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RLI Corp.

9025 North Lindbergh Drive

Peoria, Illinois 61615

March 25, 2010

Dear Shareholder:

Please consider this letter your personal invitation to attend the 2010 RLI Corp. Annual Shareholders Meeting. It will be held at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, the Company’s principal office, on May 6, 2010, at 2 p.m. CDT.

Business scheduled to be considered at the meeting includes the election of directors, approval of the RLI Corp. Long-Term Incentive Plan, and ratification of KPMG LLP as our independent registered public accounting firm for the current year. In addition, we will review significant events of 2009 and their impact on you and your Company. Company directors and officers and representatives of KPMG LLP will be available before and after the meeting to talk with you and answer any questions you may have.

Again this year, we are pleased to be taking advantage of a relatively new Securities and Exchange Commission rule that allows companies to furnish their proxy materials over the Internet. As a result, we are mailing to many of our shareholders a notice instead of a paper copy of this proxy statement and our 2009 Annual Report to Shareholders. The notice contains instructions on how to access those documents over the Internet. The notice also contains instructions on how shareholders can receive a paper copy of our proxy materials, including this Proxy Statement, our 2009 Annual Report to Shareholders and a proxy card. All shareholders who do not receive a notice will receive a paper copy of the proxy materials by mail. We believe that this process will provide shareholders with easier access to these proxy materials, reduce the costs of printing and distributing our proxy materials, and conserve environmental resources.

Thank you for your interest in your Company as well as your confidence and support in our future.

Sincerely,

Gerald D. Stephens, CPCU

Chairman of the Board

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RLI Corp. | 9025 N. Lindbergh Drive | Peoria, Illinois 61615

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

May 6, 2010

To the Shareholders of RLI Corp.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of RLI Corp. (“Company”) will be held at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, on Thursday, May 6, 2010, at 2 p.m. Central Daylight Time to:

1.     Elect six (6) directors for a one-year term expiring in 2011 or until their successors are elected and qualified;

2.     Consider and act upon a proposal to approve the RLI Corp. Long-Term Incentive Plan.

3.     Consider and act upon a proposal to ratify the selection of KPMG LLP as independent registered public accounting firm of the Company for the current year; and

4.     Transact such other business as may properly be brought before the meeting.

Only holders of Common Stock of the Company, of record at the close of business on March 8, 2010, are entitled to notice of and to vote at the Annual Meeting.

Peoria, Illinois

March 25, 2010

It is important, regardless of the number of shares you hold, that you personally be present or be represented by proxy at the Annual Meeting. Even if you expect to attend, it is important that you submit your proxy as follows:

·      By Mail: if you received your proxy card by mail, by completing the proxy card and signing, dating and returning it as promptly as possible;

·      By Phone: by submitting your proxy by telephone, toll-free, in accordance with the instructions provided on your proxy card or Notice of Internet Availability of Proxy Materials, or

·      By Internet: by submitting your proxy over the Internet in accordance with the instructions provided on your proxy card or Notice of Internet Availability of Proxy Materials.

You have the right to revoke your proxy at any time prior to its use by filing a written notice of revocation with the Corporate Secretary of the Company prior to the convening of the Annual Meeting, or by presenting another proxy card with a later date or voting by telephone or over the Internet at a later date. If you attend the Annual Meeting and desire to vote in person, your proxy may be withdrawn upon request.

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RLI Corp. | 9025 N. Lindbergh Drive | Peoria, Illinois 61615

PROXY STATEMENT

Annual Meeting of Shareholders to be held May 6, 2010

GENERAL INFORMATION

This Proxy Statement is furnished to the shareholders of RLI Corp., an Illinois corporation (“Company”), in connection with the solicitation, by the Board of Directors of the Company (“Board” or “Board of Directors”), of proxies to be used at the Annual Meeting of Shareholders to be held at 2 p.m. Central Daylight Time on Thursday, May 6, 2010, at the Company’s offices at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, and at any adjournments of the Annual Meeting.

This year, we are pleased to again be taking advantage of a Securities and Exchange Commission (“SEC”) rule that allows companies to furnish their proxy materials over the Internet. As a result, we are mailing to many of our shareholders a Notice of Internet Availability of Proxy Materials (“E-Proxy Notice”) instead of a paper copy of the proxy materials. The E-Proxy Notice contains instructions that will enable shareholders receiving the E-Proxy Notice to access these materials over the Internet and, if so desired, to request a paper copy of these proxy materials by mail. Shareholders who do not receive the E-Proxy Notice will receive a paper copy of the proxy materials by mail. The Company intends to mail the E-Proxy Notice to shareholders on or about March 25, 2010.

VOTING

Because many shareholders cannot attend the Annual Meeting in person, it is necessary that a large number of our voting shares be represented by proxy to achieve a quorum. Pursuant to the Company’s By-Laws, at least a majority of the outstanding voting shares must be present (in person or by proxy) at the Annual Meeting to conduct the meeting, which is known as a “quorum” of shares. Even if you expect to attend, it is important that you vote your shares in advance.

Whether you hold your shares directly as the shareholder of record or through a broker, trustee, or other nominee (“in street name”), you may vote by proxy without attending the Annual Meeting in three different ways:

·          Mail: Shareholders who receive a paper copy of a proxy card by mail may submit their proxy by signing, dating and returning the proxy card as promptly as possible in the envelope enclosed for that purpose.

·          Telephone: Shareholders may submit their proxy by telephone, toll-free, by following the instructions provided on the proxy card or on the E-Proxy Notice. Shareholders will need to have the control number appearing on their proxy card or E-Proxy Notice available in order to submit their proxy by telephone.

·          Internet: Shareholders may submit their proxy over the Internet by following the instructions provided on the proxy card or on the E-Proxy Notice. Shareholders will need to have the control number appearing on their proxy card or E-Proxy Notice available in order to submit their proxy over the Internet.

Shareholders can save the Company expense by submitting their proxy by telephone or over the Internet. If you submit your proxy by telephone or over the Internet, you do not need to also submit a proxy card unless you are doing so to change your vote as described below. The method of voting will not limit a shareholder’s right to attend the Annual Meeting.

Each proxy will be voted in accordance with the shareholder’s specifications. If you return a signed proxy card without providing voting instructions, your shares will be voted as recommended by the Board of Directors. All proxies delivered pursuant to this solicitation are revocable at any time prior to the meeting at the option of the shareholder either by giving written notice to the Corporate Secretary at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, or by timely delivery of a properly completed proxy, whether by proxy card or by Internet or telephone vote, bearing a later

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date, or by voting in person at the Annual Meeting. All shares represented by valid, unrevoked proxies will be voted at the Annual Meeting.

Assuming the presence, in person or by proxy, of a quorum, the election of directors requires the affirmative vote of a plurality of the votes cast, which means that the six persons receiving the highest number of “For” votes will be elected. With respect to the election of directors, shareholders may vote in favor of all nominees, or withhold their votes as to all nominees, or withhold their votes as to specific nominees. Votes withheld are deemed present at the meeting and thus will be counted for quorum purposes. Because, however, only a plurality of votes cast are required to elect directors, votes withheld will not impact the election of directors.

Assuming the presence, in person or by proxy, of a quorum, the affirmative vote of a majority of the votes represented at the meeting shall be required to approve Proposals Two and Three. With respect to Proposals Two and Three, shareholders may vote “For,” “Against” or “Abstain” from, each proposal. Abstentions are deemed present at the meeting, and thus will be counted for quorum purposes, but unlike votes withheld under Proposal One (election of directors),  abstentions will have the same effect as a vote against the matters respectively set forth in Proposals Two and Three.

Brokers who hold shares for the accounts of their clients “in street name” may vote such shares either as directed by their clients or at their own discretion if permitted by the New York Stock Exchange (“NYSE”) or other organization of which they are members.  If an executed proxy is returned by a broker on behalf of its client that indicates the broker does not have discretionary authority as to certain shares to vote on one or more matters (a “broker non-vote”), such shares will be considered present at the Annual Meeting for purposes of determining a quorum, but are not considered entitled to vote on that matter. If your broker holds your shares “in street name” and you do not instruct your broker how to vote, your broker will have discretion to vote your shares on routine matters, including Proposal Three, the ratification of the selection of the Company’s independent public accounting firm.

Your broker will not, however, have discretion to vote on non-routine matters absent direction from you. Under new rules adopted by the NYSE and approved by the SEC effective as of January 1, 2010, brokers are no longer entitled to use their discretion to vote uninstructed proxies in uncontested director elections. As a result, your broker will not be able to vote your shares on Proposals One and Two without your direction. Therefore, it is imperative that you provide your broker with voting instructions on all three proposals. If your shares are held by your broker “in street name,” you will receive a voting instruction form from your broker or the broker’s agent asking you how your shares should be voted. Please complete the form and return it in the envelope provided by the broker or agent.

SHAREHOLDERS ENTITLED TO VOTE

Shareholders of record at the close of business on March 8, 2010, the record date, shall be entitled to vote at the 2010 Annual Meeting. As of the record date, the Company had 21,090,569 shares of Common Stock outstanding and entitled to vote. Common share ownership entitles the holder to one vote per share upon each matter to be voted at the 2010 Annual Meeting.

PROXY SOLICITATION

The Company will bear the cost of solicitation of proxies. In addition to the use of the mail, proxies may be solicited in person or by telephone, facsimile or other electronic means, by directors, officers or employees of the Company. No additional compensation will be paid to such persons for their services. In accordance with the regulations of the SEC and the NYSE, the Company will reimburse banks, brokerage firms, investment advisors and other custodians, nominees, fiduciaries and service bureaus for their reasonable out-of-pocket expenses for forwarding soliciting material to beneficial owners of the Company’s Common Stock and obtaining their proxies or voting instructions.

ELECTRONIC ACCESS TO PROXY MATERIALS AND ANNUAL REPORT

This notice of Annual Meeting and Proxy Statement and the 2009 Annual Report are available on the Company’s Internet site at www.rlicorp.com and at www.proxyvote.com.

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SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

PRINCIPAL SHAREHOLDERS

The following are the persons or entities known to the Company who beneficially own more than 5 percent of the Company’s Common Stock as of December 31, 2009:

(1)          The information shown is based solely on a Schedule 13G dated January 25, 2010, filed with the SEC by Franklin Resources, Inc., (“Franklin”), Charles B. Johnson, Rupert H. Johnson, Jr., and Franklin Advisory Services, LLC, which filing indicates one or more open- or closed-end investment companies or other managed accounts that are investment management clients of investment managers that are direct and indirect subsidiaries of Franklin, have sole voting power with respect to 1,727,171 shares and sole dispositive power with respect to 1,747,471 shares. Messrs. Johnson and Johnson are the principal shareholders of Franklin.

