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On Jan 30, Zacks Investment Research upgraded RLI Corp. (RLI - Analyst Report) by a notch to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

RLI Corp. has been riding on a steady growth momentum since its fourth-quarter and full-year 2013 results. The growth impetus stems from improved core fundamentals throughout 2013, which are cushioned by strong operating leverage and a modest capital position.

RLI Corp. also outperformed the one-year S&P 500 index, which posted an increase of 19.4% against a return of 26.1% clocked by the company. Additionally, this global property and casualty (P&C) insurer delivered positive earnings surprises in the last three consecutive quarters, with an average beat of 28.1%.

On Jan 22, RLI Corp. reported fourth-quarter 2013 operating earnings per share of 72 cents, which noticeably outpaced the Zacks Consensus Estimate of 56 cents by 28.6% and the year-ago quarter number of 44 cents by 64%.

A 14% year-over-year increase in premiums against mere 1.5% hike in expenses drove the underwriting income over three-fold, reflecting lower catastrophe losses and improved combined ratio. Although investment income reduced owing to persistent low interest rates, return on equity (ROE) increased to 15.3% from 12.4% at 2012-end and operating cash flow escalated more than 261% in 2013.

RLI Corp.’s effort towards new product initiatives and increased exposure in mature product offerings are likely to continue driving top-line growth going forward. Also, incremental return by way of share buybacks and special dividends apart from a consistent regular dividend history boosts investor confidence.

Following its fourth-quarter earnings release, the Zacks Consensus Estimate for both 2014 and 2015 moved up by a penny to $2.32 and $2.28 per share, respectively, in the last 7 days. No downward revision in estimates was witnessed for either year.

More prominently, the Most Accurate estimate for RLI Corp.’s 2014 and 2015 earnings stands at $2.43 and $2.34 a share, resulting in an Earnings ESP of +2.1% and +1.3%, respectively.

Other Stocks to Consider

Other top-ranked insurers in the industry include Platinum Underwriters Holdings Ltd. (PTP - Snapshot Report), Aspen Insurance Holdings Ltd. (AHL - Snapshot Report) and Endurance Specialty Holdings Ltd. (ENH - Snapshot Report). All these stocks carry the same Zacks Rank as RLI Corp.

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