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RLI CORP.

9025 North Lindbergh Drive

Peoria, Illinois 61615

March 26, 2009

Dear Shareholder:

Please consider this letter your personal invitation to attend the 2009 RLI Corp. Annual Shareholders Meeting. It will be held at 9025 North Lindbergh Drive, Peoria, Illinois, 61615, the Company’s principal office, on May 7, 2009, at 2 p.m. CDT.

Business scheduled to be considered at the meeting includes the election of Class I directors, an amendment to our Articles of Incorporation to increase the amount of authorized shares, and ratification of KPMG LLP as our independent registered public accounting firm for the current year. In addition, we will review significant events of 2008 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 2008 Financial Report to Shareholders. The notice contains instructions on how to access those documents over the Internet. The notice also contains instructions on how each of those shareholders can receive a paper copy of our proxy materials, including this Proxy Statement, our 2008 Financial 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 7, 2009

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 7, 2009, at 2 p.m. Central Daylight Time to:

1.              Elect three (3) Class I directors for a one-year term expiring in 2010 or until their successors are elected and qualified;

2.              Consider and act upon a proposal to amend the Company’s Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 50 million to 100 million;

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 9, 2009, are entitled to notice of and to vote at the Annual Meeting.

Peoria, Illinois

March 26, 2009

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 7, 2009

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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 7, 2009, 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 26, 2009.

Voting  Because many shareholders cannot attend the Annual Meeting in person, it is necessary that a large number 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.

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·    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 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 three 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 our outstanding common shares shall be required to approve Proposal Two, and the affirmative vote of a majority of the votes represented at the meeting shall be required to approve Proposal 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 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. For example, members of the NYSE are permitted to vote their clients’ proxies at their own discretion as to the election of directors if the clients have not furnished voting instructions within 10 days of the meeting. 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

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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.  Consequently, with respect to approval of the matters set forth here, broker non-votes will have no effect on approval of Proposal One because the election of directors is determined by a plurality of the votes cast nor on approval of Proposal Three because broker non-votes are not counted in determining the number of shares necessary for approval for Proposal Three.   But, with respect to Proposal Two, broker non-votes will have the effect of voting against the amendment to our Restated Articles of Incorporation, as that amendment requires the affirmative vote of a majority of our common shares outstanding.

Shareholders Entitled to Vote.  Shareholders of record at the close of business on March 9, 2009, the record date, shall be entitled to vote at the 2009 Annual Meeting. As of the record date, the Company had 21,603,175 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 2009 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 2008 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 only persons or entities known to the Company who beneficially own more than 5 percent of the Company’s Common Stock as of December 31, 2008, are as follows:

(1)        The information shown is based solely on a Schedule 13G dated January 28, 2009, 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 1,708,432 shares and sole dispositive power with respect to 1,728,532 shares. Messrs. Johnson and Johnson are the principal shareholders of Franklin.

(2)        The information shown is based solely on a Schedule 13G dated February 17, 2009, filed with the SEC by State Street Bank and Trust Company (“State Street”), which filing indicates that, in its capacity as trustee of the Company’s Employee Stock Ownership Plan (“ESOP”), held 1,476,635 shares on behalf of participants in such plan. State Street further disclosed sole voting power with respect to 450,087 shares, shared voting power with respect to 1,476,635 shares, and shared dispositive power with respect to 1,926,722 shares. Each ESOP participant or beneficiary may direct State Street as to the manner in which the shares allocated to each participant under the ESOP are to be voted. State Street 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, State Street 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 49,220 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; 30,795 shares held in custodian accounts for the benefit of Mr. Stephens’ grandchildren, over which Mr. Stephens

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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; 18,459 shares owned by the Gerald D. and Helen M. Stephens Foundation, over which Mr. Stephens, as President, has sole voting and investment power; 110,585 shares owned by the Gerald D. Stephens Grantor Annuity Trust, over which Mr. Stephens, as trustee, has sole voting and investment power; and 11,508 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 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 February 6, 2009, filed with the SEC by Barclays Global Investors, NA (registered bank), Barclays Global Fund Advisors (investment advisor) and Barclays Global Investors. Ltd. (registered bank). According to the Schedule 13G, Barclays Global Investors, NA is the beneficial owner of, and has sole dispositive power with respect to 420,563 shares, and sole voting power with respect to 347,404 shares; Barclays Global Fund Advisors is the beneficial owner of, and has sole dispositive power with respect to 801,928 shares, and sole voting power with respect to 599,602 shares; and Barclays Global Investors, Ltd. is the beneficial owner of, and has sole dispositive power with respect to 11,815 shares and sole voting power with respect to 420 shares.

Directors and Officers.  The following information is furnished as to the beneficial ownership of the shares 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, 2008.

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*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. Director Deferred Compensation Plan (“Deferred Plan”) for the benefit of the following: Mr. Baily 2,241 shares; Mr. Blum 5,506 shares; Mr. Graham 4,634 shares; Mr. Lenrow 45,159 shares; Mr. Linke 5,386 shares; Mr. McPheeters 12,066 shares; Mr. Sutkowski 82,978 shares; and Mr. Viets 34,629 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, 2008, 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 7,664 shares; Mr. Lenrow 7,200 shares; Mr. Linke 5,407 shares; Mr. McPheeters 8,482 shares;  and Mr. Viets 7,200 shares.

(5)        Includes 200 shares held by Mr. Dondanville’s spouse in a custodian account for the benefit of their children, and 12,276 shares held in trust by Mr. Dondanville’s spouse, as to which Mr. Dondanville disclaims any beneficial interest.

(6)        Includes 974 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 35,661 shares allocated under the Key Plan, over which Mr. Michael has no voting or investment power.

