stock and a proportionate increase in the number of authorized shares. All share and per share information throughout this report has been retroactively adjusted to reflect the stock split.

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We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: property, casualty and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through underwriting income and combined ratios.

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KEY PERFORMANCE MEASURES

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Following is a list of key performance measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

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Underwriting Income

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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 components are presented in the statements of earnings but are not subtotaled. However, this information is available in total and by segment in note 11 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. 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:

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​ ​ Year ended December 31,

Equity in earnings of unconsolidated investees ​ ​ 4,869 ​ ​ (9,610)

Interest expense on debt ​ ​ 6,331 ​ ​ 7,301

Net unrealized gains on equity securities ​ ​ (81,734) ​ ​ (64,787)

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Combined Ratio

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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. The loss ratio is loss and settlement expenses divided by net premiums earned. 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.

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CRITICAL ACCOUNTING POLICIES

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

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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.

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LOSSES AND SETTLEMENT EXPENSES

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Overview

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Loss and loss adjustment expense (LAE) reserves represent our best estimate of ultimate payments for losses and related settlement expenses from claims that have been reported but not paid, and those losses that have been incurred but not yet reported (IBNR) to the Company. Loss reserves do not represent an exact calculation of liability, but instead represent our estimates, generally utilizing individual claim estimates, actuarial expertise and estimation techniques at a given accounting date. The loss reserve estimates are expectations of what ultimate settlement and administration of claims will cost upon final resolution. These estimates are based on facts and circumstances then known to the Company, review of historical settlement patterns, estimates of trends in claim frequency and severity, projections of loss costs, expected interpretations of legal theories of liability and many other factors. In establishing reserves, we also consider estimated recoveries from reinsurance as well as salvage and subrogation.

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We record two categories of loss and LAE reserves: case-specific reserves and IBNR reserves. Within a reasonable period of time after a claim is reported, our claim department completes an initial investigation and establishes a case reserve. This case-specific reserve is an estimate of the ultimate amount we will have to pay for the claim, including related legal expenses and other costs associated with resolving and settling it. The estimate reflects all of the current information available regarding the claim, the informed judgment of our professional claim personnel regarding the nature and value of the specific type of claim and our reserving practices. During the life cycle of a particular claim, as more information becomes available, we may revise the estimate of the ultimate value of the claim either upward or downward. We may determine that it is appropriate to pay portions of the reserve to the claimant or related settlement expenses before final resolution of the claim. The amount of the individual case reserve will be adjusted accordingly and is based on the most recent information available.

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We establish IBNR reserves to estimate the amount we will have to pay for claims that have occurred, but have not yet been reported to the Company, claims that have been reported to the Company that may ultimately be paid out differently than reflected in our case-specific reserves and claims that have been closed but may reopen and require future payment.

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LAE represents the cost involved in adjusting and administering losses from policies we issued. The LAE reserves are frequently separated into two components: allocated and unallocated. Allocated loss adjustment expense (ALAE) reserves represent an estimate of claims settlement expenses that can be identified with a specific claim. Examples of ALAE would be the hiring of an outside adjuster to investigate a claim or an outside attorney to defend our insured. The claim adjuster typically estimates this cost separately from the loss component in the case reserve. Unallocated loss adjustment expense (ULAE) reserves represent an estimate of claims settlement expenses that cannot be identified with a specific claim. An example of ULAE would be the cost of an internal claim examiner to manage or investigate claims.

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The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claim handling procedures, claim personnel, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for loss and LAE is difficult to estimate. Loss reserve estimations also differ significantly by coverage due to differences in claim complexity, the volume of claims, the policy limits written, the terms and conditions of the underlying policies, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process. We continually refine our loss reserve estimates as historical loss experience develops and additional claims are reported and settled. We rigorously attempt to consider all significant facts and circumstances known at the time loss reserves are established.

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Following is a table of significant risk factors involved in estimating losses grouped by major product line. We distinguish between loss ratio risk and reserve estimation risk. Loss ratio risk refers to the possible dispersion of loss ratios from year to year due to inherent volatility in the business, such as high severity or aggregating exposures. Reserve estimation risk recognizes the difficulty in estimating a given year’s ultimate loss liability. As an example, our property catastrophe business (included below in commercial and other property) has significant variance in year over year results; however, its reserving estimation risk is relatively moderate.

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​ ​ ​ ​ ​ Expected loss Reserve

​ ​ Length of ​ Emergence ​ ​ ​ ratio ​ estimation

Commercial excess Long Internal Low frequency High High

​ ​ ​ ​ ​ High severity ​ ​ ​ ​

​ ​ ​ ​ ​ Loss trend volatility ​ ​ ​ ​

​ ​ ​ ​ ​ Exposure growth ​ ​ ​ ​

​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

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Personal umbrella Medium Internal Low frequency Medium Medium

​ ​ ​ ​ ​ ​ High severity ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Loss trend volatility ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Exposure growth ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

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General liability Long Internal Exposure changes/mix Medium High

​ ​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

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Professional services Medium Internal Highly varied exposures Medium Medium

​ ​ ​ ​ ​ Loss trend volatility ​ ​ ​ ​

​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

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Commercial transportation Medium Internal High severity Medium Medium

​ ​ ​ ​ ​ Exposure change/mix ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Loss trend volatility ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

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Small commercial Medium Internal Exposure change/mix Medium Medium

​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Small volume ​ ​ ​ ​

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Executive products Long Internal & external Low frequency High High

​ ​ ​ ​ ​ High severity ​ ​ ​ ​

​ ​ ​ ​ ​ Loss trend volatility ​ ​ ​ ​

​ ​ ​ ​ ​ Economic volatility ​ ​ ​ ​

​ ​ ​ ​ ​ Unforeseen tort potential ​ ​ ​ ​

​ ​ ​ ​ ​ ​ Exposure growth/mix ​ ​ ​ ​

​ ​ ​ ​ ​ Heavily reinsured ​ ​ ​ ​

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Other casualty Medium Internal & external Small volume Medium Medium

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Marine Medium Internal & external Exposure growth/mix High Medium

​ ​ ​ ​ ​ ​ Aggregation exposure ​ ​ ​ ​

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Commercial and other property Short Internal Aggregation exposure High Medium

​ ​ ​ ​ ​ Low frequency ​ ​ ​ ​

​ ​ ​ ​ ​ High severity ​ ​ ​ ​

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Surety Medium Internal Economic volatility Medium Medium

​ ​ ​ ​ ​ Unique exposures ​ ​ ​ ​

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​ ​ ​ ​ ​ ​ Mass tort/latent exposure ​ ​ ​ ​

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Due to inherent uncertainty underlying loss reserve estimates, including, but not limited to, the future settlement environment, final resolution of the estimated liability may be different from that anticipated at the reporting date. The amount by which current estimated losses differ from those estimated for a period at a prior valuation date is known as development. Development is unfavorable when the losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on unresolved claims. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on unresolved claims. We reflect favorable or unfavorable development of loss reserves in the results of operations in the period the estimates are changed.

