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Schedule 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant /X/

Filed by a party other than the Registrant //

Check the appropriate box:

/ / Preliminary Proxy Statement

/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)

/ X/ Definitive Proxy Statement

/ / Definitive Additional Materials

/ / Soliciting Material Pursuant to Section 240.14a-12

RLI CORP.

...................................................................................................................................................................................

(Name of Registrant as Specified In Its Charter)

...................................................................................................................................................................................

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/  No fee required

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

   (1)  Title of each class of securities to which transaction applies:

   (2) Aggregate number of securities to which transaction applies:

   (3)  Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

   (4) Proposed maximum aggregate value of transaction:

   (5) Total fee paid:

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

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   (1)  Amount Previously Paid:

   (2)  Form, Schedule or Registration Statement No.:

   (3)  Filing Party:

   (4)  Date Filed:

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RLI Corp.

9025 North Lindbergh Drive

Peoria, Illinois 61615

March 22, 2012

Dear Shareholders:

Please consider this letter your personal invitation to attend the 2012 RLI Corp. Annual Shareholders Meeting.  It will be held at the Mt. Hawley Country Club, 7724 North Knoxville Avenue, Peoria, Illinois, 61614, on May 3, 2012, at 2 p.m. CDT.

Business scheduled to be considered at the meeting includes the election of directors, ratification of KPMG LLP as our independent registered public accounting firm for the current year, and an advisory vote on executive compensation (the “Say-on-Pay” vote).  In addition, we will review significant events of 2011 and their impact on you and your Company. 

We are pleased to be taking advantage of the Securities and Exchange Commission rule that allows companies to furnish their proxy materials over the Internet. As a result, we are mailing our shareholders a notice instead of a paper copy of this 2012 Proxy Statement and our 2011 Annual Report to Shareholders. The notice contains instructions on how to access those documents over the Internet.

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

Sincerely,

Jonathan E. Michael

Chairman & Chief Executive Officer

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To the Shareholders of RLI Corp.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of RLI Corp. (“Company”) will be held at the Mt. Hawley Country Club, 7724 North Knoxville Avenue, Peoria, Illinois, 61614, on Thursday, May 3, 2012, at 2 p.m. Central Daylight Time for the following purposes:

1.              to elect nine (9) directors for a one-year term expiring at the 2013 Annual Meeting;

2.              to ratify the selection of KPMG LLP as the independent registered public accounting firm of the Company for the current year;

3.              to hold an advisory vote on executive compensation (the “Say-on-Pay” vote); and

4.              to 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 6, 2012, are entitled to notice of and to vote at the Annual Meeting.

By Order of the Board of Directors

Daniel O. Kennedy

Vice President, General Counsel & Corporate Secretary

Peoria, Illinois

March 22, 2012

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 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;

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

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

Annual Meeting of Shareholders to be held May 3, 2012

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 3, 2012, at the Mt. Hawley Country Club, 7724 North Knoxville Avenue, Peoria, Illinois, 61614, 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 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 22, 2012.

VOTING

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

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

·           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.

·           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.

·           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.

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, although you may do so as one method of changing 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 majority of the shares represented in person or by proxy at the meeting and entitled to vote. 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 and have the effect of a vote against the director.

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Assuming the presence, in person or by proxy, of a quorum, the affirmative vote of a majority of the shares represented in person or by proxy at the meeting and entitled to vote shall be required to approve Proposal Two. The Proposal Three (Say-on-Pay) vote is advisory in nature so there is no specified requirement for approval. However, the Board of Directors will consider that the shareholders have approved executive compensation on an advisory basis if this agenda item receives the affirmative vote of a majority of the votes cast (in person or by proxy).

With respect to Proposals Two and Three, shareholders may vote “For,” “Against” or “Abstain” on each proposal. Abstentions are deemed present at the meeting, and thus will be counted for quorum purposes, but will have the same effect as a vote against the matters respectively set forth in Proposals Two and Three.

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

Your broker will not, however, have discretion to vote on non-routine matters absent direction from you. Among other matters, brokers are not entitled to use their discretion to vote uninstructed proxies in director elections or executive compensation matters. As a result, your broker will not be able to vote your shares on Proposals One and Three without your direction. Therefore, it is important that you provide your broker with voting instructions on all proposals. If your shares are held by your broker “in street name,” you will receive a voting instruction form from your broker or the broker’s agent asking you how your shares should be voted. Please complete the form and return it in the envelope provided by the broker or agent.

SHAREHOLDERS ENTITLED TO VOTE

Shareholders of record at the close of business on March 6, 2012, the record date, shall be entitled to vote at the 2012 Annual Meeting. As of the record date, the Company had 21,205,953 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 2012 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 2011 Annual Report are available on the Company’s Internet site at www.rlicorp.com and at www.proxyvote.com.

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Share Ownership of Certain Beneficial Owners

PRINCIPAL SHAREHOLDERS

The following are the persons or entities known to the Company who beneficially own more than 5 percent of the Company’s Common Stock as of December 31, 2011:

(1)       The information shown is based solely on an Schedule 13G dated February 9, 2012, filed with the SEC by State Street Corporation (“State Street”), which filing indicates that State Street Bank and Trust Company (“Trustee”), a subsidiary of State Street, in its capacity as trustee of the Company’s Employee Stock Ownership Plan (“ESOP”), held 1,608,935 shares on behalf of participants in such plan. State Street further disclosed no sole voting or sole dispositive power with respect to the shares, and shared voting and shared dispositive power with respect to 2,031,368 shares. Each ESOP participant or beneficiary may direct the Trustee as to the manner in which the shares allocated to each participant under the ESOP are to be voted. The Trustee has sole voting power with respect to all unallocated shares and sole investment power as to all allocated and unallocated shares. With respect to allocated shares for which no votes are received, the Trustee will vote such shares in proportion to the votes cast on behalf of allocated shares for which votes are received.