(8)        Includes 49,220 shares allocated to Mr. Stephens under the Key Plan, over which Mr. Stephens has no voting or investment power; 30,795 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; 110,585 shares owned by the Gerald D. Stephens Grantor Annuity Trust, over which Mr. Stephens, as trustee, has sole voting and investment power; and 18,459 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, 2008, the following shares were allocated under the ESOP: Mr. Dondanville 24,470 shares; Mr. Kennedy 1,036 shares; Mr. Kliethermes 1,038 shares; Mr. Michael 64,050 shares; and Mr. Stone 13,958 shares.  During 2008, 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, 2008, under the Incentive Stock Option Plan (“ISOP”) and the Omnibus Stock

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Plan, upon the exercise of outstanding stock options as follows: Mr. Dondanville 119,600 shares; Mr. Kennedy 7,999 shares; Mr. Kliethermes 3,800 shares; Mr. Michael 250,201 shares; and Mr. Stone 87,300 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 8,681 shares; Mr. Kliethermes 1,915 shares; Mr. Michael 14,390 shares; Mr. Stephens 11,508 shares; and Mr. Stone 17,645 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, 2008, the following number of shares were held in such accounts: Mr. Michael 168,813 shares; and, Mr. Sutkowski 21,000 shares.

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, 2008, the reporting persons have complied with all filing requirements of Section 16(a) of the 1934 Act.

Proposal One:

Election of Directors

General.  The Company’s Board of Directors currently consists of 12 persons, divided into three classes (Class I, Class II and Class III). 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 will be the last three-year term for any director. The Board’s Class I directors, standing for election at this year’s Annual Meeting, will stand for a one-year term.    The Class II directors will continue to hold office until the end of the term for which they were previously elected, (i.e., until the 2010 Annual Meeting), and will stand for one-year terms thereafter. 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, three (3) Class I directors are to be elected, each to hold

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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 proxy will be voted for the election of the three 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 and Jonathan E. Michael, each current directors, are the Class I directors standing for election. Except for Mr. Ahlmann, such directors were elected previously by the shareholders in 2006 for a three-year term expiring in 2009. Mr. Ahlmann was appointed to the Board on February 1, 2009, and will replace Mr. Sutkowski who has decided not to stand for re-election.   Each is nominated to serve for a one-year term expiring in 2010.

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 three nominees listed below.

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Director and Nominee Information.  The following includes certain information with respect to the current directors and nominees to the Board of Directors furnished to the Company by such individuals:

Certain information concerning the remaining directors, whose terms expire either in 2010 or 2011, is set forth as follows based upon information furnished to the Company by such individuals:

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(1)          Mr. Baily serves as a Director of Endurance Specialty Holdings Ltd. and NYMAGIC, Inc., both publicly traded companies.

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

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Proposal Two:
Amend the Company’s Restated Articles of Incorporation
to Increase the Number of Authorized Shares of Common Stock

General.  The Company’s Board of Directors has unanimously approved, and submits for authorization and approval of shareholders, a proposal to amend Article Four of the Company’s Restated Articles of Incorporation (“Articles”) to increase the number of shares of authorized Common Stock from 50 million shares to 100 million shares (the “Proposed Amendment”). The revised Articles reflecting the Proposed Amendment are attached as Exhibit “A.”

Increase in Authorized Shares of Common Stock.  The Company’s Articles currently authorize the issuance of a total of 50 million shares of Common Stock, par value $1.00 per share, and 5 million shares of Preferred Stock, par value $0.01 per share, for a total of 55 million shares.  The Proposed Amendment would increase the number of authorized shares of Common Stock from 50 million to 100 million (the “Share Increase”) and thereby increase the total number of authorized shares of all capital stock from 55 million to 105 million shares.  The Proposed Amendment does not propose an increase in the amount of authorized shares of Preferred Stock, or make any other changes to the articles.  As of March 9, 2009 (record date), 21,603,175 shares of Common Stock were outstanding (32,131,459 shares were issued and outstanding if treasury shares are included), and no shares of Preferred Stock were outstanding.  As of March 9, 2009, 564,867 shares of Common Stock were reserved for issuance pursuant to the Company’s Omnibus Stock Plan.  The number of shares to be issued upon exercise of outstanding options as of March 9, 2009, is 1,407,518.

The Share Increase will constitute additional authorized but unissued shares of the existing Common Stock and, if and when issued, will have the same rights and privileges as the shares of Common Stock currently authorized.  The Share Increase only increases our amount of authorized shares, but will not increase the current number of issued and outstanding shares.

The Share Increase would enable the Company, without further shareholder approval, (unless shareholder approval is required by law, the SEC or under the rules of the NYSE) to issue shares from time to time as may be required for various purposes.  The purposes contemplated by Company management and the Board for the additional authorized shares include potential stock splits, stock dividends, mergers and acquisitions, present and future employee benefit programs (including stock option plans), raising additional capital for ongoing operations, and other general corporate purposes.  The current number of authorized shares of Common Stock was established 13 years ago (in 1996), and has not been increased since then.  Company management and the Board believe the Share Increase is reasonable and advisable in view of our growth and capital structure needs since that time, and to support the Company’s future corporate growth.  For example, with the current number of available common shares, the Company could not accomplish a 2-for-1 stock split and retain a reasonable cushion of available common shares thereafter.  Likewise, a combination of other potential beneficial uses of stock — such as stock dividends, use in acquisitions or raising capital, stock options, etc., — could be impaired by the lack of available shares or reduce the available share cushion to unacceptably low levels.  As the Company has grown over time, its capital structure and needs for capital stock have grown as well.  Company management and the Board believe it is prudent to enhance its capital structure at this time so that it has the flexibility to prepare for, and adapt to, future corporate stock needs.  The Company has no present plans or understandings for issuance of any of the newly-authorized

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shares of Common Stock.