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Our IBNR reserving process involves three steps: (1) an initial IBNR generation process that is prospective in nature, (2) a loss and LAE reserve estimation process that occurs retrospectively and (3) a subsequent discussion and reconciliation between our prospective and retrospective IBNR estimates, which includes changes in our provisions for IBNR where deemed appropriate.

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Initial IBNR Generation Process

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Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve.

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For certain property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are determined by IBNR percentages applied to premium earned. The percentages are determined based on expected loss ratios and loss development assumptions. The loss development assumptions are typically based on historical reporting patterns but could consider alternative sources of information. The IBNR percentages are reviewed and updated periodically. No deductions for paid or case reserves are made. This alternative method of determining initial IBNR allows incurred losses and ALAE to react more rapidly to the actual emergence, and is more appropriate for our property products where final claim resolution occurs over a shorter period of time.

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We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we review insured locations exposed to the event. We also consider our knowledge of frequency and severity from early claim reports and onsite reviews of damage to determine an appropriate reserve for the catastrophe. These reserves are reviewed frequently to consider actual losses reported and appropriate changes to our estimates are made to reflect the new information.

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The initial loss and ALAE ratios that are applied to earned premium are reviewed at least semi-annually. Prospective estimates are made based on historical loss experience adjusted for exposure mix, price change and loss cost trends. The initial loss and ALAE ratios also reflect our judgment as to estimation risk. We consider estimation risk by product and coverage within product, if applicable. A product with greater volatility and uncertainty has greater estimation risk. Products or coverages with higher estimation risk include, but are not limited to, the following characteristics:

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● Significant changes in underlying policy terms and conditions,

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● A new business or one experiencing significant growth and/or high turnover,

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● Longer emergence patterns with exposures to latent unforeseen mass tort,

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● High severity and/or low frequency,

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● Operational processes undergoing significant change and/or

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The historical and prospective loss and ALAE estimates, along with the risks listed, are the basis for determining our initial and subsequent carried reserves. Adjustments in the initial loss ratio by product and segment are made where necessary and reflect updated assumptions regarding loss experience, loss trends, price changes and prevailing risk factors.

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Loss and LAE Reserve Estimation Process

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Estimates of the expected value of the unpaid loss and LAE are derived using standard actuarial methodologies on a quarterly basis. In addition, an emergence analysis is completed quarterly to determine if further adjustments are necessary. These estimates are then compared to the carried loss reserves to determine the appropriateness of the current reserve balance.

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The process of estimating ultimate payment for claims and claim expenses begins with the collection and analysis of current and historical claim data. Data on individual reported claims, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics. There is judgment involved in this grouping. Considerations when grouping data include the volume of the data available, the credibility of the data available, the homogeneity of the risks in each grouping and both settlement and payment pattern consistency. We use this data to determine historical claim reporting and payment patterns, which are used in the analysis of ultimate claim liabilities. In some analyses, including businesses without sufficiently large numbers of policies or that have not accumulated sufficient historical statistics, our own data is supplemented with external or industry average data as available and when appropriate. For liabilities arising out of directors and officers, management liability and workers’ compensation, we utilize external data extensively.

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We also incorporate estimated losses relative to premium (loss ratios) by year into the analysis. The expected loss ratios are based on a review of historical loss performance, trends in frequency and severity and price level changes. The estimates are subject to judgment including consideration given to available internal and industry data, growth and policy turnover, changes in policy limits, changes in underlying policy provisions, changes in legal and regulatory interpretations of policy provisions and changes in reinsurance structure. For the most current year, these are equivalent with the ratios used in the initial IBNR generation process. Increased recognition is given to actual emergence as the years age.

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We use historical development patterns, expected loss ratios and standard actuarial methods to derive an estimate of the ultimate level of loss and LAE payments necessary to settle all the claims occurring as of the end of the evaluation period.

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Our reserve processes include multiple standard actuarial methods for determining estimates of IBNR reserves. Other supplementary methodologies are incorporated as necessary. Mass tort and latent liabilities are examples of exposures for which supplementary methodologies are used. Each method produces an estimate of ultimate loss by accident year. We review all of these various estimates and assign weights to each based on the characteristics of the product being reviewed.

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The methodologies we have chosen to incorporate are a function of data availability and are reflective of our own book of business. From time to time, we evaluate the need to add supplementary methodologies. New methods are incorporated if it is believed they improve the estimate of our ultimate loss and LAE liability. All of the actuarial methods eventually converge to the same estimate as an accident year matures. Our core methodologies are listed below with a short description and their relative strengths and weaknesses:

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Paid Loss Development — Historical payment patterns for prior claims are used to estimate future payment patterns for current claims. These patterns are applied to current payments by accident year to yield an expected ultimate loss.

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Strengths: The method reflects only the claim dollars that have been paid and is not subject to case-basis reserve changes or changes in case reserve practices.

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Weaknesses: External claims environment changes can impact the rate at which claims are settled and losses paid (e.g. increase in attorney involvement or change in legal precedent). Adjustments to reflect changes in payment patterns on a prospective basis are difficult to quantify. For losses that have occurred recently, payments can be minimal and thus early estimates are subject to significant instability.

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Incurred Loss Development — Historical case-incurred patterns (paid losses plus case reserves) for past claims are used to estimate future case-incurred amounts for current claims. These patterns are applied to current case-incurred losses by accident year to yield an expected ultimate loss.

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Strengths: Losses are reported more quickly than paid, therefore, the estimates stabilize sooner. The method reflects more information in the analysis than the paid loss development method.

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Weaknesses: Method involves additional estimation risk if significant changes to case reserving practices have occurred.

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Case Reserve Development — Patterns of historical development in reported losses relative to historical case reserves are determined. These patterns are applied to current case reserves by accident year and the result is combined with paid losses to yield an expected ultimate loss.

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Strengths: Like the incurred development method, this method benefits from using the additional information available in case reserves that is not available from paid losses only. It also can provide a more reasonable estimate than other methods when the proportion of claims still open for an accident year is unusually high or low.

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Weaknesses: It is subject to the risk of changes in case reserving practices or philosophy. It may provide unstable estimates when an accident year is immature and more of the IBNR is expected to come from unreported claims rather than development on reported claims and when accident years are very mature with infrequent case reserves.

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Expected Loss Ratio — Historical loss ratios, in combination with projections of frequency and severity trends, as well as estimates of price and exposure changes, are analyzed to produce an estimate of the expected loss ratio for each accident year. The expected loss ratio is then applied to the earned premium for each year to estimate the expected ultimate losses. The current accident year expected loss ratio is also the prospective loss and ALAE ratio used in our initial IBNR generation process.

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Strengths: Reflects an estimate independent of how losses are emerging on either a paid or a case reserve basis. This method is particularly useful in the absence of historical development patterns or where losses take a long time to emerge.

