UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended June 30, 1997
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------- ---------------
Commission File Number: 0-6612
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RLI Corp.
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(Exact name of registrant as specified in its charter)
ILLINOIS 37-0889946
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9025 North Lindbergh Drive, Peoria, IL 61615
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(Address of principal executive offices) (Zip Code)
(309) 692-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 8, 1997 the number of shares outstanding of the registrant's
Common Stock was 9,394,655.
Page 1 of 16<PAGE>
PART I
Item 1. Financial Statements
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings
(Unaudited)
For the Three-Month Period
Ended June 30,
1997 1996
(Restated)
----------- -----------
Net premiums earned $35,974,352 $32,390,263
Net investment income 5,999,346 6,091,854
Net realized investment gains(losses) 1,734,460 ( 36,190)
----------- -----------
43,708,158 38,445,927
----------- -----------
Losses and settlement expenses 15,650,578 16,907,372
Policy acquisition costs 10,931,140 7,505,677
Insurance operating expenses 4,762,090 3,862,271
Interest expense on debt 690,532 690,570
General corporate expenses 964,240 853,523
----------- -----------
32,998,580 29,819,413
----------- -----------
Equity in earnings of
unconsolidated investee 296,783 235,723
----------- -----------
Earnings before income taxes 11,006,361 8,862,237
Income tax expense 3,022,692 2,481,575
----------- -----------
Net earnings $ 7,983,669 $6,380,662
============ =============
Net earnings per share:
Primary $1.05 $0.80
Fully diluted $0.90 $0.71
Weighted average number of
common shares outstanding
Primary 7,625,456 7,935,776
Fully diluted 9,394,687 9,705,007
Cash dividends declared per common share $0.15 $0.14
The accompanying notes are an integral part of the financial statements.
2<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statement Of Earnings (Continued)
(Unaudited)
For the Six-Month Period
Ended June 30,
1997 1996
(Restated)
----------- -----------
Net premiums earned $69,039,987 $64,557,241
Net investment income 12,020,897 11,819,299
Net realized investment gains 2,294,484 105,120
----------- -----------
83,355,368 76,481,660
----------- -----------
Losses and settlement expenses 31,353,740 34,938,024
Policy acquisition costs 20,894,159 15,507,006
Insurance operating expenses 8,546,493 7,198,226
Interest expense on debt 1,381,084 1,411,914
General corporate expenses 1,844,709 1,588,565
----------- -----------
64,020,185 60,643,735
----------- -----------
Equity in earnings of
unconsolidated investee 540,456 360,411
----------- -----------
Earnings before income taxes 19,875,639 16,198,336
Income tax expense 5,336,185 4,301,777
----------- -----------
Net earnings $14,539,454 $11,896,559
============ =============
Net earnings per share:
Primary $1.90 $1.50
Fully diluted $1.64 $1.32
Weighted average number of
common shares outstanding
Primary 7,661,884 7,921,316
Fully diluted 9,431,115 9,690,547
Cash dividends declared per common share $0.29 $0.27
The accompanying notes are an integral part of the financial statements.
3<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Balance Sheet
June 30, December 31,
ASSETS 1997 1996
Investments ------------ -------------
Fixed maturities (Unaudited)
Held-to-maturity, at amortized cost $271,852,314 $263,282,430
Trading, at fair value 9,341,423 0
Available-for-sale, at fair value 35,871,552 44,904,303
Equity securities, at fair value 220,430,101 188,935,360
Short-term investments, at cost which
approximates fair value 13,641,393 40,823,967
----------- -------------
Total investments 551,136,783 537,946,060
Cash 0 0
Accrued investment income 5,921,377 5,835,885
Premiums and reinsurance balances receivable 56,229,272 37,166,516
Ceded unearned premiums 50,499,192 53,705,078
Reinsurance balances recoverable on unpaid losses 165,048,161 165,017,149
Deferred policy acquisition costs 24,484,881 16,663,603
Property and equipment 12,154,354 12,126,552
Investment in unconsolidated investee 13,205,265 8,970,691
Other assets 11,953,805 8,042,250
----------- ------------
TOTAL ASSETS $890,633,090 $845,473,784
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and settlement expenses $408,986,876 $405,801,220
Unearned premiums 135,435,750 129,781,639
Reinsurance balances payable 27,132,237 23,699,837
Long-term debt:
Convertible debentures 46,000,000 46,000,000
Income taxes-current 3,096,541 2,134,692
Income taxes-deferred 29,430,287 17,170,687
Other liabilities 16,484,617 20,846,348
----------- ------------
TOTAL LIABILITIES 666,566,308 645,434,423
----------- ------------
Shareholders' Equity:
Common stock ($1 par value, authorized
50,000,000 shares, issued 8,453,499 shares
at 12/31/96 and 8,453,724 shares at 6/30/97) 8,453,724 8,453,449
Other shareholders' equity 228,440,402 197,464,904
Less: Treasury shares at cost
(631,719 shares at 12/31/96)
(828,268 shares at 6/30/97) (12,827,344) (5,878,992)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 224,066,782 200,039,361
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $890,633,090 $845,473,784
============ ============
The accompanying notes are an integral part of the financial statements.
4<PAGE>
RLI Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six-Month Period
Ended June 30,
--------------------------
1997 1996
(Restated)
------------ ------------
Net cash used in operating activities ($ 5,983,352) ($ 5,054,319)
------------ ------------
Cash Flows from Investing Activities
Investments purchased (42,608,387) (18,247,840)
Investments sold 9,926,806 4,683,628
Investments called or matured 21,701,592 10,200,000
Net decrease in
short-term investments 27,182,573 9,134,602
Net property and equipment purchased ( 1,296,163) ( 1,434,402)
------------ ------------
Net cash from investing activities 14,906,421 4,335,988
------------ ------------
Cash Flows from Financing Activities
Cash dividends paid (2,211,382) ( 2,142,799)
Payments on debt 0 ( 2,800,000)
Change in contributed capital 236,665 1,615,396
Treasury shares reissued 0 538,789
Treasury shares purchased (6,948,352) 0
------------ ------------
Net cash (used in)
financing activities (8,923,069) ( 2,788,614)
------------ ------------
Net increase (decrease) in cash 0 ( 3,506,945)
------------ ------------
Cash at the beginning of the year 0 3,506,945
------------ ------------
Cash as of June 30 $ 0 $ 0
============ ============
The accompanying notes are an integral part of the financial statements.
5<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The financial information is
prepared in conformity with generally accepted accounting principles and
such principles are applied on a basis consistent with those reflected in
the 1996 annual report filed with the Securities and Exchange Commission.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not
express an opinion thereon. The condensed consolidated balance sheet as
of December 31, 1996 has been derived from, and does not include all the
disclosures contained in the audited consolidated financial statements for
the year ended December 31, 1996.
The information furnished includes all adjustments and normal recurring
accrual adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. Results of
operations for the six month periods ended June 30, 1997 and 1996 are not
necessarily indicative of the results of a full year.
Primary earnings per share are computed using the weighted average number
of shares of common stock outstanding during the period.
Fully diluted earnings per share calculations are based on the weighted
average number of shares of common stock outstanding for the period,
assuming full conversion of all Convertible Debentures into common stock.
Net earnings are adjusted for purposes of this calculation to eliminate
interest and amortization of debt issuance costs on the Convertible
Debentures net of related taxes. When the conversion of Convertible
Debentures increases the earnings per share or reduces the loss per share,
the effect on earnings is antidilutive. Under these circumstances, the
fully diluted net earnings or net loss per share is computed assuming no
conversion of the Convertible Debentures.
As previously reported in RLI Corp.'s Form 10-K filed for the period ended
December 31, 1996, on December 1, 1996, RLI Vision Corp., the Company's
wholly-owned optical goods distributor, merged with Hester Enterprises,
Inc., the manufacturer of Maui Jim sunglasses. The Company retained a 34%
minority interest in the combined entity, renamed Maui Jim, Inc. The
Company accounted for this merger as a non-monetary exchange of ownership
interests with no gain or loss recognized.
As a result of the merger, the Company has presented its minority interest
in Maui Jim, Inc. under the equity method of accounting beginning December
1, 1996. Additionally, for comparative purposes, the Company has restated
prior period financial information to present its 100% ownership in RLI
Vision Corp. under the equity method. This restatement is a change in
presentation only and has no impact on earnings. In January 1997, the
Company paid $3,694,119 for an additional 10% ownership interest in Maui
Jim, Inc., bringing the Company's total minority interest in Maui Jim,
Inc. to 44%.
The accompanying financial data should be read in conjunction with the
notes to the financial statements contained in the 1996 10-K Annual
Report.
6<PAGE>
2. INDUSTRY SEGMENT INFORMATION - Selected information by industry segment
for the six months ended June 30, 1997 and 1996 is presented below.
SEGMENT DATA - (in thousands) EARNINGS
(LOSS)
BEFORE
REV. TAXES ASSETS
1997 ------- -------- ------
RLI Insurance Group $ 69,040 $ 8,246 $849,128
Net investment income 12,021 12,021
Net realized investment gains 2,294 2,294
General corporate & interest expense -- (3,226) 41,505
Equity in earnings of unconsolidated
investee -- 540
-------- --------- --------
Consolidated $ 83,355 $ 19,875 $890,633
======== ========= ========
1996
RLI Insurance Group $ 64,557 $ 6,914 $800,548
Net investment income 11,819 11,819
Net realized investment gains 105 105
General corporate & interest expense -- (3,000) 22,495
Equity in earnings of unconsolidated
investee -- 360
-------- --------- --------
Consolidated $ 76,481 $ 16,198 $823,043
======== ========= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This discussion and analysis may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 which are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected.
OVERVIEW
RLI Corp. (the Company) is a holding company that, through its subsidiaries,
underwrites selected property and casualty insurance products.
The most significant operation is RLI Insurance Group (the Group), which
provides specialty property and casualty coverages for primarily commercial
risks. The Group accounted for 83% of the Company's total revenue for the six
months ended June 30, 1997.
7<PAGE>
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS
ENDED JUNE 30, 1996
Consolidated gross sales, which consist of gross premiums written, net
investment income and realized investment gains (losses) totaled $160.9
million for the first six months of 1997, up 7.5% from the same period in
1996. This increase was the result of a 6.4% increase in gross sales of the
insurance group, as detailed in the discussion of RLI Insurance Group that
follows. Net investment income grew, as well, posting a 1.7% improvement over
1996 levels. Consolidated revenue increased $6.9 million, or 9.0%, from the
same period in 1996. Net premiums earned for the first six months of 1997
were up $4.5 million, or 6.9%, compared to the same period in 1996, as surety
writings showed marked improvement. Additionally, realized investment gains
were $2.2 million higher than 1996. The sale of certain equity securities and
real estate during the first six months of 1997 accounted for this increase.
The net after-tax earnings for the first six months of 1997 totaled $14.5
million, $1.90 per share, compared to $11.9 million, $1.50 per share, for the
same period in 1996. The increase in net earnings is attributable to
continued strong property underwriting results and increased net investment
income and investment gains.
RLI INSURANCE GROUP
Gross premiums written for the first six months of 1997 totaled $146.6
million, compared to $137.8 million reported for the same period in 1996.