The Share Increase could have a number of effects on the Company’s shareholders, depending upon the exact nature and circumstances of any actual issuances of these authorized shares. These effects are described further below.

Anti-Takeover Effects of the Proposed Amendment to Increase Authorized Shares of Common Stock.  The Share Increase and the subsequent issuance of such shares could have the effect of delaying or preventing a change of control of the Company without further action by the shareholders.  For example, shares of authorized and unissued Common Stock could (within the limits imposed by applicable law) be issued in one or more transactions that would make a change of control of the Company more difficult, or be issued to discourage persons from attempting to gain control of the Company.

In addition, the Share Increase authorized by the Proposed Amendment could permit the Company to issue Common Stock to persons supportive of management’s position, who may then be in a position to vote to prevent or delay a proposed business combination that is deemed unacceptable to the Board of Directors.  Similarly, the issuance of additional shares to certain persons allied with the Company’s management could have the effect of making it more difficult to remove the Company’s current management by diluting the stock ownership or voting rights of persons seeking to cause such removal.  Likewise, shares could be used to facilitate the adoption of measures intended to deter unfair or coercive takeover tactics not believed to be in the best interests of shareholders.

The Board of Directors is not aware of any attempt or contemplated attempt to acquire control of the Company, and the Share Increase is not being presented with the intent that it be utilized as a type of anti-takeover device.

Additional Effects of the Share Increase.  Although the Share Increase will not affect the terms or rights of holders of existing shares of Common Stock, an issuance of additional Common Stock will generally have the effect of diluting the earnings per share and book value per share of outstanding shares of Common Stock and the equity and voting rights of holders of shares of Common Stock.  Depending on the amount of consideration received for any issuance of additional Common Stock, subsequent issuances may also reduce shareholder’s equity on a per share basis.

Recommendation of the Board of Directors.  The Board of Directors has unanimously approved the Proposed Amendment and has determined that the Share Increase is in the best interests of the Company and its shareholders.

The Share Increase as manifested in the Proposed Amendment shall only be effectuated and effective if shareholder approval is secured; if such shareholder approval is not secured, the Share Increase shall not be effectuated.

The affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock of the Company is required for adoption of this proposal.

The Board of Directors recommends the shareholders vote “For” Proposal Two to amend the Company’s Restated Articles of Incorporation to Increase the Authorized Shares of Common Stock.

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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 2009 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, and are available in print to any shareholder who requests them, outline the directors’ responsibilities, which include attendance at shareholder, Board and committee meetings. Each member of the Board (who was a member of the Board at the time) attended the 2008 Annual Meeting of Shareholders and was available to respond to appropriate questions from the shareholders.

The Company has developed an orientation process that encourages new directors to attend a director seminar in their first year as a director. Each year, certain of the incumbent directors are requested to attend an accredited director seminar selected by the Company.

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

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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 or director nominee (collectively referred to as “director”) has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company), and also meet 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 twelve-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

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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. 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.

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Board Independence Status

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

Prior to February 1, 2006, Mr. Blum was the non-executive Chairman of Axis Capital Holdings (“Axis”), affiliates of which include reinsurance and insurance companies. Other than an immaterial, minority equity ownership in Axis, Mr. Blum has no employee, officer or director affiliations with the Axis group of companies. From time to time the Company enters into immaterial reinsurance arrangements with certain of the Axis companies.

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.

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.

Mr. Stephens is the founder of the Company and ceased being an employee of the Company on January 1, 2006.   In February 2009, the Nominating/Corporate Governance Committee and the Board of Directors made the affirmative determination that Mr. Stephens complies with the Company’s categorical independence standards for directors and also has no material relationship with the Company (Mr. Stephens abstained from voting).   Consequently Mr. Stephens qualifies as an independent director as set forth in the Company’s independence standards for directors and as required by the NYSE corporate governance standards.  In making their respective independence determinations for Mr. Stephens, the Nominating/Corporate Governance Committee and the Board of Directors considered all relevant facts and circumstances, including the following factors:  (a) the fact that Mr. Stephens has not been an employee of the Company for over three years, (b) Mr. Stephens’ status as founder of the Company, (c) Mr. Stephens’ status as the Company’s largest individual

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shareholder, (d) Mr. Stephens’ position as Chairman of the Board of Directors, (e) Mr. Stephens’ use of an office and administrative assistant at the Company’s headquarters, and (f) Mr. Stephens’ privileges for personal use of the Company aircraft.

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 and reviews the appropriate skills and characteristics required of Board members. 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. Any shareholder may recommend nominees for director by writing to the Corporate Secretary of the Company at 9025 N. Lindbergh Drive, Peoria, Illinois 61615, giving the candidate’s name, biographical data and qualifications. Any such recommendation should be accompanied by a written statement from the candidate of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director.

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 and is available in print to any shareholder who requests it. 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.

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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 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.

Certain Relationships and Related Transactions.  In 2008, 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 had or will have a direct or indirect material interest.

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 2008 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

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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 accounting firm. The Audit 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

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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.

Mr. Baily serves as either a member or chair of the audit committee of four public companies including the Company. After examination of Mr. Baily’s extensive accounting experience and considering his retirement from full-time employment, the Board determined that such simultaneous service would not impair his ability to effectively serve on the Audit Committee.

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 six times in 2008 to evaluate and recommend salaries, bonuses and other compensation incentives of the President & Chief Executive Officer and certain key executive officers of the Company. The committee also reviews and evaluates the President’s personal goals, management development and succession planning and the Company’s deferred compensation, stock option, retirement and medical programs.