(2)          The information shown is based solely on a Schedule 13G dated February 12, 2010, filed with the SEC by State Street Corporation (“State Street”), which filing indicates that, State Street Bank and Trust Company (“Trustee”), a subsidiary of State Street, in its capacity as trustee of the Company’s Employee Stock Ownership Plan (“ESOP”), held 1,492,203 shares on behalf of participants in such plan. State Street further disclosed no sole voting or sole dispositive power with respect to the shares, shared voting power with respect to 1,895,735 shares, and shared dispositive power with respect to 1,895,735 shares. Each ESOP participant or beneficiary may direct the Trustee as to the manner in which the shares allocated to each participant under the ESOP are to be voted. The Trustee has sole voting power with respect to all unallocated shares and sole investment power as to all allocated and unallocated shares. With respect to allocated shares for which no votes are received, the Trustee will vote such shares in proportion to the votes cast on behalf of allocated shares for which votes are received.

(3)          Mr. Stephens is the Chairman of the Company’s Board of Directors. Includes 25,091 shares allocated to Mr. Stephens under the RLI Corp. Key Employee Excess Benefit Plan (“Key Plan”), over which Mr. Stephens has no voting or investment power; 19,564 shares held in custodian accounts for the benefit of Mr. Stephens’ grandchildren, over which Mr. Stephens has sole voting and investment power; 2,492 shares in the B. L. Stephens Trust for the benefit of Mr. Stephens’ sister, over which Mr. Stephens, as trustee, has sole voting and investment power; 18,839 shares owned by the Gerald D. and Helen M. Stephens Foundation, over which Mr. Stephens, as President, has sole voting and investment power; 360,180 shares owned by the Gerald D. Stephens Grantor Annuity Trusts, over which Mr. Stephens, as trustee, has sole voting and investment power; and 7,785 shares held by a bank, as trustee, under an irrevocable trust established by the Company pursuant to the RLI Corp. Executive Deferred Compensation Agreement (“Deferred Agreement”). Excludes 68,935 shares owned by

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Mr. Stephens’ spouse, over which Mr. Stephens has no voting or investment power, as to which Mr. Stephens disclaims beneficial ownership.

(4)          The information shown is based solely on a Schedule 13G dated January 20, 2010, filed with the SEC by BlackRock, Inc. (“BlackRock”). According to the Schedule 13G, BlackRock is the beneficial owner of, and has sole voting and sole dispositive power with respect to 1,404,280 shares.

(5)          The information shown is based solely on a Schedule 13G dated February 16, 2010, filed with the SEC by Neuberger Berman Group LLC (“Neuberger”). According to the Schedule 13G, Neuberger is the beneficial owner of, and has shared voting power with respect to 995,107 shares and shared dispositive power with respect to 1,179,107 shares.

DIRECTORS AND OFFICERS

The following is information regarding beneficial ownership of the Company’s Common Stock by each current director and named executive officer, and the directors and executive officers of the Company as a group, as of December 31, 2009.

*Less than 1% of Class.

(1)          Unless otherwise noted, each person has sole voting power and sole investment power with respect to the shares reported.

(2)          Includes shares held by a bank trustee under an irrevocable trust established by the Company pursuant to the RLI Corp. Nonemployee Director Deferred Compensation Plan (“Deferred Plan”) for the benefit of the following: Mr. Baily 2,288 shares; Mr. Blum 5,621 shares; Mr. Graham 6,840 shares; Mr. Lenrow 48,106 shares; Mr. Linke 6,469 shares; Mr. McPheeters 12,473 shares; and Mr. Viets 35,459 shares. Each participating director has no voting or investment power with respect to such shares.

(3)          Includes 3,000 shares held by Mr. Baily’s spouse as to which Mr. Baily claims beneficial interest.

(4)          Includes shares that may be acquired by the named persons within 60 days after December 31, 2009, under the Directors’ Stock Option Plan for Outside Directors (“Director Plan”), upon the exercise of outstanding stock options as follows: Mr. Baily 4,233 shares; Mr. Blum 7,200 shares; Mr. Lenrow 7,200 shares; Mr. Linke 5,407 shares; Mr. McPheeters 8,482 shares; and Mr. Viets 3,600 shares.

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(5)          Includes 12,276 shares held in trust by Mr. Dondanville’s spouse, as to which Mr. Dondanville disclaims any beneficial interest.

(6)          Includes 995 shares held by Mr. Lenrow’s spouse in a custodian account for the benefit of their minor daughter, as to which Mr. Lenrow disclaims any beneficial interest.

(7)          Includes 36,400 shares allocated under the Key Plan, over which Mr. Michael has no voting or investment power and 10,118 shares owned by the Jonathan E. Michael Grantor Retained Annuity Trust, over which Mr. Michael, as Trustee, has sole voting and sole investment power.

(8)          Includes 25,091 shares allocated to Mr. Stephens under the Key Plan, over which Mr. Stephens has no voting or investment power;19,564 shares held in custodian accounts for the benefit of Mr. Stephens’ grandchildren, over which Mr. Stephens has sole voting and investment power; 2,492 shares in the B. L. Stephens Trust for the benefit of Mr. Stephens’ sister, over which Mr. Stephens, as trustee, has sole voting and investment power; 360,180 shares owned by the Gerald D. Stephens Grantor Retained Annuity Trusts, over which Mr. Stephens, as trustee, has sole voting and investment power; and 18,839 shares owned by the Gerald D. and Helen M. Stephens Foundation, over which Mr. Stephens, as President, has sole voting and investment power. Excludes 68,935 shares owned by Mr. Stephens’ spouse, over which Mr. Stephens has no voting or investment power, as to which Mr. Stephens disclaims beneficial interest.

(9)          Includes shares allocated to the named persons under the ESOP with respect to which such persons have sole voting power and no investment power. As of December 31, 2009, the following shares were allocated under the ESOP: Mr. Dondanville 25,149 shares; Mr. Kennedy 1,473 shares; Mr. Kliethermes 1,475 shares; Mr. Michael 65,791 shares; and Mr. Stone 14,663 shares. During 2009, Joseph E. Dondanville, Jonathan E. Michael and Michael J. Stone were eligible to elect to diversify shares owned by the ESOP.

(10)  Includes shares that may be acquired by the named persons within 60 days after December 31, 2009, under the Incentive Stock Option Plan (“ISOP”) and the Omnibus Stock Plan, upon the exercise of outstanding stock options as follows: Mr. Dondanville 130,700 shares; Mr. Kennedy 14,599 shares; Mr. Kliethermes 8,800 shares; Mr. Michael 275,401 shares; and Mr. Stone 105,900 shares.

(11)  Includes shares allocated to the named persons which shares are held by a bank trustee under an irrevocable trust established by the Company pursuant to the Deferred Agreement for the benefit of the following: Mr. Dondanville 8,861 shares; Mr. Kennedy 255 shares; Mr. Kliethermes 2,581 shares; Mr. Michael 14,688 shares; Mr. Stephens 7,785 shares; and Mr. Stone 18,011 shares. Each participant has no voting or investment power with respect to such shares.

(12) Includes shares held in margin securities or pledged asset accounts at brokerage firms. At December 31, 2009, the following number of shares were held in such accounts: Mr. Michael 167,941 shares; Mr. Dondanville 35,433 shares; and Mr. Viets 9,764 shares.

(13) Includes 5,079 shares owned by the Michael J. Stone Grantor Retained Annuity Trust, over which Mr. Stone, as Trustee, has sole voting and sole investment power.

(14) Includes 19,870 shares owned by the Robert O. Viets Grantor Retained Annuity Trust, over which Mr. Viets, as Trustee, has sole voting and sole investment power.

The information with respect to beneficial ownership of Common Stock of the Company is based on information furnished to the Company by each individual included in the table.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (“1934 Act”), requires the Company’s directors, executive officers and beneficial owners of more than 10 percent of the Common Stock of the Company to file with the SEC certain reports regarding their ownership of Common Stock or any changes in such ownership. In addition, officers, directors and greater than 10 percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file.

Based solely on its review of the copies of such reports received by it, and/or written representations from certain reporting persons, the Company believes that, during the year ended December 31, 2009, the reporting persons have complied with all filing requirements of Section 16(a) of the 1934 Act.

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PROPOSAL ONE: ELECTION OF DIRECTORS

GENERAL

The Company’s Board of Directors currently consists of 11 persons. At the Company’s 2008 Annual Shareholders’ Meeting held on May 1, 2008, the Company’s Shareholders voted on and approved an amendment to the Company’s Restated Articles of Incorporation (“Articles”) to declassify the Board on a phased-in basis. The Board’s Class III directors elected at the 2008 Annual Meeting (Messrs. Baily, Graham, Lenrow and Stephens) were elected for a three-year term expiring at the 2011 Annual Meeting and will stand for one-year terms thereafter. The election of the Class III directors was the last three-year term for any director. The Board’s former Class I and II directors, standing for election at this year’s Annual Meeting, will stand for a one-year term. Thus, commencing in 2011, all directors will be elected on an annual basis for one-year terms, and at that time the Board will cease to be classified.

At this year’s Annual Meeting, six directors are to be elected, each to hold office for a one-year term or until a successor is elected and qualified unless that director dies, resigns or is removed prior to that time. Directors whose terms do not expire this year will continue to serve. Unless otherwise instructed, the shares represented by a signed proxy card will be voted for the election of the six nominees named below. Assuming the presence of a quorum at the Annual Meeting, the affirmative vote of a plurality of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the election of directors. Votes will be tabulated by an Inspector of Election appointed at the Annual Meeting. Shares may be voted for, or withheld from, each nominee. Shares that are withheld and broker non-votes count towards establishment of a quorum but have no effect on determinations of plurality and thus will not affect the outcome of the election. There is no cumulative voting for the directors under the Company’s Articles.

NOMINEES

Messrs. Kaj Ahlmann, Charles M. Linke, F. Lynn McPheeters, Jonathan E. Michael and Robert O. Viets and Ms. Barbara R. Allen, each current directors, are standing for election. Ms. Allen and Messrs. McPheeters and Viets were elected previously by the shareholders in 2007 for a three-year term expiring in 2010. Messrs. Ahlmann, Linke and Michael were elected previously by the shareholders in 2009 for a one-year term expiring in 2010. Mr. Blum has decided not to stand for re-election. Each is nominated to serve for a one-year term expiring in 2011.

