RLI reports third quarter earnings

RLI Corp. (NYSE: RLI) – RLI Corp. reported third quarter 2008 operating earnings of $24.3 million ($1.12 per share), versus $59.1 million ($2.46 per share) for the comparable period last year. For the nine months ended September 30, 2008, operating earnings were $80.8 million ($3.69 per share), compared to $128.7 million ($5.28 per share) for the same period last year.

Highlights for the quarter included:

• Combined ratio of 88.3.
• Book value per share of $33.57.
• Net operating cash flow of $40.2 million.
• Favorable development from prior years’ loss reserves of $21.9 million pretax ($0.66 per share), net of bonus and profit-sharing related expenses.
• Net losses from both Hurricanes Gustav and Ike of approximately $21.2 million pretax ($0.64 per share), net of bonus and profit-sharing related expenses.
• Net losses on invested securities of $24.2 million pretax, primarily from impaired securities in the financial sector.

"RLI is in a strong position in spite of the ongoing financial market turmoil,” said RLI President & CEO Jonathan E. Michael. "In these unstable times, our customers seek assurance in terms of financial stability. RLI’s solid balance sheet is the encouragement they’re looking for.

"Our financial base remains rock solid. To our policyholders, that means our ability to pay claims is secure. To our producers, that means we are ready for the growth opportunities that today’s instability creates. And to our shareholders, that means we can remain committed to prioritizing profitable results over market share.”

Please refer to following sections for the quarterly and year-to-date impact of specific items and a discussion of the use of non-GAAP financial measures.

Third quarter underwriting results

RLI achieved $15.2 million of underwriting income in the third quarter of 2008 on an 88.3 combined ratio, compared to $66.4 million of underwriting income on a 50.6 combined ratio in the same quarter for 2007.

RLI reported year-to-date underwriting income of $59.0 million representing an 85.2 combined ratio versus the $131.1 million underwriting income representing a 68.0 combined ratio for the same period last year.

Other income

For the quarter, investment income was $19.8 million, 2.9% less than the same period last year due to a declining interest rate environment. For the nine month period ended September 30, 2008, investment income was $58.7 million, up 0.4% over the same period last year.

The investment portfolio’s total return for the quarter was -2.1%; the bond portfolio was -0.7% and the equity portfolio was -8.3%. Through nine months, the investment portfolio’s total return was -2.7% with the bond portfolio returning 0.7% and equities returning -16.4%. Our investment returns compare favorably to the leading market indices, including the U.S. Lehman Aggregate, 0.6% return year to date, and the S&P 500, -19.3% return year to date.

RLI recorded $24.2 million of realized losses on the investment portfolio during the quarter, primarily from impaired securities in the financial sector. The majority of our realized losses relate to our preferred stock portfolio which was heavily weighted in the financial sector.

Equity in earnings of unconsolidated investee, Maui Jim, Inc. (Maui Jim), declined by 88%, to $0.2 million. During the quarter, Maui Jim was affected by the increasing value of the dollar, resulting in currency losses which negatively impacted earnings. Also during the quarter, we received a $4.0 million dividend from Maui Jim, which resulted in a $1.1 million after-tax gain ($0.05 per share).

Supplemental disclosure regarding the earnings impact of specific items

Other news

During the quarter, the company was named as one of the insurance industry's top performing companies by the Ward's Top 50 list. RLI is one of only five property and casualty insurers to have been recognized for excellence among 3,000 property and casualty insurers for 18 straight years - since the list's inception.

In the third quarter of 2008, we repurchased 42,600 of our shares at an average cost of $54.26 ($2.3 million). As of September 30, 2008, we have $37.8 million of remaining capacity from the $200 million repurchase program approved in 2007. Late in the quarter, the company temporarily suspended the repurchase program in response to the developing financial market turmoil.

The company will pay a third quarter cash dividend of $0.25 per share on October 15, 2008. RLI’s cumulative dividends, including this recent payment, are more than $172 million paid in 129 consecutive quarterly dividends. The company’s dividend yield would be 1.9%, based on the $1.00 annualized dividend and today’s closing stock price of $52.68.

At 10 a.m. CDT tomorrow, October 15, 2008, RLI management will hold a conference call to discuss quarterly results with insurance industry analysts. Interested parties may listen to the discussion through the Internet at RLI’s website, www.rlicorp.com.

Underwriting income, operating earnings, earnings per share (EPS) from operations and other per share items are non-GAAP financial measures, and we believe that investors’ understanding of RLI’s core operating performance is enhanced by our disclosure of these financial measures. Underwriting income or profit represents 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 premium earned. Operating earnings and EPS from operations consist of our net earnings adjusted by net realized investment gains (losses) and their related taxes. Our definitions of these items may not be comparable to the definitions used by other companies. Net earnings and net earnings per share are the GAAP financial measures that are most directly comparable to operating earnings and EPS from operations. All earnings per share data are calculated using fully diluted shares. Combined ratio refers to a GAAP combined ratio.

S&P 500 returns provided by Standard and Poor’s. U.S. Lehman Aggregate returns provided by Barclays Capital Inc.

Except for historical information, this news release may include forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) including, without limitation, statements reflecting our current expectations about the future performance of our company or our business segments or about future market conditions. These statements are subject to certain risk factors that could cause actual results to differ materially. Various risk factors that could affect future results are listed in the company's filings with the Securities and Exchange Commission, including the Form 10-K Annual Report for the year ended December 31, 2007.

RLI, a specialty insurance company, offers a diversified portfolio of property and casualty coverages and surety bonds serving "niche" or underserved markets. RLI operates in all 50 states from office locations across the country. The company's talented associates have delivered underwriting profits in 27 of the last 31 years, including the last 12. RLI's insurance subsidiaries – RLI Insurance Company, Mt. Hawley Insurance Company and RLI Indemnity Company – are rated A+ "Superior" by A.M. Best Company and A+ "Strong" by Standard & Poor's.

For additional information, contact Treasurer John Robison at (309) 693-5846 or at john.robison@rlicorp.com or visit our website at www.rlicorp.com.