Property premiums increased to $78.8 million for the first six months of 1997
compared to $70.5 million for the same period in 1996. The addition of the
Hawaiian Homeowners business in March of 1997 fueled this growth. As part of
the purchase agreement with the Hawaii Property Insurance Association, RLI
Insurance Group assumed $10.7 million in written premium. Since March, an
additional $2.3 million in premium has been assumed and $1.4 million has been
written directly by the Group, for total premium writings of $14.4 million
from this book as of June 30, 1997. It is anticipated that the Hawaiian book
will provide an additional $10.0 to $12.0 million in gross written premium on
an annual basis. The Company's surety book also posted substantial growth in
the first half of 1997. Direct writings for surety improved to $12.4 million
versus $3.1 million for the same period in 1996. This increase is primarily
the result of the implementation of two new contract surety programs in the
second quarter of 1996. The increased writings on the property and surety
books were partially offset by declines in the Company's casualty book. Gross
written premium on the casualty book declined $8.8 million to $55.4 million
when compared to the same period in 1996. General Liability, Employers
Indemnity, and Directors and Officers Liability accounted for $5.4, $1.8 and
$1.4 million, respectively, of this decline, as continued less favorable
pricing and soft market conditions have resulted in the non-renewal of certain
accounts which cannot be underwritten profitably.
Net premiums written for the first six months of 1997 increased $10.1 million,
or 14.9%, from the same period in 1996. Of this increase, $10.8 million was
related to the property book. Net property writings increased $14.0 million
with the addition of the Hawaiian Homeowners business. This increase,
however, was offset by a $3.9 million decrease in Difference-In-Conditions net
8<PAGE>
writings. This decline was primarily due to the change in booking ceded
premium from a written premium basis to an earned premium basis on California
Excess of Loss treaties in 1996. Ceded premiums and unearned premiums were
adjusted proportionally downward causing net premiums to be higher in 1996
compared to 1997. The Company's surety book posted net premium written of
$6.9 million, a $4.5 million improvement over the same period in 1996. The
improvements experienced in property and surety, however, were offset by a
$5.2 million decline in net casualty writings related to the unfavorable
pricing and market conditions as mentioned previously.
Net premiums earned of $69.0 million in the first half of 1997 represents a
6.9% increase from the same period in 1996. Earned premiums associated with
the Hawaiian Homeowners business caused property to improve $4.5 million over
first half 1996 levels. With the addition of the two new programs, as
mentioned previously, the surety book improved, as well, posting a $3.1
million increase over 1996 levels. Earned premiums on the casualty book,
however, declined by $3.2 million due to the decline in writings as mentioned
previously.
The Group's pretax earnings totaled $8.2 million for the first six months of
1997 compared to pretax earnings of $6.9 million for the same period in 1996.
The property book contributed to this improvement posting $9.3 million in
pretax earnings in 1997 compared to $8.5 million for the first half of 1996.
1996 property earnings were reduced by $2.2 million, or $.18 per share, due to
winter storm losses on the east coast. For the first quarter of 1997,
however, only $300,000, or $.03 per share, were reported from eastern winter
storm losses. Surety showed improvement, as well, reporting a pretax profit
of $278,000 compared to a pretax loss of $365,000 for the same period in 1996.
This translates into surety's second consecutive quarter of operating profits
and is directly in line with the original business plan for this division.
The improvement experienced in property and surety was partially offset by a
decline in earnings on the casualty book. Casualty posted a pretax loss of
$1.3 million for the first half of 1997 compared to a pretax loss of $1.2
million for the same period in 1996.
The GAAP combined ratio through the first six months of 1997 was 88.0 compared
to 89.3 for the same period in 1996. The loss ratio decreased from 54.1 for
the first half of 1996 to 45.4 in the first half of 1997. This decrease was
mainly the result of the improved property and casualty loss ratios. The
property book reported a loss ratio of 19.2 for the first half of 1997
compared to 25.0 for the same period in 1996. The decline in losses reported
from eastern winter storms, as mentioned previously, was the primary driver of
this improvement. The casualty book reported a loss ratio of 69.7 in 1997
compared to 73.2 in 1996. The higher loss ratio in 1996 was the result of
$2.2 million in General Liability reserve strengthening on the 1994 through
1996 accident years. The Company's expense ratio increased from 35.2 for the
first half of 1996 to 42.6 for the first half of 1997. This increase was
primarily related to commissions associated with the acquisition of the
Hawaiian Homeowners business. The $13.0 million in assumed premium on the
Hawaiian book was purchased at a commission rate of 65.4. New business,
directly written by the Company, however, will carry a commission rate between
17% and 20%. These two items contributed to the increase in property's
expense ratio from 39.8 in the first half of 1996 to 48.4 in the first half of
1997. The casualty book, as well, showed an increase in expense ratio from
9<PAGE>
29.9 in 1996 to 34.0 in 1997. Despite only a $533,000 increase in total
expense between periods, the $3.2 million decline in earned premiums in 1997
compared to 1996 contributed to the increase in casualty's expense ratio. The
surety book, however, posted a significant improvement in expense ratio,
decreasing from 93.8 in 1996 to 72.7 in 1997. The tremendous growth in surety
earned premiums, as discussed previously, coupled with expense control
measures, contributed to this improvement.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $12.0 million during the first six months of 1997, an increase of 1.7% over
that reported for the same period in 1996. This increase is the result of a
higher invested asset base for the six months ended June 30, 1997 compared to
the same period in 1996.
Invested assets at June 30, 1997 increased by $13.2 million, or 2.5%, from
December 31, 1996. Short-term investments, however, declined by $27.2 million
from December 31, 1996 due primarily to the funding of reinsurance obligations
and other operating needs. In addition, the Company recognized realized
investment gains of $2.3 million in the first six months of 1997 compared to
$105,000 in the first six months of 1996. Capital gains have increased over
1996 levels due to the sale of real estate and certain equity securities.
Capital gains associated with sale of real estate amounted to $775,000. The
remaining gains related to the sale of certain equity securities deemed to
have reached their full potential.
The Company's fixed income portfolio consisted entirely of securities rated A
or better and 98% were rated AA or better. The year-to-date yields on the
Company's fixed income investments for the six month periods ended June 30,
1997 and 1996 have remained relatively flat and are as follows:
1997 1996
---- ----
Taxable 6.92% 6.94%
Non-taxable 5.03% 5.00%
The Company's available-for-sale portfolio of debt and equity securities had
net unrealized gains before tax of $28.3 million in the first six months of
1997 compared to net unrealized gains before tax of $9.0 million for the same
period in 1996. During the second quarter of 1997, the stock market rallied
from the correction experienced in March of 1997. This rally resulted in the
Company recording $26.1 million in net unrealized gains before tax for the
three months ended June 30, 1997. Unrealized appreciation on securities, net
of tax is reflected in a separate component of shareholders' equity. The
Company's net unrealized gain before tax was $105.9 million and $77.5 million
at June 30, 1997 and December 31, 1996, respectively.
Interest expense on debt obligations remained flat at $1.4 million for the
first six months of 1997 and 1996.
10<PAGE>
INCOME TAXES
The Company's effective tax rate for the first six months of 1997 and 1996 was
27%. Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. federal tax rate of 35% to pretax
income for the first six months of 1997 and 1996 as a result of the following:
1997 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 6,956,474 35% $ 5,669,418 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 891,015) ( 4%) ( 750,458) ( 4%)
Dividends received deduction ( 661,571) ( 3%) ( 592,993) ( 4%)
Dividends paid deduction ( 119,497) ( 1%) ( 128,844) ( 1%)
Other items, net 51,794 -- 104,654 1%
---------- ---- ---------- ----
Total tax expense $ 5,336,185 27% $ 4,301,777 27%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the primary sources of the Company's liquidity have been funds
generated from insurance premiums and investment income (operating activities)
and maturing investments (investing activities). In addition, the Company has
occasionally received proceeds from financing activities such as the sale of
common stock to the employee stock ownership plan, sale of convertible
debentures, and small, short-term borrowings.
During the first half of 1997, the Company repurchased 196,549 of its
outstanding shares at a cost of $6.9 million. These treasury shares are
reflected as a separate component of equity.
On June 20, 1997, the Company announced that it was calling for redemption all
of its outstanding 6% convertible debentures that were to mature July 15,
2003. The $46.0 million bond issue was to be redeemed for cash on July 22,
1997 at 103% of its principal amount, plus accrued interest. Holders of the
debenture had the option to convert, at any time prior to the close of
business on July 21, 1997, the debentures at an exchange rate of 38.4615
shares of RLI common stock for each $1,000 principal amount of convertible
debt ($26.00 per share conversion price). On July 24, 1997, the Company
announced that the entire $46.0 million had been converted into RLI common
stock. This conversion created an additional 1,769,199 new shares of RLI
common stock.
At June 30, 1997 the Company had short-term investments, cash and other
investments maturing within one year, of approximately $31.6 million and
additional investments of $122.7 million maturing within five years. The
Company maintains three sources of credit from two financial institutions: one
$10.0 million secured and committed line of credit that cannot be canceled
during its annual term; a $30.0 million secured line of credit that cannot be
canceled during its annual term; and a $3.0 million secured line of credit
11<PAGE>
available for the issuance of letters of credit. All lines were unused at
June 30, 1997.
Management believes that cash generated by operations, cash generated by
investments and cash available from financing activities will provide
sufficient sources of liquidity to meet its anticipated needs over the next
twelve to twenty-four months.
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS
ENDED JUNE 30, 1996
Consolidated gross sales, totaled $84.0 million for the second quarter of
1997, up 4.5% from the same period in 1996. This increase was the result of a
2.6% increase in gross sales of the insurance group, as well as a $1.8 million
increase in realized capital gains. Consolidated revenue for the second
quarter of 1997 increased $7.2 million, or 13.7%, from the same period in
1996. Net premiums earned in the second quarter of 1997 were up 11.1%
compared to 1996, as surety writings showed marked improvement, and the
Hawaiian homeowner's book provided additional earned premium.
The net after-tax earnings for the second quarter of 1997 totaled $8.0
million, $1.05 per share, compared to $6.4 million, $.80 per share, for the
same period in 1996. The increase in net earnings is attributable to
continued strong property and surety underwriting results and increased net
investment gains.
RLI INSURANCE GROUP
Gross premiums written in the second quarter of 1997 totaled $76.3 million,
compared to $74.4 million reported for the same period in 1996. Property
premiums remained flat at $39.8 million for the second quarter of 1997 and
1996. Hawaiian Homeowners business added $3.7 million in written premium.
This increase, however, was offset by modest declines in both Difference-In-
Condition and Property-Fire. The Company's surety book posted substantial
growth in the second quarter of 1997. Direct writings for surety improved to
$7.5 million compared to $2.1 million for the same period in 1996. The
Company's casualty book, however, posted a $3.4 million decline in writings,
as soft market conditions have resulted in the non-renewal of certain accounts
which cannot be underwritten profitably.
Net premiums written for the second quarter of 1997 increased $7.0 million or
20.6% from the same period in 1996. Of this increase, $6.4 million was
related to the property book. Net property writings increased $3.4 million
with the addition of the Hawaiian Homeowners business. The Company's surety
book posted net premium written of $4.1 million, a $2.5 million improvement
over the same period in 1996. The improvements experienced in property and
surety, however, were offset by a $1.9 million decline in net casualty
writings related to the less favorable pricing and market conditions mentioned
previously.