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Weaknesses: Ignores how losses are actually emerging and thus produces the same estimate of ultimate loss regardless of favorable/unfavorable emergence.

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Paid and Incurred Bornhuetter/Ferguson (BF) — This approach blends the expected loss ratio method with either the paid or incurred loss development method. In effect, the BF methods produce weighted average indications for each accident year. As an example, if the current accident year for commercial automobile liability is estimated to be 20 percent paid, then the paid loss development method would receive a weight of 20 percent and the expected loss ratio method would receive an 80 percent weight. Over time, this method will converge with the ultimate estimated by the respective loss development method.

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Strengths: Reflects actual emergence that is favorable/unfavorable, but assumes remaining emergence will continue as previously expected. Does not overreact to the early emergence (or lack of emergence) where patterns are most unstable.

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Weaknesses: Could potentially understate favorable or unfavorable development by putting weight on the expected loss ratio.

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In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations, and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods, when applied to a particular group of claims, can also change over time. Therefore, the weight given to each estimation method will likely change by accident year and with each evaluation.

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The actuarial central estimates typically follow a progression that places significant weight on the BF methods when accident years are younger and claim emergence is immature. As accident years mature and claims emerge over time, increasing weight is placed on the incurred development method, the paid development method and the case reserve development method. For product lines with faster loss emergence, the progression to greater weight on the incurred and paid development methods occurs more quickly.

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For our long and medium-tail products, the BF methods are typically given the most weight for more evaluation periods than the short-tailed lines. These methods are also predominant for the first 12 months of evaluation for short-tail lines. Beyond these time periods, our actuaries apply their professional judgment when weighting the estimates from the various methods deployed, but place significant reliance on the expected stage of development in normal circumstances.

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Judgment can supersede this natural progression if risk factors and assumptions change, or if a situation occurs that amplifies a particular strength or weakness of a methodology. Extreme projections are critically analyzed and may be adjusted, given less credence or discarded altogether. Internal documentation is maintained that records any substantial changes in methods or assumptions from one loss reserve study to another.

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Our estimates of ultimate loss and LAE reserves are subject to change as additional data emerges. This could occur as a result of change in loss development patterns, a revision in expected loss ratios, the emergence of exceptional loss activity, a change in weightings between actuarial methods, the addition of new actuarial methodologies, new information that merits inclusion or the emergence of internal variables or external factors that would alter our view.

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There is uncertainty in the estimates of ultimate losses. Significant risk factors to the reserve estimate include, but are not limited to, unforeseen or unquantifiable changes in:

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● Loss payment patterns,

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● Loss reporting patterns,

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● Frequency and severity trends,

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● Underlying policy terms and conditions,

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● Business or exposure mix,

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● Regulatory and legal environment and/or

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● Economic environment.

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Our actuaries engage in discussions with senior management, underwriters and the claim department on a regular basis to ascertain any substantial changes in operations or other assumptions that are necessary to consider in the reserving analysis.

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A considerable degree of judgment in the evaluation of all these factors is involved in the analysis of reserves. The human element in the application of judgment is unavoidable when faced with uncertainty. Different experts will choose different assumptions based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected by various qualified experts may differ significantly from each other. We consider this uncertainty by examining our historic reserve accuracy and through an internal and external review process.

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Given the substantial impact of the reserve estimates on our financial statements, we subject the reserving process to significant diagnostic testing and reasonability checks. In addition, there are data validity checks and balances in our front-end processes. Data anomalies are researched and explained to reach a comfort level with the data and results. Leading indicators such as actual versus expected emergence and other diagnostics are also incorporated into the reserving processes.

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Determination of Our Best Estimate

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Our best estimate of ultimate loss and LAE reserves are proposed by our lead reserving actuary and then discussed and approved by our Loss Reserve Committee (LRC). The LRC is made up of various members of the management team including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer, chief claim officer, chief legal officer and other selected executives. As part of the discussion with the LRC, the analysis supporting the actuarial central estimate of the IBNR reserve by product is reviewed. The actuaries also present explanations supporting any changes to the underlying assumptions used to calculate the indicated central estimate. Our actuaries make a recommendation to management in regard to booked reserves that reflect both their analytical assessment and relevant qualitative factors, such as their view of estimation risk. After discussion of these analyses, recommendations and all relevant risk factors among the LRC, our actuaries determine whether the reserve balances require further adjustment.

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As a predominantly excess and surplus lines and specialty admitted insurer serving niche markets, we believe we are subject to above-average variation in estimates and that this variation is not symmetrical around the actuarial central estimate.

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One reason for the variation is the above-average policyholder turnover and changes in the underlying mix of exposures typical of an excess and surplus lines business. This constant change can cause estimates based on prior experience to be less reliable than estimates for more stable, admitted books of business. Also, as a niche market insurer, there is little industry-level information for

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direct comparisons of current and prior experience and other reserving parameters. These unknowns create greater-than-average variation in the actuarial central estimates.

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Actuarial methods attempt to quantify future outcomes. However, insurance companies are subject to unique exposures that are difficult to foresee when coverage is initiated. Judicial and regulatory bodies involved in interpretation of insurance contracts have increasingly found opportunities to expand coverage beyond that which was intended or contemplated at the time the policy was issued. Many of these policies offer broad coverages (with named exclusion) and are issued on an occurrence basis. Claimants have at times sought coverage beyond the insurer’s original intent, including seeking to void or limit exclusionary language.

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Because of the variation and the likelihood that there are unforeseen and under-quantified liabilities absent from the actuarial estimate, we believe there are circumstances where it is prudent to enhance our normal reserving process. Generally, these are circumstances where we have qualitative information and knowledge of increased risk, but those circumstances have not occurred within the history of our quantitative data. In these situations, we will rely on that qualitative information, usually from our claim team or underwriting staff, and make an enhancement to our normal process. In general, these enhancements will result in an increased overall reserve level compared to reserves based only on observed quantitative information. In the cases where these risks fail to materialize, favorable loss development will likely occur in subsequent periods. It is also possible that the risks materialize above the enhanced reserve level, in which case unfavorable loss development will likely occur in subsequent periods.

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Our best estimate of loss and LAE reserves may change as a result of a revision in the actuarial central estimate, the actuary’s certainty in the estimates and processes and our overall view of the underlying risks. From time to time, we benchmark our reserving policies and procedures and refine them by adopting industry best practices where appropriate. A detailed, ground-up analysis of the reserve estimation risks associated with each of our products and segments, including an assessment of industry information, is performed annually. This information is used when determining management’s best estimate of booked reserves.

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We do not use discounting in reporting our estimated reserves for losses and settlement expenses.

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Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate settlement values. Periodic adjustments to these estimates will likely occur as the actual loss emergence reveals itself over time. Our loss reserving processes reflect accepted actuarial practices and our methodologies result in a reasonable provision for reserves as of December 31, 2024.