Ms. Allen, Messrs. Blum (Chairman), Sutkowski and Viets are the members of the committee.

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 2008 to discuss ongoing financial, investment and capital matters.

Messrs. Graham, Linke, Michael (Chairman), Stephens and Sutkowski are the members of the committee.  Effective February 10, 2009, Mr. Ahlmann was appointed a member of the committee.

Nominating/Corporate Governance Committee.  The Company’s Nominating/Corporate Governance Committee, composed exclusively of independent directors, met five times in 2008 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 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 four times in 2008 to oversee the Company’s strategic plan and its

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implementation.

Ms. Allen, Messrs. Blum, Graham (Chairman), McPheeters, and Michael are the members of the committee.   Effective February 10, 2009, Mr. Ahlmann was appointed a member of the committee.

Committee Membership

* Chair of Committee

Board Meetings and Compensation

Meetings. During 2008, five 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 and non-management directors meet in executive session with no members of management present. At least once a year, the independent directors meet in executive session with neither non-management nor management directors present.  Mr. Viets was the Presiding Director of the Board’s executive session in 2008 and was re-elected as Presiding Director of the executive session until the 2010 Annual Meeting of Shareholders.

Director Compensation. During 2008, Outside Directors (which consist of our independent directors and our non-management director) were compensated as follows:

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

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

Outside Director compensation for 2009 remains the same as the 2008 compensation noted above.

The following table provides the compensation of the Company’s Board of Directors earned for the fiscal year ended December 31, 2008.

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(1)         Each outside director elects 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 Nonemployee Directors Deferred Compensation 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 Nonemployee Director Deferred Compensation Plan. Amounts shown include the value of fees taken in the form of Company stock.

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

(3)         Effective May 7, 2004, no further options were granted to outside directors under the Stock Option Plan for Outside Directors. The aggregate number of outstanding stock options under the Directors’ Stock Option Plan for Outside Directors as of December 31, 2008, were as follows: Mr. Baily 4,233 options; Mr. Blum 7,664 options; Mr. Lenrow 7,200 options; Mr. Linke 5,407 options; Mr. McPheeters 8,482 options; and Mr. Viets 7,200 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.

(4)         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.

(5)         Effective January 1, 2006, Mr. Stephens retired as an employee of the Company and receives 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 2008.

(6)         Represents personal use of the Company aircraft imputed at the Standard Industry Fare Level. Mr. Stephens was also provided an office when present at the Company’s home office, and part-time secretarial support at the aggregate cost of $30,177.

Stock option Plan for Outside Directors. 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.

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Outside Directors’ Fee Award Agreement. In 2008, the Director Fee Award 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. Likewise, it 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 2008 and 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.

Director Deferred Compensation 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 must transfer to a bank trustee, under an irrevocable trust established by the Company, such number of shares of the Company as are equal to the compensation as earned and deferred during the relevant year. Dividends on these shares are reinvested quarterly under the Company’s Dividend Reinvestment Plan. In general, Deferred Plan benefits are distributable beginning when the director’s status terminates.

Director Share Ownership. Each outside director is encouraged to, within three years of the later of (i) January 1, 2006, or (ii) 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 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

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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 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.

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, 2008, as filed with the SEC.

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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 of Directors that the Compensation Discussion and Analysis be included in the Company’s 2009 Proxy Statement.

Members of the Executive Resources Committee

Richard H. Blum (Chairman)

Barbara A. Allen

Edward F. Sutkowski

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/Corporate Governance. 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. Until May 2008, the members of the ERC were Messrs. Viets (Chairman), Linke and Sutkowski, and Ms. Allen.   After May 2008, the members of the ERC were Messrs. Blum (Chairman), Viets and Sutkowski and Ms. Allen.

ERC Members and Charter. 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,

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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. 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 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) determining the scope of benefits offered under 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 between Board and executive compensation.

The principal functions and responsibilities of the ERC relate to compensation and management development, and are as follows:

Compensation:

1.              Ensure that the Company’s executive compensation policies and administration are directly aligned with the Company’s strategy, are consistent with a “pay for performance” philosophy, and support long-term shareholder value creation.

2.              Review and evaluate, at least annually, the corporate goals and objectives, the performance (in light of the goals and objectives) and the leadership of the Chief Executive Officer (“CEO”); determine and recommend compensation of the CEO to the independent Directors for approval; review performance and recommend compensation of the non-CEO executive officers (designated by the ERC to be those identified under Section 16(a) of the Securities Exchange Act of 1934) to the Board of Directors for approval.

3.              Determine and approve annually the participants, target awards, and the Company’s financial goals for the Market Value Potential Executive Incentive Program.

4.              Review and approve (or recommend changes for the Board to approve) the Company’s long-term incentive programs and plans and equity-based plans.

5.              Review annual reports prepared by management disclosing all direct and indirect compensation paid to all home office and branch vice presidents.

6.              Retain compensation consultants as appropriate to assist in the evaluation of CEO and other executive compensation.

7.              Review annually management’s summary report on all other executive compensation actions.

Management Development:

1.              Review periodically the process and results for identifying key executive managers of the Company.

2.              Review periodically the Company’s key employee management development actions

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and succession plan.

3.              Review periodically with the Board the Company’s succession plan, including those plans for emergency succession in cases of the unexpected disability, of the CEO.

ERC Meetings. The ERC meets in person in February, May, August, and November in conjunction with Board meetings. The ERC holds additional meetings in person and telephonically as necessary. In 2008, the ERC held six meetings. The agenda for each ERC meeting is established by the Chairman of the ERC in consultation with other ERC members, 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. Michael and Fick. In addition, Mr. Stephens attended six ERC meetings in 2008. Messrs. Michael and Fick are excused during the executive session portion of the ERC meetings.

