RLI Corp. Tops on Higher Premium

RLI Corp. (RLI - Analyst Report) reported third-quarter 2011 operating earnings of $1.23 per share, beating the Zacks Consensus estimate by 24 cents. Operating earnings were 3.4% ahead of $1.19 earned in the year-ago period.

Operating earnings for the quarter were $26.2 million, up 4.8% year over year. The improvement over the prior-year quarter may primarily be attributable to a significant improvement in Casualty underwriting income, which increased almost threefold over the prior year.

Third-quarter 2011 operating earnings include favorable development on casualty prior years' reserves of 83 cents, favorable development on casualty prior years' reserves of 1 cent, favorable development on casualty prior years' reserves of 1 cent and adverse effect of 18 cents due to Hurricane Irene.

Including realized investment losses, net of tax, of $0.1 million or 1 cent per share, the company has reported a net income of $26.1 million or $1.22 per share compared with $28.0 million or $1.33 per share in third-quarter 2010. Net income in the year-ago quarter included realized investment gains, net of tax, of $2.9 million or 14 cents per share.

Operational Performance

Gross written premium during the third quarter of 2011 was $184.0 million, up 16.9% year over year from $157.4 million during third-quarter 2010. Net premium written improved 21.6% from the year-ago quarter to $144.6 million.

Net premiums earned in the quarter were $146.6 million, increased 14.2% year over year.

All the segments posted year-over-year improvement in premiums.

Underwriting income was $24.7 million, up 13.8% year over year. An almost three-fold increase in underwriting income at Casualty, partially offset by an underwriting loss at Property, aided the improvement.

Investment income declined 4.8% year over year to $16.0 million attributable to lower reinvestment rates. The investment portfolio’s total return for the quarter was flat compared to the prior year quarter; the return in the bond portfolio was 2.4%, while the equity portfolio was negative 10%.

Revenue in the quarter under review totaled $162.3 million, up 8.5% from $149.6 million in the prior-year quarter, driven by higher premiums earned. Revenue also topped the Zacks Consensus estimate of $148 million.

Total expenses during third-quarter 2011 were $124.9 million, up 13.3% year over year. The increase was primarily driven by higher loss and settlement expense and higher policy acquisition costs.

Combined ratio in the third quarter was 83.1%, flat with third quarter 2010. Higher combined ratio at Property was offset by lower combined ratio Casualty and Surety.

Book value was $41.16 per share as of September 30, 2011, up 9.0% from $37.75 as of December 31, 2010. The company recorded a 16.5% return on equity, with a 14.6% return on a comprehensive basis. This compares with a return on equity of 13.8% and 16.9% on a comprehensive basis in the prior year. Statutory surplus increased 6.6% over 2010-end to $780 million at quarter-end.

Dividend Update

In the third quarter, RLI Corp. paid a cash dividend of 30 cents per share.

Share Repurchase

In the quarter, RLI Corp. spent $3.8 million to buy back 64,856 shares at an average cost of $59.24. The company has $87.5 million available in its stock repurchase program at the end of second-quarter 2011.

Our Take

The company is focused on diversifying its product mix, as well as expanding its product offering. The company’s underwriting discipline is also expected to bode well given the stabilization in the markets. Also, acquisitions broaden its client base and help it to write higher premiums in the upcoming quarters.

The company scores strongly with the rating agencies and remains focused to return value to its shareholders value through dividend increase and share buybacks.

We maintain our Neutral rating on RLI Corp. 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., through its subsidiaries, underwrites property and casualty insurance primarily in the United States. It 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