(2)         The information shown is based solely on a Schedule 13G dated February 14, 2012, filed with the SEC by Neuberger Berman Group LLC (“Neuberger”). According to the Schedule 13G, Neuberger is the beneficial owner of 1,923,777 shares, has shared voting power with respect to 1,716,277 shares and shared dispositive power with respect to 1,923,777 shares.

(3)         The information shown is based solely on a Schedule 13G dated January 20, 2012, filed with the SEC by BlackRock, Inc. (“BlackRock”). According to the Schedule 13G, BlackRock is the beneficial owner of 1,381,813 shares, and has sole voting and sole dispositive power with respect to 1,381,813 shares.

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(4)         The information shown is based solely on a Schedule 13G dated February 10, 2012, filed with the SEC by Kayne Anderson Rudnick Investment Management LLC (“Kayne”). According to the Schedule 13G, Kayne is the beneficial owner of 1,299,367 shares, and has sole voting and sole dispositive power with respect to 1,299,367 shares.

(5)        The information shown is based solely on a Schedule 13G dated January 23, 2012, filed with the SEC by Gerald D. Stephens, the retired Chairman of the Company’s Board of Directors. Includes 17,512 shares held in custodian accounts for the benefit of Mr. Stephens’ grandchildren, over which Mr. Stephens has sole voting and investment power; 19,151 shares owned by the Gerald D. and Helen M. Stephens Foundation, over which Mr. Stephens, as President, has sole voting and investment power; 451,091 shares owned by the Gerald D. Stephens Grantor Annuity Trusts, over which Mr. Stephens, as trustee, has sole voting and investment power. Excludes 162,135 shares owned by Mr. Stephens’ spouse, over which Mr. Stephens has no voting or investment power, as to which Mr. Stephens disclaims beneficial ownership.

(6)        The information shown is based solely on a Schedule 13G dated February 6, 2012, filed with the SEC by The Vanguard Group, Inc. (“Vanguard”). According to the Schedule 13G, Vanguard is the beneficial owner of 1,124,610 shares, and has sole voting and shared dispositive power with respect to 27,671 shares, and sole dispositive power with respect to 1,096,939 shares.

(7)         The information shown is based solely on a Schedule 13G dated February 9, 2012, 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 1,073,828 shares and sole dispositive power with respect to 1,085,428 shares. Messrs. Johnson and Johnson are the principal shareholders of Franklin.

DIRECTORS AND OFFICERS

The following is information regarding beneficial ownership of the Company’s Common Stock by each current director and named executive officer (whose compensation is disclosed in this Proxy Statement), and the directors and executive officers of the Company as a group, as of December 31, 2011.

*Less than 1% of Class.

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

(2)        Includes shares held by a bank trustee under an irrevocable trust established by the Company pursuant to the RLI Corp. Nonemployee Director Deferred Compensation Plan (“Deferred Plan”) for the benefit of the following: Mr. Baily 7,017 shares; Mr. Graham 13,402 shares; Mr. Lenrow 61,356 shares; Mr. Linke 12,544 shares; Mr. McPheeters 15,751 shares; and Mr. Viets 45,978 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.

(4)        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, 2011, the following shares were allocated under the ESOP: Mr. Kennedy 2,820 shares; Mr. Kliethermes 2,822 shares; Mr. Michael 84,100 shares; and Mr. Stone 19,495 shares. During 2011, Jonathan E. Michael and Michael J. Stone were eligible to elect to diversify their respective ESOP shares.

(5)        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. Kennedy 495 shares; Mr. Kliethermes 4,949 shares; Mr. Michael 18,549 shares; and Mr. Stone 22,745 shares. Each participant has no voting or investment power with respect to such shares.

(6)        Includes shares that may be acquired by the named persons within 60 days after December 31, 2011, under the Incentive Stock Option Plan (“ISOP”), the Omnibus Stock Plan and the Long-Term Incentive Plan, upon the exercise of outstanding stock options as follows: Mr. Kliethermes 19,300 shares; Mr. Michael 168,200 shares; and Mr. Stone 50,400 shares

(7)        Includes 176 shares held by Mr. Lenrow’s daughter, as to which Mr. Lenrow disclaims any beneficial interest.

(8)        Includes shares that may be acquired by the named persons within 60 days after December 31, 2011, under the Directors’ Stock Option Plan for Outside Directors (“Director Plan”), upon the exercise of outstanding stock options as follows: Mr. McPheeters 5,400 shares; and Mr. Viets 3,600 shares.

(9)        Includes 45,968 shares allocated under the Key Plan, over which Mr. Michael has no voting or investment power; 14,920 shares owned by the Jonathan E. Michael Grantor Retained Annuity Trusts, over which Mr. Michael, as Trustee, has sole voting and sole investment power; and 5,060 shares owned by the Michael Charitable Fund, over which Mr. Michael has no voting power and sole investment power.

(10)      Includes shares held in margin securities or pledged asset accounts at brokerage firms. At December 31, 2011, the following number of shares were held in such accounts: Mr. Michael 83,521 shares.

(11)      Includes 46,131 shares owned by the Michael J. Stone Grantor Retained Annuity Trusts, over which Mr. Stone, as Trustee, has sole voting and sole investment power.

(12)      Includes 13,633 shares owned by the Robert O. Viets Grantor Retained Annuity Trusts, over which Mr. Viets, as Trustee, has sole voting and sole investment power.

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, 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.

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, 2011, the reporting persons have complied with all filing requirements of Section 16(a).