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Reserve Sensitivities

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There are three major parameters that have significant influence on our actuarial estimates of ultimate liabilities by product. They are the actual losses that are reported, the expected loss emergence pattern and the expected loss ratios used in the analyses. If the actual losses reported do not emerge as expected, it may cause the Company to challenge all or some of our previous assumptions. We may change expected loss emergence patterns, the expected loss ratios used in our analysis and/or the weights we place on a given actuarial method. The impact will be much greater and more leveraged for products with longer emergence patterns. Our general liability product is an example of a product with a relatively long emergence pattern. The following chart illustrates the sensitivity of our general liability reserve estimates to these key parameters. We believe the scenarios to be reasonable, as similar favorable variations have occurred in recent years. For example, our general liability calendar year emergence on prior accident years has ranged from 17 percent to 27 percent favorable and our transportation emergence has ranged from 30 percent adverse to 40 percent favorable over the last three calendar years, while our overall emergence for all products combined has ranged from 13 percent to 25 percent favorable. The numbers below are the changes in estimated ultimate loss and ALAE in millions of dollars as of December 31, 2024, resulting from the change in the parameters shown. These parameters were applied to a general liability net loss and LAE reserve balance, which was $209 million at December 31, 2024.

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​ Result from favorable Result from unfavorable

(in millions) ​ change in parameter ​ change in parameter

+/- 5 point change in expected loss ratio for all accident years ​ $ (18) ​ $ 18

+/- 10% change in expected emergence patterns ​ $ (5) ​ $ 6

+/- 30% change in actual loss emergence over a calendar year ​ $ (7) ​ $ 8

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There are often significant interrelationships between our reserving assumptions that have offsetting or compounding effects on the reserve estimate. Thus, in almost all cases, it is impossible to discretely measure the effect of a single assumption or construct a meaningful sensitivity expectation that holds true in all cases. The scenario above is representative of general liability, one of our

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largest and longest-tailed products. It is unlikely that all of our products would have variations as wide as illustrated in the example. It is also unlikely that all of our products would simultaneously experience favorable or unfavorable loss development in the same direction or at their extremes during a calendar year. Because our portfolio is made up of a diversified mix of products, there would ordinarily be some offsetting favorable and unfavorable emergence by product as actual losses start to emerge and our loss estimates become more reliable.

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INVESTMENT VALUATION

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Throughout each year, we and our investment managers buy and sell securities to achieve investment objectives in accordance with investment policies established and monitored by our board of directors and executive officers.

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Equity securities are carried at fair value with unrealized gains and losses recorded within net earnings. We classify our investments in fixed income securities into one of three categories: trading, held-to-maturity or available-for-sale. We do not hold any securities classified as trading or held-to-maturity. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.

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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 determine 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.

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RECOVERABILITY OF REINSURANCE BALANCES

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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 related liabilities, since reinsurance does not relieve the Company of its 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 their annual financial statements and Securities and Exchange Commission (SEC) filings for reinsurers 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. Additionally, we perform an in-depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

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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 balance recoverable from the reinsurer are specifically identified and charged to earnings in the form of an allowance for uncollectible amounts. We subject our remaining reinsurance balances receivable to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and record an additional allowance for unrecoverable amounts from reinsurers. This credit 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.

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DEFERRED POLICY ACQUISITION COSTS

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We defer incremental direct costs that relate to the successful acquisition of new or renewal insurance contracts, including commissions and premium taxes. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract, or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible 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 process contemplates the premiums to be earned, anticipated losses and settlement expenses and certain other costs expected to be incurred, but does not consider investment income. Judgments as to the ultimate recoverability of such deferred costs are reviewed on a segment basis and are highly dependent upon estimated future loss costs associated with the premiums written. This deferral methodology applies to both gross and ceded premiums and acquisition costs.

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DEFERRED TAXES

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We record deferred tax assets and liabilities to the extent that temporary differences between the tax basis and GAAP basis of an asset or liability result in future taxable or deductible amounts. Our deferred tax assets relate to expected future tax deductions arising from claim reserves and future taxable income related to changes in our unearned premium and unrealized losses on our fixed income

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portfolio. We also have a significant amount of deferred tax liabilities from unrealized gains on the equity portfolio and deferred acquisition costs.

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Periodically, management reviews our deferred tax positions to determine if it is more likely than not that the assets will be realized. These reviews include, among other things, the nature and amount of the taxable income and expense items, the expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical profitability of businesses expected to provide future earnings. Furthermore, management considers tax planning strategies it can use to increase the likelihood that the tax assets will be realized. After conducting the periodic review, if management determines that the realization of the tax asset does not meet the more likely than not criteria, an offsetting valuation allowance is recorded, thereby reducing net earnings and the deferred tax asset in that period. In addition, management must make estimates of the tax rates expected to apply in the periods in which future taxable items are realized. Such estimates include determinations and judgments as to the expected manner in which certain temporary differences, including deferred amounts related to our equity method investment, will be recovered. These estimates enter into the determination of the applicable tax rates and are subject to change based on the circumstances.

​

We consider uncertainties in income taxes and recognize those in our financial statements as required. As it relates to uncertainties in income taxes, our unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.

​

Additional discussion of other significant accounting policies may be found in note 1 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

​

RESULTS OF OPERATIONS

​

This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, incorporated herein by reference.

​

Consolidated revenue for 2024 totaled $1.8 billion, up $258 million from 2023. Net premiums earned for the Group increased 18 percent, driven primarily by growth from our property and casualty segments. Positive equity market returns during 2024 resulted in $82 million of unrealized gains on equity securities, building on a rally that led to $65 million of unrealized gains in our equity portfolio during 2023. Net investment income increased by 18 percent in 2024, primarily due to higher reinvestment rates and a larger average asset base relative to the prior year.

​

​ ​ ​ ​ ​ ​ ​

CONSOLIDATED REVENUE ​ Year ended December 31,

Net unrealized gains on equity securities ​ ​ 81,734 ​ ​ 64,787

​

Net earnings for 2024 totaled $346 million, up from $305 million in 2023. Improved underwriting income was bolstered by an increase in investment income and larger unrealized gains on equity securities.

​

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​ ​ ​ ​ ​ ​ ​

NET EARNINGS ​ Year ended December 31,

Net unrealized gains on equity securities ​ ​ 81,734 ​ ​ 64,787

Interest expense on debt ​ ​ (6,331) ​ ​ (7,301)

General corporate expenses ​ ​ (15,880) ​ ​ (15,917)

Equity in earnings of unconsolidated investees ​ ​ (4,869) ​ ​ 9,610

​

UNDERWRITING RESULTS

​

We surpassed $2 billion in gross premiums written for the first time and achieved our 29th consecutive year of underwriting profitability in 2024. Our track record of success is built on underwriting discipline and our diversified product portfolio, which allow us to navigate various markets.

