SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2013

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

A. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2012 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2013 and the results of operations of RLI Corp. and Subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements, and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

INTANGIBLE ASSETS

D. INTANGIBLE ASSETS

In accordance with GAAP guidelines, 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 earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangibles totaled $75.1 million at September 30, 2013. These assets relate to acquisition activity including our recent acquisitions of Contractors Bonding and Insurance Company (CBIC) and Rockbridge Underwriting Agency (Rockbridge).

Goodwill resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Goodwill and intangible assets resulting from the CBIC acquisition in April 2011 totaled $32.6 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $8.8 million. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2013. Based upon these reviews, none of the assets were impaired. In addition, as of September 30, 2013, there were no triggering events that occurred that would suggest an updated review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $3.4 million, net of amortization, as of September 30, 2013.

The remaining $16.3 million of goodwill and intangibles relates to our purchase of Rockbridge in November 2012. Goodwill attributable to our casualty segment totaled $12.4 million. Definite-lived intangible assets totaled $3.9 million, net of amortization, as of September 30, 2013. Our initial annual impairment testing on this goodwill will be performed in the fourth quarter of 2013. As of September 30, 2013, there were no triggering events that occurred that would suggest an interim review was necessary. See note 6 to the unaudited condensed consolidated interim financial statements for further discussion.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.4 million for the third quarter of 2013, and $1.0 million for the nine months ended September 30, 2013.

EARNINGS PER SHARE

E. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Period					For the Three-Month Period
	Ended September 30, 2013					Ended September 30, 2012
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	37,647	21,422	$	1.76	$	25,463	21,218	$	1.20
Effect of Dilutive Securities
Stock options	—		351			—		268
Diluted EPS
Income available to common shareholders	$	37,647	21,773	$	1.73	$	25,463	21,486	$	1.19

	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30, 2013					Ended September 30, 2012
(in thousands, except	Income		Shares	Per Share		Income		Shares	Per Share
per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	92,396	21,337	$	4.33	$	78,249	21,207	$	3.69
Effect of Dilutive Securities
Stock options	—		328			—		312
Diluted EPS
Income available to common shareholders	$	92,396	21,665	$	4.26	$	78,249	21,519	$	3.64

COMPREHENSIVE EARNINGS

F. COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used a 35 percent tax rate. The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Periods Ended September 30,					For the Nine-Month Periods Ended September 30,
(in thousands)	2013			2012		2013			2012
Unrealized Gains/Losses on Available-for-Sale Securities
Beginning balance	$	127,242		133,991		$	143,170		117,325
Other comprehensive earnings before reclassifications	5,203			25,127		(5,354		)	50,066
Amounts reclassified from accumulated other comprehensive earnings	(7,149		)	(4,080	)	(12,520		)	(12,353	)
Net current-period other comprehensive earnings	$	(1,946	)	21,047		$	(17,874	)	37,713
Ending balance	$	125,296		155,038		$	125,296		155,038

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other Comprehensive Earnings
(in thousands) Component of Accumulated	For the Three-Month Periods Ended September 30,					For the Nine-Month Periods Ended September 30,					Affected line item in the
Other Comprehensive Earnings	2013			2012		2013			2012		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	10,998		6,278		$	19,261		20,161		Net realized investment gains
	—			—		—			(1,156	)	Other-than-temporary impairment (OTTI) losses on investments
	10,998			6,278		19,261			19,005		Earnings before income taxes
	(3,849		)	(2,198	)	(6,741		)	(6,652	)	Income tax expense
	$	7,149		4,080		$	12,520		12,353		Net earnings