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PROPOSAL ONE: ELECTION OF DIRECTORS

GENERAL

At this year’s Annual Meeting, all (nine) directors are to be elected, each to hold office for a one-year term expiring at the 2013 Annual Meeting unless that director dies, resigns or is removed prior to that time. Unless otherwise instructed, the shares represented by a signed proxy card will be voted for the election of the nine nominees named below. The affirmative vote of a majority of the shares of common stock of the Company 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. Cumulative voting for the directors is not permitted under the Company’s Articles of Incorporation.

NOMINEES

Messrs. Kaj Ahlmann, John T. Baily, Jordan W. Graham, Gerald I. Lenrow, Charles M. Linke, F. Lynn McPheeters, Jonathan E. Michael and Robert O. Viets and Ms. Barbara R. Allen, each a current director, are standing for election. Each is nominated to serve for a one-year term expiring in 2013.

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 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 nine nominees listed below.

DIRECTOR NOMINEE INFORMATION

Below are specific qualifications, skills, attributes and experience with respect to the director nominees to the Board of Directors furnished to the Company by such individuals, summarized herein and more fully detailed in the individual professional history below, which information led to the conclusion that they are qualified to serve as a director and are beneficial to the Company. The Nominating/Corporate Governance Committee and the Board considered, in particular, the following with respect to each director: Mr. Ahlmann—his broad reinsurance and insurance expertise, as well as his global experience. Ms. Allen—her extensive executive management skills, as well as her strategy background. Mr. Baily—his extensive experience in accounting and auditing in the insurance and reinsurance industry. Messrs. McPheeters and Viets—their significant experience, expertise and background regarding accounting matters, together with their various executive management experience. Mr. Graham—his strong financial services, strategy, merger/acquisition and advisory experience, as well as deep technology background. Mr. Lenrow—his significant experience, expertise and knowledge of the insurance industry, including accounting matters and insurance taxation. Mr. Linke—his many years of experience in the financial field, including the broad perspective brought by Mr. Linke’s experience in consulting to clients in many diverse industries. The Board also considered the over 30 years of experience with the Company represented by Mr. Michael (our Chairman, President & Chief Executive Officer).

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The following footnotes reflect directorships held within the past five years at publicly traded companies:

(1)         Mr. Ahlmann previously served as a director of Erie Indemnity Company and its subsidiary, Erie Family Life Insurance Company, as well as SCPIE Holdings, Inc.

(2)         Ms. Allen previously served as a director of Lance, Inc.

(3)         Mr. Baily currently serves as a director of Endurance Specialty Holdings Ltd. and Golub Capital BDC, Inc. Mr. Baily previously served as a director of NYMagic, Inc., Erie Indemnity Company and its subsidiary, Erie Family Life Insurance Company.

(4)         Mr. Michael currently serves as a Director of SS&C Technologies Holdings, Inc. Mr. Michael previously served as a director of Fieldstone Investment Corp.

(5)         Mr. Viets currently serves as a director of Patriot Coal Corporation.

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PROPOSAL TWO: 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, for fiscal 2012, and the Board is asking shareholders to ratify that selection. Although current law, rules and regulations, as well a the Charter of the Audit Committee, require our independent auditor to be appointed, retained and supervised by the Audit Committee, the Board considers the selection of an independent auditor to be an important matter of shareholder concern and considers a proposal for shareholders to ratify such selection to be an important opportunity for shareholders to provide direct feedback to the Board on an important issue of corporate governance. If the appointment of KPMG is not ratified by shareholders, the Audit Committee will take such action, if any, with respect to the appointment of the independent auditor as the Audit Committee deems appropriate.

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 Two and the ratification of selection of KPMG LLP as independent registered public accounting firm of the Company for the current fiscal year.

PROPOSAL THREE: NON-BINDING, ADVISORY VOTE REGARDING THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS (“SAY-ON-PAY”)

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, at least once every six years we are required to submit for your vote a non-binding resolution to determine whether the advisory shareholder vote on executive compensation should occur every one, two or three years. At the Company’s 2011 Annual Shareholders Meeting, a significant majority of the votes cast advised that the compensation of the Company’s named executive officers be submitted to shareholders for an advisory vote every year. After taking into account the results of the shareholder advisory vote on the frequency of say-on-pay conducted at the 2011 Annual Meeting of Shareholders, it is the policy of the Board of Directors to submit the compensation of the Company’s named executive officers to shareholders for a non-binding advisory vote annually. The frequency of this say-on-pay vote will be subject to an advisory shareholder vote again in 2017.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that we seek a non-binding vote from our shareholders to approve, on an advisory basis, the compensation of our named executive officers as disclosed in the Compensation Discussion & Analysis (“CD&A”), compensation tables and related disclosures in this Proxy Statement.

As discussed in our CD&A starting on page 24, our executive compensation programs have been designed to provide a competitive total executive compensation program linked to Company performance that will attract, retain and motivate talented executives critical to the Company’s long-term success.

Our Executive Resources Committee developed an overall compensation philosophy that is built on a foundation of the following principles:

We are asking you to indicate your support for our executive compensation programs as described in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives you the opportunity to express your views on our 2011 executive compensation policies and procedures for named executive officers. This non-binding vote is not intended to address

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any specific item of compensation, but rather the overall compensation of our named executive officers and the policies and procedures described in this Proxy Statement. Accordingly, we ask the shareholders to vote “FOR” the following resolution at the Annual Meeting:

RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the CD&A, compensation tables and any related material disclosed in the Company’s Proxy Statement is hereby APPROVED.

Your vote is advisory, and therefore not binding on the Executive Resources Committee or the Board. However, we value your opinions and to the extent there is any significant vote against the named executive officer compensation as disclosed in this Proxy Statement, we will consider our shareholders’ concerns. The Executive Resources Committee will evaluate whether any actions are necessary to address those concerns.