​

Gross premiums written increased $206 million, or 11 percent, in 2024 when compared to 2023, with all three segments contributing. Despite competitive conditions, a relatively strong economy and positive rate movement benefited much of the insurance portfolio. Net premiums earned were up 18 percent in 2024.

​

Underwriting income was $211 million on an 86.2 combined ratio in 2024, compared to $173 million on an 86.6 combined ratio in 2023. Underwriting results for 2024 included $76 million of pretax losses from Hurricanes Beryl, Helene and Milton, as well as $30 million of other storm losses. Comparatively, 2023 included $49 million of pretax losses and $12 million of reinsurance reinstatement premium from the Hawaiian wildfires, as well as $31 million of other storm losses. Results for each period benefited from favorable development on prior years’ loss reserves, which provided additional pretax earnings of $95 million in 2024, compared to $109 million in 2023. Further discussion of reserve development can be found in note 5 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

​

The loss ratio was 48.4 in 2024, compared to 46.7 in 2023. The increase reflects higher net retained catastrophe losses in 2024, lower prior period reserve releases and the strengthening of current accident year casualty reserves, primarily on auto exposures. An offsetting loss ratio benefit was a modest improvement in the property segment’s current accident year attritional, non-catastrophe loss ratio. The expense ratio decreased to 37.8 in 2024, from 39.9 in 2023. Growth of net premiums earned allowed for improved leveraging of our expense base, despite continued investments in our people and technology, as well as higher levels of bonus and profit-sharing expense that resulted from improved operating performance.

​

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

​

A large portion of our reinsurance placements renewed on January 1, 2025. For our property treaties, the risk-adjusted rate change was down 10 percent to 20 percent, with greater decreases in the higher layers. Prepaid reinstatements were added back to the bottom half of the catastrophe tower, which reduces the net loss impact on catastrophe events. The risk-adjusted rate change for our casualty treaties was plus or minus 5 percent, depending on the underlying coverage.

​

Like most of the industry, we are closely monitoring the severity of auto losses, which adversely impacted our current and prior accident year losses in 2024. The goal of our business model has always been to underwrite for profit and our underwriters are incentivized to walk away from underpriced risks. We obtained rate increases across most of our insurance portfolio in 2024. However, we are not solely reliant on rate to pursue profitable underwriting. We utilize our in-house loss control team to encourage our commercial auto insureds to follow safe practices, work with producers to balance growth and exit classes of business or individual accounts that are driving loss severity. We have a strong feedback loop between our underwriting, claim and analytical teams that address new or prevailing topics, like legal system abuse. Overall, we remain optimistic about the potential underlying profitability of our product portfolio. Our investments in technology and specialized underwriting staff should put us in a position to take advantage of opportunities as we move forward.

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​

The following tables and narrative provide a more detailed look at individual segment performance over the last two years.

​

GROSS PREMIUMS WRITTEN AND NET PREMIUMS EARNED

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Gross Premiums Written ​ ​ Net Premiums Earned ​

CASUALTY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

PROPERTY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

SURETY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Casualty

​

Gross premiums written for casualty were up $147 million in 2024. We continued to benefit from positive rate movement across a large portion of our casualty segment, as well as from new business growth within our personal umbrella and small commercial distribution channels. The commercial excess product grew as new project work resulted in more business opportunities and renewal retention improved. Commercial transportation benefited from an increase in new business submissions and new products, including moving and storage as well as an excess and surplus lines offering. Our executive products premium decreased, largely due to a continued soft management liability marketplace.

​

The casualty segment remains highly diversified, allowing select products to work through challenges, while the success of other products allows us to achieve positive overall results. Rate filings for personal umbrella were approved in the second half of 2024, and where increases can be justified, we will be pursuing further rate increases for auto-exposed lines. With the broader industry experiencing higher loss severity trends, we see potential for ongoing market disruption. As with all our segments, our investments in underwriting talent and strong relationships with producers should put us in position to take advantage of market opportunities as they arise. However, our underwriters are incentivized and empowered to shrink our top line revenue to protect our bottom-line profitability when necessary.

​

Property

​

Gross premiums written for the property segment were up $46 million in 2024, with commercial property contributing $15 million of that growth. Property lines within the excess and surplus market are in transition and conditions began to change mid-year. Rates for wind coverages were down in the second half of the year after multiple years of double-digit rate increases. We have started to see more competition and the deterioration of terms and conditions, but are willing to forgo opportunities that do not meet our underwriting standards. The earthquake market has also been affected by intense competition and some businesses deciding not to procure coverage.

​

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We leverage our underwriting expertise by acting as a Lloyd’s coverholder and write coastal wind and earthquake exposures on a syndicated policy. While allowing us to diversify risk through a mechanism outside of reinsurance, this approach also allows us to generate fee income that offsets underwriting expense. Combined with the challenging property market, an increased percentage of premium being written by our syndicated partner resulted in a decline in earthquake and wind exposures for the Company. However, our fire and other peril coverage offerings experienced growth, resulting in overall premium expansion for commercial property. All coverages remain well priced and we believe there is opportunity to continue writing profitable business in these spaces.

​

A strong construction market and an expansion of newer offerings led to increased submissions and $21 million of premium growth for our marine product. Additionally, some competitors have reduced their appetite for select Hawaii homeowner coverages, which, along with rate increases that became effective during the fourth quarter, has allowed our other property premium to grow.

​

Surety

​

Gross premiums written for the surety segment were up $14 million in 2024 and we continue to invest in infrastructure to support long-term growth. Contract surety benefited from new agency relationships, new construction projects and elevated material costs, while transactional surety grew organically by leveraging existing relationships from complementary products. Despite a highly competitive commercial surety market, the expansion of existing accounts and new business also allowed for premium growth. Industry loss ratios have increased, particularly in the contract surety space. However, our underwriters monitor the financial condition of principals and partner with them to support achievable projects, which has helped us avoid material losses in the past. We believe this collaborative approach will help us write profitable business going forward.

​

UNDERWRITING INCOME

​

​ ​ ​ ​ ​ ​ ​

Underwriting Income ​ ​ ​ ​ ​ ​

​

​ ​ ​ ​ ​

​

Casualty

​

Underwriting income for the casualty segment was $18 million on a 97.9 combined ratio in 2024, compared to $59 million on a 92.2 combined ratio in 2023. The decline was the result of decreased favorable development on prior accident years’ reserves and an increase in current accident year losses, primarily on auto related exposures.

​

Favorable development on prior accident years’ loss reserves contributed to underwriting earnings in each of the past two years. The total benefit from favorable development on prior years’ reserves was $53 million for 2024, which was largely attributable to accident years 2019 through 2023. Favorable development was widespread, with notable amounts from commercial excess, general liability, executive products, professional services and our mortgage reinsurance program within other casualty. Commercial transportation and small commercial experienced adverse prior accident year development, largely related to auto exposures. Comparatively, results for the casualty segment in 2023 included favorable development of $78 million, with the majority attributable to commercial excess, general liability, personal umbrella, executive products and professional services across accident years 2015 through 2022. Hurricane and storm losses on casualty-oriented package policies that include property coverage resulted in $5 million of losses in 2024, compared to $2 million of storm losses in 2023.