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. 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 2008.   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.

Objectives of Compensation Program. The ERC’s objective is to provide a total executive compensation program linked to Company performance that will attract, retain and motivate talented executives critical to the Company’s long-term success. The ERC seeks to attract and retain these executives by offering competitive pay packages, including base salary and other performance based compensation. The ERC believes that a compensation structure that rewards individuals for achieving annual and long-term performance goals will motivate the executives to lead the Company to sustainable annual profitability and will enhance long-term shareholder value. The Company’s

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overall approach to executive compensation is founded on the philosophy that compensation should reflect both the Company’s and individual’s performance.

The Company also has a long-standing employee ownership culture, supported by its Employee Stock Ownership Plan implemented in 1975. The ownership culture creates strong alignment between the interests of employees and shareholders to foster long-term shareholder value. Consistent with the Company’s dual emphasis on Company and individual performance and its employee ownership culture, the ERC has designed the executive compensation program to provide cash and stock-based incentives and has implemented a stock ownership guideline requiring significant levels of stock ownership (direct and indirect) for key executives.

Base pay levels are guided by competitive market data in the insurance industry for executive positions and their associated skill sets. The Company has a long-standing philosophy that executive annual and long-term incentive compensation should be at risk, with significant upside potential associated with superior annual and long-term financial results, and significant downside consequences for poor results. In general, the Company targets base pay at or below the median of base salary for comparable positions in the insurance industry.  Total cash compensation (base salary and annual incentives) for executives exceeds the median of competitive market data for the insurance industry if the Company’s and individual participant’s annual incentive goals are met. Long-term incentives are awarded to senior level employees who are in a position to directly influence business decisions that have long-term consequences. The Company targets long-term incentives at approximately the median of competitive market data. Total compensation and other benefits are determined by reference to insurance industry compensation surveys and by comparison to available data for the peer companies described below.

Elements of Executive Compensation and Compensation Program Design. The Company’s total executive compensation program is comprised of the following components:

(a)         Total annual cash compensation consisting of:

(i)            Base salary;

(ii)         Annual Bonuses under the Market Value Potential Executive Incentive Program (“MVP Program”) for the CEO, COO and CFO; and

(iii)      Annual Bonuses under the Management Incentive Program for other vice presidents, assistant vice presidents, and other senior managers.

(b)        Long-term incentive compensation granted under the Incentive Stock Option Plan and Omnibus Stock Plan; and

(c)         Perquisites. All executives are provided with travel accident insurance and are reimbursed out of pocket costs for an annual comprehensive 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 an hourly lease approved by the Board of Directors, with maximum use limited to total lease charges of 6.5% of base salary.

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Annual Compensation

Base Salary. Executive base salaries are targeted to be at or below 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 2008, the ERC set base salary ranges for the CEO, CFO, and COO based on publicly available executive compensation data from the following peer companies: W.R. Berkley Corporation; HCC Insurance Holdings, Inc.; Travelers; ACE Limited; Axis Capital Holdings Limited; Arch Capital Group Ltd.; The Chubb Corporation; CNA Financial Corporation; Zenith National Insurance Corp.; LandAmerica Financial Group, Inc.; Selective Insurance Group, Inc.; Horace Mann Educators Corporation; Argonaut Group, Inc.; Mercury General Corporation; Cincinnati Financial Corporation; Philadelphia Insurance Companies; Alleghany Corporation; Endurance Specialty Holdings Ltd.; Midland National Life Insurance Company; CNA Surety Corporation; PMA Capital Corporation; SCPIE Holdings Inc.; Markel Insurance Company; and NYMagic, Inc.

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 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 three-year combined ratio; market capitalization; price-to-book ratio; and total return to shareholders for one, three, five, and ten year timeframes. 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 salaries for comparable executives in the insurance industry.

Market Value Potential Executive Incentive Program (MVP Program). The Company has paid annual cash bonuses to certain executive officers under the Market Value Potential Executive Incentive Compensation Plan (“MVP Plan”), adopted by the shareholders in 1997, and again ratified by the shareholders in 2002. The MVP Plan was replaced with the RLI Incentive Compensation Plan in 2006 when it was approved by shareholders. In 2006, as authorized under the RLI Incentive Compensation Plan, the Board of Directors approved the MVP Program, which incorporated all material provisions of the prior MVP Plan.

The MVP Program uses a 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.

The MVP Program employs a banking feature which places annual award amounts (which may be positive or negative) into a “bonus bank” that is at risk depending on future financial results, paying only a portion of the bonus bank each year to participants as a cash bonus.  Consequently, the time horizon of the MVP Program focuses participants on both annual results and long-term shareholder value creation.   The ERC believes that the long-term banking

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feature in the MVP Program reduces the likelihood that senior management will take high risk actions solely to improve short-term financial results to the detriment of long-term performance.   The ERC is further of the opinion that the MVP Program does not encourage or reward senior management to take unnecessary and excessive risks that threaten the value of the Company.

Participation in the MVP Program, percentage awards, and the formula to calculate MVP are recommended by the ERC and approved annually by the independent directors of the Board of Directors for Mr. Michael and the entire Board of Directors for other participants. In 2008, participation in the MVP Program was limited to Messrs. Michael, Stone, and Dondanville. The Board of Directors has concluded that the senior executive management team (the CEO, COO, and CFO) 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 in a calendar year. The ERC determines each executive’s percentage 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 MVP percentage award, expressed as a percentage of after-tax MVP for each participant for 2008 was as follows:  2.0 percent for Mr. Michael, 1.2 percent for Mr. Stone and 0.8 percent for Mr. Dondanville, the same respective award for each participant since 2001.