The Board of Directors recommends that shareholders vote “FOR” the proposal to approve the compensation of the Company’s named executive officers as described in this Proxy Statement.

CORPORATE GOVERNANCE AND BOARD MATTERS

CORPORATE GOVERNANCE PRINCIPLES

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

The Company’s published Corporate Governance Guidelines, which are publicly available on the Company’s Internet site under Investors at www.rlicorp.com, outline the directors’ responsibilities, which include attendance at shareholder, Board and committee meetings. All members of the Board attended the 2011 Annual Meeting of Shareholders and were available to respond to appropriate questions from the shareholders.

The Company has developed an orientation process for new directors and also encourages new directors to attend a director seminar in their first year as a director. Each incumbent director is expected to attend an accredited director education seminar at least once a year, and each Audit Committee member is expected to attend an audit committee forum/conference at least once a year.

DIRECTOR INDEPENDENCE

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

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

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

(a)   A Director will not be independent if:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DIRECTOR NOMINATION POLICY

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

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

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

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

·   Commitment to enhancing shareholder value.

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

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

The Nominating/Corporate Governance Committee will consider qualified director candidates as properly nominated by shareholders as further set forth under SHAREHOLDER PROPOSALS on page 44.

CODE OF CONDUCT

The Company has adopted a Code of Conduct, which is designed to help directors, officers and employees maintain ethical behavior and resolve ethical issues in an increasingly complex global business environment. The Code of Conduct applies to all directors, officers and employees, including the Chief Executive Officer, the Chief Financial Officer, the Controller, the General Counsel 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, ethical behavior, conflicts of interest, corporate opportunities, confidentiality of information and compliance with laws and regulations. A copy of our Code of Conduct is available at the Company’s website under the Investors section at www.rlicorp.com. Any amendments to the Code of Conduct will be posted on the website, and any waiver that applies to a director or executive officer will be disclosed in accordance with the Rules of the NYSE.

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SHAREHOLDER AND INTERESTED PARTIES COMMUNICATIONS

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

COMPANY POLICY ON RELATED PARTY TRANSACTIONS

The Company recognizes that related party transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof) and therefore has adopted a written policy which shall be followed in connection with all related party transactions involving the Company. The policy generally requires approval by the Nominating/Corporate Governance Committee for all transactions above $10,000 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. No proposed transactions falling within the purview of the policy were presented or approved in 2011.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In 2011, there were no transactions or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer or holder of more than 5 percent of the Common Stock of the Company (or any of their immediate family members) had or will have a direct or indirect material interest nor is any such transaction currently proposed.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board has five standing committees: Audit, Executive Resources, Finance and Investment, Nominating/Corporate Governance and Strategy. The Audit, Executive Resources and Nominating/Corporate Governance Committees are composed solely of independent directors in compliance with the Company’s requirements and the NYSE Listing Standards. The Nominating/Corporate Governance Committee annually evaluates both Committee members and Committee Chairs, and rotates as necessary. In his discretion, the Chairman of the Board may attend any or all Committee meetings. All committees meet at least quarterly and also hold informal discussions from time to time. 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 ten times in 2011 to consider various audit and financial reporting matters, including the Company’s outside audit firm relationship and to discuss the planning of the Company’s annual outside audit and its results. The committee also monitored the Company’s management of its exposures to risk of financial loss, assessed the auditors’ performance, reviewed the adequacy of the Company’s internal controls, reviewed the extent and scope of audit coverage, reviewed quarterly financial results, monitored selected financial reports and selected the Company’s independent registered public accounting firm. The committee also meets in executive session, with no members of management present, after its regular meetings, as well as private executive sessions with KPMG and various members of management.

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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:

(1)     The increase in Audit Fees from 2010 to 2011 is primarily reflective of the purchase of Contractors Bonding and Insurance Company through an acquisition of its holding company, Data and Staff Service Co.

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 review of documents filed with the SEC, including attestation as required under Section 404 of the Sarbanes-Oxley Act of 2002.

Audit-Related fees consist of a review of an SEC employee benefit plan registration statement.

All Other Fees relate to professional services and expenses in assisting management with technical accounting advice and due diligence regarding the acquisition of Contractors Bonding and Insurance Company.

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

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

Until the May 2011 Board meeting, the members of the committee were Messrs. Baily (Chair), Lenrow, McPheeters and Viets. After the May 2011 Board meeting, the members of the committee were Messrs. Baily (Chair), Lenrow and Viets, and Ms. Allen.

EXECUTIVE RESOURCES COMMITTEE

The Company’s Executive Resources Committee, composed exclusively of independent directors, met five times in 2011 to evaluate and recommend compensation of the President & Chief Executive Officer and certain key executive officers of the Company, discuss and evaluate the Company’s Market Value Potential Executive Incentive Program and to develop objective criteria for the selection and ongoing management of the Company’s compensation peer group and to enhance the overall effectiveness of the executive compensation programs. The committee also reviews and evaluates the President & Chief Executive Officer’s goals and objectives, management development and succession planning, and the Company’s deferred compensation, stock option, retirement and medical programs. Ms. Allen (Chair) and Messrs. Graham, Lenrow and McPheeters are members of the committee.

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FINANCE AND INVESTMENT COMMITTEE

The Company’s Finance and Investment Committee is composed exclusively of independent directors and 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 2011 to discuss ongoing financial, investment and capital matters.

Until the May 2011 Board meeting, the members of the committee were Messrs. Michael (Chair), Ahlmann, Linke and Stephens. After the May 2011 Board meeting, the members of the committee were Messrs. McPheeters (Chair), Ahlmann and Linke.

