RLI Corp. Seals Rockbridge Deal

In keeping with its continual effort of expanding its business, RLI Corp. (RLI - Analyst Report) acquired Rockbridge Underwriting Agency.

Houston-based Rockbridge Underwriting Agency is a managing general agency focusing mainly on medical malpractice insurance. With a widespread network of retail and wholesale brokers, Rockbridge provides coverage in 50 states.

This acquisition bodes well with RLI Corp’s strategy of capitalizing on the resources in niche markets in order to induce growth. RLI Corp. expects Rockbridge to infuse $20 million in premium annually to its business.

RLI Corp. has been delivering solid premium numbers over several quarters. We expect the addition of Rockbridge to its portfolio will help it to continue with the momentum. In the last quarter, gross premium increased 6.4% year over year.

RLI Corp. undertook the acquisition after a long gap of nearly one and a half years. Last in April 2011, RLI Corp. acquired Contractors Bonding Insurance Company. The acquisition has broadened the company’s client base, thereby proving accretive for its earnings.

With the improving pricing scenario in the insurance market supported by RLI Corp.’s strong infrastructure, we expect the company to perform well in the coming quarters.

RLI Corp. reported third quarter 2012 operating earnings of $1.02 per share, surpassing the Zacks Consensus Estimate by 10.8%. The Zacks Consensus Estimates for fourth quarter is 96 cents while for the full year it is $1.01.

In late October, ACE Limited (ACE - Analyst Report), which closely competes with RLI Corp. announced its decision to ink a definitive agreement for the acquisition of Mexico’s sixth-largest property and casualty (P&C) insurer, ABA Seguros from Ally Financial Inc. The $865 million cash purchase deal is expected to culminate in the first half of 2013. The acquisition is anticipated to be accretive to ACE Limited’s earnings from the first year of purchase. Moreover, it is likely to achieve or even surpass the company’s targeted long-term return on equity projection by the third year.

We retain our Neutral recommendation on RLI Corp. In the absence of any near term catalysts, which will drastically impacts the results, we expect the company to perform in line with the market and thus blends well with our Zacks # 3 Rank, implying a short term Hold rating.