​

The segment’s loss ratio was 61.5 in 2024, compared to 55.1 in 2023. The higher loss ratio in 2024 was due to lower amounts of favorable development on prior years’ reserves and strengthening our current accident year reserves for our personal umbrella, transportation and professional services products. The expense ratio for the casualty segment was 36.4 in 2024, compared to 37.1 in 2023.

​

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Property

​

Underwriting income from the property segment was $168 million on a 68.5 combined ratio in 2024, compared to $86 million on a 78.5 combined ratio in 2023. Underwriting results for 2024 included $33 million of favorable development on prior years’ attritional and catastrophe loss reserves, largely from the marine and commercial property businesses; $73 million of losses from Hurricanes Beryl, Helene and Milton; as well as $28 million of other storm losses. Results for 2023 included $21 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the commercial property business; $49 million of losses and $12 million of reinsurance reinstatement premium from Hawaiian wildfires; as well as $29 million of other storm losses.

​

A larger earned premium base resulted in higher levels of underwriting income as well as a lower expense ratio. The segment’s loss ratio was 37.4 in 2024, compared to 42.9 in 2023. Catastrophe losses added 19 points to the loss ratio in 2024, compared to 20 points of impact in 2023. Additionally, the current accident year attritional loss ratio improved in 2024. The expense ratio for the property segment declined to 31.1 in 2024, from 35.6 in 2023, as the growth in the earned premium base exceeded the growth in expense. Furthermore, the expense ratio benefited from an increase in fee income, which was the result of producing more premium for our syndicated partner.

​

Surety

​

Underwriting income for the surety segment totaled $25 million on an 82.2 combined ratio in 2024, compared to $27 million on a 79.6 combined ratio in 2023. Underwriting performance for each year reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. Favorable development on prior accident years’ reserves decreased loss and settlement expenses for the segment by $9 million for 2024 and 2023.

​

The segment’s loss ratio was 11.2 in 2024, compared to 10.7 in 2023. An increase in the current accident year loss ratio led to the slightly higher overall loss ratio for the segment. The expense ratio for the surety segment was 71.0 in 2024, up from 68.9 in 2023, due to increases in select policy acquisition costs, as well as continued investments in technology and people to support growth and improve the customer experience.

​

NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS

​

During 2024, net investment income increased by 18 percent. The increase was primarily due to higher interest rates and an increased asset base relative to the prior year. The average annual yields on our investments were as follows for 2024 and 2023:

​

​ ​ ​ ​ ​ ​

PRETAX YIELD ​ ​ ​ ​ ​

Taxable (on book value) 3.82 % 3.51 %

Tax-exempt (on book value) 2.87 % 2.80 %

Equities (on fair value) 1.97 % 2.27 %

​ ​ ​ ​ ​ ​

AFTER-TAX YIELD ​ ​ ​ ​ ​

Taxable (on book value) 3.02 % 2.77 %

Tax-exempt (on book value) 2.72 % 2.65 %

Equities (on fair value) 1.71 % 1.97 %

​

The after-tax yield reflects the different tax rates applicable to each category of investment. Our taxable fixed income securities were subject to a corporate tax rate of 21 percent, our tax-exempt municipal securities were subject to a tax rate of 5.3 percent and our dividend income was generally subject to a tax rate of 13.1 percent. During 2024, the average after-tax yield on the taxable fixed income portfolio was 3.0 percent, an increase from 2.8 percent in the prior year. The average after-tax yield on the tax-exempt portfolio was 2.7 percent for both 2024 and 2023.

​

The fixed income portfolio increased by $320 million during the year, as we allocated the majority of available cash flow to investment grade bonds and experienced positive market performance throughout the year. The tax-adjusted total return on a mark-to-market basis was 3.4 percent. Our equity portfolio increased by $146 million to $736 million in 2024 as a result of strong equity market returns during the year. The total return for the year on the equity portfolio was 21.1 percent.

​

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Our investment results for the last five years are shown in the following table:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ Tax

​ ​ ​ ​ ​ ​ ​ ​ ​ Pre-tax Equivalent

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Annualized ​ Annualized

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in ​ Return on ​ Return on

​ ​ Average ​ Net ​ ​ ​ ​ Unrealized ​ Avg. ​ Avg.

​ ​ Invested ​ Investment ​ Net Realized ​ Appreciation ​ Invested ​ Invested

(in thousands) Assets (1) Income (2)(3) Gains (3)(4) (3)(5) Assets Assets

(2) Investment income, net of investment expenses.

(3) Before income taxes.

(5) Relates to available-for-sale fixed income and equity securities.

​

In 2024, we recognized $31 million of net realized gains in the equity portfolio, $5 million of net realized losses in the fixed income portfolio and $6 million of other net realized losses. In 2023, we recognized $22 million of net realized gains in the equity portfolio, $3 million of net realized losses in the fixed income portfolio and $14 million of other net realized gains, primarily from the payout of the working capital escrow associated with our sale of Maui Jim.

​

Investment income was aided by higher interest rates in 2024, as the Federal Reserve kept the Fed Funds target high relative to recent history. Entering 2025, consensus is the Federal Reserve’s current policy will continue balancing price stability against maximum employment, and result in two to three rate cuts over the coming year. A stable interest rate environment and a larger invested asset base should offer continued investment income growth. However, if yields decline dramatically from current levels, investment income growth may be limited.

​

INVESTMENTS

​

We maintain a diversified investment portfolio with a prudent mix of fixed income and risk assets. We continually monitor economic conditions, our capital position, the insurance market and relative value in the capital markets to determine our tactical allocation. As of December 31, 2024, the portfolio had a fair value of $4.1 billion, an increase of $408 million from the end of 2023. Excluding U.S. government and agency issues, no single issuer in either the fixed income or equity portfolio represented more than 1 percent of invested assets.

​

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. For additional information, see notes 1 and 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

​

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As of December 31, 2024, our investment portfolio had the following asset allocation breakdown:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Cost or ​ ​ ​ ​ Unrealized ​ % of Total ​ ​

(in thousands) Amortized Cost Fair Value Gain/(Loss) Fair Value Quality*

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

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

​

Quality in the previous table and in all subsequent tables is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio.

​

In selecting the maturity of securities in which we invest, we consider the relationship between the duration of our fixed income investments and the duration of our liabilities, including the expected ultimate payout patterns of our reserves. We believe that both liquidity and interest rate risk can be minimized by such asset/liability management. As of December 31, 2024, our fixed income portfolio’s duration was 4.9 years.

​

Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk asset classes. Equities comprised 18 percent of our total 2024 portfolio, up from 16 percent at the end of 2023, as equity markets rose over the course of the year. 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 extended investment horizon.

