RLI Corp. Retained at Neutral

With the improving pricing scenario in the insurance market and supported by RLI Corp.’s (RLI - Analyst Report) strong infrastructure, we expect the company to perform well in the upcoming quarters. Also, the company has a favorable loss reserve ratio compared with the previous year along with increasing statutory reserve. Moreover, RLI Corp. scores strongly with the rating agencies.

However, continued low interest rate environment keeps us on the sidelines. We retain our Neutral recommendation 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. With the expansion of its business, the company’s gross premium written increased almost 15% to $405.9 million in the second quarter of 2012.

The company maintains a conservative underwriting and reserving policy and continues to achieve favorable reserve releases from prior years. Its statutory surplus levels are also strong and exhibit an increasing trend.

RLI Corp. remains focused on enhancing shareholder value. Following a dividend hike of 6.7%, dividend yield came in at 3.00%, higher than the 2.1% of the S&P index. Additionally, it is still left with $87.5 million available under its authorization. Over the last five years, RLI Corp. paid back more than $700 million to its shareholders through dividends, special dividends and share buybacks.

The company also scores strongly with the rating agencies. Recently, A.M. Best Co. reaffirmed its financial strength rating on the subsidiaries.

On the flip side, low interest rate environment continues to weigh on net investment income and the recent quarter was no exception. The quarter marked a decline in net investment income largely due to lower reinvestment rates in the fixed income portfolio.

Also, RLI Corp. continues to suffer from the overhang of cat losses. The combined ratio for the second quarter of 2012 deteriorated to 84.7% from 67.8% in the year-ago quarter. However, the company, by purchasing reinsurance, limits its loss.

The Zacks Consensus Estimate for third-quarter 2012 is pegged at 94 cents per share. For full years 2012 and 2013, the Zacks Consensus Estimates are, respectively, $4.06 and $4.20 per share.

The quantitative Zacks #3 Rank (short-term Hold rating) on the stock indicates no clear directional pressure over the near term. ACE Limited (ACE - Analyst Report) and The Travelers Companies, Inc. (TRV - Analyst Report) which competes with RI Corp. also share a Zacks #3 Rank.