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With its fourth-quarter 2013 operating earnings of 72 cents per share exceeding the Zacks Consensus Estimate by 28.6%, RLI Corporation (RLI - Analyst Report) delivered three straight quarters of positive surprises. The result also outpaced the year-ago quarter’s earnings by 64%.

The improvement came on the back of better underwriting results.

Shares of RLI Corporation gained about 1.78% in the after-market session, indicating that the market has taken this release positively.

Fourth-quarter 2013 operating earnings include favorable developments in Casualty’s prior years’ reserves of 19 cents, 2 cents each for Property’s and Surety’s prior years' reserves, gain from tax benefit of special dividend to ESOP of 4 cents and gain from change in tax rate applicable to Maui Jim of 8 cents.

Including realized investment gains, net of tax or 5 cents per share, RLI Corp. reported net income of 77 cents per share compared with 58 cents per share in the fourth quarter of 2012. The prior-year quarter net income included realized investment gains, net of tax, of 14 cents per share.

Full-Year Highlights

For full year 2013, RLI posted record earnings of $2.57 per share which climbed 27.9% year over year and surpassed the Zacks Consensus Estimate by 6.6%.

The top line came in at $705.6 million, improving 6.8% year over year.

Operational Performance

Revenues in the quarter under review totaled $185.4 million, improving 8.2% year over year, driven by 14% increase in net premiums earned that increased 14% year over year. Revenues outperformed the Zacks Consensus Estimate by 4%.

Investment income declined 7.3% year over year to $13.4 million.

Total expense of RLI Corp. during the fourth quarter scaled up 1.5% year over year to $144.8 million. Increase in interest expense, other insurance expenses, general corporate expenses and policy acquisition costs, and other insurance expenses primarily drove the increase.

Underwriting income for RLI Corp. was $29.6 million in the quarter, up more than threefold year over year. For 2013, underwriting income improved 68% over 2012.

The combined ratio in the reported quarter improved 1190 basis points (bps) to 82.4%, while full year combined ratio improved 590 bps to 83.1%. Improvement stemmed from a benign catastrophe season, improved current year results in our casualty segment, as well as increased favorable development in prior years’ loss reserves.

Full-year underwriting results marked the 18th consecutive year of underwriting profit and the 9th straight year of combined ratio below 90.

RLI Corp.’s total return from the investment portfolio was 1.9% during the reported quarter. The bond portfolio returned 0.3%, while the equity portfolio yielded a return of 8.2%.

Financial Update

RLI Corp. exited 2013 with total investments and cash of $1.9 billion, up 4.4% from 2012-end.

Long-term debt was $149.6 million at the end of 2013.

RLI Corp.’s book value stood at $19.29 per share as of Dec 31, 2013, up 3% year over year.

The company has recorded a return on equity of 15.3% along with a 14.4% return on a comprehensive basis compared with a return on equity of 12.4%, with 15.5% on a comprehensive basis, in the prior-year. Statutory surplus increased 25.6% over 2012-end to $859.2 million as on Dec 31, 2013.

Cash provided by operations was $135 million, up 261.2% year over year.

Dividend Update

On Dec 20, 2013, RLI paid a special cash dividend of $1.50 per share and a quarterly dividend of 17 cents per share, amounting to $71.8 million. The payout marks 150 consecutive quarters of dividend payment. The company has consistently hiked regular dividends for the last 38 straight years with an average of 11.9% increase over the last 10 years.

Our Take

During the quarter, RLI Corp.’s earnings and revenues beat both the Zacks Consensus Estimate as well as the year-ago result. The outperformance came on the back of better underwriting performances.

The company continues to deliver robust underwriting income. Given the improving pricing scenario in the insurance market and widened product lines, we expect RLI Corp. to perform well in the upcoming quarters. It also remains focused on expanding its product portfolio. The company plans to focus on leveraging its expertise in niche markets as well.

Moreover, the company’s two-for-one stock split makes its share affordable for investors.

RLI Corp. currently carries a Zacks Rank #3 (Hold). Some better-ranked property & casualty insurers that carry a Zacks Rank #1 (Strong Buy) are ACE Ltd. (ACE - Analyst Report), The Chubb Corp. (CB - Analyst Report) and PartnerRe Ltd. (PRE - Analyst Report). All these companies are slated to release their fourth-quarter earnings soon.

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