​

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FIXED INCOME PORTFOLIO

​

As of December 31, 2024, our fixed income portfolio had the following rating distributions:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

FAIR VALUE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Below ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment ​ ​ ​ ​ ​ ​

(in thousands) AAA AA A BBB Grade No Rating Fair Value

Bonds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Structured: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

GSE - RMBS ​ ​ — ​ ​ 356,956 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 356,956

GSE - CMBS ​ ​ — ​ ​ 39,267 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 39,267

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Mortgage-Backed, Asset-Backed and Commercial Mortgage-Backed Securities

​

We believe mortgage-backed securities (MBS), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) add diversification, liquidity, credit quality and additional yield to our portfolio. The following table summarizes the distribution of our MBS portfolio by investment type, as of December 31:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(in thousands) Amortized Cost Fair Value % of Total

2024 ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

2023 ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Agency MBS represented 12 percent of the fixed income portfolio, compared to 15 percent as of December 31, 2023. Our objective for the agency MBS portfolio is to provide reasonable cash flow stability where we are compensated for the call risk associated with residential mortgage refinancing. The agency MBS portfolio includes mortgage-backed pass-through securities and collateralized mortgage obligations (CMO), which include planned amortization classes and sequential pay structures. As of December 31, 2024, all the securities in our agency MBS portfolio were rated AA and issued by Government Sponsored Enterprises (GSEs) such as the Governmental National Mortgage Association, Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.

​

Variability in the average life of principal repayment is an inherent risk of owning mortgage-related securities. However, we reduce our portfolio’s exposure to prepayment risk by seeking characteristics that tighten the probable scenarios for expected cash

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flows. As of December 31, 2024, the agency MBS portfolio contained 68 percent of pure pass-throughs, up from 65 percent as of December 31, 2023. An additional 10 percent of the MBS portfolio was invested in sequential payer, down from 13 percent in 2023.

​

The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of December 31:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Amortized ​ ​ ​ ​ ​ ​

(in thousands) Cost Fair Value % of Total

2024 ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

2023 ​ ​ ​ ​ ​ ​ ​ ​ ​

​

An ABS, CMBS or non-agency residential mortgage-backed security (RMBS) is a securitization collateralized by the cash flows from a specific pool of underlying assets. These asset pools can include items such as credit card payments, auto loans, structured bank loans in the form of collateralized loan obligations (CLOs) and residential or commercial mortgages. As of December 31, 2024, ABS/CMBS/RMBS investments were 13 percent of the fixed income portfolio, compared to 10 percent as of December 31, 2023. Fifty-five percent of the securities in the ABS/CMBS/RMBS portfolio were rated AAA as of December 31, 2024, while 85 percent were rated A or better. We believe that ABS/CMBS investments often add superior cash flow stability over mortgage pass-throughs or CMOs.

​

When making investments in MBS/ABS/CMBS, we evaluate the quality of the underlying collateral, the structure of the transaction, which dictates how any losses in the underlying collateral will be distributed, and prepayment risks. We had $63 million in unrealized losses in these asset classes as of December 31, 2024.

​

Municipal Fixed Income Securities

​

As of December 31, 2024, municipal bonds comprised 14 percent of our fixed income portfolio, compared to 19 percent as of December 31, 2023. We believe municipal fixed income securities can provide diversification and additional tax-advantaged yield to our portfolio. Our objective for the municipal fixed income portfolio is to provide reasonable cash flow stability and increased after-tax yield.

​

Our municipal fixed income portfolio is comprised of general obligation (GO) and revenue securities. The revenue sources include sectors such as sewer and water, public improvement, school, transportation and colleges and universities. As of December 31, 2024, approximately 50 percent of the municipal fixed income securities in the investment portfolio were GO and the remaining 50 percent were revenue based. The municipal portfolio is diversified amongst 282 issues.

​

Ninety-three percent of our municipal fixed income securities were rated AA or better, while 99 percent were rated A or better. The municipal portfolio includes 66 percent taxable and 34 percent tax-exempt securities.

​

Corporate Debt Securities

​

As of December 31, 2024, our corporate debt portfolio comprised 42 percent of the fixed income portfolio, compared to 43 percent as of December 31, 2023. The corporate allocation includes floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio. Non-investment grade bonds totaled $148 million while non-rated Regulation D securities totaled $90 million at the end of 2024. While these Regulation D securities are not rated by a traditional nationally recognized statistical rating organization, all but one carry an equivalent investment-grade rating from

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the Securities Valuation Office of the NAIC. The corporate debt portfolio has an overall quality rating of A- diversified among 954 issues.

​

The table below illustrates our corporate debt exposure as of December 31, 2024. Private placements include bank loan and Regulation D securities.

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Amortized ​ ​ ​ ​ ​ ​

(in thousands) Cost Fair Value % of Total

Bonds: ​ ​ ​ ​ ​ ​ ​ ​ ​

Corporate industrial - private placements ​ ​ 40,474 ​ ​ 38,532 ​ 2.8 %

Corporate financial - private placements ​ ​ 50,635 ​ ​ 48,497 ​ 3.6 %

Corporate utilities - private placements ​ ​ 2,526 ​ ​ 2,501 ​ 0.2 %

​

We believe corporate debt investments add diversification and additional yield to our portfolio.

​

EQUITY SECURITIES

​

As of December 31, 2024, our equity portfolio comprised 18 percent of the investment portfolio, up from 16 percent at the end of the previous year. The securities within the equity portfolio are well diversified and are primarily invested in broad index ETFs that represent market indexes similar to the Russell 3000 Index, Russell 1000 Index and S&P 500 Index. The ETF portfolio is congruent with the actively managed equity portfolios and solves for exposures that line up with our overall benchmark index, the Russell 3000. In total, the equity portfolio is comprised of 89 securities.

​

INTEREST AND GENERAL CORPORATE EXPENSE

​

We incurred $6 million of interest expense on outstanding debt during 2024 and $7 million in 2023. At December 31, 2024, our debt included $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). The borrowing may be repaid at any time and carries an adjustable interest rate of 5.98 percent as of the end of 2024. Additionally, we borrowed $50 million from the Federal Home Loan Bank of Chicago (FHLBC) that matures on November 12, 2025 and pays interest monthly at an annualized rate of 4.44 percent. Comparatively, at December 31, 2023, our debt consisted of $50 million from our revolving line of credit with PNC and carried a floating interest rate of 7.07 percent, as well as $50 million of borrowings from the FHLBC that matured on November 10, 2024 and paid interest monthly at an annualized rate of 5.44 percent.

​

We incurred $16 million of general corporate expense during 2024 and 2023. General corporate expenses include director and shareholder relation costs and other compensation-related expenses incurred for the benefit of the corporation.

