RLI Corp. Downgraded

We are downgrading RLI Corp. (RLI - Analyst Report) to Neutral from Outperform as its Casualty segment continues to remain under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages.

The Casualty segment was under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages. General Liability, the largest product of the company under the Casualty segment, has remained soft over the past several quarters. Nearly 50% of the General Liability book relates to the construction industry. 

RLI Corp.’s Casualty business is traditionally characterized by higher combined ratios and longer-tailed liabilities, which could pressure its overall underwriting margins in the long term. This business is price sensitive and therefore the continued decay in premium rates is raising additional concerns. Also, the Surety segment is reporting basically flat premium writings.

Counting on the positives, RLI Corp. continues to deliver consistent underwriting profit and remains focused on enhancing shareholders value. RLI has generated underwriting profits in 31 of the last 35 years, including the last 16 consecutive years. A strong local branch office network, broad range of product offerings, and focus on specialty insurance lines appear to be the other contributors to the company’s superior profitability.

RLI Corp. has increased dividends for the past 36 years, the latest of which was a quarterly increase of 3.4% in May 2011. As of March 31, 2011, the company’s equity portfolio had a dividend yield of 2.7% compared with 1.8% for the S&P 500 index.

The company RLI Corp. scores strongly with the rating agencies. A.M. Best Co. has reiterated its issuer credit ratings (ICR) of “a-” for RLI Corp.  The rating agency has upgraded the outlook to positive from stable. The credit rating agency reiterated ICR of  “aa-” and financial strength rating (FSR) of A+ (Superior) of RLI Group and its members.

RLI Corp. reported first-quarter 2011 operating earnings of $1.11 per share, beating the Zacks Consensus Estimate by 17 cents and were 18% ahead of 94 cents earned in the year-ago period. The improvement may primarily be attributable to lower expenses and better performance at the Property and Surety segment. 

The Zacks Consensus Estimate for second-quarter 2011 is $1.09 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $4.18 per share and $4.09 per share.

The quantitative Zacks #3 Rank (short term Hold rating) on the stock indicates no clear directional pressure on the shares over the near term.

Headquartered in Peoria, Illinois, RLI Corp. is a specialty property-casualty (P&C) underwriter that caters primarily to niche markets through its main operating subsidiary, RLI Insurance Company. The company competes with ACE Limited (ACE - Analyst Report), CNA Financial Corporation (CNA - Snapshot Report) and The Travelers Companies, Inc. (TRV - Analyst Report).

Read the full analyst report on RLI

Read the full analyst report on TRV

Read the full analyst report on ACE

Read the full analyst report on CNA