NOMINATING/CORPORATE GOVERNANCE COMMITTEE

The Company’s Nominating/Corporate Governance Committee, composed exclusively of independent directors, met four times in 2011 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.

Members of the committee were Messrs. Linke (Chair), Baily and Viets.

STRATEGY COMMITTEE

The Company’s Strategy Committee is composed exclusively of independent directors. The committee met four times in 2011 to oversee the Company’s strategic plan and its implementation.

Until the May 2011 Board meeting, the members of the Strategy Committee were Ms. Allen and Messrs. Ahlmann, Graham (Chair), McPheeters and Michael. After the May 2011 Board meeting, the members of the committee were Messrs. Ahlmann (Chair) and Graham.

COMMITTEE MEMBERSHIP

* Chair of Committee

BOARD MEETINGS AND COMPENSATION

MEETINGS

During 2011, five meetings of the Board of Directors were held with all directors in attendance. No director attended fewer than 75 percent of the aggregate number of meetings of the Board and Board committees on which he or she served. In connection with each Board meeting, the independent directors meet in executive session with no members of management present. Mr. Lenrow was the Presiding Director of the Board’s executive sessions until the May 5, 2011 Annual Meeting of Shareholders. Effective May 5, 2011, the Lead Director position was established and the Chairman of the Nominating/Corporate Governance Committee was elected Lead Director of the Board and presided at the Board’s executive sessions.

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DIRECTOR COMPENSATION

During 2011, the Independent Directors were compensated as follows:

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

Upon Mr. Stephens’ retirement from Chairman of the Board on May 5, 2011, he was deemed Chairman Emeritus of the Board, with the following benefits/services during his three-year term as Chairman Emeritus:

·          Personal use of the Company aircraft for up to 25 hours per year based on a Company Aircraft Time Share Agreement, for which the Company will be reimbursed by Mr. Stephens at the current Time Share rate then in effect (which rate is modified annually);

·          Temporary office space at the Company’s Home Office in Peoria, Illinois during his in-person visits to the Company; and

·          Use of up to 40 percent of one Company administrative support personnel’s time for assistance with professional and personal administrative matters at an aggregate cost of approximately $30,000. Any use amount over 40 percent will be reimbursed to the Company.

Mr. Stephens is authorized by the Board to use the Company aircraft for personal use, when it is not being used for business purposes, pursuant to a lease arrangement at an hourly lease rate established from time to time by the Board. Under the aircraft lease arrangement, income is imputed to Mr. Stephens under certain circumstances pursuant to tax regulations. In 2011, Mr. Stephens reimbursed the Company for his personal use of the Company aircraft at the agreed lease rate, and $1,195 was imputed income.

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The following table provides the compensation of the Company’s Board of Directors earned for the fiscal year ended December 31, 2011.

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

(2)             Effective May 7, 2004, no further options were granted to outside directors under the Stock Option Plan for Outside Directors (“Director Plan”). The aggregate number of outstanding stock options under the Director Plan as of December 31, 2011, were as follows: Mr. McPheeters 5,400 options; and Mr. Viets 3,600 options.

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

(4)             Effective January 1, 2006, Mr. Stephens retired as an employee of the Company and received the same compensation as all outside directors of the Company. In addition, Mr. Stephens was paid an $85,000 annual fee as Chairman of the Board until his retirement in May 2011.

(5)             Mr. Stephens was provided an office when present at the Company’s home office. He was also provided part-time secretarial support at the aggregate cost of $32,071. Also includes $1,195 in imputed income in connection with personal use of the Company aircraft.

BOARD LEADERSHIP STRUCTURE

Immediately following the 2011 Annual Shareholders Meeting, Mr. Stephens retired as Chairman of the Board, and Mr. Michael was appointed Chairman of the Board in addition to his current position of President and Chief Executive Officer.

The Company does not have a formal policy regarding separation of the offices of chairman of the board and chief executive officer. The Board believes that the decision whether to combine or separate such positions will vary from company to company and depends upon a company’s particular circumstances at a given point in time.

The Board believes that a joint board chairman and chief executive officer position is advisable and in the best interests of the Company and its shareholders given our current Board and Lead Director configuration. This structure promotes unified leadership, continuity and direction for the Company. This combined position also provides a clear focus for management to execute the Company’s strategy and business plan, while fostering clear accountability and decision-making in such roles. The Board believes the designation of an empowered “Lead Director” provides a counterbalancing governance structure and enables an appropriate balance between strategic execution and independent oversight of management.

The Lead Director (an independent director) is the Chairperson of the Board’s Nominating/Corporate Governance Committee and is elected / confirmed by the Board’s independent directors. The Lead Director (a) presides over executive

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sessions of the independent directors, (b) serves as liaison between the Chairman and the independent directors, (c) assists in setting Board meeting agendas and schedules, (d) assists in determining information sent to directors for meetings, (e) may call meetings of the independent directors, (f) may consult with major shareholders if requested by the Chairman or the Board, and (g) consults with the Chairman/CEO regarding results of annual performance reviews of the Board Committees, Board members and CEO, all as set forth in the charter for the Lead Director position.

Several factors promote a strong and independent Board at our Company. Currently, all directors except for Mr. Michael are independent as defined in the applicable NYSE listing standards (as adopted by the Company). The Audit, Executive Resources, and Nominating/Corporate Governance committees of our Board are comprised entirely of independent directors. Also, our independent directors meet quarterly in executive session without management present. Consequently, with our Lead Director position, we believe our Board continues to be strong and independent, and provides appropriate counterbalance to a combined Chairman/CEO position.

STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (DIRECTOR PLAN)

Prior to May 7, 2004, the Director Plan provided for the grant of an option to purchase 3,000 shares of the Company’s Common Stock to each newly elected or appointed outside director. In addition, effective the first business day in February of each year, each outside director was annually granted an option to purchase 1,800 shares of the Company’s Common Stock under the Director Plan. If the Company earned more than its cost of capital as provided under its MVP Plan in each respective year, each outside director was granted an option to purchase 1,800 additional shares of the Company’s Common Stock under the Director Plan, effective the first business day in February of the succeeding year. The exercise price of each option granted is an amount equal to the fair market value of such option share on the grant date, and all options granted provided for one-third annual vesting over a period of three years. In the event of an outside director’s death, disability or termination of status as an outside director, all options granted become fully vested. Effective May 7, 2004, no future options were granted to outside directors under the Director Plan.

NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN (DEFERRED PLAN)

Prior to the beginning of each year, an outside director may elect to defer the compensation otherwise payable or awarded to the director during the succeeding year pursuant to the Deferred Plan. Under the Deferred Plan, the Company transfers to a bank trustee, under an irrevocable trust established by the Company, such number of shares of the Company as are equal to the compensation deferred by the director during the relevant year. The deferred compensation is used to purchase an equivalent amount of Company Common Stock. Dividends on these shares are reinvested quarterly under the Company’s Dividend Reinvestment Plan. In general, Deferred Plan benefits are distributable, in the form of Company Common Stock, beginning when the director’s status terminates.

DIRECTOR SHARE OWNERSHIP

Outside Directors are encouraged to, within three years of 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 $85,000 in 2009 and $95,000 in 2010 and 2011. 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.

AUDIT COMMITTEE REPORT

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

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

The primary role of the Committee is to assist the Board of Directors in its oversight of (a) the Company’s corporate accounting and reporting practices, (b) the quality and integrity of the Company’s financial statements, (c) the Company’s compliance with legal and regulatory requirements, (d) the qualifications, independence and performance of the independent registered public accounting firm, and (e) the performance of the Company’s internal audit function. In addition to those primary roles, the Committee also performs other roles and functions as outlined in its charter, including risk management oversight,

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preliminary review of earnings releases and other activities. The Committee also acts as the audit committee for each of the Company’s insurance company subsidiaries. A more detailed description of the Committee’s roles, functions and activities is set forth in the description of Board committees elsewhere in this Proxy Statement and in the Committee’s charter.

The Board of Directors has determined that each of the members of the Audit Committee qualifies as “independent” within the meaning of the NYSE Listing Standards and the rules of the SEC. The Board of Directors has further determined that each of Ms. Allen and Messrs. Baily, Lenrow and Viets is an “audit committee financial expert” within the meaning of the SEC rules.

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 of 2002, 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 preparing the financial statements, designing and assessing the effectiveness of internal control over financial reporting and determining that the Company’s financial statements are complete and accurate and in accordance with U.S. generally accepted accounting principles and applicable laws and regulations.

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, as amended (AICPA – AU Section 380) as adopted by the Public Company Accounting Oversight Board (“PCAOB”). The Committee received from the Company’s independent registered public accounting firm the written disclosures and letter required by the applicable PCAOB 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, including audit and non-audit fees.

Based on the Committee’s discussion with and review of reports from management, the Company’s internal auditors and the Company’s 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, 2011, as filed with the SEC.

The foregoing report has been approved by all members of the Audit Committee.

MEMBERS OF THE AUDIT COMMITTEE

John T. Baily (Chair)

Barbara R. Allen

Gerald I. Lenrow

Robert O. Viets

EXECUTIVE RESOURCES COMMITTEE REPORT

The Executive Resources Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis section of this Proxy Statement. Based on the Executive Resources Committee’s review and discussions, it recommended to the Board, and the Board approved, that the Compensation Discussion and Analysis be included in the Company’s 2012 Proxy Statement.

MEMBERS OF THE EXECUTIVE RESOURCES COMMITTEE

Barbara R. Allen (Chair)

Jordan W. Graham

Gerald I. Lenrow

F. Lynn McPheeters

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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.

2012 COMPENSATION DISCUSSION & ANALYSIS

INTRODUCTION

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

EXECUTIVE SUMMARY

The Company is a specialty insurance company that offers a diverse portfolio of property and casualty coverage and surety bonds. We are always focused on achieving an underwriting profit and growing book value to create security for our policyholders and long-term value for our shareholders. As a result, we have structured our compensation programs to provide incentives for achieving those objectives.

In May 2011 we held a shareholder advisory vote on the compensation of our named executive officers, referred to as a “say-on-pay” vote. Our shareholders expressed strong support for our compensation practices, with 83 percent of shareholder votes cast in favor of our say-on-pay resolution. We considered this vote to represent strong support by shareholders for our longstanding executive compensation policies and practices. In 2011, therefore, the ERC continued its general approach to executive compensation:

·          Conservative base salary increases: The average increase in base salaries for the Named Executive Officers (“NEOs”) in May 2011 when salaries were reviewed was 2.7 percent. The NEOs in May 2011 were Jonathan Michael, President & CEO; Michael Stone, President & COO, RLI Insurance Company; Joseph Dondanville; Senior Vice President, CFO (retired); Craig Kliethermes, Senior Vice President, Risk Services; and Daniel Kennedy, Vice President, General Counsel, and Corporate Secretary.

·          Performance-based compensation: Total executive compensation is directly linked to Company performance. As in prior years, all executives participate in an annual incentive plan through which they are eligible to earn compensation based on achievement of Company financial objectives that are aligned with shareholder value creation.

·          Conservative long-term incentive awards: In 2011, we continued our conservative approach to long-term incentives, awarding stock option grants sufficient to align the interests of the management team with shareholders, but not at a level which, in our view, would provide a windfall to recipients. Stock option awards in 2011 generally were at or below median levels for comparable positions.