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 income taxes.   Awards so calculated are added annually to a MVP “bonus bank” for each participant. If MVP is negative for a year, an award so calculated to eliminate the effect of the Company’s state and federal taxes, thereby resulting in a larger negative award, is deducted from each participant’s bonus bank in the same manner. Negative bank balances carry 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, a percentage of a participant’s MVP Program bonus bank (if positive) is paid as a cash bonus payment. The bonus payout percentage equals 33 percent of a participant’s positive bonus bank balance attributable to contributions to the bonus bank for years 2007 and later, and 40 percent of a participant’s bank balance attributable to contributions to the bonus bank for years 2006 and earlier.  A negative MVP Award and all bonus payouts will first be applied to bonus bank amounts attributable to years 2006 and earlier until such amounts are depleted, at which time all bonus payouts will be at the 33% payout level.

Individual annual MVP Awards are capped at $7.5 million. In 2006, the Board added a Board Approval Limit to the MVP Program. The Board Approval Limit 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 of the Board must approve that portion of the MVP Award in excess of the Board Approval Limit.  MVP Awards approved by the ERC for 2008 for Messrs. Michael, Stone, and Dondanville did not exceed the Board Approval Limit of 300 percent of their respective base salaries.

The Company’s after-tax MVP in 2008 was a negative $ 37.3 million, compared to positive

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2007 MVP of $109.1 million. The following negative awards were deducted from MVP bonus banks for 2008: Mr. Michael, $1,163,744; Mr. Stone, $698,246; and Mr. Dondanville, $465,498. The negative awards were deducted first from each participant’s bonus bank balance for years 2006 and prior and reduced each such balance to zero, with the remainder of such negative awards deducted from each participant’s respective bonus bank for years 2007 and later.   The following amounts, representing  33 percent of each participant’s remaining MVP bonus bank balance attributable to MVP awards for 2007 and later, were paid in February 2009 with respect to 2008: Mr. Michael, $1,101,221; Mr. Stone, $660,376, and Mr. Dondanville, $441,280. After the February 2009 MVP bonus payments, the MVP bank balance for each participant was: Mr. Michael, $2,235,813; Mr. Stone, $1,340,764; and Mr. Dondanville, $895,932.

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 (collectively, financial 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 2008, Messrs. Kennedy and Kliethermes were eligible for a MIP target award of 50 percent, with a maximum award of 75 percent of their respective year-end base salaries. The target award of 50 percent was comprised of a target of 15 percent of base pay for achieving the MVP goal of $60 million, a target 15 percent of base pay for achieving the OE goal of $110 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 2008.

* Amounts between stated OE and MVP values are extrapolated to nearest 0.25% Bonus Award.

The Company achieved OE of $109 million and MVP of negative $37.3 million. Mr. Kennedy

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received a 2008 MIP award of $96,940, reflective of 14.75 percent of base salary for the operating earnings goal, 0 percent for the MVP goal, and 18 percent for personal objectives. Mr. Kliethermes received a 2008 MIP award of $97,875, reflective of 14.75 percent of base salary for the operating earnings goal, 0 percent for the MVP goal, and 19 percent for personal objectives.

Long-term Compensation

Deferred Compensation Plan (Deferred Plan). Under the Company’s Deferred Plan, an executive officer may elect to defer up to 100 percent of total cash compensation after payroll deductions. Upon an election by an executive officer to defer compensation, the Company transfers cash equal to the amount deferred to a bank trustee under an irrevocable trust established by the Company, and the trustee purchases a number of shares of Common Stock of the Company representing an amount equal to the compensation deferred by the executive officer. Pursuant to the Deferred Plan, dividends paid on the shares in such trust are used by the trustee to purchase additional shares of Common Stock of the Company which are placed in the trust. The trust is considered to be a “Rabbi Trust” or grantor trust for tax purposes. The assets of the trust are subject to claims by the Company’s creditors. The Deferred Plan generally provides that the shares credited to the participant’s account will be paid upon termination of employment over five years. Messrs. Kliethermes and Kennedy deferred income under the Deferred Plan in 2008. Messrs. Michael, Stone, and Dondanville have deferred income under the Deferred Plan in prior years, and continue to receive dividends on shares held in the Deferred Plan.

Omnibus Stock Plan (Omnibus Plan). Under the Company’s Omnibus Plan, certain employees, officers, consultants and directors of the Company are eligible to receive long-term incentive compensation in a variety of forms including non-qualified stock options, incentive stock options, stock appreciation rights, performance units, restricted stock awards, and other stock-based awards. The Omnibus Plan was adopted in 2005 and replaced the Company’s Incentive Stock Option Plan (“ISOP”). The purpose of the Omnibus Plan is to promote the interests of the Company and its shareholders by providing key personnel of the Company with an opportunity to acquire a proprietary interest in the Company and rewarding them for achieving or exceeding the Company’s performance goals. The grant of awards, the value of which is related to the value of the Company’s Common Stock, aligns the interests of the Company’s employees, executive officers, consultants, and directors with that of the shareholders. The ERC believes this arrangement develops a strong incentive for the key personnel to put forth maximum effort for the continued creation of shareholder value and long-term growth of the Company.

In 2008, the Company awarded long-term incentives in the form of non-qualified stock option grants to certain employees and officers of the Company. In general, the stock options vest over five years at the rate of 20 percent per year and expire 10 years after grant.  Generally, upon termination of employment (other than due to retirement, disability or death), vested options must be exercised within the earlier of 90 days of termination or expiration of the option award.

