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RLI Corp. (RLI - Analyst Report) continues to benefit from its business expansion drive, extensive product offerings, strong local branch network and focus on specialty insurance lines. The company scores strongly with the rating agencies and remains focused on returning value to its shareholders.

However, these positives are somewhat dwarfed by RLI Corp’s exposure to cat losses and the strained Casualty segment. We thus remain Neutral on the company.

RLI Corp. is one of the industry’s most profitable P&C writers, having generated underwriting profits in 31 of the last 35 years, including the last 16 consecutive years. The company remains focused on expanding its business with diversifying into new avenues. The company acquired Contractors Bonding Insurance Company (“CBIC”) in 2011. CBIC also had a track record of recording underwriting profit in 15 of its 16 operational years. The acquisition has broadened RLI Corp’s client base. With business expanding, the company’s gross premium written increased almost 10% in 2011. Also, underwriting profits geared up 30% last year.

RLI Corp. has increased dividends for the past 36 years and has also been paying dividends for 141 consecutive quarters. The company has hiked its quarterly dividend by an average of 1.4% over the last 10 years. Over the last five years, RLI Corp. has paid back almost $700 million to its shareholders through dividends, special dividends and share buybacks.

RLI Corp. also scores strongly with the rating agencies. A.M. Best and Standard & Poor’s reaffirmed their A+ ratings on the company.

However, RLI Corp. has exposure to commercial properties throughout the Gulf and East Coasts. Hurricane Irene in August had severely hit these areas. The industry, in 2011, had suffered catastrophe losses. The company had incurred losses totaling $13.0 million from spring storms, while Hurricane Irene added $4.5 million in losses. However, the company limits its losses by purchasing reinsurance.

Looking at specific Casualty products, general liability, which is the largest product of the company, has been experiencing significant declines for the past several quarters. Gross premium written declined 9% in 2011, though improving from a decline of 15% in 2010 and 17% in 2009.

RLI Corp.’s earnings in the fourth quarter declined over the prior-year quarter primarily due to lower underwriting income at Casualty and Surety, partially offset by higher income at Property. However, results surpassed the Zacks Consensus Estimate.

The Zacks Consensus Estimate for first-quarter 2012 is pegged at $1.07 per share. For full years 2012 and 2013, the Zacks Consensus Estimates are, respectively, $4.24 and $4.38 per share.

The quantitative Zacks #4 Rank (short-term Sell rating) on the stock indicates slight downward pressure over the near term.

Headquartered in Peoria, Illinois, RLI Corp. is a specialty property-casualty 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). 

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