The Board of Directors has no reason to believe that any nominee will be unable to serve if elected. In the event that any nominee shall become unavailable for election, the shares represented by a proxy will be voted for the election of a substitute nominee selected by the persons appointed as proxies and recommended by the Board unless the Board of Directors should determine to reduce the number of directors pursuant to the Company’s By-Laws or allow the vacancy to stay open until a replacement is designated by the Board.

The Board of Directors recommends the shareholders vote “For” election of all six nominees listed below.

DIRECTOR AND NOMINEE INFORMATION

Following are specific qualifications, skills, attributes and experience with respect to the current directors and nominees to the Board of Directors furnished to the Company by such individuals, which information led to the conclusion that they are qualified to serve as a director and are beneficial to the Company. The Nominating/Corporate Governance Committee and the Board considered, in particular, the following with respect to each director: Mr. Ahlmann — his broad reinsurance and insurance expertise, as well as his global experience. Ms. Allen — her extensive executive management skills, as well as her strategy background. Messrs. Baily, McPheeters and Viets — their significant experience, expertise and background regarding accounting matters, together with their various executive management experience. Mr. Graham — his strong financial services, strategy, merger/acquisition and advisory experience, as well as deep technology background. Mr. Lenrow — his significant experience, expertise and knowledge of the insurance industry, including accounting matters and insurance taxation. Mr. Linke — his many years of experience in the financial field, including the broad perspective brought by Mr. Linke’s experience in consulting to clients in many diverse industries. The Board also considered the many years of experience with the Company represented by Mr. Stephens (our founder and Chairman) and Mr. Michael (our President & Chief Executive Officer) — over 45 years in the case of Mr. Stephens, and over 27 years In the case of Mr. Michael.

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Certain information concerning the remaining directors, whose terms expire in 2011, is set forth as follows based upon information furnished to the Company by such individuals:

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(1)          Mr. Ahlmann previously served as a Director of Erie Indemnity Company and its subsidiary, Erie Family Life Insurance Company, publicly traded companies.

(2)          Ms. Allen previously served as a Director of Lance, Inc. and Maytag Corporation, publicly traded companies.

(3)          Mr. Michael previously served as a Director of Fieldstone Investment Corp., a publicly traded company.

(4)          Mr. Viets currently serves as a Director of Patriot Coal Corporation, a publicly traded company.

(5)          Mr. Baily currently serves as a Director of Endurance Specialty Holdings Ltd. and NYMAGIC, Inc., both publicly traded companies. Mr. Baily previously served as a Director of Erie Indemnity Company and its subsidiary, Erie Family Life Insurance Company, publicly traded companies.

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PROPOSAL TWO: APPROVAL OF THE RLI CORP. LONG-TERM INCENTIVE PLAN

The Board of Directors has adopted and recommends to the shareholders of the Company for their approval and adoption the RLI Corp. Long-Term Incentive Plan (“Plan”). The Board and Company management believe that the Plan will be instrumental in attracting, retaining and motivating the Company’s executive officers, directors and key personnel. See the Equity Compensation Plan Information on page 45 for information regarding Common Stock that may be issued under the Company’s existing equity compensation plans.

SUMMARY OF THE PLAN

The following is a summary of the Plan adopted by the Board of Directors on February 4, 2010, subject to shareholder approval of the Plan. This summary is qualified in its entirety by reference to the complete Plan attached as Exhibit A, which you are encouraged to read carefully in its entirety. Effective May 6, 2010, no future options or other equity based awards will be granted under the Company existing equity incentive plan — the RLI Corp. Omnibus Stock Plan (“Omnibus Plan”) — if the Plan is approved by the shareholders.

The Plan is largely modeled on the Omnibus Plan. Some of the more significant changes from the Omnibus Plan are summarized below.

·                  Unlike the Omnibus Plan, the Plan does not authorize or otherwise provide for the award of incentive stock options. Under the Plan, the only stock options available for award are non-qualified stock options (“Options”).

·                  The Plan also provides for what are termed “Full Value Awards,” which are awards other than (1) Options, (2) stock appreciation rights (“SARs”) or (3) Performance Units (described below) payable in cash. The maximum number of Full Value Awards a participant may be awarded in a calendar year is 160,000.

·                  The Plan provides that an Option or SAR shall cease to be exercisable if a participant is terminated for “cause.” Cause is defined as (1) a failure to comply with any material policies and procedures of the Company or its affiliates; (2) conduct reflecting dishonesty or disloyalty to the Company or its affiliates, or which may have a negative impact on the reputation of the Company or its affiliates; (3) commission of a felony, theft or fraud, or violation of law involving moral turpitude; (4) failure to perform the material duties of his or her employment; (5) excessive absenteeism; (6) unethical behavior or (7) violation of a material policy of the Company.

·                  The Plan provides for the issuance of up to 2,000,000 shares of Common Stock. For purposes of calculating this limit and limits applicable to individual participants, each share of Common Stock underlying a Full Value Award shall count as 2.5 shares. Option awards shall be deemed to be for the maximum number of shares that may be issued upon their exercise and SARs shall be deemed to be issued for the gross number of shares with respect to which the SAR may be exercised.

PURPOSE AND ELIGIBILITY

The purpose of the Plan is to promote the interests of the Company and its shareholders by providing key personnel of the Company and its affiliates with an opportunity to acquire a proprietary interest in the Company and reward them for achieving a high level of corporate performance, and thereby developing a stronger incentive to put forth maximum effort for the continued success and growth of the Company and its affiliates. In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining key personnel of outstanding ability. The Plan is also intended to provide nonemployee directors with an opportunity to acquire a proprietary interest in the Company, to compensate nonemployee directors for their contribution to the Company and to aid in attracting and retaining nonemployee directors.

Participation in the Plan is limited to employees or directors of the Company or any affiliate. The granting of awards is solely at the discretion of the Executive Resources Committee. Approximately 80 persons are currently eligible to participate in the Plan. No awards have been granted under the Plan.

ADMINISTRATION OF THE PLAN

The Executive Resources Committee of the Board (or any other committee of the Board consisting of two or more nonemployee directors designated by the Board to administer the Plan so as to permit grants to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and Section 162(m) of the

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Internal Revenue Code of 1986, as amended (“Code”), will administer the Plan (“Committee”). The Committee has exclusive power to (1) make awards, (2) determine when and to whom awards will be granted, the form of each award, the amount of each award, and any other terms or conditions of each award consistent with the Plan, (3) determine whether, to what extent and under what circumstances awards may be settled, paid or exercised in cash, shares of Common Stock, or other property, and (4) determine whether, to what extent and under what circumstances awards may be canceled, forfeited or suspended. Each award will be subject to an agreement authorized by the Committee. Notwithstanding the foregoing, the Board has the sole and exclusive power to administer the Plan with respect to awards granted to nonemployee directors.

SHARES AVAILABLE UNDER THE PLAN

The number of shares of Common Stock available for distribution under the Plan may not exceed 2,000,000 (subject to adjustment for changes in capitalization of the Company). As of March 8, 2010, the closing sale price of the Company’s Common Stock was $55.70 per share as reported by the New York Stock Exchange (“NYSE”). Any shares subject to the terms and conditions of an award under the Plan that are not used because the terms and conditions of the award are not met may again be used for an award under the Plan. Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited award, or any award settled in cash in lieu of shares will be available for further awards. No fractional shares may be issued under the Plan; however, cash will be paid in lieu of any fractional share in settlement of an award. Certain Common Stock shares are not available for future issuance under the Plan, including (1) shares exchanged or withheld as payment of purchase price or tax obligations in connection with any Plan award, (2) shares not issued/delivered in connection with net award settlements, and (3) shares purchased on the open market with proceeds from exercise of options.

DESCRIPTION OF PLAN AWARDS

The Plan provides that the Committee may grant awards to participants in the form of (1) shares of Common Stock subject to restrictions on transfer and conditions of forfeiture (“Restricted Stock”), (2) Options, (3) SARs, which are rights to receive a payment from the Company in cash, Common Stock, or a combination thereof, equal to the excess of the Fair Market Value (described below under “Stock Options”) of a share of Common Stock on the date of exercise over a specified price fixed by the Committee, (4) performance units, which are rights to receive payment from the Company in cash, Common Stock or a combination thereof, based upon the achievement of performance goals established by the Committee (“Performance Units”), (5) shares of Common Stock, or (6) other stock based awards (“Other Stock Based Awards”). A description of each of these awards follows.

Restricted Stock Awards

An award of Restricted Stock under the Plan will consist of shares of Common Stock subject to restrictions on transfer and conditions of forfeiture, which restrictions and conditions will be included in the applicable agreement. The Committee may provide for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine. Except as otherwise provided in the applicable agreement, each stock certificate issued with respect to an award of Restricted Stock will either be deposited with the Company or its designee, together with an assignment separate from the certificate, in blank, signed by the participant, or bear such legends with respect to the restricted nature of the Restricted Stock evidenced thereby as will be provided for in the applicable agreement. The agreement will describe the terms and conditions by which the restrictions and conditions of forfeiture upon awarded Restricted Stock will lapse. Upon the lapse of the restrictions and conditions, shares free of restrictive legends, if any, relating to such restrictions will be issued to the participant. A participant with a Restricted Stock award will have all the other rights of a shareholder including, but not limited to, the right to receive dividends and the right to vote the shares of Restricted Stock. No more than 160,000 shares of Restricted Stock, together with any other Full Value Awards, may be issued to a participant in any calendar year.

Stock Options

An Option will be granted pursuant to an agreement and will constitute a non-statutory stock option (i.e., an option that does not qualify for special tax treatment under Section 422 of the Code). The purchase price of each share of Common Stock subject to an Option will be determined by the Committee and set forth in the agreement, but will not be less than 100 percent of the Fair Market Value of a share as of the date the Option is granted. “Fair

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Market Value” as of any date means the closing sale price of a share of Common Stock on such date or on the next business day, if such date is not a business day (1) as reported on the NYSE, or (2) if the shares are not traded on the NYSE, on the principal national securities exchange registered under the Exchange Act on which the shares are listed, or (3) if the shares are not listed on any such exchange, on any over-the-counter market or any quotation system then in use. The purchase price of the shares with respect to which an Option is exercised will be payable in full at the time of exercise in cash or by delivery or tender of shares (by actual delivery or attestation) having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the shares being purchased pursuant to the Option, or a combination thereof, as determined by the Committee, but no fractional shares will be issued or accepted. To the extent permitted by law, the agreement may permit some or all participants to instruct the Company to withhold a portion of the shares issuable upon exercise equal to the number of shares having a Fair Market Value equal to the exercise price for the Option being exercised. A participant exercising an Option will not be permitted to pay any portion of the purchase price with shares if, in the opinion of the Committee, payment in such manner could have adverse financial accounting consequences for the Company. Each Option will be exercisable in whole or in part on the terms provided in the agreement. When an Option is no longer exercisable, it will be deemed to have lapsed or terminated. Upon receipt of notice of exercise, the Committee may elect to cash-out all or part of the portion of the shares for which an Option is being exercised by paying the participant an amount, in cash or shares, equal to the excess of the Fair Market Value of the shares over the aggregate purchase price for the shares for which the Option is being exercised on the effective date of such cash-out. In no event will any Option be exercisable at any time after the expiration of its term. Dividends and dividend equivalents are not paid on Options. The maximum number of shares that may be awarded to a participant in the form of Options in any calendar year is 400,000 and the maximum term is 10 years.