The ERC believes stock options serve as incentives to executives to maximize long-term

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growth and profitability of the Company, an arrangement that benefits both the executives and shareholders. Stock options, also provide a means to retain key employees. The ERC establishes and recommends to the independent directors of the Board the annual stock option grant for Mr. Michael, which is established based on a review of long-term incentive compensation of CEO positions among the peer companies described above. A target range of the value of annual long-term incentives awards, expressed as a percentage of base salary, has been established for all other Company executives. Mr. Michael recommends to the ERC proposed annual stock options awards within the target range for each position.  The ERC determines the number of stock option awards an executive officer receives under the Omnibus Plan based on the executive officer’s position, and a subjective assessment of the executive officer’s individual performance and anticipated future contributions to the Company.  The ERC then recommends stock option awards to the Board of Directors for approval.

Employee Stock Ownership Plan (ESOP). The Company’s ESOP offers another performance-based means of retaining and motivating employees, including executive officers, who work 1,000 or more hours per year, by offering ownership in the Company on a long-term basis. The Board of Directors may approve an annual profit sharing contribution to the ESOP that is used by the ESOP to purchase Common Stock on behalf of the Company’s employees, including executive officers. All ESOP participants, including executive officers, may receive an annual contribution expressed as a percentage of eligible compensation (limited for an individual employee to an annual cap of $230,000 in earnings in 2008). For plan years prior to 2007, ESOP contributions vest 100 percent after five years of vesting service; for plan years after 2006, ESOP contributions vest 100 percent after three years of vesting service. For 2008, the Company’s Board of Directors approved a discretionary profit sharing contribution to the ESOP of 9.33 percent of participants’ eligible compensation.

401(K) Plan. Effective January 1, 2004, the Company adopted a 401(k) Plan in which all employees, including executive officers, scheduled to work 1,000 or more hours per year, are entitled to participate. All participants receive a “safe harbor” annual contribution by the Company to their 401(k) accounts of three percent of eligible compensation (limited for an individual employee to an annual cap of $230,000 in earnings in 2008), which is immediately vested. The Board of Directors may also approve discretionary profit sharing contributions to the 401(k) Plan, which are allocated in proportion to the eligible compensation paid to each participant, subject to statutory maximums. For plan years 2006 and prior, the profit sharing contributions vest 100 percent after five years of vesting service; for plan years 2007 and after, profit sharing contributions vest after three years of vesting service. Participants are entitled to make their own elective deferrals to the 401(k) Plan through compensation reduction. For 2008, in addition to the safe harbor three percent annual contribution, the Company’s Board of Directors approved a discretionary profit sharing contribution to the 401(k) of 1.67 percent of participants’ eligible compensation.

Key Employee Excess Benefit Plan (Key Plan). The purpose of the Key Plan is to restore benefits lost to certain executive officers under the

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ESOP and 401(k) Plan due to limitations on benefits contained in the Internal Revenue Code. The Company transfers to a bank trustee under an irrevocable trust established by the Company such number of shares of Common Stock of the Company representing an amount equal to the benefits the participant would have earned in 401(k) and ESOP but for the limitation in the Internal Revenue Code on the maximum compensation on which those benefits may be calculated. The trust is considered to be a “Rabbi Trust” or grantor trust for tax purposes. The assets of the trust are subject to claims by the Company’s creditors. The Key Plan generally provides that dividends are credited to the participant’s account and reinvested in shares of Common Stock of the Company. The shares credited to the participant’s account pursuant to the Key Plan will be paid upon termination of employment in five annual installments. Mr. Michael ceased active participation in the Key Plan in 2005. Dividends on his shares held in the Key Plan continue to be credited to his account in the Key Plan. No other employee participates or has participated in the Key Plan.

Perquisites and Other Personal Benefits. Until May 2007, Messrs. Michael, Stone and Dondanville were authorized to use the Company’s aircraft for their personal use, and were reimbursed for their personal commercial air travel and personal legal expenses, all of which could not exceed 6.5 percent of each of their respective base salary (hereinafter referred to as the travel/legal benefit). They were reimbursed for any taxes arising out of the receipts of these benefits, but only to the extent that these benefits and related taxes together did not exceed 6.5 percent of base salary. The travel/legal benefit was eliminated effective May 2007. In May 2007, an amount of 5 percent of base salary was added to the base salary for Messrs. Stone and Dondanville to compensate for the elimination of the travel/legal benefit, which amount was recommended by Mr. Michael and the ERC and approved by the Board of Directors. At Mr. Michael’s request, no increase was added to his base salary for the elimination of this benefit.

In May 2007, the Board authorized Messrs. Michael, Stone and Dondanville to continue to use the Company’s aircraft for personal use, when it is not being used for business purposes, by paying an hourly lease rate pursuant to a lease arrangement approved by the Board at a rate of $1,100 per hour representing the variable cost to operate the aircraft, including fuel. The lease rate was increased to $1,700 in August 2008 to reflect increased operating cost of the aircraft.  Use of the aircraft by Messrs. Michael, Stone and Dondanville is subject to an annual usage limit equal to aggregate annual lease charges actually paid by Messrs. Michael, Stone, or Dondanville equal to 6.5 percent of their respective base salaries.

Until May 2007, Messrs. Michael, Stone and Dondanville were provided with a company car for personal and business use. The company car perquisite was eliminated effective May 2007 and $7,500 was added to the base salary for Messrs. Stone and Dondanville to compensate for the elimination of that perquisite, which amount was recommended by Mr. Michael and the ERC and approved by the Board of Directors. At Mr. Michael’s request, no increase was added to his base salary for the elimination of this benefit. At that time, the Board authorized Messrs. Michael, Stone and Dondanville to purchase their respective company cars at fair market value.

