Rli Corp · 10-K · For 12/31/96

Filed On 3/25/97   ·   SEC File 1-09463   ·   Accession Number 912057-97-9996

Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         35    177K 
 2: EX-3.1      Articles of Inc                                        5     20K 
 3: EX-3.2      Bylaws                                                24     95K 
 4: EX-11       Rli & Subsidiaries                                     2±    10K 
 5: EX-13       Selected Financial Data                               47±   241K 
 6: EX-21.1     Subsidiaries of Registrant                             1      6K 
 7: EX-23.1     Consent of Independent Auditors                        1      7K 
 8: EX-27       Exhibit 27 FDS                                         2      9K 
 9: EX-28.1     Info From Reports Furnished to State Insurance         1      7K 

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     UNITED STATES
      SECURITIES AND EXCHANGE COMMISSION
      Washington, D.C. 20549

     FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934    For the fiscal year ended      December 31, 1996                     
                                  ------------------------------------------
      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                                        
                   ---------------------------------------------------------

     RLI CORP.
------------------------------------------------------------------------------- 
      (Exact name of registrant as specified in its charter)

   Illinois                                     37-0889946
---------------------------------------------    -----------------------------  
(State or other jurisdiction of                  (I.R.S. Employers              
incorporation or organization)                   Identification No.)          

9025 North Lindbergh Drive, Peoria, Illinois               61615                
---------------------------------------------    -----------------------------  
(Address of principal executive offices)                 (Zip Code)             

Registrant's telephone number, including area code    (309) 692-1000            
                                                ----------------------------

Securities registered pursuant to Section 12(b) of the Act:                     

                                       Name of each exchange
Title of each class                          on which registered        
-------------------                          ---------------------      
Common Stock $1.00 par value                     New York Stock Exchange        
6% Convertible Subordinated Debentures due 2003  New York Stock Exchange        

Securities registered pursuant to Section 12(g) of the Act:     NONE            

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.                                       
                                                        X   Yes         No
                                                  -------    -------

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the    
best of registrant's knowledge, in definitive proxy or information statements   
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    [   ]                                                             

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February   
28, 1997 as reported on the New York Stock Exchange, was $263,068,745.  Shares  
of Common Stock held directly or indirectly by each officer and director along  
with shares held by the Company ESOP have been excluded in that such persons may
be deemed to be affiliates.  This determination of affiliate status is not      
necessarily a conclusive determination for other purposes.                      

The number of shares outstanding of the Registrant's Common Stock, $1 par   
value, on February 28, 1997 was 7,625,181.                                      

     DOCUMENTS INCORPORATED BY REFERENCES.
  Portions of the Annual Report to Shareholders for the past year ended December
31, 1996, are incorporated by reference into Parts I and II of this document.   

Portions of the Registrant's definitive Proxy Statement for the 1997 annual 
meeting of security holders to be held May 1, 1997, are incorporated herein by  
reference into Part III of this document.                                       

     Exhibit index is located on pages 34-35 of this document.
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      PART I

Item 1.  BUSINESS                                                               

(a) General Development of Business                                             

 As used in this Form 10-K, the term "Company" refers to RLI Corp. and its
subsidiaries and affiliates, unless the context otherwise indicates.            

RLI Corp., which was incorporated in Illinois in 1965, merged into and  
became a Delaware corporation in 1984.  In May of 1993, RLI Corp. changed its   
state of incorporation back to Illinois through a merger.  RLI Corp. is a       
holding company, which, through its subsidiaries, underwrites selected property 
and casualty insurance.                                                         

SIGNIFICANT DEVELOPMENT                                                         

OPHTHALMIC MERGER                                                               

In November 1996, the Company announced the merger of its ophthalmic    
services subsidiary, RLI Vision Corp., with Hester Enterprises, Inc.  The       
resulting organization operates under the name Maui Jim, Inc.  This transaction 
brings together the infrastructure of RLI Vision to support the recent sales    
growth of Maui Jim sunglasses.  The Company has a 44% (34% at December 31, 1996)
minority interest in Maui Jim, Inc., which is reflected in the Company's        
financial statements as an equity-based investment.  Fourth quarter 1996 results
included a one-time charge to the Company of $733,000, or $.06 per share, for   
the effect of the change from pooling to purchase accounting stemming from a    
1995 RLI Vision Corp. business combination.  This change was required because of
the aforementioned merger.                                                      

For further discussion of this transaction, refer to Note 1B of Notes to        
Consolidated Financial Statements from the Company's Annual Report to           
Shareholders, as attached in Exhibit 13.                                        

(b) Financial Information about Industry Segments                               

  Selected information about industry segments is included herein as Item 8.

(c) Narrative Description of Business                                           

     RLI INSURANCE GROUP

  RLI Insurance Group is composed primarily of two main insurance companies.
RLI Insurance Company, the principal subsidiary, writes multiple lines of       
insurance on an admitted basis in all 50 states, the District of Columbia and   
Puerto Rico.  Mt. Hawley Insurance Company, a subsidiary of RLI Insurance       
Company, writes multiple lines of insurance on an admitted basis in Kansas and  
surplus lines insurance in the remaining 49 states, the District of Columbia,   
Puerto Rico, the Virgin Islands and Guam.  Other companies in the RLI Insurance 
Group include: Replacement Lens Inc., RLI Aviation, Inc., License Express       
Services, Inc., and RLI Insurance Ltd.                                          

Since 1977, when the Company first began underwriting specialty property
and casualty coverages for commercial risks, highly cyclical market conditions  
and a number of other factors have influenced the Company's growth and          
underwriting profits.  The Company, as a "niche" company rather than an "all    
lines" company, seeks to develop expertise and large homogeneous books of       
business in areas generally overlooked by traditional markets.                  

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 In response to the soft market conditions of the early 1980's, which were
characterized by severe rate competition and excess underwriting capacity, the  
Company limited its writings in specialty property and casualty lines and       
terminated certain lines and sources of production.                             

 Significant rate increases resulted when the insurance market hardened in
late 1984.  The Company responded by expanding its premium volume in targeted   
lines.  Since 1987, the industry has experienced generally soft market          
conditions featuring intensified competition for admitted and surplus lines     
insurers, resulting in rate decreases.  The Company has continually monitored   
its rates and controlled its costs in an effort to maximize profits during this 
entrenched soft market condition.  As a result of Hurricane Andrew and other    
catastrophic losses, especially the Northridge Earthquake of January 17, 1994,  
property rates hardened in California, Florida and the wind belt, but remain    
soft in other areas of the country.  During 1994, the Company secured rate      
increases of over 30% on the commercial property book of business, while the    
casualty book of business incurred flat to moderate decreases.  During 1995,    
rates for catastrophic driven property business, especially in California,      
continued to remain hard.  In 1996, as expected, some softening began for this  
type of business.  The Company's casualty book has continued to incur flat to   
moderate rate decreases.                                                        

The Company initially began to write specialty property and casualty    
insurance primarily through independent underwriting agents.  However, with the 
opening of its first branch office in 1984, the Company began to shift its      
marketing efforts from independent underwriting agents to wholly-owned branch   
offices which market to wholesale producers.  The Company also markets certain  
products to retail producers from its Specialty Marketing Division located at   
the home office.  The Company produced business under agreements with three     
underwriting agents in 1996. The majority of its specialty property and casualty
business is marketed through its Specialty Marketing and Surety divisions and   
eight branch offices located in Los Angeles, California; San Diego, California; 
San Francisco, California; St. Paul, Minnesota; Overland Park, Kansas;          
Glastonbury, Connecticut; Atlanta, Georgia; and Chicago, Illinois.  In  1995,   
the Company established an underwriting facility in Columbus, Ohio to underwrite
Lenders' Single Interest inland marine property insurance.                      

The following table provides for the year ended December 31, 1996 the   
geographic distribution of the Company's risks insured as represented by direct 
premiums earned for all product lines.  For the year ended December 31, 1996, no
other state accounted for more than 2% of total direct premiums earned for all  
product lines.                                                                  
     Direct Premiums
      STATE                       EARNED        PERCENT OF TOTAL
       -----                   -------------      ----------------

California               $106,222,590             39.1% 
Texas                      38,767,328             14.3  
Florida                    20,731,370              7.6  
New York                   18,377,973              6.8  
Michigan                    6,554,086              2.4  
Pennsylvania                5,754,042              2.1  
Illinois                    5,647,419              2.1  

All other                  69,496,900             25.6  
                          ----------             -----

Total direct premiums    $271,551,708            100.00%
                         ============            =======

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  The Company presently underwrites selected property and casualty insurance
primarily in the following lines:                                               

 COMMERCIAL PROPERTY.  The Company's commercial property coverage consists
primarily of excess and surplus lines and specialty insurance such as fire and  
difference in conditions which includes earthquake, flood and collapse          
coverages.  The Company writes coverage for a wide range of commercial and      
industrial classes such as office buildings, apartments, condominiums, certain  
industrial and mercantile structures, and buildings under construction.  The St.
Paul, Los Angeles, Glastonbury, Overland Park, San Francisco, Chicago, Columbus 
and Atlanta branch offices are responsible for underwriting this coverage.  In  
1994, 1995, and 1996, net earned premiums totaled $42,646,000, $49,430,000, and 
$47,822,000 or 27%, 32%, and 31% respectively, of the Company's consolidated    
revenues.                                                                       

  GENERAL LIABILITY.  The Company writes general liability coverages through
its St. Paul, Glastonbury, Chicago and Atlanta branch offices and through one of
its unaffiliated underwriting agents.  The Company's general liability business 
consists primarily of coverage for third party liability of commercial insureds 
including manufacturers, contractors, apartments and mercantile.  Net earned    
premiums totaled $35,160,000, $36,499,000, and $34,834,000, or 22%, 23% and 22% 
of the Company's consolidated revenues for the years 1994, 1995, and 1996,      
respectively.                                                                   

COMMERCIAL AND PERSONAL UMBRELLA LIABILITY.  The Company's commercial   
umbrella coverage is produced through its Overland Park, St. Paul, Atlanta, and 
Glastonbury branch offices.  The coverage is principally written in excess of   
primary liability insurance provided by other carriers and, to a small degree,  
in excess of primary liability written by the Company.  The personal umbrella   
coverage, which is produced through the Specialty Marketing Division, is written
in excess of the homeowners and automobile liability coverage provided by other 
carriers.  Net earned premiums totaled $17,638,000,  $18,092,000, and           
$21,282,000 or 11%, 12%, and 14% of the Company's consolidated revenues for the 
years 1994, 1995, and 1996, respectively.                                       

DIRECTORS' AND OFFICERS' LIABILITY/MISCELLANEOUS PROFESSIONAL LIABILITY.
In December, 1990, the Company established a new Directors' and Officers'       
Liability underwriting facility in San Diego, California.  In 1996, the facility
expanded to offer Miscellaneous Professional Liability for a variety of low to  
moderate classes of risks.  Net earned premiums totaled $5,680,000, $6,025,000, 
and $5,000,000, or 4%, 4% and 3% of the Company's consolidated revenues for the 
years 1994, 1995, and 1996, respectively.                                       

EMPLOYER'S EXCESS INDEMNITY.  In 1993, the Company began offering       
Employer's Excess Indemnity coverage for businesses which have opted out of the 
Workers' Compensation plan in the state of Texas.  The coverage is similar to   
accident and health, in that it indemnifies the employer for expenses resulting 
from a work related injury or disease, excess of a self-insured retention (SIR).
The SIR can range from $50,000 to $500,000. The product is underwritten out of  
the Overland Park branch office.  Net earned premiums totaled $7,953,000,       
$8,257,000, and $6,566,000 or 5%, and 5%, and 4% of the Company's consolidated  
revenues for 1994, 1995, and 1996, respectively.                                