·          Significant executive stock ownership: Our compensation programs encourage employees to build and maintain an ownership interest in the Company. We have established specific executive stock ownership guidelines and our NEOs currently maintain significant share ownership in the Company.

·          Peer company comparisons: In accordance with our standard practice, each year we conduct a review of executive compensation within an insurance peer group to ensure that the Company’s executive compensation remains fair, competitive, and consistent with Company performance. In 2011, the Committee retained Pay Governance, a compensation consulting firm, to assist in the evaluation and selection of appropriate peer companies.

Additionally, our compensation decisions during the 2011 fiscal year continued to be influenced by ongoing economic and insurance marketplace uncertainty. We feel that our conservative approach to both our business and compensation practices during the past year contributed to our overall financial success. In 2011, the Company had solid financial performance, delivering the 16th consecutive year of underwriting profit; achieving an excellent combined ratio; and returning capital to our shareholders through a $5.00 per share special dividend and our 36th consecutive year of paying regular dividends. We made the largest acquisition in Company history, acquiring and successfully integrating Contractors Bonding and Insurance Company (“CBIC”).

Our CFO, Joseph E. Dondanville retired in 2011 after 27 years of service to the Company. Thomas L. Brown joined the Company as CFO on September 1, 2011. Each of their respective compensation for 2011 is described below.

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HOW THE ERC OPERATES

ERC MEMBERS

In 2011, the members of the ERC were Ms. Allen (Chair) and Messrs. Graham, Lenrow and McPheeters. ERC members are nominated by the Nominating/Corporate Governance Committee, elected by the Board, and may be removed from the ERC by the Board at any time, with or without cause. The members of the ERC are independent directors under the independence standards developed by the Board, which incorporate all of the NYSE independence standards, and which are set out above under the section entitled “Corporate Governance and Board Matters.” The Board annually determines the independence of each member of the ERC under those independence standards.

ERC RESPONSIBILITIES

The ERC operates under a Charter, which can be found on 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 recommendation to the full Board for approval. The ERC is responsible to the Board for (1) reviewing and providing advice regarding the Company’s executive compensation policy and the execution thereof; (2) reviewing and providing advice regarding the Company’s management succession and development processes; (3) monitoring compensation actions by management below the executive level; (4) producing an annual report on executive compensation for approval by the Board for inclusion in the Company’s proxy statement in accordance with applicable rules and regulations; and (5) reviewing the Company’s employee benefit plans. Compensation of the Board is recommended by the Nominating/Corporate Governance Committee, with the advice and counsel of the ERC to ensure alignment of interests between Board and executive compensation.

ERC MEETINGS

The ERC held five meetings in 2011. The agenda for each ERC meeting is established by the Chair of the ERC in consultation with other ERC members, and with Mr. Michael and Jeffrey Fick, the Company’s Vice President, Human Resources. ERC materials are prepared by Messrs. Michael and Fick and are reviewed and approved by the ERC Chair in advance of distribution to ERC members. The ERC meetings are attended by Messrs. Michael and Fick.

INPUT FROM MANAGEMENT

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

·   annual base salary levels;

·   annual bonus targets and financial goals; and

·   the form and amount of long-term incentives.

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

COMPENSATION CONSULTANT

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 same compensation consulting firm retained by the ERC without approval in advance by the ERC.

In 2011 the compensation consulting firm of Pay Governance was engaged by the ERC with respect to two matters: (1) assisting the ERC in the evaluation and potential revisions to the current compensation peer group, including the development of objective criteria for the selection and ongoing management of the members of the peer group, described in more detail at page 26; and (2) an assessment of the Market Value Potential Executive Incentive Program (“MVP Program”) to assist the ERC to enhance the overall effectiveness of the Program, described in more detail at page 27. Total fees of $68,491.64 were paid to Pay Governance for this engagement.

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OVERVIEW OF RLI EXECUTIVE COMPENSATION

OBJECTIVES

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

GUIDING PRINCIPLES

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

(1)         The focus is on the linkage between long-term shareholder value creation and executive pay;

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

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

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

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

(6)         Appropriate safeguards must be in place to ensure annual incentives are aligned with long-term risk and value creation to protect against unnecessary and excessive risk to the Company.

ELEMENTS OF COMPANY EXECUTIVE COMPENSATION

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

(1)   Total annual cash compensation consisting of:

(a)   Base salary;

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

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

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

(2)         Long-term incentive compensation granted under the Long-Term Incentive Plan; and

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

ANNUAL COMPENSATION

BASE SALARY

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

In 2011, the ERC set base salary ranges for the CEO, CFO and COO based on publicly available executive compensation data for 2010 from the following peer companies: Alleghany Corporation; AmTrust Financial Services; Argonaut Group, Inc; Baldwin & Lyons Inc.; CNA Surety Corporation; Endurance Specialty Holdings Ltd.; Global Indemnity; HCC Insurance Holdings, Inc.; Markel Insurance Company; Meadowbrook Insurance Group Inc.; National Interstate Corp.; Navigators Group; Old Republic International Corp.; and OneBeacon Insurance Group LTD. The ERC selected these peer companies based on their judgment, input from management, and the recommendation of Pay Governance. Each of the peer companies competes within the property and casualty insurance industry and sells 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 their’s. The ERC also reviews the market capitalization of the Company compared to the peer companies to ensure that the Company is at or near the median market capitalization among those companies.

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Each year, the ERC compares the relative ranking among the Company and peer companies based on the most recently available public data for base salaries and total compensation for the CEO, COO and CFO positions to the relative performance ranking for the following performance metrics for the prior year: price-to-book ratio; price-to-earnings ratio; return on equity; combined ratio; five-year combined ratio; and total return to shareholders for one, three, and five-year time frames to determine the overall competitiveness of the Company’s executive compensation. Such a comparison in 2011 demonstrated that total compensation for each of these individuals was above the median among the peer companies, consistent with the ranking for the Company in the performance metrics listed above which were above the median for every metric.