As provided in their respective offers of employment, Messrs. Kennedy and Kliethermes are reimbursed for the annual installment of their country club capital charges and such amounts are grossed up to offset the effect of income taxes.  With the exception of this income tax gross

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up, the Company does not provide a gross up of any compensation or benefit to any Named Executive Officer to offset the personal income tax due on such compensation or benefit.

Elements of Post-Termination Compensation and Benefits. The Company has not entered into any employment contracts or other severance agreements with any of its executive officers that would compensate the executive officers for or after departing the Company. Nor does the Company have change in control agreements with its executives and does not provide any additional benefits for executives in the event of a change in control.

Messrs. Michael, Stone, and Dondanville are participants in the MVP Program, which is described in more detail at page 38. Upon termination of employment of an MVP Program participant for any reason other than retirement (defined as the date at which a participant has attained both combined age and service with the Company of 75 and at least 10 years of service), death, or disability, all unpaid positive MVP bonus bank balances of the participant are forfeited unless the ERC deems otherwise. Upon the termination of employment of a participant qualifying as retirement, a positive MVP bonus bank calculated on the last day of the quarter during which the participant’s employment ended will be paid to a participant in a lump sum within 90 days of termination of employment if the participant is age 65 or older, and as a quarterly annuity to age 65 using the interest rate for the five year Treasury Note in effect at the date of retirement if the Participant’s age is less than 65. A bonus bank balance will also be calculated at the end of the quarter prior to a participant’s termination of employment and the Company may, in its discretion, pay the lower of the calculated bonus banks.  All such payments upon a termination of employment qualifying as retirement are subject to ongoing restrictions on the participant’s employment in the insurance industry, solicitation of Company employees, solicitation of business away from the Company, and disclosure of confidential information of the Company.

At year-end 2008, Messrs. Michael and Dondanville qualified for retirement under the MVP Program; Mr. Stone did not qualify for retirement.  Had Mr. Michael’s employment ended on December 31, 2008, he would have met the definition of retirement under the MVP Program and would have been entitled to the payment of his MVP bonus bank on that date in the amount of $3,337,034 in the form of a quarterly annuity at an interest rate of 1.55% until age 65.  Had Mr. Dondanville’s employment ended on December 31, 2008, he would have met the definition of retirement under the MVP Program and would have been entitled to the payment of his outstanding MVP bonus bank on that date in the amount of $1,337,211 in the form of a quarterly annuity at an interest rate of 1.55% until age 65.

Under the terms of the Incentive Stock Option Plan and Omnibus Stock Plan, stock option grants vest upon the death or disability of an optionee, and may vest upon the retirement of an optionee provided that the underlying stock option agreement so provides.   The awards of stock options to the Named Executive Officers, and all other stock option recipients at the Company, provide for the immediate vesting of outstanding unvested stock options in the event of a recipient’s termination of employment qualifying as a retirement.   Retirement is defined under the Incentive Stock Option Plan and Omnibus Stock Plan as the termination of employment of a participant with combined age and years of service of 75 or greater. Stock

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options must be exercised within the earlier of one year of the death of an optionee, or three years of the termination of employment due to the disability or retirement of an optionee, and the original expiration date of the stock option award.  In the event of the termination of employment of an optionee for reasons other than death, disability, or retirement, vested options must be exercised within the earlier of 90 days of the termination of employment or the original expiration of the option award.

In 2008, Messrs. Michael’s and Dondanville’s respective age and years of service exceeded 75. Accordingly, upon Mr. Dondanville’s or Mr. Michael’s termination of employment with the Company, all of their respective unvested stock option grants will immediately vest, expiring on the earlier of the original expiration date or three years. Therefore, had Messrs. Michael or Dondanville left the employment of the Company on December 31, 2008, their respective unvested stock options would have immediately vested on that date.  The in-the-money value of such options that would have vested on December 31, 2008, using the closing stock price on that date of $61.16, would have been $661,101 for Mr. Michael and $300,563 for Mr. Dondanville.

Under the Company’s self-funded health plan for employees, coverage may be maintained at retirement, defined as termination of employment at age 55 or older and at least 20 years of service, until age 65, by paying the full amount of the employee and Company premium. At the end of 2008, none of the Named Executive Officers qualified for such continuation of coverage.

Stock Ownership/Retention Guidelines. It is the Company’s belief that key executives, those few executives who impact the stock price based on their achievements, should hold significant amounts of Company stock. The value of all shares owned, including those held outright and in benefit plans, but excluding the value of stock options held, must equal or exceed a multiple of their annual base salary, as shown below:

Executives to whom this Guideline applies will be encouraged to reach their respective stock ownership level within five years of the later of: the enactment of this Guideline in February 2006, or the date on which an individual assumes an executive position covered by this Guideline.

The ERC reviews the progress of executives, to whom the Guideline applies, toward their stock ownership goal each year. Effective December 31, 2008, Messrs. Michael, Stone, and

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Dondanville had met and greatly exceeded their respective stock ownership goal. Mr. Kennedy who joined the Company in 2006, held 2,080 shares of RLI stock effective December 31, 2008. Mr. Kliethermes who joined the Company in 2006, held 5,835 shares of RLI stock effective December 31, 2008. Until an executive subject to the Guideline reaches the stated level of ownership, the executive is required to hold all net shares received from long-term incentive awards. The ERC has concluded that all Company executives to whom the Guideline applies have met their ownership level or are making satisfactory progress toward the achievement of their respective ownership goal.

Executive Management

Executive Officers. The following information is provided as to each current executive officer of the Company: