A.M. Best Affirms Ratings Of RLI & Subsidiaries.

OLDWICK, N.J.--(BUSINESS WIRE)--Dec. 9, 1999--

A.M. Best Co. today affirmed the A (Excellent) ratings of RLI Insurance Co. and its subsidiary Mt. Hawley Insurance Co. A.M. Best also affirmed the A- (Excellent) rating of Underwriters Indemnity Group, another RLI subsidiary.

The rating of RLI Insurance Co. is based on the consolidated operating performance and financial position of all three companies. It also reflects their favorable operating performance, excellent capitalization and sound liquidity. RLI Insurance Co. focuses on underwriting specialty property and casualty insurance products, including difference in conditions property, fire, general liability, commercial and personal umbrella, directors and officers liability surety and commercial transportation coverages on both an admitted and non-admitted basis throughout the United States. However, approximately one third of the combined companies' direct premiums and most of their catastrophe exposure are concentrated in California. RLI Insurance Co. ranks among the nation's 200 largest property and casualty insurance groups based on policyholder surplus.

Strong operating results generated in recent years are the result of the companies' focusing their underwriting expertise on specialty-market segments generally overlooked by traditional markets because of their unique risk characteristics. Recently, however, standard market insurers have increased their focus on segments of RLI Insurance Co.'s core market, which is attributed to prolonged soft market conditions combined with the standard market's desire to achieve top-line growth. The companies' operating results are susceptible to catastrophic and severe weather-related losses and are attributed to the fact that earnings generated from their property book of business represents a disproportionate amount of overall earnings. In the first half of 1999, the companies have experienced growth in premium volume, primarily in excess liability, commercial automobile and surety; this growth is expected to continue throughout the year.

RLI Insurance Co.'s strong earnings and significant unrealized capital gains have generated substantial surplus growth in recent years, despite its having transferred a significant portion of earnings to its holding company, RLI Corp., to service its debt and holding company obligations and provide dividends to common shareholders. A substantial portion of the companies' capital base consists of unrealized capital gains resulting from their sizable equity portfolio. Since 1997, management has used reverse repurchase agreements at the operating company level to finance the corporate share repurchase program, which management believes provides the companies with affordable financing and flexibility. However, these agreements are secured by high-quality assets that are retained at the operating company level and are short-term obligations.

The rating of Mt. Hawley Insurance Co. reflects its strong operating performance and financial position on a stand-alone basis, combined with its strategic importance as an excess and surplus provider of RLI Insurance Co.'s core products. A.M. Best views the rating outlook of both RLI Insurance Co. and Mt. Hawley Insurance Co. as stable.

The rating of Underwriters Indemnity Group, acquired by RLI Corp. in January 1999, is based on the consolidated operating performance and financial position of Underwriters Indemnity Co. and its wholly owned subsidiary, Planet Indemnity Co. It reflects the group's strong operating performance and adequate level of capitalization but relatively weak cash flow. Over the past five years, changes in business strategy have led to significant fluctuations in premium volume.

Through approximately 300 agents, the group specializes in providing surety and inland marine coverages to oil and gas operators on both admitted and excess and surplus lines bases. Due to the limited scope of this targeted market, profitability is highly subject to micro/macro economic factors and increased competition from both larger carriers and new entrants into the market. The group's heavy dependence on reinsurance has resulted in reinsurance recoverables in excess of three times surplus and placed sizable pressure on the overall level of capitalization as well as its cash-flow position.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.