Net premiums earned of $36.0 million in the second quarter of 1997 represents
a $3.6 million, or 11.0%, increase over the same period in 1996. Earned
12<PAGE>
premiums associated with the Hawaiian Homeowners business caused property to
improve $3.4 million over second quarter 1996 levels. The surety book
improved, as well, posting a $1.9 million increase over 1996 levels. Earned
premiums on the casualty book, however, declined by $1.7 million due to the
decline in writings mentioned previously.
The Group's pretax earnings totaled $4.6 million for the second quarter of
1997 compared to pretax earnings of $4.1 million for the same period in 1996.
The GAAP combined ratio for the second quarter of 1997 was 87.1 compared to
87.3 for the same period in 1996. The loss ratio decreased from 52.2 for the
second quarter of 1996 to 43.5 in the second quarter of 1997. The casualty
book accounted for the majority of this improvement as the loss ratio declined
to 68.8 in second quarter 1997 compared to 77.6 for the same period in 1996.
Second quarter 1996 included $2.2 million in General Liability reserve
strengthening. The Company's expense ratio increased from 35.1 for the second
quarter of 1996 to 43.6 for the second quarter of 1997. This increase was
primarily related to commissions associated with the acquisition of the
Hawaiian Homeowners business. These commissions contributed to the increase
in property's expense ratio from 38.4 in the second quarter of 1996 to 47.7 in
the second quarter of 1997. The casualty book, as well, showed an increase in
expense ratio from 30.5 in 1996 to 35.7 in 1997. Despite only a $390,000
increase in total expense between periods, the $1.7 million decline in earned
premiums in 1997 compared to 1996 contributed to the increase in the expense
ratio. The surety book, however, posted a significant improvement in expense
ratio, decreasing from 89.8 in 1996 to 70.9 in 1997. The tremendous growth in
surety earned premiums, as discussed previously, coupled with expense control
measures, contributed to this improvement.
INVESTMENT INCOME
The Company's investment portfolio generated net dividends and interest income
of $6.0 million during the second quarter of 1997, compared to $6.1 million
reported for the same period in 1996. Second quarter 1996 included a
$300,000, one-time, increase to investment income from the booking of interest
income on funds held. Net of this one-time adjustment, investment income
tracks favorably in 1997 compared to 1996.
In addition, the Company recognized realized investment gains of $1.7 million
in the second quarter of 1997 compared to a realized loss of $36,000 in the
second quarter of 1996. Second quarter 1997 included the sale of real estate
and certain equity securities, as discussed previously.
13<PAGE>
INCOME TAXES
The Company's effective tax rate for the second quarter of 1997 and 1996 was
27% and 28%, respectively. Income tax expense attributable to income from
operations differed from the amounts computed by applying the U.S. federal tax
rate of 35% to pretax income for the first three months of 1997 and 1996 as a
result of the following:
1997 1996
Amount % Amount %
------ --- ------ ---
Provision for income taxes at
the statutory rate of 35% $ 3,852,226 35% $ 3,102,147 35%
Increase (reduction) in taxes
resulting from:
Tax exempt interest income ( 447,978) ( 4%) ( 370,244) ( 4%)
Dividends received deduction ( 329,798) ( 3%) ( 293,844) ( 3%)
Dividends paid deduction ( 56,819) ( 1%) ( 64,676) ( 1%)
Other items, net 5,061 -- 108,192 1%
---------- ---- ---------- ----
Total tax expense $ 3,022,692 27% $ 2,481,575 28%
14<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Change in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 1997, at the Company's Annual Meeting of Shareholders, the following
members were elected to the Board of Directors:
Bernard J. Daenzer Jonathan E. Michael
Richard J. Haayen Edward F. Sutkowski
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
1. Amendment to the Articles of 5,905,473 707,122 38,736
Incorporation to authorize a new class
of preferred stock.
2. Amendment to the Articles of 6,503,291 125,716 22,324
Incorporation to reqiure affirmative
vote of at least a majority of the
outstanding shares entitled to vote
on subsequent amendments to the Articles.
3. Approve the Market Value Potential 6,654,695 548,138 72,959
Performance Incentive Plan.
4. Approve the Stock Option Plan for 5,471,215 1,523,274 281,303
Outside Directors.
5. Ratify the action of the Board of 7,110,409 145,350 20,033
Directors appointing KPMG Peat
Marwick LLP as independent public
accountants for 1997.
15<PAGE>
PART II - OTHER INFORMATION (Continued)
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3.1 Amended Articles of Incorporation
Exhibit 3.2 By-Laws
Exhibit 10.1 Market Value Potential Performance Incentive Plan
Exhibit 10.6 RLI Corp. Director's Option Plan
(b) The Company did not file any reports on Form 8-K during the six
months ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RLI Corp.
/s/Joseph E. Dondanville
Joseph E. Dondanville
Vice President, Chief Financial Officer
(Duly authorized and Principal
Financial and Accounting Officer)
Date: August 8, 1997
16<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FIANACIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS IN THE RLI CORP. FORM 10Q FOR THE PERIOD
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 42,213
<DEBT-CARRYING-VALUE> 271,852
<DEBT-MARKET-VALUE> 273,591
<EQUITIES> 220,430
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 551,137
<CASH> 0
<RECOVER-REINSURE> 56,229
<DEFERRED-ACQUISITION> 24,485
<TOTAL-ASSETS> 890,633
<POLICY-LOSSES> 243,939
<UNEARNED-PREMIUMS> 135,436
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 46,000
0
0
<COMMON> 8,454
<OTHER-SE> 228,440
<TOTAL-LIABILITY-AND-EQUITY> 890,633
69,040
<INVESTMENT-INCOME> 12,021
<INVESTMENT-GAINS> 2,294
<OTHER-INCOME> 540
<BENEFITS> 31,354
<UNDERWRITING-AMORTIZATION> 20,894
<UNDERWRITING-OTHER> 8,546
<INCOME-PRETAX> 19,876
<INCOME-TAX> 5,336
<INCOME-CONTINUING> 14,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,540
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.64
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
Amended and Restated
Articles of Incorporation
ARTICLE ONE
Corporate Name: Illinois RLI Corp. filed May 4, 1993;
Articles of Merger filed May 6, 1993
wherein name was changed to RLI Corp.
ARTICLE TWO
Registered Agent: Camille J. Hensey
Registered Office: 9025 North Lindbergh Drive
Peoria, Illinois 61615
Peoria County
ARTICLE THREE
Purpose or purposes for which the corporation is organized:
To do any and all acts and things for which corporations may be incorporated
under The Business Corporation Act of 1983 of the State of Illinois.
ARTICLE FOUR
Paragraph 1: Authorized Shares, Issued Shares and Paid-in Capital:
Par Value # of Shares # of Shares Paid-in
Class per Share Authorized Issued Capital
Common $1.00 50,000,000 8,453,449 $40,394,042
Preferred $0.01 5,000,000 -0- $ 0.00
Paragraph 2: The preferences, qualifications, limitations, restrictions and
special or relative rights in respect of the shares of each class are:
DENIAL OF CUMULATIVE VOTING RIGHTS: No holder of any class or series of
shares of this corporation shall have cumulative voting rights with respect to
any matter voted upon by the holders of such shares.
The Common Stock shall rank junior to the Preferred Stock in right of payment
of dividends and upon liquidation and shall be subject to all of the rights,
powers, privileges and preferences of the Preferred Stock in any resolution or
resolutions adopted by the Board of Directors pursuant to authority vested in
it by the provisions of this Article Four.
<PAGE>
The Preferred Stock may be issued from time to time in one or more series.
All shares of Preferred Stock shall be of equal rank and shall be identical,
except in respect of the matters that may be fixed by the Corporation's
Directors as hereinafter provided, and each share of each series shall be
identical with all other shares of such series, except that in the case of
series on which dividends are cumulative the dates from which dividends are
cumulative may vary to reflect differences in the date of issue. Subject to
the provisions of this resolution, which provisions shall apply to all
Preferred Stock, the Directors hereby are authorized to cause such shares to
be issued in one or more series and with respect to each such series prior to
the issuance thereof to fix:
a) The designation of the series which may be by distinguishing number,
letter and/or title.
b) The number of shares of the series, which number the Directors may (except
where otherwise provided in the creation of series) increase or decrease (but
not below the number of shares thereof then outstanding).
c) The dividend rate of the series.
d) The dates at which dividends, if declared, shall be payable, whether such
dividends shall be cumulative or noncumulative, and, if cumulative, the dates
from which dividends shall be cumulative.
e) The redemption rights and price or prices, if any, for shares of the
series.
f) The terms and amount of any sinking fund provided for the purchase or
redemption of shares of the series.
g) The amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
Corporation.
h) Whether the shares of the series shall be convertible into shares of any
other class or series of the Corporation, and, if so, the specification of
such other class or series, the conversion price or prices, any adjustments
thereof, the date or dates as of which such shares shall be convertible, and
other terms and conditions upon which such conversion may be made.
i) Restrictions on the issuance of shares of the same series or of any other
class or series.
j) The limitation or denial of voting rights, or the grant of special voting
rights, if any.
The Corporation's Directors are authorized to adopt from time to time
resolutions pursuant to these Amended Articles of Incorporation fixing, with
respect to each such series, the matters described in clauses (a) to (j),
inclusive, of this section.
<PAGE>
ARTICLE FIVE
STAGGERED DIRECTOR TERMS: In accordance with the provisions of Section
8.10(e) Number, Election and Resignation of Directors, of the Business
Corporation Act of 1983, the Board of Directors of the Corporation shall
consist of nine members. The members of the Board of Directors shall be
divided into three equal classes. The term of office of directors of the
first class shall expire at the first annual meeting of shareholders after
their election, that of the second class shall expire at the second annual
meeting of shareholders after their election, and that of the third class
shall expire at the third annual meeting of shareholders after their election.
At each annual meeting, the number of directors equal to the number of the
class whose terms expire at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting of the shareholders.
REMOVAL OF DIRECTORS: In accordance with the provisions of Section 8.35(a)(4)
Removal of Directors of the Business Corporation Act of 1983, a director of
this Corporation may be removed only for cause.
MERGER: MAJORITY SHAREHOLDER VOTE REQUIRED: In accordance with the
provisions of Section 11.20 Approval by Shareholders, of the Business
Corporation Act of 1983, any plan of merger, consolidation or exchange shall
be approved upon receiving the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote on the issue.
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE:
(a) This corporation shall indemnify any person who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, if such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which he or she reasonably believed to be in or not opposed to the best
interests of the corporation or with respect to any criminal action or
proceeding, that the person had reasonable cause to believe that his or her
conduct was unlawful.
<PAGE>
(b) This corporation shall indemnify any person who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit, if
such person acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to the best interests of the corporation, provided
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his or her duty to the corporation, unless
and only to the extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability,
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of this
corporation has been successful, on the merits or otherwise, in the defense of
any action, suit or proceeding referred to in subsections (a) and (b), or in
defense of any claim, issue or matter therein, such person shall be
indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b), unless ordered by a
court, shall be made by the corporation only as authorized in the specific
case, upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in subsections (a) or (b). Such
determination shall be made (1) by the board of directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (2) if such quorum is not obtainable or, even if obtainable,
if a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the shareholders.
(e) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding, as authorized by the board of directors in
the specific case, upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount, unless it shall
ultimately be determined that he or she is entitled to be indemnified by the
corporation as authorized in this section.
(f) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his or her official capacity and
as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee or agent,
and shall inure to the benefit of the heirs, executors and administrators of
such a person.<PAGE>
(g) This corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation
or who is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
section.
(h) If the corporation has paid indemnity or has advanced expenses to a
director, officer, employee or agent, the corporation shall report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders meeting.
(i) For purposes of this section, references to "the corporation" or "this
corporation" shall include, in addition to the surviving corporation, any
merging corporation (including any corporation having merged with a merging
corporation) absorbed in a merger which, if its separate existence had
continued, would have had the power and authority to indemnify its directors,
officers and employees or agents, so that any person who was a director,
officer, employee or agent of such merging corporation, or was serving at the
request of such merging corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprises, shall stand in the same position under the provisions of this
section with respect to the surviving corporation as such person would have
with respect to such merging corporation if its separate existence had
continued.
(j) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries. A person who acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" as referred to in
this section.
Amendment to Articles of Incorporation: In accordance with the provision of
Section 10.20(d), Amendment by Directors and Shareholders, of the Illinois
Business Corporation Act of 1983, any amendment to the Articles of
Incorporation required by the Illinois Business Corporation Act of 1983 shall
be approved upon receiving the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote on the amendment and not
less than a majority of the outstanding shares of each class or series of
shares entitled to vote as a class on the amendment.
_______________________________________________________
Amended By-Laws of RLI Corp.
_______________________________________________________
<PAGE>
Table of Contents
ARTICLE I: Offices. . . . . . . . . . . . . . 1
1.1 Registered Office.. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Offices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II: Meetings of Shareholders . . . . . . . . . 1
2.1 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Place of Meetings.. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Shareholder List. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 Proxies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.8 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9 Voting of Certain Shares. . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 Action Without Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III: Directors. . . . . . . . . . . . . 5
3.1 Number and Election.. . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Resignations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Removal.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Management of Affairs of Corporation. . . . . . . . . . . . . . . . . . 6
3.6 Dividends and Reserves. . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.9 Notice of Special Meetings. . . . . . . . . . . . . . . . . . . . . . . 7
3.10 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.11 Presumption of Assent.. . . . . . . . . . . . . . . . . . . . . . . . . 7
3.12 Action Without Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.13 Presiding Officer.. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.14 Executive Committee.. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.15 Other Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.16 Quorum and Manner of Acting - Committees. . . . . . . . . . . . . . . . 9
3.17 Committee Chairman, Books and Records.. . . . . . . . . . . . . . . . . 9
3.18 Fees and Compensation of Directors.. . . . . . . . . . . . . . . . . . 9
3.19 Reliance Upon Records.. . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV: Notices. . . . . . . . . . . . . . 10
4.1 Manner of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE V: Officers. . . . . . . . . . . . . . 10
5.1 Office and Official Positions.. . . . . . . . . . . . . . . . . . . . . 11
5.2 Election and Term of Office.. . . . . . . . . . . . . . . . . . . . . . 11
5.3 Removal and Resignation.. . . . . . . . . . . . . . . . . . . . . . . . 11
5.4 Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.5 President.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.6 Vice Presidents.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7 Secretary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 Treasurer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.9 Assistant Treasurers and Assistant Secretaries. . . . . . . . . . . . . 14
5.10 Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
ARTICLE VI: Divisions . . . . . . . . . . . 15
6.1 Divisions of the Corporation. . . . . . . . . . . . . . . . . . . . . . 15
6.2 Official Positions Within a Division. . . . . . . . . . . . . . . . . . 15
ARTICLE VII: Contracts, Loans, Checks and Deposits. . . . . . 15
7.1 Contracts and Other Instruments.. . . . . . . . . . . . . . . . . . . . 15
7.2 Loans.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.3 Checks, Drafts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.4 Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VIII: Certificates of Shares and Their Transfer. . . . . 15
8.1 Certificates of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Lost, Stolen or Destroyed Certificate.. . . . . . . . . . . . . . . . . 16
8.3 Transfers of Shares.. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.4 Restrictions on Transfer. . . . . . . . . . . . . . . . . . . . . . . . 16
8.5 No Fractional Share Certificates. . . . . . . . . . . . . . . . . . . . 17
8.6 Fixing Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.7 Shareholders of Record. . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IX: General Provisions. . . . . . . . . . . 17
9.1 Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.2 Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE X: Indemnification. . . . . . . . . . . . 18
10.1 Third Party Action. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.2 Corporation Action. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.3 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.4 Conditions Precedent. . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.5 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.6 Non-Exclusivity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.7 Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.8 Reporting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.9 Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XI: Amendments. . . . . . . . . . . . . 21
<PAGE>
ARTICLE I: Offices
1.1 Registered Office. The registered office of RLI Corp. ("Corporation") in
the State of Illinois shall be located at 9025 North Lindbergh Drive, Peoria,
Illinois 61615. The name of its registered agent is Camille J. Hensey. The
registered office and agent may be periodically changed by the Board of
Directors.
1.2 Other Offices. The Corporation may also have offices at such other
places both within or without the State of Illinois as the Board of Directors
may periodically determine or the business of the Corporation may require.
ARTICLE II: Meetings of Shareholders
2.1 Annual Meeting. The annual meeting of the shareholders shall be held at
2:00 P.M. on the first Thursday in May of each year, if not a legal holiday,
or, if a legal holiday, then on the next succeeding business day, for the
purpose of electing directors and for the transaction of such other business
as may come before the meeting. If the election of directors shall not be
held on the day designated for the annual meeting, or at any adjournment
thereof, the Board of Directors shall cause such election to be held at a
special meeting of shareholders.
2.2 Special Meetings. Any special meeting of the shareholders may be called
by the President, by the Board of Directors, or by the holders of not less
than one-fifth of the outstanding shares entitled to vote on the matter for
which the meeting is called.
2.3 Place of Meetings. Any meeting of the shareholders for the election of
directors shall be held at the office of the Corporation in Peoria, Illinois,
unless the Board of Directors shall, by resolution, designate any other
location, within or without the State of Illinois, as the place of such
meeting.
Any meeting of shareholders for any other purpose may be held at such place,
within or without the State of Illinois, and at such time as shall be
determined pursuant to Section 2.2 Special Meetings.
2.4 Notice of Meetings. Written notice stating the place, day and hour of
the meeting and, in the case of a special meeting, the purpose for which the
meeting is called, shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of the meeting, or in the case of a merger,
consolidation, share exchange, dissolution or sale, lease or exchange of
assets not less than twenty (20) nor more than sixty (60) days before the date
of the meeting, either personally or by mail, by or at the direction of the
President, the Secretary or the officer or persons calling the meeting, to
each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail addressed to the shareholder at such shareholder's address as it appears
on the records of the Corporation, with postage thereon prepaid.
When a meeting is adjourned to another time or place, no notice of the
adjourned meeting, other than an announcement at the meeting, need be given
unless the adjournment is for more than thirty (30) days or a new record date
is fixed for the adjourned meeting after such adjournment.
<PAGE>
2.5 Shareholder List. At least ten (10) days before every meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting, arranged in alphabetical order, and showing the address of each such
shareholder and the number of shares registered in the name of each such
shareholder, shall be prepared by the Secretary.
The list shall be open to examination of any shareholder of the Corporation,
and to copying at the shareholder's expense, during ordinary business hours,
for any purpose germane to the meeting during the ten (10) day period ending
on the date of the meeting, at the office of the Corporation in Peoria,
Illinois. The list shall be produced and kept at the time and place of meeting
during the meeting and be subject to inspection by any shareholder for any
purpose germane to the meeting.
2.6 Quorum. Except as otherwise provided by statute, the articles of
incorporation or By-Laws, the holders of shares of the Corporation having a
majority of the voting power thereof, present in person or represented by
proxy, shall be requisite for, and shall constitute, a quorum at all meetings
of the shareholders of the Corporation for the transaction of business. If
such quorum shall not be present or represented at any meeting of the
shareholders, the shareholders entitled to vote, present in person or
represented by proxy, shall have power to adjourn the meeting from time to
time until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.
2.7 Proxies. A shareholder may vote such shareholder's shares in person or
may appoint a proxy to vote or otherwise act for such shareholder by signing
an appointment form and delivering it to the person so appointed.
No proxy shall be valid after the expiration of eleven (11) months from the
date thereof unless otherwise provided in the proxy. Every proxy continues in
full force and effect until revoked by the person executing it prior to the
vote pursuant thereto, except as otherwise provided in this section. Such
revocation may be effected by a writing delivered to the Corporation stating
that the proxy is revoked or by a subsequent proxy executed by, or by
attendance at the meeting and voting in person by, the person executing the
proxy. The dates contained on the forms of proxy presumptively determine the
order of execution, regardless of the postmark dates on the envelopes in which
they are mailed.
An appointment of a proxy is revocable by the shareholder unless the
appointment form conspicuously states that it is revocable and the appointment
is coupled with an interest, as such term is defined by applicable law. A
transferee for value of shares subject to an irrevocable appointment may
revoke the appointment if the transferee was ignorant of its existence when
the shares were acquired and both the existence of the appointment and its
irrevocability were not noted conspicuously on the certificate, or information
statement for shares without certificates, representing the shares.
The death or incapacity of the shareholder appointing a proxy does not revoke
the proxy's authority unless notice of the death or incapacity is received by
the officer or agent who maintains the Corporation's share transfer book
before the proxy exercises such shareholder's authority under the appointment.
<PAGE>
Unless the appointment of a proxy contains an express limitation on the
proxy's authority, the Corporation may accept the proxy's vote or other action
as that of the shareholder making the appointment. If the proxy appointed
fails to vote or otherwise act in accordance with the appointment, the
shareholder is entitled to such legal or equitable relief as is appropriate in
the circumstances.
2.8 Voting. Except as otherwise provided by the articles of incorporation,
each shareholder shall be entitled to one (1) vote for each share of the
Corporation entitled to vote thereat and registered in the name of such
shareholder on the books of the Corporation on the referent record date. No
holder of any class or series of shares of this Corporation shall have
cumulative voting rights with respect to any matter voted upon by the holders
of such shares.
When a quorum is present at any meeting of the shareholders, the vote of the
holders of a majority of the shares having voting power which is present in
person or represented by proxy shall, except as otherwise required by
applicable law, the articles of incorporation, or these By-Laws, decide any
question brought before such meeting.
2.9 Voting of Certain Shares. Shares standing in the name of another
corporation, and entitled to vote may be voted by such officer, agent, or
proxy as the by-laws of such corporation may prescribe or, in the absence of
such provision, as the board of directors of such corporation may determine.
Shares standing in the name of a deceased person, a minor or an incompetent
and entitled to vote may be voted by such person's administrator, executor,
guardian or conservator, as the case may be, either in person or by proxy.
Shares standing in the name of a trustee, receiver or pledgee and entitled to
vote may be voted by such trustee, receiver or pledgee either in person or by
proxy as provided by applicable law.
2.10 Action Without Meeting. Unless otherwise provided in the articles of
incorporation, any action required to be taken at any annual or special
meeting of the shareholders, or any action which may be taken at a meeting of
the shareholders, may be taken without a meeting and without a vote if a
consent in writing, expressing the action so taken, shall be signed: if five
(5) days prior notice of the proposed action is given in writing to all of the
shareholders entitled to vote with respect to the subject matter thereof, by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voting; or, by all
of the shareholders entitled to vote with respect to the subject matter
thereof.
Prompt notice of the taking of Corporation action without a meeting by less
than unanimous written consent shall be given in writing to those shareholders
who have not consented in writing. If the action which is consented to is
such as would have required the filing of a certificate under applicable law
if such action had been voted on by the shareholders at a meeting thereof, the
certificate filed shall state, in lieu of any statement required by applicable
law, concerning any vote of shareholders, that written consent has been given
in accordance with the provisions of this section and that written notice has
been given as provided in this section.
ARTICLE III: Directors<PAGE>
3.1 Number and Election. The number of directors of this Corporation shall
be ten. The members of the Board of Directors shall be divided into three
classes, each class to be as nearly equal in number as is possible.
The term of office of directors of the first class shall expire at the first
annual meeting of shareholders after their election, that of the second class
shall expire at the second annual meeting of shareholders after their
election, and that of the third class shall expire at the third annual meeting
of the shareholders after their election. At each annual meeting, the number
of directors equal to the number of the class whose terms expire at the time
of such meeting shall be elected to hold office until the third succeeding
annual meeting of the shareholders.
Except for vacancies filled pursuant to Section 3.4 Vacancies, the directors
shall be elected by the shareholders of the Corporation, and at each election
the persons receiving the greatest number of votes, up to the number of
directors then to be elected, shall be the persons then elected. The election
of directors is subject to any provisions contained in the articles of
incorporation relating thereto.
3.2 Resignations. Any director may resign at any time by giving written
notice to the Board of Directors or to the President, provided that the party
to whom such notice is given is other than the individual director giving the
notice. Any such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein. Unless otherwise
specified in such resignation, the acceptance of such resignation shall not be
necessary to make it effective.
3.3 Removal. Except as otherwise provided in the following sentence, a
director of the Corporation may be removed only for cause by the affirmative
vote of a majority of the outstanding shares then entitled to vote at an
election of directors. No director shall be removed at a meeting of
shareholders unless the notice of such meeting shall state that a purpose of
such meeting is to vote upon the removal of the director named in the notice,
and only the named director may be removed at such meeting.
3.4 Vacancies. Except as otherwise provided in the articles of
incorporation, any vacancy in the Board, whether because of death,
resignation, disqualification, an increase in the number of directors or any
other cause, may be filled by the vote of the majority of the remaining
directors, although less than a quorum. Each director so chosen to fill a
vacancy shall hold office until such director's successor shall have been
elected and shall qualify or until such director shall resign or shall have
been removed. No decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.
3.5 Management of Affairs of Corporation. The property and business of the
Corporation shall be managed by its Board of Directors, which may exercise any
such power of the Corporation and do any such lawful act as are not by
applicable law, the articles of incorporation or these By-Laws directed or
required to be exercised or done by shareholders.
If the Corporation shall transact any business or enter into any contract with
a director, or with any firm of which one or more of its directors are
members, or with any trust, firm, corporation or association in which any
director is a shareholder, director or officer or otherwise interested, the<PAGE>
officers of the Corporation and directors in question shall be severally under
the duty of disclosing all material facts as to their interest to the
remaining directors promptly if and when such interested officers or such
interested directors in question shall become advised of the circumstances.
In the case of continuing relationships in the normal course of business such
disclosure shall be deemed effective, when once given, as to all transactions
and contracts subsequently entered into.
3.6 Dividends and Reserves. Dividends upon shares may be declared by the
Board of Directors at any regular or special meeting. Dividends may be paid in
cash, in property, in shares or otherwise in the form, and to the extent,
permitted by applicable law. The Board of Directors may set apart, out of any
funds of the Corporation available for dividends, a reserve or reserves for
working capital or for any other lawful purpose, and also may abolish any such
reserve in the manner in which it was created.
3.7 Regular Meetings. An annual meeting of the Board of Directors shall be
held, without notice other than as provided in these By-Laws, immediately
after, and at the same place as, the annual meeting of the shareholders. The
Board of Directors may provide, by resolution, the time and place, either
within or without the State of Illinois, for the holding of additional regular
meetings without notice other than such resolution.
3.8 Special Meetings. Special meetings of the Board of Directors may be
called by the President and shall be called by the Secretary at the request of
any two directors, to be held at such time and place, either within or without
the State of Illinois, as shall be designated by the call.
3.9 Notice of Special Meetings. Except as otherwise prescribed by statute,
written or actual oral notice of the time and place of each special meeting of
the Board of Directors shall be given at least two (2) day prior to the time
of holding the meeting. Any director may waive notice of any meeting.
3.10 Quorum. The presence of not less than a majority of the Board of
Directors shall be necessary and sufficient to constitute a quorum for the
transaction of business. Except as otherwise provided by applicable law, the
articles of incorporation or these By-Laws, the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors. If a quorum shall not be present at any meeting of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Unless otherwise provided by the articles of incorporation, any member of the
Board of Directors or of any committee designated by the Board may participate
in a meeting of the directors or committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting by means of
such equipment shall constitute presence in person at such meeting.
3.11 Presumption of Assent. Unless otherwise provided by applicable law, a
director of the Corporation who is present at a meeting of the Board of
Directors at which action is taken on any corporate matter shall be presumed
to have assented to the action taken unless such director's dissent shall be
entered in the minutes of the meeting or unless such director shall file such
director's written dissent to such action with the person acting as secretary<PAGE>
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
3.12 Action Without Meeting. Except as otherwise provided by applicable law,
the articles of incorporation or these By-Laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent
thereto, setting forth the action so taken, is signed by all members of the
board or of such committee entitled to vote, as the case may be, and such
written consent is filed with the minutes of proceedings of the board or
committee.
3.13 Presiding Officer. The presiding officer at any meeting of the Board of
Directors shall be the President or, in such President's absence, any other
director elected chairman by vote of a majority of the directors present at
the meeting.
3.14 Executive Committee. The Board of Directors may, by resolution passed by
a majority of the number of directors fixed by these By-Laws, designate two or
more directors of the Corporation to constitute an executive committee. The
executive committee shall, to the extent provided in the resolution and by
applicable law, have and may exercise any power and authority of the Board of
Directors in the management of the business and affairs of the Corporation.
3.15 Other Committees. The Board of Directors may, by resolution passed by a
majority of the number of directors, designate such other committees as it may
periodically determine. Any committee shall consist of such number of
directors, shall serve for such term and shall have and may exercise, during
intervals between meetings of the Board of Directors, such duties, functions
and powers as the Board of Directors may periodically prescribe, except that a
committee may not authorize distributions; approve or recommend to
shareholders any act required by applicable law to be approved by
shareholders; fill vacancies on the board or on any of its committees; elect
or remove officers or fix the compensation of any member of the committee;
adopt, amend or repeal these By-Laws; approve a plan of merger not requiring
shareholder approval; authorize or approve reacquisition of shares, except
according to a general formula or method prescribed by the Board of Directors;
authorize or approve the issuance or sale, or contract for sale, of shares or
determine the designation and relative rights, preferences and limitations of
a series of shares, except that the board may direct a committee to fix the
specific terms of the issuance or sale or contract for sale or the number of
shares to be allocated to particular employees under an employee benefit plan;
or amend, alter, repeal or take action inconsistent with any resolution or
action of the Board of Directors when the resolution or action of the Board of
Directors provides by its terms that it shall not be amended, altered or
repealed by action of a committee.
3.16 Quorum and Manner of Acting - Committees. The presence of a majority of
members of any committee shall constitute a quorum for the transaction of
business at any meeting of such committee, and the act of a majority of those
present shall be necessary for the taking of any action.
3.17 Committee Chairman, Books and Records. The Chairman of any committee
shall be selected from among the members of the committee by the Board of<PAGE>
Directors. Any committee shall keep a record of its acts and proceedings, and
any action of each committee shall be reported to the Board of Directors at
its next meeting. Any committee shall fix its own rules of procedure not
inconsistent with applicable law, these By-Laws or the resolution of the Board
of Directors designating such committee and shall meet at such times and
places and upon such call or notice as shall be provided by such designation.
3.18 Fees and Compensation of Directors. The Board of Directors shall, by
the affirmative vote of a majority of directors then in office, and
irrespective of any personal interest of any of its members, have the
authority to establish reasonable compensation of all directors for services
to the Corporation as directors, including expenses incurred.
3.19 Reliance Upon Records. Each director of the Corporation, or member of
any committee designated by the Board of Directors shall be fully protected in
relying in good faith upon the books of account or reports made to the
Corporation by any of its officials, by an independent certified public
accountant, by an appraiser selected with reasonable care by the Board of
Directors or by such committee, or in relying in good faith upon other records
of the Corporation, including the records expressing or relating to the value
and amount of assets, liabilities and profits of the Corporation or any other
facts pertinent to the existence and amount of surplus or other funds from
which dividends may properly be declared or paid or with which shares of the
Corporation might lawfully be purchased or redeemed.
ARTICLE IV: Notices
4.1 Manner of Notice. Whenever notice is required to be given to any
shareholder, director or member of any committee designated by the Board of
Directors, such notice may be given by any commercially acceptable means in
writing or otherwise, including by depositing such notice in a sealed
envelope, in the United States mail, postage prepaid, addressed to such
addressee at the address of such addressee as it appears on the books of the
Corporation or, in the case of a director, at such director's last known
address. Notice shall be deemed to be given at the time when deposited in the
United States mails or otherwise delivered to the commercially acceptable
means of communication.
Except in the case of written shareholder notice, any notice requirement shall
be deemed satisfied if actual notice is received by the person entitled
thereto as far in advance of the event with respect to which notice is given
as the minimum notice period required by applicable law or these By-Laws.
4.2 Waiver of Notice. Any notice requirement may be waived in writing signed
by the person entitled to such notice, whether before, at or after the time
stated therein. Except where a person attends a meeting for the purpose of
objecting to such meeting, or for the purpose of objecting to the transaction
of any business because such notice is not lawfully called or convened,
attendance at a meeting by a person who is the subject of a notice requirement
shall constitute a waiver of notice of such meeting.
Except as otherwise required by applicable law, the articles of incorporation
or these By-Laws, neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the shareholders, directors or committee
of directors need be specified in any written waiver of notice.
<PAGE>
ARTICLE V: Officers
5.1 Office and Official Positions. The officers of the Corporation shall be
a President, one or more Vice Presidents, a Secretary, a Treasurer, and such
Assistant Secretaries, Assistant Treasurer, and other officers as the Board of
Directors shall periodically determine to be appropriate.
Any two or more offices may be held by the same person. None of the officers
need be a director, a shareholder of the Corporation or a resident of the
State of Illinois. The Board of Directors may periodically establish, and
abolish, official positions within the divisions into which the business and
operations of the Corporation are divided and assign titles and duties to such
positions. A person appointed to any official position within any division
need not be an officer of the Corporation.
The Board of Directors may periodically appoint officers to official positions
within a division and remove any person so appointed with or without cause.
The authority incident to an official position within a division shall be
limited to acts and transactions within the scope of the business and
operations of such division.
5.2 Election and Term of Office. The officers of the Corporation shall be
elected annually by the Board of Directors. Any officer shall hold office
until the first to occur of the election of such officer's successor, or such
officer's death, resignation or removal.
5.3 Removal and Resignation. Any officer may be removed, with or without
cause, by a majority of the directors then in office at any regular or special
meeting of the board.
Any officer may resign upon written notice to the Board of Directors, to the
President or to the Secretary. Except as otherwise specified in such
resignation, any resignation shall be effective on the date received and need
not be accepted by the Corporation.
5.4 Vacancies. A vacancy in any office because of death , resignation,
removal, or any other cause may be filled for the unexpired portion of the
term by the Board of Directors.