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

At the May 2011 Board meeting, when the annual review of base salaries was conducted by the ERC, Mr. Michael recommended, and the ERC approved, no annual base salary increase for himself. The average increase in base salary in May 2011 for all NEOs averaged 2.7 percent1.

MARKET VALUE POTENTIAL EXECUTIVE INCENTIVE PROGRAM (MVP PROGRAM)

The Company has paid annual cash bonuses to certain executive officers under the MVP Program since 1996. As discussed in further detail below, the MVP Program provides a mechanism with which the ERC can correlate cash compensation to long-term shareholder value creation. The MVP Program uses an economic profit measure called “Market Value Potential”, or “MVP”, which measures the after-tax returns earned by the Company above its cost of capital, as a gauge of shareholder value creation. MVP is defined as (1) the Actual Return (the increase in GAAP book value2), less (2) the Required Return (beginning capital3 multiplied by the blended cost of capital4). If the Company does not earn the Required Return in a given year, no bonus award is made pursuant to the MVP Program for that year.

Key elements of the MVP Program for 2011 include the following:

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

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

·          Bonus banks can either be positive or negative.

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

·          Annual bonus awards in excess of 300 percent of a participant’s base salary require approval of the independent Directors.

Participation in the MVP Program, percentage bonus awards and the formula to calculate MVP are recommended by the ERC and approved annually by the independent Directors of the Board for Mr. Michael and by the entire Board for other participants. In 2011, participation in the MVP Program was limited to Messrs. Michael, Stone, Dondanville and Kliethermes. The Board has concluded based on the position responsibilities and ongoing assessment of individual performance against operational and financial goals that the senior executive management team (the CEO, COO, CFO and Senior Vice President, Risk Services) is most responsible for the operating and investment decisions and actions 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. Mr. Brown joined the Company in September 2011 and did not participate in the MVP Program for 2011, but instead participated in the Management Incentive Program (“MIP”), described below. Mr. Brown is a participant in the MVP Program beginning in 2012.

1         Mr. Michael last received an increase in his base salary rate in 2006; Messrs. Stone and Dondanville in 2007; Mr. Kennedy in 2008; and Mr. Kliethermes in 2009 when he was promoted to senior vice president.

2         The increase in GAAP book value is calculated as ending capital (defined as ending GAAP book value, less unrealized gains or losses net of tax on available-for-sale fixed maturity investments, plus outstanding long-term debt instruments at the end of the period; plus adjustments for capital transactions during the year), less beginning capital.

3         Beginning capital is defined as beginning GAAP book value, less unrealized gains or losses net of tax on available-for-sale fixed maturity investments, plus outstanding long-term instruments at the beginning of the period.

4         The Company’s blended cost of capital is defined as the weighted average of the cost of equity capital and the cost of debt capital. The cost of equity capital is the average ten year U.S. Treasury Note rate, plus a market risk premium multiplied by the Company’s beta. The Company’s cost of debt capital is the coupon or interest rate actually incurred on the outstanding long-term debt.

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For 2011, each participant in the MVP Program received an annual MVP bonus award expressed as a percentage of MVP created by the Company in that calendar year. Each year the ERC confirms that the percentage awards remain appropriate by reviewing historical bonus award payouts, projected future payouts and resulting total compensation for MVP Program participants, which in turn is compared to the performance of the Company necessary to achieve such payouts. The ERC then compares the performance of the Company and total compensation of the MVP Program participants with comparable performance metrics and compensation at companies in the peer group. The MVP percentage award, expressed as a percentage of MVP, for each participant for 2011 was as follows: 3.0 percent for Mr. Michael, 1.9 percent for Mr. Stone, 1.25 percent for Mr. Dondanville and 0.625 percent for Mr. Kliethermes. The ERC set the percentage bonus awards for 2011 based on the factors described above and based on the range of expected MVP to be created by the Company in 2011 and the projected bonus awards and bonus payouts that would result.

Annual awards are added to a MVP bonus bank for each participant. If MVP is negative for a year, a negative award is deducted from each participant’s bonus bank. If the entire bank balance is negative, the negative bank balance carries over to the next year. Interest at the three-year U.S. Government Treasury Bill rate is accrued on any positive unpaid bonus bank balance on December 31 of each year.

Annually, 33 percent of a participant’s MVP Program bonus bank (if positive) is paid as a cash bonus payment. The remainder of the bank balance is at risk and will be reduced to the extent MVP is negative in subsequent years. The MVP Program also includes a Board Approval Limit which provides that if a positive MVP award to be added to, or a negative MVP award to be deducted from, a participant’s bonus bank exceeds 300 percent of year-end base salary, the independent Directors must approve, and may reduce, that portion of the MVP award in excess of the Board Approval Limit. MVP awards approved by the ERC for 2011 for Messrs. Michael and Stone did exceed the Board Approval Limit of 300 percent of their respective base salaries. Accordingly, the amount of the MVP Awards to those individuals above 300 percent of each of their respective base salaries was approved by the independent Directors. Individual annual MVP Award payments, including the amount credited to a bonus bank, are capped at $7.5 million under the terms of the RLI Corp. Annual Incentive Compensation Plan approved by Shareholders in 2011.

The Company’s MVP in 2011 was $98.4 million, compared to MVP of $101.7 million in 2010, and MVP of $97.7 million in 2009. The following table shows the manner in which 2011 MVP payouts and remaining at-risk bank balances were calculated for Messrs. Michael, Stone, and Kliethermes.