Stock Appreciation Rights

An award of a Stock Appreciation Right (“SAR”) will entitle the participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the SAR all or a portion of the excess of the Fair Market Value of a specified number of shares as of the date of exercise of the SAR over a specified price that will not be less than 100 percent of the Fair Market Value of such shares as of the date of grant of the SAR. A SAR may be granted in connection with part or all of, in addition to, or completely independent of an Option or any other award under the Plan. If issued in connection with a previously or contemporaneously granted Option, the Committee may impose a condition that exercise of a SAR cancels a pro rata portion of the Option with which it is connected and vice versa. Each SAR may be exercisable in whole or in part on the terms provided in the agreement. No SAR will be exercisable at any time after the expiration of its term or if the participant’s employment (or service as a director) is terminated due to cause. When a SAR is no longer exercisable, it will be deemed to have lapsed or terminated. Upon exercise of a SAR, payment to the participant will be made at such time or times as will be provided in the agreement in the form of cash, shares of Common Stock or a combination of cash and shares as determined by the Committee. The agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or shares) may be made in the event of the exercise of a SAR. Dividends and dividend equivalents are not paid on SARs. The maximum number of shares that may be awarded to a participant in the form of SARs in any calendar year is 400,000 and the maximum term is 10 years.

Performance Units

An award of Performance Units under the Plan will entitle the participant to future payments of cash, shares of Common Stock or a combination of cash and shares, as determined by the Committee, based upon the achievement of performance goals established by the Committee. The agreement may establish that a portion of a participant’s award will be paid for performance that exceeds the minimum target but falls below the maximum target applicable to the award. The agreement will also provide for the timing of the payment. Following the conclusion or acceleration of each period of time over which Performance Units are earned (“Performance Cycle”), the Committee will determine the extent to which (1) performance targets have been attained, (2) any other terms and conditions with respect to an award relating to the Performance Cycle have been satisfied and (3) payment is due with respect to an award of Performance Units. If permitted by law, the agreement may permit an acceleration of the Performance Cycle and an adjustment of performance targets and payments with respect to some or all of the Performance Units awarded to a participant, upon the occurrence of certain events, which may, but need not include, without limitation, a dissolution or liquidation of the Company; a sale of substantially all of the assets of the Company; a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation;

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a statutory share exchange involving capital stock of the Company; a recapitalization; a change in the accounting practices of the Company; a change in the participant’s title or employment responsibilities; the participant’s death, disability or retirement or; with respect to payments in shares with respect to Performance Units, a reclassification, stock dividend, stock split or stock combination. The agreement also may provide for a limitation on the value of an award of Performance Units that a participant may receive. The maximum dollar value that may be paid to a participant in Performance Units in any calendar year is $7,500,000.

Other Stock Based Awards

The Committee may from time to time grant Common Stock and other awards under the Plan including, without limitation, those awards pursuant to which shares of Common Stock are or may in the future be acquired, awards denominated in Common Stock units, restricted stock units, securities convertible into Common Stock and phantom securities. The Committee, in its sole discretion, may determine the terms and conditions of such awards provided that such awards will not be inconsistent with the terms and purposes of the Plan. The Committee may, at its sole discretion, direct the Company to issue shares subject to restrictive legends and/or stop transfer instructions that are consistent with the terms and conditions of the award to which the shares relate.

PLAN BENEFITS

The grant of awards under the Plan is within the discretion of the Committee and the Board. Therefore, the Company is unable to determine the benefits or amounts that will be allocated to any participant under the Plan. No awards have been granted under the Plan.

EFFECTIVE DATE AND DURATION OF THE PLAN

The Plan will become effective as of May 6, 2010, if the Plan is approved by the requisite vote of shareholders at the 2010 Annual Shareholders Meeting. Thereafter, the Company will file a registration statement on Form S-8 with the SEC registering the shares issuable under the Plan. The Plan will remain in effect until all Common Stock subject to it is distributed, all awards have expired or lapsed, the Plan is terminated pursuant to its terms or May 5, 2020. However, awards made before the termination date may be exercised, vested or otherwise effectuated beyond the termination date unless limited in the agreement or otherwise.

AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN

The Board may at any time, and from time to time, terminate, suspend or modify the Plan. The Committee may at any time alter or amend any or all agreements under the Plan to the extent permitted by law. No termination, suspension, or modification of the Plan will materially and adversely affect any right acquired by any participant under an award granted before the date of termination, suspension, or modification, unless otherwise agreed to by the participant in the agreement or otherwise, or required as a matter of law. Except upon proportional changes in the event of changes in the Company’s capitalization, the exercise price of any outstanding award under the Plan may not be adjusted or amended, whether through amendment, replacement grant, exchange or otherwise, without the prior approval of the Company’s shareholders.

FUNDAMENTAL CHANGES

In the event of a fundamental change, which is defined as a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company, the Committee may, but shall not be obligated to:

·                  provide for the substitution of outstanding Options and SARs with options and stock appreciation rights in the voting stock of the surviving corporation or the parent of the surviving corporation.

·                  at least ten days prior to the fundamental change, declare and provide written notice to each holder of an Option or SAR that each outstanding Option or SAR, regardless of whether exercisable, shall be canceled upon, or immediately before, the fundamental change in exchange for payment within ten days after the fundamental change of cash in an amount equal to (1) in the case of Options, the difference between the exercise price and Fair Market Value of the Option and (2) in the case of a SAR, the difference between the specified price of the SAR on the date of its grant and the Fair Market Value of the SAR, provided that the Fair Market Value of the SAR shall mean, only in connection with a fundamental change, the cash plus the fair market value of any non-cash consideration, as determined in good faith by the Committee, received by the shareholders in connection with a fundamental change.

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If the Committee elects to cancel outstanding Options and SARs in exchange for payment as set forth in the previous subparagraph, each outstanding Option or SAR shall become immediately exercisable at the time of the declaration, and each holder shall have the right during the period preceding the time of cancellation of the Options and SARs to exercise his or her Option or SAR in whole or in part in accordance with its terms.

FEDERAL TAX TREATMENT

The Plan is not a qualified pension, profit-sharing or stock bonus plan under Section 401(a) of the Code. The Plan is not subject to any provisions of the Employee Retirement Income Security Act of 1974.

Restricted Stock Awards

A grant of restricted stock generally is not a taxable event for the grantee. However, when the applicable restrictions lapse, the grantee generally will recognize ordinary income equal to the excess of the Fair Market Value of such stock on the date of lapse over the amount, if any, paid for such stock. Upon the subsequent sale of the stock, the grantee would incur a capital gain or loss, with the tax rate determined based on the grantee’s holding period, which would begin on the date of lapse. Alternatively, the grantee may file an election under Section 83(b) of the Code, in which case the grantee will recognize ordinary income on the date of grant equal to the excess of the Fair Market Value of such stock on the date of grant over the amount, if any, paid for such stock. In this case, upon the subsequent sale of stock, the grantee would incur a capital gain or loss, with the tax rate determined on the grantee’s holding period, which would begin on the date of grant.

Options

The grant of a non-statutory stock option generally is not a taxable event for the grantee. Upon exercise of the option, the grantee generally will recognize ordinary income in an amount equal to the excess of the Fair Market Value of the stock acquired upon exercise (determined as of the date of exercise) over the exercise price of such option. The Company will be entitled to a deduction equal to the amount of ordinary income recognized by the grantee in the year in which such taxable income is recognized and the Company is required to withhold federal income taxes with respect to any amounts included in the optionee’s taxable income.

Stock Appreciation Rights

The grant of a SAR generally is not a taxable event for the grantee. However, upon exercise of the SAR, the grantee generally will recognize ordinary income equal to the amount of the Fair Market Value of any Common Stock received.

Performance Units

A grant of performance units generally is not a taxable event for the grantee. However, when the applicable performance targets have been attained, the grantee generally will recognize ordinary income equal to the amount of any cash received or the Fair Market Value of any Common Stock received.

Cash Awards

Generally, a grantee will recognize ordinary income and the Company will be entitled to a deduction (and will be required to withhold federal income taxes) with respect to cash awards at the earliest time at which the grantee has an unrestricted right to receive the amount of such cash payment. The timing of such income recognition will depend upon the specific terms and conditions of the cash award.

Other Stock Based Awards

Awards may be granted under the Plan that do not fall clearly into the categories described above. The federal income tax treatment of these awards will depend upon the specific terms of the awards. Generally, the Company will be entitled to a deduction and will be required to withhold applicable taxes with respect to any ordinary income recognized by a grantee in connection with awards made under the Plan.

Section 162(m) of the Code

Section 162(m) of the Code provides that the deduction by a publicly-held corporation for compensation paid in a taxable year to the chief executive officer and the four other most highly compensated executive officers of the corporation is limited to $1 million for each individual officer. For purposes of Section 162(m), compensation which is performance-based is not counted as subject to the deductibility limitation. Income pursuant to Options and SARs having an exercise price or base value equal to the Fair Market Value of the shares of the Company’s Common Stock

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on the date of grant and Performance Units is intended to be fully deductible by the Company, by qualifying such income as performance-based compensation and, therefore, exempt from the limitations of Section 162(m). Income pursuant to Restricted Stock and other awards under the Plan would be subject to the deductibility limitations of Section 162(m).

SHAREHOLDER VOTE

The listing requirements of the NYSE require that the shareholders of the Company approve the Plan. The affirmative vote of the holders of at least a majority of the shares of Common Stock of the Company present and entitled to vote at the Annual Meeting is required for adoption of this proposal.

The Board of Directors recommends the shareholders vote “For” Proposal Two to approve the Company’s Long-Term Incentive Plan.

PROPOSAL THREE: RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has selected KPMG LLP (“KPMG”), the Company’s independent registered public accounting firm since 1983, to serve as the Company’s independent registered public accounting firm for the current fiscal year if their selection is approved by the shareholders. In view of the difficulty and expense involved in changing auditors on short notice, if KPMG is not approved by the shareholders, it is contemplated the appointment for the fiscal year 2010 will be permitted to stand unless the Audit Committee finds other compelling reasons for making a change. Disapproval of KPMG by the shareholders will be considered an indication to the Audit Committee to select other auditors for the following year.

Representatives of KPMG are expected to be present at the Annual Meeting with the opportunity to make a statement, if they desire, and will be available to respond to appropriate questions from the shareholders.

The affirmative vote of the holders of at least a majority of the shares of Common Stock of the Company present and entitled to vote at the Annual Meeting is required for adoption of this proposal.

The Board of Directors recommends the shareholders vote “For” Proposal Three and the ratification of selection of KPMG LLP as independent registered public accounting firm of the Company for the current fiscal year.

CORPORATE GOVERNANCE AND BOARD MATTERS

CORPORATE GOVERNANCE PRINCIPLES

The Company is committed to having sound corporate governance principles that are designed to ensure that the Board exercises reasonable business judgment in discharging its obligations to the Company and its shareholders. Corporate governance practices also help to ensure that full and transparent disclosures are made to the Company’s shareholders and the SEC.

The Company’s published Corporate Governance Guidelines, which are publicly available on the Company’s Internet site under Investors at www.rlicorp.com, outline the directors’ responsibilities, which include attendance at shareholder, Board and committee meetings. Each member of the Board attended the 2009 Annual Meeting of Shareholders and was available to respond to appropriate questions from the shareholders.

The Company has developed an orientation process for new directors and also encourages new directors to attend a director seminar in their first year as a director. Each incumbent director is expected to attend an accredited director education seminar at least every other year. The entire Board attends an education seminar as a group at least once every three years.

DIRECTOR INDEPENDENCE

The Board is required to affirmatively determine the independence of each director and to disclose such determination in the proxy statement for each Annual Meeting of Shareholders of the Company. The Board has established guidelines, which are set forth below, to assist it in making this determination, which incorporate all of the NYSE independence standards. Only independent directors serve on the Company’s Audit Committee, Executive Resources Committee and Nominating/Corporate Governance Committee.

It is the policy of the Board of Directors of the Company that a majority of its members be independent. To be considered independent under the NYSE Listing Standards, the Board must affirmatively determine that a director

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or director nominee (collectively referred to as “director”) has no material relationship with the Company (directly or as a partner, shareholder or officer of an organization that has a relationship with the Company), and also meets other specific independence tests. The Board examines the independence of each of its members once per year, and again if a member’s outside affiliations change substantially during the year. With the exception of the President & CEO, the Board has affirmatively determined that each director is independent within the meaning of the NYSE Listing Standards and the Company’s Director Independence Standards.

The Board has established the following categorical standards, incorporating the NYSE’s independence standards to assist it in determining director independence:

(a)   A Director will not be independent if:

(i)             the Director is, or has been within the last three years, an employee of RLI, or an immediate family member of the Director is, or has been within the last three years, an executive officer of RLI;

(ii)          the Director has received, or has an immediate family member who has received, during any 12-month period within the last three years, more than $120,000 in direct compensation from RLI, other than Director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

(iii)       (A) the Director is a current partner or employee of a firm that is RLI’s internal or external auditor; (B) the Director has an immediate family member who is a current partner of such firm; (C) the Director has an immediate family member who is a current employee of such firm and personally works on RLI’s audit; or (D) the Director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on RLI’s audit within that time;

(iv)      the Director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of RLI’s present executive officers at the same time serves or served on that company’s compensation committee; or

(v)         the Director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, RLI for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2 percent of such other company’s consolidated gross revenues.

(b)         The following commercial and charitable relationships will not be considered to be material relationships that would impair a Director’s independence:

(i)             if a Director, or an immediate family member of the Director, is an executive officer, director, employee or holder of an equity interest of a company that has made payments to, or received payments from, RLI for property or services in an amount which, in the last fiscal year, does not exceed the greater of $1 million, or 2 percent of such other company’s consolidated gross revenues;

(ii)          if a Director, or an immediate family member of the Director, is an executive officer, director, employee or holder of an equity interest of a company that is indebted to RLI, or to which RLI is indebted, and the total amount of either company’s indebtedness to the other does not exceed the greater of $1 million, or 2 percent of such other company’s total consolidated assets;

(iii)       if a Director, or an immediate family member of the Director, is an executive officer, director or employee of a company in which RLI owns an equity interest, and the amount of RLI’s equity interest in such other company does not exceed the greater of $1 million, or 2 percent of such other company’s total shareholders’ equity;

(iv)      if a Director, or an immediate family member of the Director, is a holder of an equity interest of a company of which a class of equity security is registered under the Securities Exchange Act of 1934, as amended, and in which RLI owns an equity interest;

(v)         if a Director, or an immediate family member of the Director, is an executive officer, director, employee or holder of an equity interest of a company that owns an equity interest in RLI; and

(vi)      if a Director, or an immediate family member of the Director, serves as an officer, director or trustee of a tax exempt organization, and the contributions from RLI to such tax exempt organization in the last fiscal year do not exceed the greater of $1 million, or 2 percent of such tax exempt organization’s consolidated gross revenues. (RLI’s automatic matching of employee charitable contributions will not be included in the amount of RLI’s contributions for this purpose.)

(c)          For relationships not covered by the standards in subsection (b) above, the determination of whether the relationship is material or not, and therefore whether the Director would be independent or not, shall be made by the Directors who satisfy the independence standards set forth in subsections (a) and (b) above.

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RLI is required to explain in its proxy statement the basis for any Board determination that a relationship was immaterial, despite the fact that it did not meet the categorical standards of immateriality set forth in subsection (b) above.

BOARD INDEPENDENCE STATUS

The following relationships were reviewed in connection with determining director independence but were determined to not affect such persons’ independence:

Mr. Baily is a director of Endurance Specialty Holdings Ltd., affiliates of which include reinsurance companies. From time to time the Company enters into immaterial reinsurance arrangements with the Endurance companies.

Mr. Ahlmann is a director of Cyrus Re, a wholly-owned subsidiary of Cyrus Reinsurance Holdings SPC. From time to time the Company enters into immaterial reinsurance arrangements with XL Re Ltd. (“XL Re”). Cyrus Re provides reinsurance under a quota-share treaty to XL Re.

Messrs. Baily and Lenrow each formerly were partners with predecessor firms of PricewaterhouseCoopers LLP (“PwC”). Mr. Baily retired from PwC in 1999, and Mr. Lenrow retired from PwC in 1990, continuing as a consultant until 1996. From time to time, the Company engages PwC for special projects and services in actuarial, tax and other areas.

DIRECTOR NOMINATION POLICY

The Nominating/Corporate Governance Committee of the Company considers director candidates based upon a number of qualifications. A nominee should have:

·                  A reputation for the highest professional and personal ethics and values, fairness, honesty and good judgment;

·                  A significant breadth of experience, knowledge and abilities to assist the Board in fulfilling its responsibilities;

·                  Been in a generally recognized position of leadership in his or her field of endeavor; and

·                  Commitment to enhancing shareholder value.

Nominees with insurance and accounting backgrounds are particularly desirable. A nominee should not have a conflict of interest that would impair the nominee’s ability to represent the interests of the Company’s shareholders and fulfill the responsibilities of a director.

The Nominating/Corporate Governance Committee conducts an annual assessment of the composition of the Board and its committees. The Committee reviews the appropriate skills and characteristics required of Board members with a view toward establishing a diversity of backgrounds in areas of core competencies, including experience in the following: business development, insurance industry, senior management, operational, technical, compensation and finance. The Nominating/Corporate Governance Committee relies upon recommendations from a wide variety of its business contacts, including current executive officers, directors, community leaders, and shareholders as sources for potential director candidates, but may also utilize third party search firms if so desired.

The Nominating/Corporate Governance Committee will consider qualified director candidates recommended by shareholders. See SHAREHOLDER PROPOSALS on page 46 for further detail.

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CODE OF CONDUCT

The Company has adopted a Code of Conduct, which is designed to help directors and employees maintain ethical behavior and resolve ethical issues in an increasingly complex global business environment. The Code of Conduct applies to all directors and employees, including the Chief Executive Officer, the Chief Financial Officer, the Controller and any other employee with any responsibility for the preparation and filing of documents with the SEC. The Code of Conduct covers topics including, but not limited to, conflicts of interest, confidentiality of information, and compliance with laws and regulations. A copy of the Code of Conduct is available at the Company’s website under Investors at www.rlicorp.com. The Company may post amendments to or waivers of the provisions of the Code of Conduct, if any, made with respect to any of our directors and executive officers on that website. Please note, however, that the information contained on the website is not incorporated by reference in, or considered to be a part of, this document.

SHAREHOLDER AND INTERESTED PARTIES COMMUNICATIONS

Any shareholder or other interested party who desires to communicate with the Board’s Presiding Director of the Board’s independent directors or any of the other members of the Company’s Board of Directors may do so electronically by sending an email to the following address: Presiding.Director@rlicorp.com. Alternatively, a shareholder or other interested party may communicate with the Presiding Director or any of the other members of the Board by writing to: Presiding Director, RLI Corp. 9025 N. Lindbergh Drive, Peoria, Illinois 61615. Communications may be addressed to the Presiding Director, an individual director, a Board Committee, the independent directors or the full Board. Communications received by the Presiding Director will then be distributed to the appropriate directors. Solicitations for the sale of merchandise, publications or services of any kind will not be forwarded to the directors.

COMPANY POLICY ON RELATED PARTY TRANSACTIONS

The Company recognizes that related party transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof) and therefore has adopted a written policy which shall be followed in connection with all related party transactions involving the Company. The policy generally requires approval by the Nominating/Corporate Governance Committee for all transactions between the Company and its directors, officers, shareholders owning in excess of 5 percent of the Common Stock of the Company, and their family members and affiliates, above $10,000. No proposed transactions falling within the purview of the policy were presented or approved in 2009.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 2009, there were no transactions or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer or holder of more than 5 percent of the Common Stock of the Company (or any of their immediate family members) had or will have a direct or indirect material interest nor is any such transaction currently proposed.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board has five standing committees: Audit, Executive Resources, Finance and Investment, Nominating/Corporate Governance and Strategy. The Audit, Executive Resources and Nominating/Corporate Governance Committees are composed solely of independent directors in compliance with the Company’s requirements and the NYSE Listing Standards. Since 2003, each Committee Chair’s term has been limited to no more than five years. In accordance with this policy, new Audit, Executive Resources and Nominating/Corporate Governance Committee Chairpersons were appointed immediately following the 2008 Annual Meeting of Shareholders. Charters for each committee are available on the Company’s website under Investors at www.rlicorp.com.

AUDIT COMMITTEE

The Company’s Audit Committee, composed exclusively of independent directors, met nine times in 2009 to consider various audit and financial reporting matters, including the Company’s outside audit firm relationship and to discuss the planning of the Company’s annual outside audit and its results. The committee also monitored the Company’s management of its exposures to risk of financial loss, assessed the auditors’ performance, reviewed the adequacy of the Company’s internal controls, reviewed the extent and scope of audit coverage, reviewed quarterly financial results, monitored selected financial reports and selected the Company’s independent registered public

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accounting firm. The committee also meets in executive session, with no members of management present, after its regular meetings.

Fees for services rendered by KPMG, the Company’s Independent Registered Public Accounting Firm, for the past two fiscal years for each of the following categories of services, are set forth below:

Audit fees relate to professional services rendered for the audit of the consolidated financial statements of the Company, audits of the financial statements of certain subsidiaries and certain statutory audits, review of quarterly consolidated financial statements, and assistance with the review of documents filed with the SEC, including attestation as required under Sarbanes Oxley Section 404.

The Audit Committee is responsible for approving every engagement of KPMG to perform audit or non-audit services on behalf of the Company or any of its subsidiaries before KPMG is engaged to provide those services. The Audit Committee evaluated the effects that the provision of non-audit services may have on the Company’s independent registered public accounting firm services.

The Board of Directors annually determines the “financial literacy” of the members of the Audit Committee pursuant to the NYSE required standards. The Board has determined that based on those standards, each member of the Audit Committee is independent and financially literate, and that each member possesses accounting or related financial management expertise. The Board of Directors has further determined that each of Messrs. Baily, Lenrow, McPheeters and Viets qualifies as an “audit committee financial expert” as defined by the SEC.

Messrs. Baily (Chairman), Lenrow, McPheeters and Viets are the members of the committee.

EXECUTIVE RESOURCES COMMITTEE

The Company’s Executive Resources Committee, composed exclusively of independent directors, met seven times in 2009 to evaluate and recommend compensation of the President & Chief Executive Officer and certain key executive officers of the Company. The committee also reviews and evaluates the President’s goals and objectives, management development and succession planning, and the Company’s deferred compensation, stock option, retirement and medical programs. Until May 2009, the members of the committee were Messrs. Viets (Chairman), Linke and Sutkowski, and Ms. Allen. After May 2009, the members of the ERC were Messrs. Blum (Chairman), Viets, Graham and Ms. Allen.

FINANCE AND INVESTMENT COMMITTEE

The Company’s Finance and Investment Committee, composed of independent and management directors, oversees the Company’s investment and corporate finance transactions, policies and guidelines, which includes reviewing investment performance, investment risk management exposure, and the Company’s capital structure. This committee met four times in 2009 to discuss ongoing financial, investment and capital matters. Until May 2009, the members of the committee were Messrs. Michael (Chairman), Ahlmann, Graham, Linke, Stephens and Sutkowski. After May 2009, the members of the committee were Messrs. Michael (Chairman), Ahlmann, Linke, and Stephens.

NOMINATING/CORPORATE GOVERNANCE COMMITTEE

The Company’s Nominating/Corporate Governance Committee, composed exclusively of independent directors, met five times in 2009 to guide the Company’s corporate governance program, and to monitor and discuss current and emerging corporate governance principles and procedures. The committee also counsels the Board with respect to Board and Committee organization, compensation, membership, function, and Board and Committee performance

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assessments, individually and collectively. The committee identifies and reviews qualified individuals as potential new director candidates.

Messrs. Baily, Lenrow, Linke (Chairman) and McPheeters are the members of the committee.

STRATEGY COMMITTEE

The Company’s Strategy Committee, composed of both independent and management directors, met five times in 2009 to oversee the Company’s strategic plan and its implementation.

Ms. Allen and Messrs. Ahlmann, Blum, Graham (Chairman), McPheeters, and Michael are the members of the committee.

COMMITTEE MEMBERSHIP

* Chair of Committee

BOARD MEETINGS AND COMPENSATION

MEETINGS

During 2009, seven meetings of the Board of Directors were held. No director attended fewer than 75 percent of the aggregate number of meetings of the Board and Board committees on which he or she served. In connection with each Board meeting, the independent directors meet in executive session with no members of management present. Effective May 7, 2009, Mr. Viets was elected Presiding Director of the Board’s executive session until the 2010 Annual Meeting of Shareholders. On February 4, 2010, Mr. Lenrow was elected the Presiding Director of the executive session effective May 6, 2010 until the 2011 Annual Meeting of Shareholders.

DIRECTOR COMPENSATION

During 2009, the Independent Directors were compensated as follows:

*Split between cash and stock grants at the election of the director.

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Effective January 1, 2010, the Annual Board Retainer increased from $85,000 to $95,000.

Directors are also reimbursed for actual travel and related expenses incurred and are provided a travel accident policy funded by the Company.

Mr. Stephens is authorized by the Board to use the Company aircraft for personal use, when it is not being used for business purposes, pursuant to a lease arrangement at an hourly lease rate established from time to time by the Board. In August 2008 the rate was set at $1,700, and in August 2009 it was changed to $1,500 — all of which rates were reflective of the variable hourly operating cost of the Company aircraft. In 2009 Mr. Stephens paid $30,740 for 18 hours for personal use.

Under the lease arrangement, income is imputed if the Standard Industry Fair Level (SIFL) rate for a flight made under such a lease exceeds the lease rate or if a guest or guests accompany Mr. Stephens on a leased flight. In 2009, Mr. Stephens had no imputed income from leased fights or resulting from guests accompanying him on a leased flight.

The following table provides the compensation of the Company’s Board of Directors earned for the fiscal year ended December 31, 2009.

(1)          Outside directors elect the form of their Annual Board Retainer, which may be received either in cash or in Company stock, or a combination of both, in accordance with the Directors Deferred Compensation Plan (“Deferred Plan”) or the Outside Directors’ Fee Award Agreement. Each outside director also elects the form of their Annual Committee Retainer and Annual Committee Chair Retainer, if applicable, which may be received in either cash or in stock in accordance with the Director Deferred Compensation Plan. Amounts shown include the value of fees taken in the form of Company stock.

(2)          See New Director Fee description under Outside Director Fee Award Agreement on page 26.

(3)          See column (b) and related footnote (1).

(4)          Effective May 7, 2004, no further options were granted to outside directors under the Stock Option Plan for Outside Directors (“Director Plan”). The aggregate number of outstanding stock options under the Director Plan as of December 31, 2009, were as follows: Mr. Baily 4,233 options; Mr. Blum 7,200 options; Mr. Lenrow 7,200 options; Mr. Linke 5,407 options; Mr. McPheeters 8,482 options; and Mr. Viets 3,600 options. The vesting of all stock options was accelerated in 2005 to eliminate the requirement for recognizing future compensation expense under Financial Accounting Standards Board (“FASB”) Statement No. 123R and, therefore, all such options were fully vested.

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(5)          Mr. Michael, as a management director, does not receive director fees. His compensation as President and CEO is disclosed under the Executive Compensation Summary Compensation Table.

(6)          Effective January 1, 2006, Mr. Stephens retired as an employee of the Company and received the same compensation as all outside directors of the Company. In addition, Mr. Stephens was paid an $85,000 fee as Chairman of the Board for 2009.

(7)          Mr. Stephens was provided an office when present at the Company’s home office, and part-time secretarial support at the aggregate cost of $28,462.

(8)          Mr. Sutkowski did not stand for re-election to the Board at the Annual Shareholders Meeting in May 2009.

BOARD LEADERSHIP STRUCTURE

Since 2001, Mr. Stephens, the founder and former President of the Company, has served in the role of Chairman of the Board and Mr. Michael has served in the role of CEO.  The Board appoints its Chairman and has determined that Mr. Stephens’ role as the non-employee Chairman of the Board is appropriate given his longstanding leadership of the Company as its founder and former President, while Mr. Michael’s role as CEO is appropriate for day-to-day management of the Company. In addition, as mentioned above, the Board appoints another independent director to serve as Presiding Director when it meets in executive session.

STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (DIRECTOR PLAN)

Prior to May 7, 2004, the Director Plan provided for the grant of an option to purchase 3,000 shares of the Company’s Common Stock to each newly elected or appointed outside director. In addition, effective the first business day in February of each year, each outside director was annually granted an option to purchase 1,800 shares of the Company’s Common Stock under the Director Plan. If the Company earned more than its cost of capital as provided under its MVP Plan in each respective year, each outside director was granted an option to purchase 1,800 additional shares of the Company’s Common Stock under the Director Plan, effective the first business day in February of the succeeding year. The exercise price of each option granted is an amount equal to the fair market value of such option share on the grant date, and all options granted provided for one-third annual vesting over a period of three years. In the event of an outside director’s death, disability or termination of status as an outside director, all options granted become fully vested. Effective May 7, 2004, no future options were granted to outside directors under the Director Plan. In 2005, the Board approved the acceleration of the vesting of all outstanding stock options, including options issued to outside directors under the Director Plan. The Board took this action to eliminate the requirement for recognizing future compensation expense under FASB Statement No. 123R, which became effective for the Company’s financial statements on January 1, 2006.

OUTSIDE DIRECTORS’ FEE AWARD AGREEMENT (DIRECTOR AGREEMENT)

In 2009, under the Omnibus Stock Plan, the Director Agreement provided for each newly elected or appointed outside director to receive a stock award having a fair market value equal to an amount determined by the Nominating/Corporate Governance Committee. On February 1, 2009, when Mr. Ahlmann joined the Board, the New Director Fee was set at $30,000. Effective August 20, 2009, the Board suspended the New Director Fee. The Director Agreement further provides for each outside director to receive an annual stock award equal to an amount determined by the Nominating/Corporate Governance Committee (“Annual Stock Award”). With respect to the Annual Stock Award, for each fiscal quarter ending during the fiscal year, the Company will issue to each outside director a stock award having a fair market value equal to one-fourth of the Annual Stock Award (“Quarterly Stock Award”) such that the number of shares of Common Stock subject to such stock grant will be equal to the number determined by dividing the Quarterly Stock Award by the fair market value of a share of Common Stock on the date of award. For 2009, each outside director’s aggregate compensation for service on the Board, before payments for committee and chair service, was set at $85,000. Each outside director was given the opportunity to elect how much of that compensation was the Annual Stock Award and how much was the annual cash retainer. For 2010, each outside director’s aggregate compensation for service on the Board (before payments for Committee and Chairman service) was set at $95,000, and each outside director was given the opportunity to elect how much of that was the Annual Stock Award and how much as the annual cash retainer.

NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN (DEFERRED PLAN)

Prior to the beginning of each year, an outside director may elect to defer the compensation otherwise payable or awarded to the director during the succeeding year pursuant to the Deferred Plan. Under the Deferred Plan, the Company transfers to a bank trustee, under an irrevocable trust established by the Company, such number of shares

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of the Company as are equal to the compensation earned and deferred by the director during the relevant year. The deferred compensation is used to purchase an equivalent amount of Company Common Stock. Dividends on these shares are reinvested quarterly under the Company’s Dividend Reinvestment Plan. In general, Deferred Plan benefits are distributable, in the form of Company Common Stock, beginning when the director’s status terminates.

DIRECTOR SHARE OWNERSHIP

Outside directors are encouraged to, within three years of the later of (1) January 1, 2006, or (2) their initial appointment as a Company director, own shares of the Common Stock of the Company having a value of not less than 500 percent of such Director’s Annual Board Retainer, which Retainer was $60,000 in 2006 and $85,000 in 2007, 2008 and 2009. Shares held directly and in Company benefit plans are counted to satisfy the guideline, but options, whether vested or not, are not counted.

The Nominating/Corporate Governance Committee monitors directors’ share ownership and may make allowances to accommodate timing of purchases caused by “quiet period” limitations, periodic adjustments to the Annual Board Retainer, and other factors affecting a director’s share ownership level. The committee has concluded that as of December 2009 all directors have met or are making satisfactory progress toward expected ownership levels.

AUDIT COMMITTEE REPORT

The following report by the Audit Committee is required by the rules of the SEC to be included in this Proxy Statement and shall not be considered incorporated by reference in other filings by the Company with the SEC.

The Audit Committee (the “Committee”) of the Company’s Board of Directors is composed of four independent directors and operates under a written charter adopted by the Board of Directors.

The primary role of the Committee is to assist the Board of Directors in its oversight of (a) the Company’s corporate accounting and reporting practices, (b) the quality and integrity of the Company’s financial statements, (c) the Company’s compliance with legal and regulatory requirements, (d) the qualifications, independence and performance of the independent registered public accounting firm, and (e) the performance of the Company’s internal audit function. In addition to those primary roles, the Committee also performs other roles and functions as outlined in its charter, including without limitation risk management oversight, preliminary review of earnings releases, and other activities. The Committee also acts as the audit committee for each of the Company’s insurance company subsidiaries. A more detailed description of the Committee’s roles, functions and activities is set forth in the description of Board committees elsewhere in this Proxy Statement and in the Committee’s charter.

The Board of Directors believes that the Committee’s current composition satisfies the NYSE rules governing audit committee composition and that each of the members of the Audit Committee qualifies as “independent” for purposes of the NYSE Listing Standards and the rules of the SEC. The Board of Directors has further determined that each of Messrs. Baily, Lenrow, McPheeters and Viets is an “audit committee financial expert” as defined by the SEC.

The Committee reviews the internal audit function of the Company, including the independence and authority of its reporting obligations, the proposed audit plans for the coming year, and the coordination of such plans with the independent registered public accounting firm.

The Committee selects the Company’s independent registered public accounting firm and provides assistance to the members of the Board of Directors in fulfilling their oversight functions of the financial reporting practices, including satisfying obligations imposed by Section 404 of the Sarbanes Oxley Act, and financial statements of the Company. It is not the duty of the Committee, however, to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with U.S. generally accepted accounting principles. The Company’s independent registered public accounting firm is responsible for planning and conducting audits; and the Company’s management is responsible for determining that the Company’s financial statements are complete and accurate and in accordance with U.S. generally accepted accounting principles.

The Committee received reports and reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Committee also discussed with the independent registered public accounting firm the Section 404 obligations and matters required to be discussed by Statement on Auditing Standards No. 61. The Committee received from the Company’s independent registered public accounting firm the written disclosures and letter required by the applicable Public Company Accounting Oversight Board requirements for independent accountant communications with the Audit Committee concerning auditor independence. The Committee discussed with the independent registered public accounting firm that firm’s independence and any relationships that may impact that firm’s objectivity and independence.

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Based on the Committee’s discussion with and review of reports from management and its independent registered public accounting firm and the Committee’s reliance on the representation of management that the Company’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, the Committee recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the SEC.

MEMBERS OF THE AUDIT COMMITTEE

John T. Baily (Chairman)

Gerald I. Lenrow

F. Lynn McPheeters

Robert O. Viets

EXECUTIVE RESOURCES COMMITTEE REPORT

The Executive Resources Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis section of this Proxy Statement. Based on the Executive Resources Committee’s review and discussions, it recommended to the Board, and the Board approved, that the Compensation Discussion and Analysis be included in the Company’s 2010 Proxy Statement.

MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE

Richard H. Blum (Chairman)

Barbara A. Allen

Jordan W. Graham

Robert O. Viets

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Executive Resources Committee is a current or former employee or officer of the Company or otherwise had any relationships to be disclosed within the scope of SEC regulations.

COMPENSATION DISCUSSION & ANALYSIS

INTRODUCTION

The Executive Resources Committee (“ERC”) is responsible for reviewing, determining, and administering specific compensation levels for senior executive officers and for overseeing other executive compensation programs and management succession and development processes.

HOW THE ERC OPERATES

ERC Members

Until May 2009, the members of the ERC were Messrs. Blum (Chairman), Viets, Sutkowski, and Ms. Allen. After May 2009, the members of the ERC were Messrs. Blum (Chairman), Viets, Graham and Ms. Allen. ERC members are nominated by the Nominating/Corporate Governance Committee, elected by the Board, and may be removed from the ERC by the Board at any time, with or without cause. The members of the ERC are independent directors under the independence standards developed by the Board, which incorporate all of the NYSE independence standards, and which are set out previously under the section entitled “Corporate Governance and Board Matters.” The Board annually determines the independence of each member of the ERC under those independence standards.

ERC Responsibilities

The ERC operates under a Charter, which can be found at the Company’s website at www.rlicorp.com. The ERC Charter is reviewed annually by the ERC and any proposed changes to the Charter are submitted to the Nominating/Corporate Governance Committee for approval. The ERC is responsible to the Board for (1) reviewing and providing

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advice regarding the executive compensation policy and the execution thereof; (2) reviewing and providing advice regarding the Company’s management development and succession planning; (3) monitoring compensation actions by management below the executive level; (4) producing an annual report on executive compensation for approval by the Board for inclusion in the Company’s proxy statement in accordance with applicable rules and regulations; and (5) reviewing the Company’s employee benefit plans. Compensation of the Board of Directors is recommended by the Nominating/Corporate Governance Committee, with the advice and counsel of the ERC to ensure alignment of interests between Board and executive compensation.

ERC Meetings

The ERC held seven meetings in 2009. The agenda for each ERC meeting is established by the Chairman of the ERC in consultation with other ERC members, and with Mr. Michael and Jeffrey Fick, Vice President, Human Resources. ERC materials are prepared by Messrs. Michael and Fick and are reviewed and approved by the ERC Chairman in advance of distribution to ERC members. The ERC meetings are attended by Messrs. Stephens, Michael and Fick. Messrs. Michael and Fick are excused during the executive session portion of the ERC meetings.

Input From Management

Mr. Michael plays a key role in the ERC’s consideration of executive compensation levels and the design of executive compensation plans and programs for other senior executive officers. For these individuals, Mr. Michael recommends the following components of executive compensation to the ERC for review and recommendation to the Board:

·                  annual base salary levels;

·                  annual bonus targets and financial goals; and

·                  the form and amount of long-term incentives.

Mr. Michael makes such compensation recommendations based on external market data; achievement of respective performance criteria by each executive; and his judgment related to internal equity, potential for advancement, and contribution to team initiatives. Mr. Michael also relies upon the input of Messrs. Stone, Dondanville, and Fick when making such recommendations.

Compensation Consultant

Neither the ERC nor management retained a compensation consultant in 2009. The ERC Charter specifically provides that if a compensation consultant is to assist in the evaluation of CEO or senior executive compensation, the ERC has sole authority to retain and terminate the consulting firm, including sole authority to approve the firm’s fees and retention terms. Management also has authority to retain a compensation consultant, but may not retain the compensation consulting firm retained by the ERC without approval in advance by the ERC.

OVERVIEW OF RLI EXECUTIVE COMPENSATION

Objectives

The objective of the Company’s executive compensation program is to provide a competitive total executive compensation program linked to Company performance that will attract, retain and motivate talented executives critical to the Company’s long-term success.

Guiding Principles

The ERC is guided by a number of principles in its oversight of the Company’s executive compensation design and administration:

1.               There must be a direct linkage between long-term shareholder value creation and executive pay;

2.               Annual incentives for executives directly involved in underwriting are based on underwriting profit measured over a period of years consistent with the income and risk to the Company;

3.               Compensation should reflect both the Company’s and individual’s performance;

4.               A meaningful element of equity-based compensation and significant executive equity holdings are important to ensure alignment of management and shareholder interests; and,

5.               The Company’s overall executive pay levels must be competitive in the marketplace for executive talent to enable the Company to attract and retain the best talent.

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Elements of Company Executive Compensation

The Company’s total executive compensation program is comprised of the following components, each of which is described in greater detail below:

1.               Total annual cash compensation consisting of:

(a)          Base salary;

(b)         Annual bonuses under the Market Value Potential Executive Incentive Program (“MVP Program”) for the CEO; COO; CFO; and Senior Vice President, Risk Services;

(c)          Annual bonuses under the Management Incentive Program (“MIP”) for other home office executives;

(d)         Annual bonuses under the Underwriter Profit Program for product group executives;

2.               Long-term incentive compensation granted under the Omnibus Stock Plan; and

3.               Limited Perquisites. All Company executives are provided with travel accident insurance and are reimbursed out of pocket costs for an annual health examination not covered by the Company’s health plan. The CEO, COO, and CFO are permitted to use the Company’s aircraft pursuant to a lease agreement and hourly lease rate approved by the Board of Directors, with maximum annual use limited to total lease charges of 6.5 percent of annual base salary.

ANNUAL COMPENSATION

BASE SALARY

Executive base salaries are targeted to be at the median base salary for comparable positions in the insurance industry, taking into account performance, experience, potential and the level of base salary necessary to attract and retain top executive talent.

In 2009, the ERC set base salary ranges for the CEO, CFO, and COO based on publicly available executive compensation data from the following peer companies: Alleghany Corporation; Amtrust Financial Services; Arch Capital Group Ltd; Argonaut Group, Inc; Axis Capital Holdings Limited; Cincinnati Financial Corporation; CNA Financial Corporation; CNA Surety Corporation; Endurance Specialty Holdings Ltd.; Flagstone Reinsurance Holdings; HCC Insurance Holdings, Inc.; Horace Mann Educators Corporation; Markel Insurance Company; Mercury General Corporation; Navigators Group; NYMagic, Inc.; Old Republic International; PMA Capital Corporation; ProAssurance; Selective Insurance Group, Inc.; Validus Holdings; W.R. Berkley Corporation; and Zenith National Insurance Corp. The ERC selected these peer companies because each competes within the property and casualty insurance industry and sell a variety of insurance products that serve both commercial entities and individuals that can generally be defined as specialty in nature, or targeted toward niche markets. The peer companies have established records of financial performance, and most have been publicly traded for at least five years, facilitating the comparison of the Company’s financial performance to theirs. The ERC also reviews the market capitalization of the Company compared to the peer companies to ensure that the Company is at or near the median market cap among those companies.

The ERC compares the relative ranking among the Company and peer companies for base salaries and total compensation for the CEO, COO, and CFO positions to the relative performance ranking for the following performance metrics: price-to-book ratio; price-to-earnings ratio; return on equity; five-year combined ratio; and total return to shareholders for three, five, and 10-year timeframes. Each year the ERC ensures that the relative ranking of the CEO, COO, and CFO for total compensation is consistent with the relative ranking of the Company for the above-stated performance metrics. For 2009, total compensation for each of these individuals was at or near the median among the peer companies, while the ranking for the Company in the performance metrics listed above was above the median for every metric. The Company was the top performer for all peer companies for price-to-book ratio and had the second highest performance for three-year and 10-year return to shareholders.

Base salaries and total compensation for other executive positions are established by reference to the publicly available survey data, including median base salary levels, for comparable executives in the insurance industry.

In March 2009, Mr. Kliethermes was promoted from Vice President Actuarial Services, to Senior Vice President, Risk Services, with responsibility for actuarial services; home office underwriting; and oversight of the RLI Re, Fidelity, and Design Professional product groups. His annual base salary was increased effective March 1, 2009 by approximately 10 percent from $290,000 to $320,000 at the recommendation of Mr. Michael to reflect the increased responsibilities of his new role. Because of his unique role, benchmark data from peer companies or insurance industry compensation surveys was not available.

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At the May 2009 Board meeting, when the annual review of base salaries was conducted by the ERC, Mr. Michael recommended, and the ERC approved, no annual base salary increase for the named executive officers. With the exception of three other Company executives whose base salaries were low in their respective ranges and therefore warranted an increase in base salary, no increase was made to the base salary of all other Company executives. The decision not to increase executive base salaries was made to manage cost and set the tone at the top in light of the challenging economic environment.

MARKET VALUE POTENTIAL EXECUTIVE INCENTIVE PROGRAM (MVP PROGRAM)

The Company has paid annual cash bonuses to certain executive officers under the MVP Program since 1996. As discussed in further detail below, the MVP Program provides a mechanism with which the ERC can tie cash compensation to long-term shareholder value creation. The MVP Program uses an economic profit measure called Market Value Potential, or MVP, which measures the returns earned by the Company above its cost of capital, as a direct gauge of shareholder value creation. MVP is (1) the actual return (the increase in adjusted GAAP book value), less (2) the required return (invested capital multiplied by the blended cost of capital). If the Company does not earn its cost of capital in a given year, no bonus award is made pursuant to the MVP Program for that year.

Key elements of the MVP Program include the following:

·                  Annual bonus awards are expressed as a percentage of MVP created in that year.

·                  Annual bonus awards, if positive, are credited to a bonus bank with only 33 percent of the bank paid out annually, with the remaining amount in the bonus bank at risk depending on future results.

·                  Bonus banks can either be positive or negative.

·                  Bonus awards can be negative if MVP for the year is negative and are charged to the bonus bank, reducing prior year award balances in the bonus bank.

·                  Annual bonus awards that are greater than 300 percent of a participant’s base salary require approval of the independent Directors.

Participation in the MVP Program, percentage bonus awards, and the formula to calculate MVP are recommended by the ERC and approved annually by the independent directors of the Board for Mr. Michael and by the entire Board for other participants. In 2009, participation in the MVP Program was limited to Messrs. Michael, Stone, Dondanville, and Kliethermes. The Board has concluded that the senior executive management team (the CEO, COO, CFO, and Senior Vice President, Risk Services) is most responsible for the operating and investment decisions that directly impact the creation of long-term shareholder value, and, therefore, should be rewarded with incentive compensation that is directly and exclusively tied to the creation of MVP.

Each participant in the MVP Program receives an annual MVP bonus award expressed as a certain percentage of after-tax MVP created by the Company in a calendar year. The ERC determines each executive’s percentage bonus award under the MVP Program at the beginning of each year taking into account studies of base salary, bonus, and total compensation of the peer companies, the executive officer’s scope of responsibilities, and individual performance. The ERC also considers historical trends for MVP created as well as individual and aggregate MVP bonus awards. The MVP percentage award, expressed as a percentage of after-tax MVP for each participant for 2009 was as follows: 2.0 percent for Mr. Michael, 1.2 percent for Mr. Stone, 0.8 percent for Mr. Dondanville, and 0.4 percent for Mr. Kliethermes. The ERC set the percentage bonus awards for 2009 based on the factors described above and based on the range of expected MVP to be created by the Company in 2009 and the projected bonus awards and bonus payouts that would result.

Annually, the respective percentage award multiplied by actual after-tax MVP created in that year is increased as specified in the MVP Program to eliminate the impact of the Company’s state and federal marginal income tax rate due to the favorable tax impact to the Company from paying the bonuses. This adjustment provision has been in the MVP Program since its inception in 1996 and has the effect of increasing both positive and negative awards. Beginning in 2010, in order to improve the transparency of the manner in which bonuses are calculated and disclosed, MVP Program awards will be expressed with such adjustment already made. The following MVP Program percentage awards have been approved for 2010: Mr. Michael: 3.0 percent; Mr. Stone: 1.9 percent; Mr. Dondanville: 1.25 percent; and Mr. Kliethermes: 0.625 percent. Accordingly, 2010 awards will not be adjusted to eliminate the impact of the Company’s marginal state and federal tax rate. The aggregate amount of MVP percentage awards for Messrs. Michael, Stone, Dondanville, and Kliethermes for 2010 is 6.775 percent, compared to the comparable aggregate awards for 2009, adjusted to eliminate the effect of the Company’s state and federal taxes, of 6.85 percent.

Annual awards are added to a MVP bonus bank for each participant. If MVP is negative for a year, a negative award is deducted from each participant’s bonus bank. If the entire bank balance is negative, the negative bank

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balance carries over to the next year. Interest at the three-year U.S. Government Treasury Bill rate is accrued on any positive unpaid bonus bank balance on December 31 of each year.

Annually, 33 percent of a participant’s MVP Program bonus bank (if positive) is paid as a cash bonus payment. The remainder of the bank balance is at risk and will be reduced to the extent MVP is negative in subsequent years. The MVP Program also includes a Board Approval Limit which provides that if a positive MVP award to be added to, or a negative MVP award to be deducted from, a participant’s bonus bank exceeds 300 percent of year-end base salary, the independent directors must approve, and may reduce, that portion of the MVP award in excess of the Board Approval Limit. MVP awards approved by the ERC for 2009 for Messrs. Michael, Stone, and Dondanville did exceed the Board Approval Limit of 300 percent of their respective base salaries. Accordingly, the amount of the MVP Awards to those individuals above 300 percent of each of their respective base salaries was approved by the independent directors. Individual annual MVP Award payments, including the amount credited to a bonus bank, are capped at $7.5 million.

The Company’s after-tax MVP in 2009 was $97.7 million, compared to negative MVP of $37.3 million in 2008. The following awards were credited to MVP bonus banks for 2009: Mr. Michael, $3,043,732; Mr. Stone, $1,826,239; Mr. Dondanville, $1,217,493; and Mr. Kliethermes, $764,697. The following amounts, representing 33 percent of each participant’s remaining MVP bonus bank balance were paid in February 2010 with respect to 2009: Mr. Michael, $1,749,407; Mr. Stone, $1,049,403, Mr. Dondanville, $700,298, and Mr. Kliethermes, $252,350. After the February 2010 MVP bonus payments, the remaining at-risk MVP bank balance for each participant was: Mr. Michael, $3,551,825; Mr. Stone, $2,130,605; Mr. Dondanville, $1,421,818, and Mr. Kliethermes, $512,347. The following table shows the manner in which 2009 MVP payouts and remaining at-risk bank balances were calculated for each participant.

2009 MVP Program Bonus Awards and Payouts ($)

The conditions under which a positive bank balance will be distributed in the event of a participant’s termination of employment are discussed in the section entitled: “Elements of Post-Termination Compensation and Benefits” beginning on page 35.

In 2008 and prior years, Mr. Kliethermes participated in the MIP discussed immediately below. Under the MIP, annual bonuses are paid out in their entirety, compared to annual bonuses under the MVP Program which are credited to a bonus bank, with 33 percent of the bonus bank paid out annually. As a transition from participation in MIP to the MVP Program, the ERC agreed that for 2009, Mr. Kliethermes would be paid the greater of the bonus calculated under MIP or the MVP Program, with such amount deducted from his MVP bonus bank. Based on 2009 results, the bonus payable to Mr. Kliethermes was greater under the MVP Program.

MANAGEMENT INCENTIVE PROGRAM (MIP)

Participants in the MIP include home office vice presidents, assistant vice presidents, and other senior managers. Target awards are granted annually and expressed as a percentage of year-end base pay. Actual awards are based on Company performance against operating earnings (“OE”) and MVP goals and individual performance against personal objectives. OE is used as a financial goal to provide an incentive to increase annual profitability. MVP is used as a financial goal as a proxy for shareholder value creation. Actual awards for a year are paid in February of the following year and range from zero to a maximum of 150 percent of the target award for vice presidents. The ERC approves target awards for MIP participants at the vice president level. The CEO approves target award levels for other MIP participants.

For 2009, Mr. Michael recommended, and the ERC approved, a MIP target award for Messrs. Kennedy and Kliethermes of 50 percent of their respective year-end base salaries, with a maximum award of 75 percent. The target award of 50 percent consisted of a target of 15 percent of base pay for achieving the MVP goal of $60 million, a target of 15 percent of base pay for achieving the OE goal of $105 million, and a target of 20 percent of base pay for the achievement of individual objectives. Achievement levels for financial goals are measured according to the following schedule approved by the ERC at the beginning of 2009.

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