  SURETY.  In 1993, the Company began writing surety business.  This product
line is underwritten from the Home Office in Peoria and through an underwriting 
facility in Dallas, Texas.  The initial target market of the Surety Division was
a wide range of commercial surety bonds written primarily through the           
independent agency system.  In 1996, the Company expanded their product offering
to include contract bonds for small size contractors.  Net earned premiums      
totaled $2,300,000, $2,956,000, and $4,408,000, or 1%, 2%, and 3% of the        
Company's consolidated revenues for 1994, 1995, and 1996, respectively.         

   OTHER.  Smaller programs offered by the Company include: primary employer's
indemnity, excess medical, contact lens (discontinued in 1995), commercial      
multi-peril and accident and health insurance.  Net earned premiums from these  
lines totaled $28,807,000, $12,209,000, and $10,744,000 or 18%, 8% and 7% of the
Company's consolidated revenues for the years 1994, 1995, and 1996,             
respectively.                                                                   

In June of 1995, a new facility was opened in Columbus, Ohio.  This     
facility specializes in writing single interest inland marine property insurance
for major lending institutions.  This insurance covers the institution's        
interest in property used as collateral for loans, in the event of the          
borrower's default.                                                             

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COMPETITION                                                                     

The Company's specialty property and casualty insurance subsidiaries are
part of an extremely competitive industry which is cyclical and characterized by
periods of high premium rates and shortages of underwriting capacity followed by
periods of severe competition and excess underwriting capacity.  Within the     
United States alone, approximately 3,500 companies, both stock and mutual,      
actively market property and casualty products.  The combination of products,   
service, pricing and other methods of competition vary from line to line.  The  
Company's principal methods of meeting this competition are innovative products,
marketing structure and quality service to the agents and policyholders at a    
fair price.  The Company competes favorably in part because of its sound        
financial base and reputation, as well as its broad geographic penetration into 
all 50 states, the District of Columbia and Puerto Rico.  In the property and   
casualty area, the Company has acquired experienced underwriting specialists in 
its branch and home offices.  In 1987, the insurance industry, in general,      
entered into a "soft" or highly competitive period during which insurance rates 
generally decreased.  The specialty property and casualty market continues to be
soft with some rate increases experienced in the property lines in California,  
Florida and the wind belt from 1993 through 1995.  The Company is maintaining   
its underwriting and marketing standards by not seeking market share at the     
expense of earnings.                                                            

RATINGS                                                                         

  During 1992, the A.M. Best rating for RLI Insurance Company, the principal
subsidiary of the Company, was upgraded to "A" (Excellent).  During 1993, Mt.   
Hawley Insurance Company's (an indirect subsidiary of the Company) A.M. Best    
rating was upgraded from "A-" (Excellent) to "A" (Excellent).  During 1996, A.M.
Best reaffirmed "A" (Excellent) ratings for both RLI Insurance Company and Mt.  
Hawley Insurance Company.  Ratings for the industry range from "A++" (Superior) 
to "F" (In Liquidation) and some companies are not rated.  Publications of A.M. 
Best indicate that the "A" and "A-" (Excellent) ratings are assigned to those   
companies that in A.M. Best's opinion have achieved excellent overall           
performance when compared to the standards established by A.M. Best and have a  
strong ability to meet their obligations to policyholders over a long period of 
time.  In evaluating a company's financial and operating performance, A.M. Best 
reviews the company's profitability leverage and liquidity as well as the       
company's spread of risk, the quality and appropriateness of its reinsurance,   
the quality and diversification of its assets, the adequacy of its policy or    
loss reserves, the adequacy of its surplus, its capital structure and the       
experience and objectives of its management.  A.M. Best's ratings are based on  
factors relevant to policyholders, agents, insurance brokers and intermediaries 
and are not directed to the protection of investors.                            

   In conjunction with RLI Corp.'s July, 1993 issuance of $46 million of 6.00%
Convertible Debentures due 2003, the Company applied for and received a debt    
rating from two of the major debt rating agencies - Standard & Poor's Ratings   
Group and Moody's Investor Service.  Each of these security review firms        
assigned investment grade ratings to the debt issue.                            

Moody's reviews corporations and assigns ratings exclusively for the    
purpose of grading bonds according to investment quality.  Their rating symbols 
range from "Aaa" (highest) to "C" (lowest).  The Company's debt issue received a
rating of "Baa3" classifying them as medium grade obligations (i.e. they are    
neither highly protected nor poorly secured).  Moody's assigns this rating to   
companies when interest payments and principal security appear adequate for the 
present but certain protective elements may be lacking, or may be               
characteristically unreliable over any great length of time.                    

 Standard & Poor's assigns ratings to corporate debt that range from "AAA"
(highest) to "CCC" (lowest).  Standard & Poor's assigned RLI's Convertible      
Debentures a rating of "BBB-" based on the Company's adequate capitalization and
its disciplined underwriting approach.  This classification deems the issuer to 
have adequate capacity to pay interest and repay principal.  Standard & Poor's  
assigns this rating when the issuer normally exhibits adequate protection to    
debtholders, yet adverse economic conditions or changing circumstances are more 
likely to lead to a weakened capacity to pay interest and repay principal for   
debt in this capacity than in higher rated categories.                          

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REINSURANCE                                                                     

The Company reinsures a significant portion of its property and casualty
insurance exposure, paying to the reinsurer a portion of the premiums received  
on such policies.  Earned premiums ceded to non-affiliated reinsurers totaled   
$125,458,000, $131,772,000, and $140,928,000 in 1994, 1995, and 1996,           
respectively.  Insurance is ceded principally to reduce net liability on        
individual risks and to protect against catastrophic losses.  Although          
reinsurance does not legally discharge an insurer from its primary liability for
the full amount of the policies, it does make the assuming reinsurer liable to  
the insurer to the extent of the insurance ceded.                               

During the period 1994 through 1996, certain of the Company's reinsurers
were unable to meet their obligations to the Company under reinsurance treaties.
As reserves were previously established for the uncollectible amounts, the      
effects of the insolvent reinsurers on net earnings for 1994 through 1996 were  
immaterial.  The Company continually monitors the financial stability of its    
reinsurers and establishes reserves for uncollectible reinsurance balances on a 
regular basis.  As a result of these reviews, the Company reevaluates its       
position with respect to its reinsurance.  During 1994, 1995, and 1996, the     
Company provided  $1,000,000, $613,296, and $1,006,140 for uncollectible        
reinsurance balances.  Currently the Company attempts to purchase reinsurance   
from a limited number of financially strong reinsurers.  Retention levels are   
adjusted each year to maintain a balance between the growth in surplus and the  
cost of reinsurance.  At December 31, 1996, the Company had prepaid reinsurance 
premiums and reinsurance recoverables on paid and unpaid losses and settlement  
expenses with American Re-Insurance Company (rated A+ "superior" by A.M. Best   
Company) that amounted to $59,492,246.  All other reinsurance balances          
recoverable, when considered by individual reinsurer, are less than 10% of      
shareholders' equity.                                                           

 The following table sets forth the largest reinsurers in terms of amounts
recoverable, the total amounts recoverable net of reinsurance payables from such
reinsurers as of December 31, 1996 and the amounts of written premium ceded by  
the Company to such reinsurers during 1996.                                     

                                                                · Download Table


                                GROSS REINSURER                   CEDED            
                                 EXPOSURE AS OF  PERCENT       PREMIUMS   PERCENT  
                              DECEMBER 31, 1996  OF TOTAL       WRITTEN  OF TOTAL  

                                                                                   
American Re-Insurance Co.           $59,492,246   26.20%    $19,393,486     13.43% 
General Reins Corp.                  13,776,840    6.07       7,932,445      5.49  
Transatlantic Reinsurance            12,347,185    5.44      16,718,104     11.57  
Lloyd's of London                    10,687,256    4.71      14,615,153     10.12  
NAC Reinsurance Corporation           9,339,787    4.11       4,379,530      3.03  
Employer's Re                         8,102,927    3.57       8,530,215      5.91  
TIG Insurance Co                      6,505,160    2.86         708,688      0.49  
St. Paul Fire & Marine                5,414,767    2.38       1,927,657      1.33  
Security Ins. Co. of Hartford         5,214,385    2.30       1,441,772      1.00  
Everest Re                            5,064,106    2.23       6,384,821      4.42  
All other reinsurers                 91,151,134   40.13      62,411,792     43.21  
                                     ----------    -----     ----------      ----- 

Total ceded exposure               $227,095,793  100.00%   $144,443,663    100.00% 
                                   ============   =======  ============     =======


As of December 31, 1996, the Company held $18,566,380 in irrevocable    
letters of credit, $4,570,492 under trust agreements and $1,684,154 in cash to  
collateralize a portion of the total amount recoverable.                        

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Since 1992, the Company has purchased non-proportional contracts.  This 
allows the Company to retain a larger percentage of the premium and a larger    
portion of the initial loss risk.  Under non-proportional reinsurance, the      
ceding company retains losses on a risk up to a specified amount and the        
reinsurers assume any losses above that amount.  Since 1989, through its various
reinsurance programs, the Company has generally limited its maximum retained    
exposure on any one risk to $1,000,000.  The Company seeks to limit its net     
aggregate exposure to a single catastrophic event to less than 10% of           
shareholders' equity by purchasing various types of reinsurance.                

The Company maintained its commercial property reinsurance protection in
1996, but decreased net exposure by reducing its retention in the fourth        
catastrophe layer.  Through implementation of this change, the Company          
reaffirmed its ability to maintain its net aggregate exposure on a single       
catastrophic event to less than 10% of shareholders' equity.  Using             
computer-assisted techniques, the Company quantifies and monitors its exposure  
to earthquake risk, the most significant catastrophe exposure to the Company.   
Detail is captured for each location covered for earthquake risk and the        
Probable Maximum Loss (PML) for each risk is determined.  The PML calculation   
for each risk includes all faults to which the risk is exposed.  Richter scale  
magnitudes used in the PML calculations are determined and applied separately   
for each fault.  The Company uses the greater of the magnitude of an earthquake 
which only occurs every 100 years or 6.5 on the Richter scale in its PML        
calculations.  Several widely accepted methods are used to estimate the         
magnitude of the 100 year event for each fault.  Underwriting decisions are     
based on the PML as determined by the system, which calculates PML's on over 200
faults.  Portfolio runs are made regularly to determine the Company's overall   
exposure on each fault from all risks covered.  Total exposure after facultative
reinsurance is managed by the Company to fall within the limits covered by the  
Company's chosen net retention, working layer treaty reinsurance and catastrophe
reinsurance.                                                                    

   In 1996, the Company entered into an innovative catastrophe reinsurance and
loss financing program with Centre Reinsurance (Centre Re).  The program, called
Catastrophe Equity Puts (CatEPuts)SM, augments the Company's traditional        
reinsurance by integrating its loss financing needs with a pre-negotiated sale  
of securities linked to exchange-traded shares.  CatEPuts allows the Company to 
put up to $50.0 million of its convertible preferred shares to Centre Re at a   
pre-negotiated rate in the event of a catastrophic loss provided the loss does  
not reduce GAAP equity to less than $55.0 million.  CatEPuts is intended to be a
three-year program and is designed to enable the Company to continue operating  
after a loss of such magnitude that its reinsurance capacity is exhausted.  If  
the Company exercises its option to put preferred shares to Centre Re, then     
Centre Re, in turn, has the option to reinsure certain business written by the  
Company on a prospective basis.                                                 

FACTORS AFFECTING SPECIALTY PROPERTY AND CASUALTY PROFITABILITY                 

   The profitability of the specialty property and casualty insurance business
is generally subject to many factors, including rate competition, the severity  
and frequency of claims, natural disasters, state regulation of premium rates,  
default of reinsurers, interest rates, general business conditions, regulatory  
measures and court decisions that define and expand the extent of coverage and  
the amount of compensation due for injuries or losses.  One of the              
distinguishing features of the property and casualty insurance business is that 
its product must be priced before the ultimate claims costs can be known.  In   
addition, underwriting profitability has tended to fluctuate over cycles of     
several years' duration.  Insurers generally had profitable underwriting results
in the late 1970's, substantial underwriting losses in the early 1980's and     
somewhat smaller underwriting losses in 1986 and 1987.  During the years 1988   
through 1992, underwriting losses increased due to increased rate competition   
and the frequency and severity of catastrophic losses, although pre-tax         
operating income remained profitable due to investment income gains.  During    
1993 through 1995, the industry experienced some improvement in underwriting    
losses.  The trends experienced during the late 1980s, however, have continued, 
and companies continue to post underwriting losses but remain profitable through
investment income gains.  During 1996 the industry's statutory combined ratio is
estimated to be 106.1.  The Company believes that certain other factors affect  
its ability to underwrite specialty lines successfully, including:              

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SPECIALIZED UNDERWRITING EXPERTISE.  The Company employs experienced    
professionals in its branch offices.  Each office restricts its production and  
underwriting of business to certain classes of insurance reflecting the         
particular areas of expertise of its key underwriters.  In accepting risks, all 
independent and affiliated underwriters are required to comply with risk        
parameters, retention limits and rates prescribed by the Company's home office  
underwriting group, which reviews submissions and periodically audits and       
monitors underwriting files and reports on losses over $100,000.  Compensation  
of senior underwriters is substantially dependent on the profitability of the   
business for which they are responsible.  The loss of any of these professionals
could have an adverse effect on the Company's underwriting abilities and        
earnings in these lines.                                                        

  The Company's Underwriting Policy limits extension of binding authority to
independent agents.  The Company's product distribution falls into distinct     
categories, with binding authority following the categorization.                

BROKER BUSINESS.  The largest volume of broker generated premium is     
Commercial Property, General Liability, Commercial Umbrella and Employer's      
Excess Indemnity.  This business is produced through wholesale brokers who are  
not affiliated with the Company.  Only a Company underwriter has the authority  
to bind the Company on such risks.                                              

INDEPENDENT AGENT BUSINESS.  The Surety Division offers its business    
through a variety of independent agents.  Additionally, the Specialty Marketing 
Division writes program business, such as Personal Umbrella and the In-Home     
Business Policy, through independent agents.  Each of these programs involves   
detailed eligibility criteria which are incorporated into strict underwriting   
guidelines.  The programs involve prequalification of each risk using the       
"smart" system accessible by the independent agent.  The independent agent      
cannot bind the risk unless they receive approval through the Company's "smart" 
system.                                                                         

   UNDERWRITING AGENTS.  One independent agent is authorized to underwrite and
bind business on behalf of the Company within limited underwriting guidelines as
follows: General Liability business up to a limit of $1,000,000 written for a   
variety of risks, primarily in Texas and Louisiana.  As well, the Surety        
Division has authorized an underwriting agency to underwrite and bind contract  
surety business on behalf of RLI, primarily in the East and Southeast.          

 With rare exceptions, producers of business who are not Company employees
are compensated on the basis of direct commissions with no provision for any    
contingent profit commission.  There are a few volume incentives for producers  
handling association business, with the increased commission involved being tied
to the program's underwriting profit.  This represents less than 5% of the      
business.                                                                       

RETENTION LIMITS.  The Company limits its net retention of single and   
aggregate risks through the purchase of reinsurance.  See "Business -- Specialty
Property and Casualty Insurance Segment -- Reinsurance."  The amount of         
reinsurance available fluctuates according to market conditions.  Reinsurance   
arrangements are subject to annual renewal.  Any significant reduction in the   
availability of reinsurance or increase in the cost of reinsurance could        
adversely affect the Company's ability to insure specialty property and casualty
risks at current levels or to add to the amount thereof.                        

CLAIMS ADJUSTMENT ABILITY.  The Company has a professional claims       
management team with proven experience in all areas of multi-line claims work.  
This team supervises and administers all claims and directs all outside legal   
and adjustment specialists.  Whether a claim is being handled by the Company's  
claim specialist or has been assigned to a local attorney or adjuster, detailed 
attention is given to each claim to minimize loss expenses while providing for  
loss payments in a fair and equitable manner.                                   

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   EXPENSE CONTROL.  Management continues to review all areas of the Company's
operations to streamline the organization, emphasizing quality and customer     
service, while minimizing expenses.  These strategies will help to contain the  
growth of future costs.  Maintaining and improving underwriting and other key   
organizational systems continues to be paramount as a means of supporting the   
Company's orderly growth in anticipation of a market rebound, as it is the      
Company's philosophy to retain its talented insurance professionals and to build
infrastructure in spite of the soft market.  Other insurance operating expenses 
as a percent of gross written premiums for the years 1994, 1995, and 1996 were  
5%, 5%, and 6%, respectively.                                                   

ENVIRONMENTAL EXPOSURES.  The Company is subject to environmental claims
and exposures through its commercial umbrella, general liability, and           
discontinued assumed reinsurance lines of business.  Within these lines, the    
Company's environmental exposures include environmental site cleanup, asbestos  
removal, and mass tort liability.  The majority of the exposure is in the excess
layers of the Company's commercial umbrella and assumed reinsurance books of    
business.                                                                       

The following table represents inception-to-date paid and unpaid        
environmental exposure data (including incurred but not reported losses) for the
periods ended 1994, 1995 and 1996:                                              

------------------------------------------------------------------------------- 
     Inception-to-date December 31
(in thousands)                     1994                1995              1996   
------------------------------------------------------------------------------- 

Loss and Loss Adjustment                                                        
Expense (LAE) payments                                                        
Gross                           $  3,549          $ 5,117           $ 8,267 
Ceded                           (  2,933)        (  3,842)         ($ 5,761)
------------------------------------------------------------------------------- 

Net                             $    616          $ 1,275           $ 2,506 
=============================================================================== 
Unpaid losses and LAE at end of year                                            
Gross                           $ 15,519          $20,154           $17,596 
Ceded                           (  9,875)         (13,398)         ($11,150)
------------------------------------------------------------------------------- 

Net                              $ 5,644          $ 6,756           $ 6,446 
=============================================================================== 

Although the Company's environmental exposure is limited as a result of 
entering the liability lines after the industry had already recognized it as a  
problem, Management cannot determine the Company's ultimate liability within any
reasonable degree of certainty.  This ultimate liability is difficult to assess 
due to evolving legislation on such issues as joint and several liability,      
retroactive liability, and standards of cleanup.  Additionally, the Company     
participates primarily in the excess layers, making it even more difficult to   
assess the ultimate impact.                                                     

LOSSES AND SETTLEMENT EXPENSES                                                  

Many years may elapse between the occurrence of an insured loss, the    
reporting of the loss to the insurer and the insurer's payment of that loss.  To
recognize liabilities for unpaid losses, insurers establish reserves, which are 
balance sheet liabilities. The reserves represent estimates of future amounts   
needed to pay claims and related expenses with respect to insured events which  
have occurred.                                                                  

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When a claim is reported, the claims department establishes a "case     
reserve" for the estimated amount of the ultimate payment.  The estimate        
reflects the informed judgment of professional claims personnel, based on the   
Company's reserving practices and the experience and knowledge of such personnel
regarding the nature and value of the specific type of claim.  Estimates for    
losses incurred but not yet reported are determined on the basis of statistical 
information, including the Company's past experience.  The Company does not use 
discounting (recognition of the time value of money) in reporting its estimated 
reserves for losses and settlement expenses.                                    

   The reserves are closely monitored and reviewed by management, with changes
reflected as a component of earnings in the current accounting period.  For     
lines of business without sufficiently large numbers of policies or that have   
not accumulated sufficient development statistics, industry average development 
patterns are used.  To the extent that the industry average development         
experience improves or deteriorates, the Company adjusts prior accident years'  
reserves for the change in development patterns.  Additionally, there may be    
future adjustments to reserves should the Company's actual experience prove to  
be better or worse than industry averages.                                      

As part of the reserving process, historical data is reviewed and       
consideration is given to the anticipated impact of various factors such as     
legal developments and economic conditions, including the effects of inflation. 
The reserving process provides implicit recognition of the impact of inflation  
and other factors affecting claims payments by taking into account changes in   
historic payment patterns and perceived probable trends.  Changes in reserves   
from the prior years' estimates are calculated based on experience as of the end
of each succeeding year (loss and settlement expense development).  The estimate
is increased or decreased as more information becomes known about the frequency 
and severity of losses for individual years.  A redundancy means the original   
estimate was higher than the current estimate; a deficiency means that the      
current estimate is higher than the original estimate.                          

  Due to the inherent uncertainty in estimating reserves for losses and loss
adjustment expenses, there can be no assurance that the ultimate liability will 
not exceed amounts reserved, with a resulting adverse effect on the Company.    
Based on the current assumptions used in calculating reserves, Management       
believes the Company's overall reserve levels at December 31, 1996 are adequate 
to meet its future obligations.                                                 

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  The table which follows is a reconciliation of the Company's unpaid losses
and settlement expenses for the years 1994, 1995, and 1996.                     

                                                        · Enlarge/Download Table


                                                     Year Ended December 31,            
                                                  --------------------------------------

(Dollars in thousands)                          1994           1995           1996      
                                                ----           ----           ----      
                                                                                        
Unpaid losses and settlement                                                            
  expenses at beginning of year:                                                        

  Gross                                     $310,767       $394,966       $418,986      
  Ceded                                     (145,208)      (199,737)      (197,338)     
                                             -------        -------        -------      
  Net                                        165,559        195,229        221,648      
                                             -------        -------        -------      

Increase (decrease) in incurred losses and                                              
  settlement expenses:                                                                  

  Current accident year                      100,535         62,619         69,724      
  Prior accident years                         1,107         23,271         (1,463)     
                                               -----         ------         ------      

    Total incurred                           101,642         85,890         68,261      
                                             -------         ------         ------      

Loss and settlement expense payments for                                                
  claims incurred:                                                                      
  Current accident year                      (36,501)       (10,586)       (11,026)     
  Prior accident years                       (36,026)       (48,023)       (37,505)     
                                              ------         ------         ------      

    Total paid                               (72,527)       (58,609)       (48,531)     
                                              ------         ------         ------      

Insolvent reinsurer charge off                   643            514            607      
Loss reserves commuted                           (88)        (1,376)        (1,201)     
                                              ------          -----         ------      

Unpaid losses and settlement                                                            
  expenses at end of year                   $195,229       $221,648       $240,784      
                                            ========       ========       ========      

Unpaid losses and settlement                                                            
  expenses at end of year:                                                              

  Gross                                     $394,966       $418,986       $405,801      
  Ceded                                     (199,737)      (197,338)      (165,017)     
                                            --------       --------       --------      
  Net                                       $195,229       $221,648       $240,784      
                                            ========       ========       ========      


Explanation of significant components of reserve development by calendar
year are as follows:                                                            

1994     During 1994, the Company experienced approximately $1,107,000 of       
       adverse development on loss reserves.  This development resulted from
        approximately $2,512,000 of adverse development in the other liability
        and products liability lines of business.  Approximately $1,000,000 of
         this development related to one individual claim.  The remainder of the
     adverse development is related to changes in loss reserves on prior
     years related to the professional liability business written by RLI
from 1987 through 1993.                                       

Offsetting the adverse development experience in the other liability and
products liability lines of business was approximately $1,644,000 of    
favorable development on the property line of business.  This favorable 
development resulted from individual claim estimates where the claims   
closed for less than the recorded reserves.                             

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1995     During 1995, the Company experienced approximately $23,300,000 of      
       adverse development on loss reserves.  This development resulted from
       approximately $27,300,000 of adverse development in the property line
  due to the 1994 Northridge earthquake.  Excluding the earthquake
  development, the Company experienced approximately $4,000,000 of
    favorable development.  Approximately $1,000,000 of this favorable
     development occurred in the property line excluding the earthquake,
    with the remaining $3,000,000 occurring in the other liability and
        products liability lines.  The liability development was the result of
  IBNR reserve decreases made possible by lower than expected tail
development on two liability programs.                        

1996     During 1996, the Company experienced approximately $1,463,000 of       
    favorable development on loss reserves.  This development resulted
        from approximately $1,519,000 of favorable development in the property
         lines of business.  Various property claims closed during the year were
    settled below recorded reserves.  The remaining $56,000 of adverse
        development relates to the net effect of changes made to casualty loss
     reserves.  This development is a result of reserve strengthening of
         $3,557,000 made in the General Liability and Miscellaneous Professional
         business on accident years 1987 through 1995.  This increase was offset
     by favorable development and reserve decreases of $3,501,000 in the
     Umbrella and Excess Employer's Indemnity programs on accident years
1986 and 1993 through 1995.                                   

The table on the following page presents the development under generally
  accepted accounting principles of the Company's balance sheet reserves for
1987 through 1996.  The top line of the table shows the reserves at the 
  balance sheet date for each of the indicated periods.  This represents the
estimated amount of losses and settlement expenses arising in all prior 
  years that are unpaid at the balance sheet date, including losses that had
been incurred but not yet reported to the Company.  The lower portion of
   the table shows the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year.  The estimate
  changes as more information becomes known about the frequency and severity
of claims for individual periods.                                       

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                                                        · Enlarge/Download Table


                                                                             Year Ended December 31,                         
                               --------------------------------------------------------------------------------------------- 

(Dollars in thousands)         1987     1988      1989      1990      1991      1992      1993      1994      1995      1996 
                               ----     ----      ----      ----      ----      ----      ----      ----      ----      ---- 
                                                                                                                             
 Net Liability for unpaid                                                                                                    
  losses and settlement                                                                                                      
  expenses at end of year   $66,169  $89,197   $95,953  $103,302  $110,844  $130,452  $165,559  $195,229  $221,648  $240,784 

Paid (cumulative) as of:                                                                                                     
 One year later              10,170   17,312    14,302    19,297    23,561    24,725    36,026    48,023    37,505           
 Two years later             21,860   26,093    26,685    35,963    37,763    46,342    63,675    73,972                     
 Three years later           28,052   37,137    40,341    44,088    49,462    64,364    84,614                               
 Four years later            35,459   47,617    44,714    52,322    57,085    78,994                                         
 Five years later            42,010   48,937    51,153    56,413    65,318                                                   
 Six years later             41,698   53,670    54,546    62,989                                                             
 Seven years later           44,995   56,254    59,444                                                                       
 Eight years later           46,113   60,499                                                                                 
 Nine years later            49,551                                                                                          

Liability re-estimated                                                                                                       
 as of:                                                                                                                      
 One year later              67,033   86,230    91,646   101,251   108,249   128,600   166,666   218,499   220,185           
 Two years later             67,939   85,120    89,112    98,505   105,747   132,850   164,218   214,352                     
 Three years later           68,697   84,426    87,981    95,690   107,777   132,377   157,286                               
 Four years later            69,904   84,931    87,403    97,041   106,326   127,426                                         
 Five years later            69,670   84,217    90,030    96,490   100,968                                                   
 Six years later             70,486   87,585    88,982    93,159                                                             
 Seven years later           72,074   86,593    85,381                                                                       
 Eight years later           72,540   83,306                                                                                 
 Nine years later            69,601                                                                                          

Net cumulative redundancy                                                                                                    
 (deficiency)               $(3,432) $ 5,891   $10,572   $10,143   $ 9,876   $ 3,026   $ 8,273  $(19,123)  $ 1,463           

Gross liability                                                                                 $394,966  $418,986  $405,801 
Reinsurance recoverable                                                                         (199,737) (197,338) (165,017)
                                                                                                --------  --------  -------- 
Net liability                                                                                   $195,229  $221,648  $240,784 

Gross re-estimated liability                                                                    $427,830  $413,669           
Re-estimated recoverable                                                                        (213,478) (193,484)          
                                                                                                --------  --------           
Net re-estimated liability                                                                      $214,352  $220,185           

Gross cumulative redundancy                                                                                                  
 (deficiency)                                                                                   $(32,864)   $5,227           


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OPERATING RATIO                                                                 

PREMIUMS TO SURPLUS RATIO                                                       

The following table shows, for the periods indicated, the Company's     
insurance subsidiaries' statutory ratios of net premiums written to             
policyholders' surplus.  While there is no statutory requirement applicable to  
the Company which establishes a permissible net premiums written to surplus     
ratio, guidelines established by the National Association of Insurance          
Commissioners provide that this ratio should generally be no greater than 3 to  
1.                                                                              

                                                        · Enlarge/Download Table

                                                   YEAR ENDED DECEMBER 31,                
                                ----------------------------------------------------------

(Dollars in thousands)              1992         1993        1994         1995        1996
                                    ----         ----        ----         ----        ----
                                                                                          
Statutory net premiums written  $110,895     $136,728    $131,164     $130,453    $130,908

Policyholders' surplus          $100,585     $152,262    $136,125     $172,313    $207,787

Ratio                           1.1 to 1      .9 to 1    1.0 to 1      .8 to 1     .6 to 1


GAAP AND STATUTORY COMBINED RATIOS                                              

The underwriting experience of the Company is best indicated by its GAAP
combined ratio, which is the sum of (a) the ratio of incurred losses and        
settlement expenses to net premiums earned (loss ratio) and (b) the ratio of    
policy acquisition costs and other operating expenses to net premiums earned    
(expense ratio).                                                                

                                                                · Download Table

                                   YEAR ENDED DECEMBER 31,                
                ----------------------------------------------------------

GAAP                1992         1993        1994         1995        1996
                    ----         ----        ----         ----        ----
                                                                          
Loss ratio          60.3         63.3        72.5         64.4        52.2

Expense ratio       31.1         33.9        44.4         43.1        35.2
                    ----         ----        ----         ----        ----

Combined ratio      91.4         97.2       116.9        107.5        87.4
                    ====         ====       =====        =====        ====


(1) Excluding the effects of the Northridge Earthquake, the GAAP combined ratio 
for the years ended 1994 and 1995 would have been 91.1 and 86.2,        
respectively.                                                           

The Company also calculates the statutory combined ratio, which is not  
indicative of GAAP underwriting profits due to accounting for multiple-year     
retrospectively-rated reinsurance contracts and policy acquisition costs        
differently for statutory accounting purposes compared to GAAP.  The statutory  
combined ratio is the sum of (a) the ratio of statutory loss and settlement     
expenses incurred to statutory net premiums earned (loss ratio) and (b) the     
ratio of statutory policy acquisition costs and other underwriting expenses to  
statutory net premiums written.                                                 

                                                        · Enlarge/Download Table

                                            YEAR ENDED DECEMBER 31,                     
                         ----------------------------------------------------------     
                                                                                        
Statutory                    1992         1993        1994         1995        1996     
                             ----         ----        ----         ----        ----     

Loss ratio                   58.9         65.8        73.4         63.6        52.3     

Expense ratio                36.9         22.1   (3)  43.5         42.9        36.8     
                             ----         ----        ----         ----        ----     

Combined ratio               95.8         87.9   (3) 116.9   (4)  106.5   (4)  89.1     
                             ====         ====       =====        =====        ====     

Industry combined ratio     115.7   (2)  106.9   (2) 108.4   (2)  106.4   (2) 106.1  (1)
                            =====        =====       =====        =====       =====     


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(1) Source:  Insurance Information Institute.  Estimated for the year ended     
December 31, 1996.                                                      

(2) Source:  A.M. Best Aggregate & Averages -- Property-Casualty (1996          
Edition).                                                               

(3) Contingent commission income recorded during 1993, from the cancellation of 
a multiple-year retrospectively-rated reinsurance contract, reduced the 
statutory combined and expense ratio by 10.3 points.                    

(4) Excluding the effects of the Northridge Earthquake, the statutory combined  
ratio for the years ended 1994 and 1995 would have been 89.7 and 85.3,  
respectively.                                                           

     INVESTMENTS

The investment portfolios of the Company are managed by an Investment   
Committee of the Board of Directors.  The Company follows an investment policy  
that is reviewed quarterly and revised periodically.                            

Investments of the highest quality and marketability are critical for   
preserving claims paying ability.  Virtually all of RLI's fixed income          
investments are U.S. Government securities or AA rated or better taxable and tax
exempt issues.  Common stock portfolios are limited to securities listed on     
national exchanges and listed by the Securities Valuation Office of the National
Association of Insurance Commissioners.  The investment portfolio serves        
primarily as the funding source of loss reserves and secondly as a source of    
income.  For these reasons, RLI's primary investment criteria are quality and   
liquidity, followed by yield.                                                   

During 1996, operating cash flows were used to acquire fixed income     
instruments composed mainly of intermediate-term U.S. Government and Agency     
securities and municipal securities.  Additionally, a small portion of the funds
were allocated to an investment grade convertible debenture portfolio designed  
to provide diversification and yield enhancement to the portfolio.  The         
tax-exempt component of the fixed maturity portfolio increased $7.9 million, to 
$114.7 million; and comprises 37.2% of the Company's total fixed maturity       
portfolio, up 1.1% from year end 1995.  The taxable U.S. Government, Agency and 
Municipal portion of the fixed income portfolio declined slightly by $0.4       
million to $185.8 million, or 60.3% of the total versus 63.0% at year end 1995. 
Investment grade corporate securities totaled $3.7 million compared to $2.7     
million at year end 1995, while convertible debenture securities totaling $4.0  
million were added to the portfolio in 1996.                                    

   Equity securities increased $34.9 million from $154.0 million at the end of
last year to $188.9 million at the end of 1996.  During 1996, net common equity 
investments totaling $9.2 million were purchased and pretax unrealized          
appreciation of equity securities totaled $25.8 million.  Equity securities as a
percentage of cash and invested assets increased to 35.1% at the end of 1996    
from 32.4% at year end 1995.  Combined cash and short-term investments totaling 
$40.8 million at year end 1996 represented 7.6% of cash and invested assets     
versus 4.4% in 1995.  The Company's short-term investments consist of U.S.      
Government and Agency backed money market funds and the highest rated commercial
paper.                                                                          

RLI's mix of fixed income securities continues to be biased in favor of 
U.S. Government and Agency securities due to their high liquidity and almost    
risk-free nature.  The mixture of tax-exempt and taxable instruments within the 
fixed income portfolios is decided at the time of purchase on the basis of      
available after-tax returns and overall taxability of all invested assets.  The 
majority of securities reviewed for purchase are either U.S. Government, Agency,
or high grade municipal debt instruments.  As part of its investment philosophy,
the Company attempts to avoid exposure to default risk by holding, almost       
exclusively, instruments ranked in the top two grades of investment security    
quality by Standard & Poor's and Moody's (i.e. AAA and AA).  Interest rate risk 
is limited by restricting and managing acceptable call provisions among new     
security purchases.                                                             

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   The Company follows a program of matching assets to anticipated liabilities
to ensure its ability to hold securities until maturity.  The Company's known   
debt and long-term accounts payable are added to the estimate of its unpaid     
losses and settlement expenses, by line of business.  These anticipated         
liabilities are then factored against ultimate payout patterns and the resulting
payout streams are fully funded with the purchase of fixed-income securities of 
like maturity.  Management believes that interest rate risk can best be         
minimized by such asset/liability matching.                                     

Aggregate maturities for the fixed maturity securities are as follows:  

                                                                · Download Table

MATURITY                  PAR      AMORTIZED           FAIR       CARRYING
YEAR                    VALUE          VALUE          VALUE          VALUE
----                    -----          -----          -----          -----
                                                                          
1997              $16,745,000    $16,719,228    $16,829,890    $16,721,759
1998               27,995,000     28,260,289     28,717,798     28,287,175
1999               39,270,000     39,626,036     40,901,976     39,943,462
2000               32,910,000     33,687,738     34,601,360     33,876,334
2001               20,640,000     21,371,646     21,649,472     21,305,084
2002               23,380,000     24,390,589     24,560,773     24,300,451
2003               41,300,000     41,534,757     40,607,493     41,534,757
2004               20,295,000     20,433,996     20,474,843     20,433,996
2005               29,040,000     29,446,145     29,833,274     29,446,145
2006               14,350,000     14,343,596     14,532,125     14,343,596
2007                7,100,000      7,114,873      7,218,453      7,114,873
2008                8,275,000      8,029,518      8,206,127      8,029,518
2009               10,310,000     10,384,245     10,416,465     10,384,245
2010                9,750,000     10,132,696      9,968,673     10,132,696
2011                2,000,000        812,348        787,500        812,348
2012                        0              0              0              0
2013                1,400,000        999,354      1,088,500        999,354
2014                        0              0              0              0
2015                  500,000        520,940        535,000        520,940
                      -------        -------        -------        -------

                 $305,260,000   $307,807,994   $310,929,722   $308,186,733
                 ============   ============   ============   ============


Under generally accepted accounting principles, equity and fixed income 
securities are carried at fair market value, except that a company that can     
demonstrate its ability to hold fixed income securities until their originally  
scheduled maturity is permitted to carry such securities at amortized cost.  RLI
Corp. has chosen to carry most of its fixed income securities at amortized cost 
as it believes it has constructed its fixed income portfolios to match expected 
liability payouts and thus has the ability and intention to hold such securities
until originally scheduled maturity.  Consequently, fluctuations in the market  
value of most bonds are not reflected in the financial statements and do not    
affect shareholders' equity.  At December 31, 1996, the Company's equity        
securities valued at $188.9 million, accounted for 35.1% of total cash and      
invested assets and 90.9% of the combined statutory surplus of its insurance    
subsidiaries.  At December 31, 1996, net pretax unrealized capital appreciation 
of equity securities was $77.2 million.                                         

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The Company's investment results are summarized in the following table: 

                                                                · Download Table

                                           YEAR ENDED DECEMBER 31,                
                        ----------------------------------------------------------

(Dollars in thousands)      1992         1993        1994         1995        1996
                            ----         ----        ----         ----        ----
                                                                                  
Average invested                                                                  
 assets (1)             $259,522     $341,361    $407,722     $442,717    $504,773
Investment                                                                        
 income (2)(3)            13,483       16,857      20,133       22,029      23,681
Realized gains                                                                    
 (losses) (3)                921          254     (3,595)          457       1,018
Change in unreal-                                                                 
 ized appreciation/                                                               
 depreciation  (3)(4)      3,546        7,945     (5,749)       36,037      25,033
Annualized return                                                                 
 on average                                                                       
 invested assets            6.9%         7.3%        2.7%        13.2%        9.9%


(1) Average of amounts at beginning and end of each year.                       
(2) Investment income, net of investment expenses, including non-debt interest  
expense.                                                                
(3) Before income taxes.                                                        
(4) Relates to available-for-sale fixed maturities and equity securities.       

      REGULATION

STATE REGULATION                                                        

The Company's insurance subsidiaries are highly regulated by insurance  
regulators in their states of incorporation as well as the states in which they 
do business.  Such regulations, among other things, limit the amount of         
dividends and other distributions the subsidiaries can pay without prior        
approval of the insurance department in the states in which they are physically 
and/or commercially domiciled, and impose restrictions on the amount and type of
investments they may have.  Certain states also regulate the rates insurers may 
charge for certain property/casualty products.                                  

These regulations are designed to ensure financial solvency of insurance
companies and to require fair and adequate service and treatment for            
policyholders.  They are enforced through the granting and revoking of licenses 
to do business, licensing of agents and brokers, monitoring of trade practices, 
policy form approval, fair and equitable premium and commission rates, and      
minimum reserve and capital requirements.  The procedures are administered by   
the various state departments of insurance and are supplemented by periodic     
reporting procedures and periodic examinations.                                 