5.5 President. The President shall be the chief executive officer of the
Corporation and shall preside at all meetings of the shareholders, the Board
of Directors or any committee of the Board if such President is a member.
The President shall have the overall supervision of the business of the
Corporation and shall direct the affairs and policies of the Corporation,
subject to such policies and directions as may periodically be promulgated by
the Board of Directors. The President shall have authority to designate the
duties and powers of other officers and delegate special powers and duties to
specified officers, so long as such designation shall not be inconsistent with
applicable law, the articles of incorporation, these By-Laws or action of the
Board of Directors. The President may execute any deed, mortgage, bond,
contract or other instrument of the Corporation except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by the President to some other officer or agent of the
Corporation. <PAGE>
The President may sign with the Secretary or any Assistant Secretary or the
Treasurer or any Assistant Treasurer, any certificate for shares, the issuance
of which shall have been duly authorized by the Board of Directors, and shall
vote, or give a proxy to any other person to vote, all shares of any other
corporation standing in the name of the Corporation.
Subject to the limitations and satisfaction of the conditions expressed in the
preceding paragraphs, the President shall have all powers and shall perform
all duties which are incident to the chief executive office of a Corporation
or as may periodically be prescribed by the Board of Directors.
5.6 Vice Presidents. Absent the President, the Vice Presidents in order of
their rank as fixed by the Board of Directors or, if not ranked, the Vice
President designated by the Board of Directors or the President, shall perform
all duties and shall have all powers of the President.
The Vice Presidents shall have such other powers and perform such other
duties, not inconsistent with applicable law, the articles of incorporation,
these By-Laws, or action of the Board of Directors, as may periodically be
prescribed for them, respectively, by the Board of Directors or the President.
Any Vice President may sign, with the Secretary or an Assistant Secretary, or
the Treasurer or an Assistant Treasurer, certificates for shares of the
Corporation, the issuance of which shall have been duly authorized by the
Board of Directors.
5.7 Secretary. The Secretary shall:
(a) keep the minutes of the meetings of the shareholders, the Board of
Directors and committees of directors, in one or more books provided for such
purpose;
(b) see that all notices are fully given in accordance with the provisions of
these By-Laws or as required by applicable law;
(c) have charge of the corporate records and of the seal of the Corporation;
(d) affix the seal of the Corporation or a facsimile thereof, or cause it to
be affixed, to all certificates for shares prior to the issue thereof and to
all documents the execution of which on behalf of the Corporation under its
seal is duly authorized by the Board of Directors or otherwise in accordance
with the provisions of these By-Laws;
(e) keep a register of the post office address of each shareholder, director
and committee member which shall periodically be furnished to the Secretary by
such shareholder, director or member;
(f) sign with the President, or a Vice President, certificates for shares of
the Corporation, the issuance of which shall have been duly authorized by
resolution of the Board of Directors;
(g) have general charge of the stock transfer books of the Corporation; and
(h) perform all duties incident to the office of Secretary and such other
duties as may periodically be assigned to the Secretary by the President or by
the Board of Directors. The Secretary may delegate such details of the
performance of duties of the Secretary's office as may be appropriate in the<PAGE>
exercise of reasonable care to one or more persons, but shall not be relieved
of responsibility for the performance of such duties.
5.8 Treasurer. The Treasurer shall:
(a) be responsible to the Board of Directors for the receipt, custody and
disbursements of all funds and securities of the Corporation;
(b) receive and give receipts for moneys due and payable to the Corporation
from any source whatsoever and deposit all such moneys in the name of the
Corporation in such banks, trust companies or other depositories as shall from
time to time be selected in accordance with the provisions of these By-Laws;
(c) disburse the funds of the Corporation as ordered by the Board of Directors
or the President or as otherwise required in the conduct of the business of
the Corporation;
(d) render to the President or Board of Directors, upon request, an account of
all transactions as Treasurer and on the financial condition of the
Corporation;
(e) perform all the duties incident to the office of Treasurer and such other
duties as may periodically be assigned to the Treasurer by the President, by
the Board of Directors or these By-Laws. The Treasurer may sign, with the
President, or a Vice President, certificates for shares of the Corporation,
the issuance of which shall have been duly authorized by resolution of the
Board of Directors. The Treasurer may delegate such details of the
performance of duties of the Treasurer's office as may be appropriate in the
exercise of reasonable care to one or more persons, but shall not be relieved
of responsibility for the performance of such duties.
5.9 Assistant Treasurers and Assistant Secretaries. The Assistant Treasurers
and Assistant Secretaries shall perform all functions and duties which the
Secretary or Treasurer, as the case may be, may assign or delegate.
5.10 Salaries. The salaries of the officers shall be periodically determined
by the Board of Directors or as it shall otherwise direct. No officer shall
be prevented from receiving a salary or other compensation by reason of the
fact that such officer is also a director of the Corporation.
ARTICLE VI: Divisions
6.1 Divisions of the Corporation. The Board of Directors may periodically
establish such operating divisions of the Corporation as the Board of
Directors periodically determines to be appropriate.
6.2 Official Positions Within a Division. Except as otherwise periodically
provided by the Board of Directors, the President may appoint and remove, with
or without cause, any individual as an officer within a division.
ARTICLE VII: Contracts, Loans, Checks and Deposits
7.1 Contracts and Other Instruments. The Board of Directors may periodically
authorize any person to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, or of any division
thereof and such authorization may be general or confined to specific<PAGE>
instances.
7.2 Loans. No loan shall be contracted on behalf of the Corporation, or any
division thereof, and no evidence of indebtedness shall be issued in the name
of the Corporation, or any division thereof, unless authorized by a resolution
of the Board of Directors and such authorization may be general or confined to
specific instances.
7.3 Checks, Drafts. Any check, demand, draft or other order for the payment
of money, note or other evidence of indebtedness issued in the name of the
Corporation, or any division thereof, shall be signed by such person as the
Board of Directors shall periodically designate.
7.4 Deposits. Any funds of the Corporation, or any division thereof, not
otherwise employed shall be periodically deposited to the credit of the
Corporation in such bank, trust company or other depository as the Board of
Directors may periodically designate.
ARTICLE VIII: Certificates of Shares and Their Transfer
8.1 Certificates of Shares. The certificates of shares shall be in such form
as may be periodically determined by the Board of Directors, shall be numbered
and entered in the books of the Corporation as they are issued, and shall
exhibit the holder's name and number of shares, that the Corporation is
organized under the Illinois Business Corporation Act, and shall be signed by
the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary.
If any share certificate is signed by a transfer agent and a registrar, the
signature of any officer of the Corporation may be facsimile. If any officer
whose facsimile signature has been used on any certificate, and such officer
shall cease to act in such capacity before such certificate is delivered by
the Corporation, such certificate may nevertheless be delivered by the
Corporation without regard to the cessation of such officer.
Any certificate surrendered to the Corporation for transfer shall be canceled
and no new certificate shall be issued to evidence transferred shares until
the former certificate shall have been surrendered.
8.2 Lost, Stolen or Destroyed Certificate. The Board of Directors may
periodically promulgate procedures to be followed in connection with the
issuance of new certificates in replacement of any certificate previously
issued by the Corporation.
8.3 Transfers of Shares. Subject to the satisfaction of the conditions
periodically expressed by the Board of Directors, upon the surrender of a
certificate representing shares of the Corporation, the Corporation shall
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books. Transfers of shares
shall be made only on the books of the Corporation by the registered holder
thereof or by its attorney or successor duly authorized as evidenced by
documents filed with the Secretary or transfer agent of the Corporation. The
person in whose name shares stand on the books of the Corporation shall be
deemed the owner thereof for all purposes.
8.4 Restrictions on Transfer. Subject to such conditions and limitations as<PAGE>
the Board of Directors may periodically promulgate, and except as otherwise
provided by any applicable law, the articles of incorporation or these By-
Laws, any shareholder or the Corporation may enter into any agreement
restricting the transferability of any shares of the Corporation, granting
put, call, or other rights or responsibilities with respect to such shares on
such terms and conditions as are equally applicable to any other shareholder
of the Corporation. Any restriction on the transferability of any shares may
be expressed on the certificate representing such shares.
8.5 No Fractional Share Certificates. Certificates shall not be issued
representing any fractional share.
8.6 Fixing Record Date. The Board of Directors may fix in advance a date,
not exceeding sixty (60) days, nor less than ten (10) days, preceding the date
of any meeting of shareholders, or the date for the payment of any dividend,
or the date for the allotment of rights, or the date when any change or
conversion or exchange of shares shall be effective, or a date in connection
with obtaining any consent, as a record date for the termination of the
shareholders entitled to notice of, and to vote at, any such meeting, or
adjournment thereof, or entitled to receive payment of any such dividend, or
to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of shares, or to give such consent, and in
such case such shareholders and only such shareholders as shall be
shareholders of record on the date so fixed shall be entitled to notice of,
and to vote at, such meeting and any adjournment thereof, or to receive
payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, or to give such consent, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation
after any such record date.
8.7 Shareholders of Record. Except as otherwise required by applicable law,
the Corporation may treat the holder of record of any share as the holder in
fact thereof.
ARTICLE IX: General Provisions
9.1 Fiscal Year. The fiscal year of the Corporation shall begin on January 1
and shall end on December 31.
9.2 Seal. The Board of Directors may provide a corporate seal which shall
have inscribed thereon the name of the Corporation, and the words "CORPORATE
SEAL" and "Illinois;" and it shall otherwise be in the form approved by the
Board of Directors. The seal may be used by causing it, or a facsimile
thereof, to be impressed or affixed or otherwise reproduced.
ARTICLE X: Indemnification
10.1 Third Party Action. The Corporation shall indemnify any person who was
or is a party, or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the Corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts<PAGE>
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, if such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed
to the best interests of the Corporation, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Corporation or with respect to
any criminal action or proceeding, that the person had reasonable cause to
believe that his or her conduct was unlawful.
10.2 Corporation Action. The Corporation shall indemnify any person who was
or is a party, or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, if such person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to the best interests of the Corporation,
provided that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
Corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
as the court shall deem proper.
10.3 Fees. To the extent that a director, officer, employee or agent of the
Corporation has been successful, on the merits or otherwise, in the defense of
any action, suit or proceeding referred to in Sections 10.1 Third Party Action
or 10.2 Corporation Action, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
therewith.
10.4 Conditions Precedent. Any indemnification under Sections 10.1 Third
Party Action or 10.2 Corporation Action, unless ordered by a court, shall be
made by the Corporation only as authorized in the specific case, upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he or she has met the applicable
standard of conduct expressed in Sections 10.1 Third Party Action or 10.2
Corporation Action. Such determination shall be made by the board of
directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or if such quorum is not
obtainable or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
shareholders.
10.5 Expenses. Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the Corporation in advance of the final<PAGE>
disposition of such action, suit or proceeding, as authorized by the board of
directors in the specific case, upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount, unless it
shall ultimately be determined that he or she is entitled to be indemnified by
the Corporation as authorized in this Article.
10.6 Non-Exclusivity. The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any by-law, the articles of incorporation, agreement,
vote of shareholders or disinterested directors or otherwise, both as to
action in such person's official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent, and shall inure to the benefit of
the heirs, executors and administrators of such a person.
10.7 Insurance. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this section.
10.8 Reporting. If the Corporation has paid indemnity or has advanced
expenses to a director, officer, employee or agent, the Corporation shall
report the indemnification or advance in writing to the shareholders with or
before the notice of the next shareholders meeting.
10.9 Definitions. For purposes of this Article, references to "the
Corporation" or "this Corporation" shall include, in addition to any surviving
corporation, any merging corporation (including any corporation having merged
with a merging corporation) absorbed in a merger which, if its separate
existence had continued, would have had the power and authority to indemnify
its directors, officers and employees or agents, so that any person who was a
director, officer, employee or agent of such merging corporation, or was
serving at the request of such merging corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprises, shall stand in the same position under the provisions of
this Article with respect to the surviving corporation as such person would
have with respect to such merging corporation if its separate existence had
continued.
For purposes of this Article, references to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references
to "serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes duties
on, or involves services by such director, officer, employee or agent with
respect to an employee benefit plan, its participants or beneficiaries. A
person who acted in good faith and in a manner he or she reasonably believed
to be in the best interests of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not opposed
to the best interest of the Corporation" as referred to in this Article.
<PAGE>
ARTICLE XI: Amendments
These By-Laws may be made, altered, amended or repealed by the shareholders or
the Board of Directors. Any By-Law made, altered, amended or repealed by the
shareholders may be altered, amended or repealed by the Board of Directors, or
by the shareholders.
<PAGE>
MARKET VALUE POTENTIAL
PERFORMANCE INCENTIVE PLAN
PLAN DESCRIPTION
1. PURPOSE OF PLAN
The purpose of this plan is to provide incentive to select key employees to
effectively utilize company capital thereby maximizing the value of
shareholder investment. This plan aligns participant compensation incentive
with the factors upon which the Company's market value is driven.
2. DEFINITIONS
2.1 "Pay Position Policy" is a statement of salary, bonus formula and expense
allowances prepared for each key employee each year as approved by the Board
of Directors of RLI Corp. at their annual meeting. This incentive plan
description is part of the pay position policy statement and is not to be
construed as an employment agreement.
2.2 "Company" means RLI Corp.
2.3 "Participant" is a key executive of the Company designated by the Board
of Directors of the Company to be eligible for the plan.
2.4 "Plan Administration Committee" consists of the RLI Insurance Company's
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and
Administrative Vice President. The Committee is authorized to interpret the
plan and may, from time to time, adopt such rules and regulations necessary
for the administration of the plan as it shall determine. Decisions of the
Committee shall be final, subject at all times to review or change by members
of the Executive Resources Committee who are outside directors, within the
meaning of Section 162(m) of the Internal Revenue Code, of the Board of
Directors of the Company.
2.5 "Award Year" is the Company's current fiscal year.
2.6 "Invested Capital" is the historic common and preferred stock investment
including retained earnings plus outstanding debt instruments owned by outside
parties as indicated on the Company's year-end audited financial statements.
2.7 "Blended Cost of Capital" is defined for purpose of this plan as the
thirty-year U.S. Treasury Bill rate plus 6% modified by the Dow Jones Property
& Casualty Insurance group beta on a five-year rolling average basis at the
beginning of the year. This resulting rate is blended prorata (comparing
market capitalization of the Company's stock with outstanding Company debt at
cost or conversion price, whichever is higher) with the coupon or interest
rate actually incurred on the outstanding debt. Should preferred stock be
issued the historic investment after-tax will be blended with the historic
common stock investment plus retained earnings.
2.8 "Actual Return" is the Company's GAAP fiscal year adjusted increase in
shareholders' equity as calculated in Section 3.<PAGE>
2.9 "Required Return" is equal to the beginning of the year Invested Capital,
times the Blended Cost of Capital plus the after-tax cost of any ESOP and
excess ESOP contribution for the year in accordance with the plan provisions.
This return is required before executive bonuses are eligible for payment.
Amounts in excess of the Required Return equal Market Value Potential ("MVP")
for bonus purposes.
Required Return will be adjusted quarterly on a time-weighted basis as
follows:
2.91 Beginning Invested Capital:
2.911 At the end of each quarter the increase (or decrease) in Invested
Capital, net of retained earnings, is divided by four. The result is
multiplied by the number of quarters left in the fiscal year and added (or
subtracted) to beginning capital;
2.912 The result equals adjusted Invested Capital;
2.913 The increase (or decrease) in Invested Capital is multiplied by the
debt or equity component of the December 31 Blended Cost of Capital;
2.914 No adjustment will be made in the fourth quarter of the fiscal year.
2.10 "Cause" means failure to meet the Company's standards with respect to
performance of duties, excessive absenteeism, unethical behavior, or violation
of a material policy of the Company.
2.11 "Trade Secret" means information that: is used or intended for use in a
trade or business; is included or embodied in a formula, pattern, compilation,
computer software, drawing, device, method, technique or process; is not
publicly known and is not generally known in the trade or business of the
Company; cannot be readily ascertained or derived from publicly available
information; and has significant economic value.
3. BONUS CALCULATION
3.1 For bonus purposes, MVP is quantified as below:
3.11 Company ending GAAP book value:
3.111 Plus outstanding debt instruments at end of period;
3.112 Less additional investments in the Company in the form of stock issues
(including ESOP and Excess ESOP stock purchases from the Company) or outside
debt instruments issued during the year at issue price. This includes
acquisitions using the Company's stock or debt whether pooled or not;
3.113 Plus any Company stock repurchases;
3.114 Plus any payment of debt principal;
3.115 Plus after-tax accrued interest paid on all outside debt instruments;
3.116 Plus shareholder dividends paid during the year;<PAGE>
3.117 Plus current year after-tax accrued executive MVP bonuses;
3.118 Plus current year after-tax accrued ESOP contribution;
3.119 Plus current year after-tax payment of preferred dividends.
3.12 Less Company beginning GAAP book value:
3.121 Plus outstanding debt instruments at beginning of period.
3.13 The result is the Actual Return for the Award Year.
3.2 The Actual Return less the Required Return is MVP.
3.3 Each Participant will be assigned a percent of MVP as determined annually
by the Executive Resources Committee of the Company's Board of Directors. The
assigned percent times MVP will be credited without limit to a memo bank
account for each Participant. If the Required Return is not achieved, any
amount less than the Required Return will be charged to the Participant's bank
account at the same rate without limit.
3.4 The bonus for a Participant newly hired during the Award Year shall be
calculated prorata beginning the first day of the following month of
employment. The new Participant shall not be eligible to participate in the
plan if hired during the fourth quarter.
3.5 Bonus Bank
As MVP bonuses are calculated after-tax, the earned bonus will be grossed up
by the Company's marginal state and federal income tax rate and credited to
the Participant's bonus bank account established for that purpose. If the
Required Return is not earned, negative bonus will be grossed up by the same
tax rates and charged to the Participant's bonus bank account. The grossed up
debit or credit to the bank will be made without limit. These calculations
shall be done immediately after the annual audit.
3.6 Interest will be paid in arrears by the Company to each Participant's
bank account once a year on any unpaid positive balance before the current
year's contribution. The interest rate applied will be the three-year U.S.
Treasury Bill rate in effect at the end of the fiscal year.
3.7 After the Award Year bonus (or charge) and applicable interest are posted
to the Participant's bank account and upon completion of the annual outside
audit, 60% of any positive total bonus bank balance will be paid to the
Participant and the amount of such payment will reduce the bank balance.
3.8 Positive or negative balances will be carried forward to the next year as
long as the Participant is employed by the Company. The Participant will not
be required to reimburse the Company for a negative balance upon termination
of employment or otherwise.
3.9 Upon termination of employment (including retirement in accordance with
the Company's normal retirement policies) should the Participant's bank
account balance be positive, it will be payable to the terminated Participant
subject to the following limitations:<PAGE>
3.91 The bank account balance of the terminated Participant will be
calculated as of the end of the quarter in which the termination took place.
The Participant's bank account balance will be at risk from a negative MVP
charge only until that time. Twenty percent(20%) of the eligible positive
balance will then be paid. Twenty percent(20%) of the remaining balance will
then be paid twelve(12) months later. Thirty percent(30%) of the balance will
be paid at twenty-four(24) months and the balance will be paid thirty-six(36)
months after the date of termination. All payments are subject to the
following benefits and restrictions:
3.911 At the Company's fiscal year-end, if the Participant's bank balance is
positive, it will be credited in arrears with interest at the three-year U.S.
Treasury Bill rate on that date;
3.912 During the payment period, the Participant must cooperate with the
Company and must not divulge or use in any way, either directly or indirectly,
whether or not for personal gain, proprietary Company information such as, but
not limited to, customer lists, software, or Company procedures. The
Participant must never disclose any Company Trade Secret;
3.913 The Participant agrees to give depositions and testify in any court
matter effecting the Company without charging a fee. The Company will
reimburse out-of-pocket transportation, meal and lodging costs;
3.914 The Participant does not directly or indirectly solicit Company
employees to work for another company. In addition the Participant shall not
directly or indirectly solicit any person who was employed by the Company
within six months prior to the date the Participant's employment terminated;
3.915 The Participant shall not contact any producer of the Company for the
purpose of soliciting business away from the Company. This restriction shall
not apply to producers already licensed and/or producing with competitors.
4. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors of the Company may at any time terminate, modify or
amend this plan. Any change shall not adversely affect the then existing
earned bonus bank of each Participant.
5. NONASSIGNABLE DEATH AND TOTAL DISABILITY
No right or interest of any Participant in the plan shall be assignable or
transferable or subject to any lien, directly, by operation of law or
otherwise, including execution, levy garnishment, attachment, pledge and
bankruptcy. In the event of a Participant's death or total disability, payment
of the then existing balance calculated to the end of the nearest quarter
shall be made to the Participant together with interest calculated to the date
of termination as described in Section 3.6. If deceased, payment will be made
to the Participant's designated beneficiary, or in the absence of such
designation, to the Participant's estate. If in the judgment of the Plan
Administration Committee the beneficiary designation is insufficient, or if
the designated beneficiary dies before all payments due have been made, any
unpaid earned bonus amount will be made in the order noted during the lifetime
of each individual beneficiary: the Participant's spouse if living, or if not,
the Participant's then living descendants per stirpes, or if there are none,
the Participant's estate.<PAGE>
6. TAX WITHHOLDING
The Company shall deduct from payments under this plan any applicable Federal,
state, local or other taxes including any interest, penalty or addition,
whether disputed or not.
7. HOLD HARMLESS
The Participant must hold the Company harmless from and pay any cost, expense
or fee incurred by the Company in respect to any claim, due or demand asserted
by any person, except the Company, against such Participant's MVP bonus amount
or bank account balance.
8. FUNDING
The MVP bank account balance is contingent upon future events, is unfunded, is
subject to the claims of the general creditors of the Company, may not be
assigned, sold, anticipated, pledged or otherwise transferred and shall not be
subject to the claims of the Participant, the Participant's spouse, or their
assigns. The foregoing sentence shall not relieve the Company of its
obligation to pay the bonus when due under the terms of the plan.
9. EMPLOYMENT OR RELATED AGREEMENTS
This plan shall not constitute an employment agreement between the Company and
any Participant, as consideration for or as an inducement to any Participant
to assume or remain employed by the Company. Nothing expressed in this plan
shall be deemed to grant to any Participant any right to be retained in the
service of the Company or to interfere with the right of the Company other
than as limited by any written employment agreement between the Company and
the Participant to the contrary. Notwithstanding any provision of the plan to
the contrary, no Participant shall earn any benefit under this plan unless
such Participant satisfies all conditions applicable to such Participant and
such Participant's benefit to the subjective satisfaction of the Company.