​

INVESTEE EARNINGS

​

As of December 31, 2024, we had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services, Inc. (Prime). Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and surplus lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. As a private company, the market for Prime’s stock is limited. While we have certain rights under our shareholder agreement and maintain a position on Prime’s board of directors, we are subject to the decisions of the controlling shareholder, which may impact the value of our investment. In 2024, we recorded $5 million in investee losses for Prime, compared to $10 million of investee earnings in 2023. The loss in 2024 is reflective of Prime strengthening loss reserves on a number of prior accident years. Additionally, we maintain a quota share reinsurance treaty with Prime, which contributed $9 million of gross premiums written and $8 million of net premiums earned during 2024, compared to $7 million of gross premiums written and $13 million of net premiums earned during 2023. The decrease in premiums earned is attributable to a reduction of our participation in the quota share reinsurance treaty, as well as the competitive market in which Prime operates.

​

We received dividends of $3 million from Prime in 2024, while no dividends were received from Prime in 2023. Dividends from our equity method investees have been irregular in nature, and while they provide added liquidity when received, we do not rely on those dividends to meet our liquidity needs.

​

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INCOME TAXES

​

Our effective tax rates were 19.1 percent and 19.3 percent for 2024 and 2023, respectively. Effective rates are dependent upon components of pretax earnings, which is impacted by the volatility of unrealized gains and losses in equity securities, and the related tax effects. The effective rate was slightly lower in 2024 due to higher levels of tax-favored adjustments, such as excess tax benefits on share-based compensation.

​

Dividends paid to our ESOP result in a tax deduction. Dividends paid to the ESOP in 2024 and 2023 resulted in tax benefits of $3 million and $2 million, respectively. These tax benefits reduced the effective tax rate for 2024 and 2023 by 0.6 percent and 0.4 percent, respectively.

​

NET UNPAID LOSSES AND SETTLEMENT EXPENSES

​

The primary liability on our balance sheet relates to unpaid losses and settlement expenses, which represents our estimated liability for losses and related settlement expenses before considering offsetting reinsurance balances recoverable. The largest asset on our balance sheet, outside of investments, is the reinsurance balances recoverable on unpaid losses and settlement expenses, which serves to offset this liability. The liability can be split into two parts: (1) case reserves representing estimates of losses and settlement expenses on known claims and (2) IBNR reserves representing estimates of losses and settlement expenses on claims that have occurred but have not yet been reported to the Company. Our gross liability for both case and IBNR reserves is reduced by reinsurance balances recoverable on unpaid losses and settlement expenses to calculate our net reserve balance. This net reserve balance increased to $1.9 billion at December 31, 2024, from $1.7 billion as of December 31, 2023. This reflects net incurred losses of $739 million in 2024 offset by paid losses of $490 million, compared to net incurred losses of $604 million offset by $491 million paid in 2023. For more information on the changes in loss and LAE reserves by segment, see note 5 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data.

​

Gross reserves (liability) and the reinsurance balances recoverable (asset) are generally subject to the same influences that affect net reserves, though changes to our reinsurance agreements can cause reinsurance balances recoverable to behave differently. Total gross loss and LAE reserves increased to $2.7 billion at December 31, 2024, from $2.4 billion at December 31, 2023, while ceded loss and LAE reserves decreased to $755 million from $757 million over the same period.

​

LIQUIDITY AND CAPITAL RESOURCES

​

OVERVIEW

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We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) investing cash flows related to the purchase, sale and maturity of investments and (3) financing cash flows that impact our capital structure, such as changes in debt, issuance of common stock and dividend payments. The following table summarizes these three cash flows over the last two years:

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Net cash provided by operating activities ​ $ 560,219 ​ $ 464,257

Net cash used in investing activities ​ ​ (318,870) ​ ​ (211,803)

Net cash used in financing activities ​ ​ (237,983) ​ ​ (238,848)

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We have posted positive operating cash flow in the last two years. Variations in operating cash flow between periods are largely driven by the volume and timing of premium receipt, claim payments, reinsurance and taxes. In addition, fluctuations in insurance operating expenses impact operating cash flow. During 2024, the majority of cash outflows were associated with the net purchase of fixed income securities, classified as investing activities, and the payment of our regular quarterly dividends and $2.00 per share special dividend, classified as financing activities.

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We have entered into certain contractual obligations that require the Company to make recurring payments. The following table summarizes our contractual obligations as of December 31, 2024:

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​ ​ Payments due by period ​ ​ ​

(in thousands) Less than 1 year 1-3 years 3-5 years More than 5 years Total

Interest on debt ​ ​ 2,242 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,242

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Loss and settlement expense reserves represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by periods are based on our historical claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on unpaid loss and settlement reserves are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge the Company of its liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $755 million at December 31, 2024, compared to $757 million in 2023.

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The next largest contractual obligation relates to debt outstanding. On September 15, 2023, we accessed $50 million from our revolving line of credit with PNC Bank, N.A. (PNC). As the borrowing may be repaid at any time and carries an adjustable interest rate of 5.98 percent as of the end of 2024, interest on this $50 million borrowing is excluded from the table above. Additionally, on November 12, 2024 we borrowed $50 million from the FHLBC. The borrowing matures on November 12, 2025 and monthly interest is paid at an annualized rate of 4.44 percent. We are not party to any off-balance sheet arrangements. See note 3 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data for more information on our debt. Additionally, see note 2 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data for information on our obligations for other invested assets.

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At December 31, 2024, we had cash, short-term investments and other investments maturing within one year of approximately $372 million and an additional $739 million of investments maturing between 1 to 5 years. Our revolving line of credit with PNC permits us to borrow up to an aggregate principal amount of $100 million, but may be increased up to an aggregate principal amount of $130 million under certain conditions. The facility has a three-year term that expires on May 29, 2026. As of December 31, 2024, $50 million was outstanding on this facility. Additionally, based on qualifying assets and the $50 million borrowing outstanding with the FHLBC as of year-end, additional immediate borrowing capacity from the FHBLC is approximately $15 million. However, under certain circumstances, that capacity may be increased based on additional FHLBC stock purchased and available collateral. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing.

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Our primary objective in managing our capital is to preserve and grow shareholders’ equity and statutory surplus to improve our competitive position and allow for expansion of our insurance operations. Our insurance subsidiaries must maintain certain minimum capital levels in order to meet the requirements of the states in which we are regulated. Our insurance companies are also evaluated by rating agencies that assign financial strength ratings that measure our ability to meet our obligations to policyholders over an extended period of time.

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We have historically grown our total capital as a result of three sources of funds: (1) earnings on underwriting and investing activities, (2) appreciation in the value of our investments and (3) the issuance of common stock and debt. 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 have consistently generated positive operating cash flow. The primary factor in our ability to generate positive operating cash flow is underwriting profitability, which we have achieved for 29 consecutive years.

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OPERATING ACTIVITIES

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The following list highlights some of the major sources and uses of cash flow from operating activities:

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Sources Uses

Premiums received Claims

Loss payments from reinsurers Ceded premium to reinsurers

Investment income (interest and dividends) Commissions paid

Funds held Operating expenses

​ Interest expense