   The quarterly and annual financial reports to the states utilize accounting
principles which are different than the generally accepted accounting principles
used in shareholders' reports.  The statutory accounting principles, in keeping 
with the intent to assure policyholder protection, are based, in general, on a  
liquidation concept while generally accepted accounting principles are based on 
a going concern concept.  Currently, the National Association of Insurance      
Commissioners (NAIC) has a project to codify statutory accounting practices, the
result of which is expected to constitute the only source of "prescribed"       
statutory accounting practices.  Accordingly, the project may result in changes 
to the accounting policies that insurance enterprises use to prepare their      
statutory financial statements.                                                 

Under the laws of most states and provinces, regulatory authorities have
relatively broad discretion with respect to granting, renewing and revoking     
brokers' and agents' licenses to transact business in the state.  The manner of 
operating in particular states may vary according to the licensing requirements 
of the particular state, which may, among other things, require a firm operate  
in the state through a corporation.  In a few states and provinces, licenses are
issued only to individual residents or locally-owned business entities.  In such
cases, the Company has arrangements with residents or business entities licensed
to act in the state.                                                            

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  As an insurance holding company, RLI Corp. is subject to regulation by the
states in which its insurance subsidiaries are domiciled or transact business.  
Most states have enacted legislation that requires each insurance company in a  
holding company system to register with the insurance regulatory authority of   
its state of domicile and furnish to it financial and other information         
concerning the operations of companies within the holding company system that   
may materially affect the operations, management or financial condition of the  
insurers within the system.  All transactions within a holding company system   
affecting insurers must be fair, and the insurer's policyholder surplus         
following any transaction must be both reasonable in relation to its outstanding
liabilities and adequate for its needs.  Notice to applicable regulators is     
required prior to the consummation of certain transactions affecting insurance  
subsidiaries of the holding company system.                                     

PROPOSITION 103 (RATE ROLLBACK INITIATIVE)--In November 1988, California
voters approved Proposition 103, which requires insurance rates for certain     
lines of business to be rolled back 20% from the rates in effect in November    
1987.  Beginning in 1989 and ending in 1994, the Company deferred premium       
revenue of $1,449,200 and accrued interest in the amount of $1,050,480 to cover 
the proposed rollback.  No additional provision was made during 1995 and the    
total funds accrued for rollback remained $2,449,680 at December 31, 1995.      

During 1996, the Company reached a settlement with the California Department of 
Insurance resolving its total liability for refunds and interest under          
Proposition 103.  The settlement requires the Company to pay $2,987,050 in      
refunds and interest.  In the second quarter of 1996, the Company recorded a    
pretax charge of $487,370 to record the difference between the actual settlement
and the amount previously accrued.  The Company is currently in the process of  
issuing refund checks to policyholders.                                         

ASSESSMENTS AGAINST INSURERS                                            

Under insurance insolvency or guaranty laws in most states in which the 
Company operates, insurers doing business therein can be assessed for           
policyholder losses covered by insolvent insurance companies.  The amount and   
timing of any future assessments on the Company under these laws cannot be      
reasonably estimated and are beyond the control of the Company.  Recent         
financial difficulties of insurance companies increase the probability of       
assessments under these laws.  Most of these laws do provide, however, that an  
assessment may be excused or deferred if it would threaten an insurer's         
financial strength.  The Company generally accrues the full amount of the       
assessment upon notification.                                                   

LEGISLATION AT FEDERAL LEVEL                                            

Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in 
a variety of ways.  Current and proposed federal measures which may             
significantly affect the insurance business include employee benefits           
regulation, limitation on anti-trust immunity, minimum solvency requirements and
removal of barriers preventing banks from engaging in the insurance business.   
The Company is monitoring the following federal proposals:                      

NATURAL DISASTER ACT--Recent natural disasters such as Hurricane Andrew,
the Midwestern floods and the Northridge Earthquake have sparked debate on the  
best way to provide affordable insurance coverage for such events.  Previously  
the Company supported the proposed Natural Disaster Act as the most desirable   
alternative.  That Act was never passed and the Company is considering other    
proposed alternatives.                                                          

SUPERFUND REFORM (ENVIRONMENTAL LIABILITY)--In 1996, the president asked
congress to reinstate the corporate levies that provide funds for Superfund     
cleanup.  Congressional representatives indicate they would not support a       
reinstatement but are considering comprehensive reform of this bill, that if    
passed, could impose some tax liability on the Company.                         

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NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS                         

  The National Association of Insurance Commissioners (NAIC) facilitates the
regulation of multi-state companies through uniform reporting requirements,     
standardized procedures for financial examinations, and uniform regulatory      
procedures embodied in model acts and regulations.  Current developments address
the reporting and regulation of the adequacy of capital and surplus.            

   The NAIC has developed Property-Casualty Risk-Based Capital (RBC) standards
that relate an insurer's reported statutory surplus to the risks inherent in its
overall operations.  The RBC formula uses the statutory annual statement to     
calculate the minimum indicated capital level to support asset (investment and  
credit) risk and underwriting (loss reserves, premiums written, and unearned    
premium) risk.  The NAIC model law calls for various levels of regulatory action
based on the magnitude of an indicated RBC capital deficiency, if any.  The RBC 
standards became effective for 1994 annual statement filings.  The Company      
continues to monitor its subsidiaries' internal capital requirements and the    
NAIC's RBC developments.  The Company has determined that its capital levels are
well in excess of the minimum capital requirements for all RBC action levels.   
Management believes that its capital levels are sufficient to support the level 
of risk inherent in its operations.                                             

      AGENCY LICENSES AND TRADEMARKS

Replacement Lens Inc. and RLI Insurance Agency Ltd., or their designated
employees, must be licensed to act as resident or non-resident brokers or agents
by regulatory authorities in the states or provinces in which they operate.     

Replacement Lens Inc. obtained service mark registration of the letters 
"RLI" in 1978 and currently maintains such registration in 47 states.  Such     
registration protects the mark from deceptively similar use by the Company's    
competitors.  The duration of this registration is ten years for all states     
except three in which registration is limited to five years unless renewed.     
Duration of the registration in the State of Wisconsin is twenty years.         

     CLIENTELE

No significant part of the Company's or its subsidiaries' business is   
dependent upon a single client or upon a very few clients, the loss of any one  
of which would have a material adverse effect on the Company.                   

     EMPLOYEES

The Company employs a total of 357 associates.  Of the 357 total        
associates, 40 are part-time and 317 are full-time.                             

(d) Financial Information about Foreign and Domestic Operations and Export      
Sales.                                                                  

For purposes of this discussion, foreign operations are not considered  
material to the Company's overall operations.                                   

Item 2.  PROPERTIES                                                             

The Company owns a two-story, 80,000 square foot building in Peoria,    
Illinois, which serves as the Corporate Headquarters for RLI Corp., RLI         
Insurance Company and Mt. Hawley Insurance Company.  Two RLI Insurance Company  
Branch Offices also lease office space in this building.                        

Located on the same 23.0 acre campus is a 12,800 square foot building.  
Nearly 9,800 square feet of this building are used as warehouse storage for     
records and equipment.  The remaining 3,000 square feet is leased to Maui Jim,  
Inc., as a part of its contact lens distribution center.                        

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Additionally, the Company owns two other buildings located near the     
headquarter building.  One, a 19,000 square foot building, is leased to Maui    
Jim, Inc. and is used as their headquarters.  The other, a 20,000 square foot   
building, was purchased in December of 1996.  Currently, used for warehousing   
and record storage, this building will provide space for future office          
expansion.                                                                      

   All other operations of RLI Corp. lease the office space which they need in
various locations throughout the country.                                       

Item 3.  LEGAL PROCEEDINGS                                                      

The Company is involved in certain legal proceedings and disputes       
considered by management to be ordinary and incidental to the business or which 
have no foundation in fact.  Management believes that valid defenses exist as to
all such litigation and disputes, and is of the opinion that these will not have
a material effect on the Company's consolidated financial statements.           

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

No matters were submitted by the Company to a vote of security holders  
during the fourth quarter of the fiscal year covered by this report.            

     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  

   Refer to the Corporate Data on page 49 of the Annual Report to Shareholders
for the year ended December 31, 1996 attached in Exhibit 13.                    

Item 6.  SELECTED FINANCIAL DATA                                                

 Refer to the Selected Financial Data on pages 18 through 19 of the Annual
Report to Shareholders for the year ended December 31, 1996 attached in Exhibit 
13.                                                                             

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                                                                   

Refer to the Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 20 through 25 of the Annual Report to        
Shareholders for the year ended December 31, 1996 attached in Exhibit 13.       

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

Refer to the consolidated financial statements and supplementary data   
included on pages 26 through 43 of the Annual Report to Shareholders for the    
year ended December 31, 1996 attached in Exhibit 13.  (See Index to Financial   
Statements and Schedules attached on page 24.)                                  

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND        
FINANCIAL DISCLOSURE                                                            

 There were no changes in accountants or disagreements with accountants on
any matters of accounting principles or practices or financial statement        
disclosure.                                                                     

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      PART III

Items 10 to 13.                                                                 

Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13,     
inclusive, have not been restated or answered since the Company intends to file 
within 120 days after the close of its fiscal year with the Securities and      
Exchange Commission a definitive proxy statement pursuant to Regulation 14A     
under the Securities Exchange Act of 1934, which proxy statement involves the   
election of directors.  The information required in these items 10 to 13,       
inclusive, is incorporated by reference to that proxy statement.                

     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K       

(a) (l-2) Consolidated Financial Statements and Schedules.  See Index to        
Financial Statements and Schedules attached.                            

(3) Exhibits.  See Exhibit Index on pages 34-35.                                

(b) No reports on Form 8-K were filed during the last quarter of 1996.          

(c) Exhibits.  See Exhibit Index on pages 34-35.                                

(d) Financial Statement Schedules.  The schedules included on attached pages 25 
through 33 as required by Regulation S-X are excluded from the Company's
Annual Report to Shareholders.  See Index to Financial Statements and   
  Schedules on page 24.  There is no other financial information required by
Regulation S-X which is excluded from the Company's Annual Report to    
Shareholders.                                                           

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      SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.                                                                       
(Registrant)                                                                    

By:    /S/Joseph E. Dondanville                                                 
----------------------------------------------------                      
J. E. Dondanville                                                 
Vice President, Chief Financial Officer                           
(Principal Financial and Accounting Officer)                      

Date:  March 5, 1997                                                            
--------------------------------------------------                      

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the          
registrant and in the capacities and on the dates indicated.                    

