On Aug 14, 2014, we issued an updated research report on RLI Corp. (RLI - Analyst Report).
RLI Corp. (RLI - Analyst Report) delivered mixed second-quarter results with earnings of 66 cents per share, in line with the Zacks Consensus Estimates but missing revenues at the same. Notably, both the top and bottom lines improved year over year on higher premiums and investment income.
Given the company’s business expansion, along with stability in the rate environment, it witnessed consistent solid growth in the gross premium written over the years with Casualty Segment making the major contribution.
The net premiums have also been continuously improving over the years. With the company’s effort toward new product initiatives and increased exposure in mature product offerings, we expect RLI Corp. to continue exhibiting top-line growth going forward.
Nevertheless, the low interest rate environment has weighed on net investment income of RLI Corp. over the past few years. However, an improvement in the net investment was witnessed in the second quarter on the heels of a larger invested asset base and stable reinvestment rates.
However, increased expenses over the last few years have pressured expansion of the company’s operating margin. The debt level has also been increasing and if this is not catered to in a timely manner, the credit worthiness of RLI Corp. will suffer.
Being a property and casualty insurer, RLI Corp. is exposed to catastrophic (CAT) occurrences. Over the years, the combined ratio was improving due to the absence of CAT impact but in second quarter, the company incurred a huge cat loss, thereby greatly affecting its underwriting results and combined ratio.
Apart from engaging in share repurchases through continued dividend hikes since 39 years, RLI Corp. remains committed to enhance its shareholders’ value. Over a period of five years, the company has returned more than $625 million in the form of share repurchase and dividends to shareholders.
RLI Corp. now has a sound capital structure, with an asset turnover of 0.27 compared to the sector average of 0.02, followed by return on equity of 15.62%, better than the industry average of 7.06%. The company has a low financial leverage (16.27% on Jun 30, 2014), which provides significant financial flexibility to the operating subsidiaries.
RLI Corp.’s fluctuating cash balances over the years keeps us cautious about its ability to meet its debt and liquidity requirements.
With respect to earnings trend, the company posted an earnings beat in three of the last four quarters with an average beat of 27.69%. The Zacks Consensus Estimate for 2014 is currently pegged at $2.41 while for 2015, it is $2.37. The expected long-term earnings growth rate of the stock is 15%.
RLI Corp. currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked property and casualty insurers worth reckoning include Endurance Specialty Holdings Ltd. (ENH - Snapshot Report), Global Indemnity plc and Mercury General Corporation (MCY - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).