10. EFFECTIVE DATE
The effective date of the plan is January 1, 1996.
11. APPLICABLE LAW
The validity and interpretation of the plan and all matters relating to it
shall be determined under, and construed according to, the laws of the State
of Illinois.
12. INVALID PROVISION
If any term or provision of this plan or its application to any person or
circumstance will to any extent be held invalid or unenforceable, the
remainder of this plan, or the application of such term or provision to such
person or circumstance other than that as to which is invalid or
unenforceable, will not be effected. Each term or provision of this plan is
valid and will be enforced to the fullest extent permitted by law.
13. NOTICES
<PAGE>
All notices, requests, communications and demands shall be in writing and
shall be deemed to have been duly given if delivered in person or sent by
registered or certified mail, postage prepaid, to the Company at its principal
place of business, or to such other address as the Company shall periodically
designate by written notice. In the case of the Participant, notice shall be
mailed to the Participant's last known principal place of residence or to such
other address as the Participant shall periodically designate by written
notice.
14. VENUE
As a substantial portion of the duties and obligations of the parties created
by the plan are performable in Peoria, Illinois, it shall be the sole and
exclusive venue for any arbitration, litigation, special proceedings, or
other proceedings between the parties in connection with the plan.
15. WAIVER
The waiver by the Company of any breach of this plan, whether in a single
instance or repeatedly, shall not be construed as a waiver of rights under the
plan. Such breach shall not be construed as a waiver by the Company to
strictly adhere to the terms and conditions of this plan, nor as a waiver of
any claim for damages or other remedy by reason of any such breach.
<PAGE>
___________________________________
RLI Corp./Name of Director
Director's Stock Option
___________________________________
<PAGE>
Table of Contents
I. RECITALS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
A. Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
B. Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
C. Securities Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
II. AGREEMENTS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1. Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3. Exercise Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4. Exercise Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4.1 Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5. Exercise Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5.1 Exercise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
5.2 Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6. Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
7. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
7.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
7.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
7.3 Incorporation by Reference. . . . . . . . . . . . . . . . . . . . . . . .4
7.4 Interpretive Guidelines . . . . . . . . . . . . . . . . . . . . . . . . .4
7.5 Invalid Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
8. Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Disabled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Execution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Fair Market Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Grant Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
RLI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Securities Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Stock Option Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
III. EXECUTION:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
<PAGE>
THIS RLI CORP./NAME OF DIRECTOR DIRECTOR'S STOCK OPTION ("Option") is issued
to Name of Director ("(Name of Director)") pursuant to the RLI Corp. ("RLI")
Stock Option Plan ("Plan") at Peoria, Illinois.
I. RECITALS:
A. Purposes
The Board of Directors adopted the Directors' Stock Option Plan to provide
compensation, in the form of stock options, to each director of RLI who is not
an employee of RLI at the time of such director's election or selection to the
Board of Directors in an effort to enhance RLI's ability to attract and retain
well-qualified individuals to serve as directors of RLI. The Board of
Directors believes that the Directors' Stock Option Plan will also enhance the
long-term commitment of outside directors to RLI and further align their
interests with the interests of the shareholders.
B. Tax Law
This Option is granted pursuant to the Plan and is not an "incentive stock
option" as defined in Code Section 422 Incentive Stock Option. Accordingly,
upon the exercise of this option, (Name of Director) must recognize income
equal to the difference between the purchase price for the shares and the
option price for the shares.
C. Securities Law
The Plan and any Option Share issuable pursuant to this Option comply with all
Securities Laws.
II. AGREEMENTS:
NOW, THEREFORE, (Name of Director) and RLI agree as follows:
Grant
Effective May 2, 1996, subject to shareholder ratification of the adoption of
the Plan by the Board of Directors, RLI hereby grants to (Name of Director) an
option ("Option") to purchase three thousand (3,000) shares of RLI ("Option
Shares").
If any change in the outstanding shares occurs by reason of any stock split,
dividend, split-up, split-off, spin-off, recapitalization, merger,
consolidation, rights offering, reorganization, combination or exchange of
shares, a sale by RLI of all of its assets, any distribution to shareholders
other than a normal cash dividend, or other extraordinary or unusual event,
the number of Option Shares shall automatically be equitably adjusted by the
Stock Option Committee to reflect any such change.
Price
The price in respect of each Option Share shall be an amount equal to the Fair
Market Value of such Option Share on the Grant Date.
Exercise Period
<PAGE>
(Name of Director) must exercise this Option before the expiration of the ten
(10) year period beginning on the Grant Date.
Exercise Schedule
Except in the case of (Name of Director)'s death, Disability or termination of
(Name of Director)'s status as a director of RLI, this Option may not be
exercised for more than the percentage of the aggregate number of Option
Shares, determined by the number of full years from the Grant Date to the date
of such exercise, in accordance with the following Option exercise schedule:
Cumulative Percentage
Completed Years of Option Shares That May
From Grant Date Be Exercised
Less than 1 year 0%
1 but less than 2 years up to 33%
2 but less than 3 years up to 66%
3 but less than 4 years up to 100%
In the case of (Name of Director)'s death, Disability or the termination of
(Name of Director)'s status as a director of RLI, the preceding Option
exercise schedule shall not be applicable and (Name of Director) may exercise
this Option with respect to all Option Shares.
Transferability
This Option may not be Transferred by (Name of Director) otherwise than by
will or the laws of descent and distribution without the consent of the Stock
Option Committee.
Upon the death of (Name of Director) while a director of RLI, this Option may
be exercised by the estate of (Name of Director) or by a Person who acquired
the right to exercise such Option by bequest or inheritance, or by reason of
the death of (Name of Director).
Exercise Procedures
(Name of Director) must satisfy the conditions expressed in the following
Sections with respect to the exercise of this Option.
Exercise
This Option must be exercised by written notice from (Name of Director) to RLI
at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, or its then current
principal office, Attention: Vice President/Administration. The notice must
express the number of Option Shares for which this Option is being exercised
and must be accompanied by certified funds in the amount of the Option price.
If this Option is exercised other than by (Name of Director), such Person
shall provide evidence of authority to exercise this Option as counsel to RLI
may periodically request.
Certificate
Subject to the satisfaction of the conditions expressed in the following
paragraphs, a certificate for the Option Shares will be issued as soon as<PAGE>
reasonably practical.
RLI need not issue a certificate until RLI has complied with all requirements
of the Securities Laws, rules of any stock exchange on which RLI's shares may
then be listed, and all applicable Federal and state laws in connection with
the issuance or sale of such Option Shares or the listing of such Option
Shares on any such exchange. Until the issuance of the certificates for such
Option Shares, (Name of Director) shall have no rights of a shareholder with
respect to the Option Shares or this Option.
If no registration statement under the Securities Laws is in effect covering
the issuance of the Option Shares to (Name of Director), the certificate must
bear a legend to the effect that the Option Shares cannot be Transferred in
the absence of such a registration statement or an opinion of counsel
satisfactory to RLI that such registration is not required, coupled with a
representation from (Name of Director) that the Option Shares are being
acquired by (Name of Director) for investment and not with a view toward the
resale or distribution thereof, and that the Option Shares will not be
Transferred in the absence of such registration statement or an opinion of
counsel satisfactory to RLI that such registration is not required.
Beneficiary
(Name of Director) may designate a beneficiary of this Option. If (Name of
Director) fails to designate a beneficiary, (Name of Director)'s Option will
be distributed to the individuals expressed in the following phrases and in
the order in which each sentence appears. (Name of Director)'s spouse; (Name
of Director)'s then living descendants, per stirpes; the individuals entitled
to inherit (Name of Director)'s property under the law of the State of
Illinois and in the proportions determined under such law.
General
Amendment
This Option may be periodically amended with the consent of the Parties.
Governing Law
The validity, construction, interpretation and effect of this instrument shall
exclusively be governed by and determined in accordance with the law of the
State of Illinois, except to the extent preempted by Federal law, which shall
to the extent govern.
Incorporation by Reference
The terms and provisions of the Plan are hereby incorporated herein by this
reference.
Interpretive Guidelines
The Stock Option Committee shall interpret and construe this Option, which
interpretation and constructions shall be conclusive and binding on the
Parties and any other Person claiming an interest in respect of (Name of
Director).
<PAGE>
The words and phrases set off by quotation marks in the Glossary have the
meanings therein indicated. Any word or phrase which appears in this Plan in
parenthesis, set off by quotation marks and capitalized, has the meaning
denoted by its context. Whenever the words and phrases defined either in the
Glossary or elsewhere in this Plan are intended to have their defined
meanings, the first letter of such word or the first letters of all
substantive words in such phrase will be capitalized. When the context
permits, a word or phrase used in the singular means the plural, and when used
in any gender, its meaning also includes all genders. Captions of Sections
are inserted as a matter of convenience only and do not define, limit or
extend the scope or intent of this Plan or any provision hereof.
Invalid Provision
If any term or provision of this Option, or the application thereof to any
Person or circumstance will, to any extent, be invalid or unenforceable, the
remainder of this Option, or the application of such term or provision to such
Person or circumstance other than that as to which it is invalid or
unenforceable, will not be affected, and each term and provision of this
Option will be valid and will be enforced to the fullest extent permitted by
law.
Glossary
"Code" means the Internal Revenue Code of 1986, as may periodically be
amended.
"Disabled" means the state of being unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted, or
can be expected to last, for a continuous period of not less than twelve (12)
months.
"Execution Date" means the date on which the last Party to sign this Option
signs this Option.
"Fair Market Value" means, in respect of any share of RLI, the closing price
on such date or on the next business date, if such date is not a business day,
of a share of RLI reflected in The Wall Street Journal or any other
publication selected by the Stock Option Committee; however, if shares of RLI
shall not have been traded on the New York Stock Exchange for more than ten
(10) days immediately preceding such date, or if deemed appropriate by the
Stock Option Committee for any other reason, the fair market value of shares
of RLI shall be determined by RLI in such other manner as it may deem
appropriate.
"Grant Date" means May 2, 1996.
"Parties" means (Name of Director) and RLI.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, a government or any department or
agency thereof, or any combination of the foregoing.
"Plan" means the RLI Corp. Directors' Stock Option Plan, as periodically
amended or restated.<PAGE>
"RLI" means RLI Corp. or its successor.
"Securities Laws" means collectively (a) the Securities Act of 1933, as
periodically amended, 15 U.S.C. Section 77a, et seq., (b) the Securities
Exchange Act of 1934, as periodically amended, 15 U.S.C. Section 78a, et seq.,
including Rule 16(b)-3; (c) any subsequent federal legislation and (d) any
state legislation regulating the sale of any security.
"Stock Option Committee" means a committee comprised of the outside members of
the Board of Directors of RLI.
"Transfer" means any direct or indirect, voluntary or involuntary, for value,
by operation of law or otherwise, assignment, or other disposition of any
direct or indirect, economic or legal interest in, including but not limited
to, any security interest in or with respect to either any Option Share or
this Option.
[The balance of this page is intentionally left blank. The next page begins
with Section III. EXECUTION.]<PAGE>
III. EXECUTION:
Executed in duplicate at Peoria, Illinois, on the Execution Date effective May
2, 1996.
RLI: (Name of Director):
RLI Corp. ________________________________
Name of Director
By:______________________________
Its:________________________ Dated:__________________________
Dated:___________________________
<PAGE>