By:    /S/Gerald D. Stephens                                                    
----------------------------------------------------                      
G. D. Stephens, President                                         
(Principal Executive Officer)                                     

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/Joseph E. Dondanville                                                 
----------------------------------------------------                      
J. E. Dondanville, Vice President,                                
Chief Financial Officer                                           
(Principal Financial and Accounting Officer)                      

Date:  March 5, 1997                                                            
----------------------------------------------------                      
* * * * *                                           

By:    /S/Gerald D. Stephens                                                    
------------------------------------------------                  
G. D. Stephens, Director                                          

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/Bernard J. Daenzer                                                    
------------------------------------------------                  
B. J. Daenzer, Director                                           

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/Richard J. Haayen                                                     
------------------------------------------------                  
R. J. Haayen, Director                                            

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/William R. Keane                                                      
------------------------------------------------                  
W. R. Keane, Director                                             

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

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By:    /S/Gerald I. Lenrow                                                      
------------------------------------------------                  
G. I. Lenrow, Director                                            

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/John S. McGuinness                                                    
------------------------------------------------                  
J. S. McGuinness, Director                                        

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:   /S/Edwin S. Overman                                                       
-------------------------------------------------                   
E. S. Overman, Director                                             

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/Edward F. Sutkowski                                                   
------------------------------------------------                  
E. F. Sutkowski, Director                                         

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

By:    /S/Robert O. Viets                                                       
------------------------------------------------                  
R. O. Viets, Director                                             

Date:  March 5, 1997                                                            
------------------------------------------------                  
* * * * *                                           

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     INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                REFERENCE (PAGE)

DATA SUBMITTED HEREWITH:                                                        

Report of Independent Auditors                                          25      

Schedules:                                                                      

I.  Summary of Investments - Other than Investments in                          
Related Parties at December 31, 1996.                               26  

II. Condensed Financial Information of Registrant                               
for the three years ended December 31, 1996.                   27 - 29  

III.Supplementary Insurance Information                                         
for the three years ended December 31, 1996.                   30 - 31  

IV. Reinsurance for the three years ended December 31, 1996.            32      

V.  Valuation and Qualifying Accounts                                   33      

VI. Supplemental Information Concerning Property-Casualty Insurance             
Operations for the three years ended December 31, 1996.        30 - 31  

  Schedules other than those listed are omitted for the reason that they are
not required, are not applicable or that equivalent information has been        
included in the financial statements, and notes thereto, or elsewhere herein.   

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      INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders                                         
RLI Corp.:                                                                      

Under date of January 21, 1997, we reported on the consolidated balance sheets  
of RLI Corp. and subsidiaries as of December 31, 1996 and 1995, and the related 
consolidated statements of earnings, shareholders' equity, and cash flows for   
each of the years in the three-year period ended December 31, 1996, as contained
in the 1996 annual report to shareholders.  These consolidated financial        
statements and our report thereon are incorporated by reference in the annual   
report on Form 10-K for the year 1996.  In connection with our audits of the    
aforementioned consolidated financial statements, we also have audited the      
related financial statement schedules as listed in the accompanying index.      
These financial statement schedules are the responsibility of the Company's     
management.  Our responsibility is to express an opinion on these financial     
statement schedules based on our audits.                                        

In our opinion, the financial statement schedules, when considered in relation  
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.                    

                                                           KPMG Peat Marwick LLP

Chicago, Illinois                                                               
January 21, 1997                                                                

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      RLI CORP. AND SUBSIDIARIES

      SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
      IN RELATED PARTIES

     DECEMBER 31, 1996

                                                        · Enlarge/Download Table

Column A                                                Column B         Column C         Column D            

                                                                                           Amount             
                                                                                          at Which            
                                                                                          Shown in            
                                                                           Fair         the Balance           
Type of Investment                                       Cost(1)            Value          Sheet              
--------------------------------------------------------------------------------------------------------------
                                                                                                              
Fixed maturities:                                                                                             
 Bonds:                                                                                                       
  Held-to-maturity                                                                                            
    United States government and government                                                                   
     agencies and authorities                       $152,612,589      $154,134,493     $152,612,589           
    States, political subdivisions, and revenues     110,669,841       111,890,926      110,669,841           
--------------------------------------------------------------------------------------------------------------

     Total held-to-maturity                          263,282,430       266,025,419      263,282,430           
--------------------------------------------------------------------------------------------------------------

  Available-for-sale                                                                                          
    United States government and government                                                                   
     agencies and authorities                         29,461,455        29,681,299       29,681,299           
    Foreign governments                                  443,198           435,094          435,094           
    Corporates                                         7,585,492         7,736,658        7,736,658           
    States, political subdivisions, and revenues       7,035,419         7,051,252        7,051,252           
--------------------------------------------------------------------------------------------------------------

     Total available-for-sale                         44,525,564        44,904,303       44,904,303           
--------------------------------------------------------------------------------------------------------------

     Total fixed maturities                          307,807,994       310,929,722      308,186,733           
--------------------------------------------------------------------------------------------------------------

Equity securities, available-for-sale:                                                                        
 Common stock:                                                                                                
  Public utilities                                    36,340,454        51,075,525       51,075,525           
  Banks, trusts and insurance companies                9,872,511        22,279,317       22,279,317           
  Industrial, miscellaneous and all other             65,558,288       115,578,210      115,578,210           
 Preferred stock                                           1,950             2,308            2,308           
--------------------------------------------------------------------------------------------------------------

    Total equity securities                          111,773,203       188,935,360      188,935,360           
--------------------------------------------------------------------------------------------------------------

Short-term investments                                40,823,967        40,823,967       40,823,967           
--------------------------------------------------------------------------------------------------------------

    Total investments                               $460,405,164      $540,689,049     $537,946,060           
--------------------------------------------------------------------------------------------------------------


Note: See notes 1D and 2 of Notes to Consolidated Financial Statements, as      
attached in Exhibit 13.                                                         

(1)  Original cost of equity securities and, as to fixed maturities, original   
cost reduced by repayments and adjusted for amortization of premiums or accrual 
of discounts.                                                                   

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      RLI CORP. AND SUBSIDIARIES

      SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
      (PARENT COMPANY)

      CONDENSED BALANCE SHEETS

      DECEMBER 31, 1995 AND 1996

                                                    1995              1996
------------------------------------------------------------------------------- 
ASSETS                                                                          

Cash                                           $    236,902       $ 9,597,834   
Investments in subsidiaries, at equity          199,299,589       228,205,464   
Equity securities available-for-sale,                                           
at fair value                                                                 
(Cost--$6,667,195 in 1995 and                                               
$6,800,912 in 1996)                            8,138,847         9,676,285
Investment in Rabbi Trust                         2,817,965         4,062,723   
Deferred debt costs                                 928,865           805,701   
Income taxes recoverable                            537,838                     
Property and equipment                            1,090,713         1,051,637   
Other assets                                        238,615           898,113   
------------------------------------------------------------------------------- 
Total assets                                  $213,289,334      $254,297,757  
=============================================================================== 

LIABILITIES AND SHAREHOLDERS' EQUITY                                            

Liabilities:                                                                    
Accounts payable, current                     $  1,163,723      $  1,283,960  
Notes payable, short-term                        2,800,000                    
Deferred compensation--Rabbi Trust               2,817,965         4,062,723  
Interest payable--Convertible debentures         1,265,000         1,265,000  
Income taxes payables                                                815,999  
Long-term debt--Convertible debentures          46,000,000        46,000,000  
Other liabilities                                  634,930           830,714  
------------------------------------------------------------------------------- 
Total liabilities                              54,681,618        54,258,396 
------------------------------------------------------------------------------- 

Shareholders' equity:                                                           
Common stock ($1 par value, authorized                                        
12,000,000 shares, in 1995 and 50,000,000                                   
shares in 1996, issued 8,453,449                                            
shares in 1995 and 1996)                        8,453,449         8,453,449 
Other shareholders' equity                     153,544,590       197,464,904  
Treasury shares at cost (602,567 shares                                       
in 1995 and 631,719 shares in 1996)            (3,390,323)       (5,878,992)
------------------------------------------------------------------------------- 
Total shareholders' equity                    158,607,716       200,039,361 
------------------------------------------------------------------------------- 
Total liabilities and shareholders' equity   $213,289,334      $254,297,757 
=============================================================================== 

See Notes to Consolidated Financial Statements, as attached in Exhibit 13.      

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      RLI CORP. AND SUBSIDIARIES

      SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
     (PARENT COMPANY)--(CONTINUED)
      CONDENSED STATEMENTS OF EARNINGS
      YEARS ENDED DECEMBER 31,

                                                        · Enlarge/Download Table

                                                       1994                1995                1996 
                                                                                                    
----------------------------------------------------------------------------------------------------
Net investment income (expense)                  $  146,815        $ (  100,881)          $ 164,181 
Selling, general, and administrative expenses     2,845,289           2,093,019           3,559,113 
Interest expense on debt                          3,431,464           3,347,378           2,808,470 
----------------------------------------------------------------------------------------------------
                                                 (6,129,938)         (5,541,278)         (6,203,402)
Income tax benefit                               (2,312,907)         (2,147,995)         (2,186,013)
----------------------------------------------------------------------------------------------------
Net loss before equity in net earnings                                                              
 of subsidiaries                                 (3,817,031)         (3,393,283)         (4,017,389)
Equity in net earnings (loss) of subsidiaries      (958,840)         11,342,824          29,713,110 
----------------------------------------------------------------------------------------------------
  Net earnings (loss)                           $(4,775,871)         $7,949,541         $25,695,721 
====================================================================================================


See Notes to Consolidated Financial Statements, as attached in Exhibit 13.      

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      RLI CORP. AND SUBSIDIARIES

      SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
     (PARENT COMPANY)--(CONTINUED)
      CONDENSED STATEMENTS OF CASH FLOWS

      YEARS ENDED DECEMBER 31,

                                                        · Enlarge/Download Table

                                                      1994           1995           1996  
------------------------------------------------------------------------------------------
                                                                                          
Cash Flows from Operating Activities                                                      
 Losses before equity in net earnings                                                     
 of subsidiaries                                $(3,817,031)   $(3,393,283)   $(4,017,389)

Adjustments to reconcile net losses to net                                                
 cash provided by operating activities:                                                   
 Write-down of investments                            9,597                               
 Other items, net                                   445,597       (399,566)       (55,262)
 Change in:                                                                               
  Affiliate balances payable                        (10,058)       135,916       (207,668)
  Federal income taxes                           (1,034,695)     1,658,597        437,303 
  Deferred debt costs                               135,908        123,165        123,164 
------------------------------------------------------------------------------------------
  Net cash used in operating activities          (4,270,682)    (1,875,171)    (3,719,852)
------------------------------------------------------------------------------------------
Cash Flows from Investing Activities                                                      
 Purchase of:                                                                             
  Equity securities, available-for-sale          (1,995,106)      (857,883)      (387,395)
  Property and equipment                         (1,054,894)        (9,600)               
 Sale of:                                                                                 
  Equity securities, available-for-sale             433,263      1,004,380        236,986 
 Cash dividends received-subsidiaries             6,340,282      7,823,965     21,125,783 
------------------------------------------------------------------------------------------
  Net cash provided by investing activities       3,723,545      7,960,862     20,975,374 
------------------------------------------------------------------------------------------
Cash Flows from Financing Activities                                                      
 Payments on debt                                  (745,000)    (6,255,000)    (2,800,000)
 Proceeds from issuance of debt                                  2,800,000                
 Fractional share paid                                              (4,010)               
 Treasury shares reissued                         2,513,375         33,667      2,207,526 
 Treasury shares purchased                                                     (3,040,671)
 Cash dividends paid                             (3,461,217)    (3,849,521)    (4,261,445)
------------------------------------------------------------------------------------------
  Net cash used in financing activities          (1,692,842)    (7,274,864)    (7,894,590)
------------------------------------------------------------------------------------------
  Net increase (decrease) in cash                (2,239,979)    (1,189,173)     9,360,932 
Cash at beginning of year                         3,666,054      1,426,075        236,902 
------------------------------------------------------------------------------------------
Cash at end of year                             $ 1,426,075      $ 236,902    $ 9,597,834 

=============================================================================== 
Interest paid on outstanding debt for 1994, 1995, and 1996 amounted to          
$3,345,714, $3,372,479, and $2,834,192, respectively.                           

See Notes to Consolidated Financial Statements, as attached in Exhibit 13.      

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      RLI CORP. AND SUBSIDIARIES

     SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
     SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
      PROPERTY-CASUALTY INSURANCE OPERATIONS

     YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

                                                        · Enlarge/Download Table

Column A                      Column B     Column C (1)    Column E (1)     Column F      Column H  
                                                                                          Incurred  
                              Deferred        Unpaid                                      Losses and
                               policy        losses and                                  settlement 
                              acquisition    settlement      Unearned       Premiums      expenses  
Segment                         costs      expenses, net   premiums, net    earned      Current year
----------------------------------------------------------------------------------------------------

Year ended                                                                                          
 December 31, 1994                                                                                  
                                                                                                    
RLI Insurance Group    $19,208,212   $195,229,244    $78,839,454   $140,184,488   $100,534,321      
==================================================================================================  

Year ended                                                                                          
 December 31, 1995                                                                                  

RLI Insurance Group    $15,806,911   $221,648,494    $75,824,217   $133,468,133   $ 62,618,745      
==================================================================================================  

Year ended                                                                                          
 December 31, 1996                                                                                  

RLI Insurance Group    $16,663,603   $240,784,071    $76,076,561   $130,656,095   $ 69,724,730      
==================================================================================================  


NOTE 1:  Investment income is not allocated to the segments, therefore net      
investment income (column G) has not been provided.                             

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      RLI CORP. AND SUBSIDIARIES

     SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
     SCHEDULE VI--SUPPLEMENTARY INFORMATION CONCERNING
      PROPERTY-CASUALTY INSURANCE OPERATIONS
     (CONTINUED)

     YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

                                                        · Enlarge/Download Table


Column A                Column H       Column I        Column J       Column K              
                        Incurred                                                            
                       Losses and                                                           
                       settlement        Policy         Other           Net                 
                        expenses       acquisition     operating     Premiums               
Segment                 Prior year        costs        expenses       written               
--------------------------------------------------------------------------------------------
                                                                                            
Year ended                                                                                  
 December 31, 1994                                                                          

RLI Insurance Group    $ 1,107,345    $47,106,098    $15,142,384   $146,661,684             
============================================================================================

Year ended                                                                                  
 December 31, 1995                                                                          

RLI Insurance Group    $23,271,250    $43,042,045    $14,470,053   $130,452,895             
============================================================================================

Year ended                                                                                  
 December 31, 1996                                                                          

RLI Insurance Group   $( 1,463,423)   $29,556,390    $16,441,332   $132,357,640             
============================================================================================


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      RLI CORP. AND SUBSIDIARIES

      SCHEDULE IV--REINSURANCE

      FOR THE YEARS 1994, 1995, AND 1996

                                                        · Enlarge/Download Table


Column A                 Column B        Column C        Column D      Column E           Column F  

                                                                                         Percentage 
                                         Ceded to        Assumed                          of Amount 
                            Gross         Other         From Other        Net            Assumed to 
                          Amount         Companies       Companies     Amount               Net     
----------------------------------------------------------------------------------------------------
1994                                                                                                
----------------------------------------------------------------------------------------------------
                                                                                                    
RLI Insurance Group                                                                                 
 premiums earned      $265,453,514   $125,458,397       $189,371   $140,184,488            .1%      
====================================================================================================

1995                                                                                                
----------------------------------------------------------------------------------------------------

RLI Insurance Group                                                                                 
 premiums earned      $264,651,370   $131,771,599       $588,362   $133,468,133            .4%      
====================================================================================================

1996                                                                                                

----------------------------------------------------------------------------------------------------

RLI Insurance Group                                                                                 
 premiums earned      $271,551,708   $140,928,326       $ 32,713   $130,656,095           .02%      
====================================================================================================


NOTES:  Column B, "Gross Amount" includes only direct premiums earned.          

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      RLI CORP. AND SUBSIDIARIES

     SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

     YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996

                                                        · Enlarge/Download Table

                              Column A       Column B        Column C       Column D      Column E      

                             Balance at       Amounts        Amounts                       Balance      
                            beginning of    charged to       recovered       Amounts       at end       
                               period         expense     (written-off)     commuted       of period    
--------------------------------------------------------------------------------------------------------
                                                                                                        
1994  Allowance for                                                                                     
      insolvent reinsurers  $15,602,148     $1,000,000    $(1,054,748)            --    $15,547,400     

1995  Allowance for                                                                                     
      insolvent reinsurers  $15,547,400     $  613,296    $   261,373     $  (85,923)   $16,336,146     

1996  Allowance for                                                                                     
      insolvent reinsurers  $16,336,146     $1,006,140    $  (444,488)            --    $16,897,798     


      33

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     EXHIBIT INDEX

Exhibit No.   Description of Document          Reference (page)                 
-----------   -----------------------          ----------------                 

2.1         Plan of Reorganization   Incorporated by reference to the       
and Agreement            Company's Quarterly        
    of Merger                Form 10-Q for the First Quarter
                   ended March 31, 1993.

2.2         Articles of Merger       Incorporated by reference to the       
                               Company's Quarterly Form 10-Q for
                                     the Second Quarter ended June 30, 1993.

3.1         Articles of              Attached Exhibit 3.1.                  
incorporation                                       

3.2         By-Laws                  Attached Exhibit 3.2.                  

4.1         Indenture dated          Incorporated by reference to the       
        July 28, 1993 between    Company's Registration Statement on
     the Company and          Form S-3 filed on July 21, 1993.
Norwest Bank                                        
Minnesota, National                                 
Association as Trustee                              

10.1        Executive Achievement    Incorporated by reference to the       
Target Salary            Company's Registration     
   Plan                     Statement on Form S-2 filed on
                               August 22, 1985, File No. 0-6612.

10.2        RLI Corp. Director       Incorporated by reference to the       
        Deferred                 Company's Registration Statement on
           Compensation Plan        Form 10-Q for the Second Quarter ended
            June 30, 1993.

10.3        The RLI Corp.            Incorporated by reference to the       
        Directors' Irrevocable   Company's Registration Statement on
           Trust Agreement          Form 10-Q for the Second Quarter ended
            June 30, 1993.

10.4        Key Employee Excess      Incorporated by reference to the       
 Benefit Plan             Company's Annual Form 10-K/A
                                   for the year ended December 31, 1992.

10.5        RLI Corp. Incentive      Incorporated by reference to Company's 
        Stock Option Plan        Registration Statement  on Form S-8
                      filed on March 11, 1996,
                File No. 333-01637

10.9        Reinsurance Agreements   Incorporated by reference to the Annual
   between the Company      Form 10-K/A for the year ended
and American             December 31, 1992.         
Re-Insurance Company                                

10.10       Reinsurance Agreements   Incorporated by reference to the       
 between the Company      Company's Annual Form 10-K/A
          and Lloyds of London     for the year ended December 31, 1992.

10.11       Reinsurance Agreements   Incorporated by reference to the       
 between the Company and  Company's Annual Form 10-K/A
          NAC Reinsurance Corp.    for the year ended December 31, 1992.

11.0        Statement re computation Attached page 36.                      
of per share earnings                               

13.1        Refer to the Annual      Attached Exhibit 13.                   
Report to Shareholders                              
for the year ended                                  
December 31, 1996,                                  
pages 18-43 and 49.                                 

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Exhibit No.   Description of Document          Reference (page)                 
-----------   -----------------------          ----------------                 

21.1        Subsidiaries of the      Attached page 37.                      
Registrant                                          

23.1        Consent of KPMG Peat     Attached page 38.                      
Marwick LLP                                         

23.2        Consent of Kirkland      Incorporated by reference to the       
                            & Ellis Company's Registration
                         Statement on Form S-3 filed
            July 21, 1993.

24.1        Powers of Attorney       Incorporated by reference to the       
                    Company's Registration
                         Statement on Form S-3 filed
               on July 21, 1993.

27          Financial Data Schedule  Attached Exhibit 27.                   

29.1        Information from         Attached page 39.                      
reports furnished to                                
state insurance                                     
regulatory authorities                              

      35

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		12/31/92		34
		3/31/93		34
		6/30/93		34
		7/21/93		34		35
		7/28/93		34
		1/17/94		3
		12/31/94		30		33
		12/31/95		18		33			10-K
		3/11/96		34					S-8
For The Period Ended		12/31/96		1		34
		1/21/97		25
		2/28/97		1
		3/5/97		22		23
Filed On / Filed As Of		3/25/97
		5/1/97		1					PRE 14A, DEF 14A
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