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We retain our Neutral recommendation on RLI Corp. (RLI - Analyst Report) following its third-quarter results. Though the bottom line surpassed the Zacks Consensus Estimate, it lagged the year-ago numbers largely due to lower underwriting results at Casualty.

RLI Corp. is focused on expanding its business with new products and increasing emphasis on niche markets. Recently, RLI Corp acquired Rockbridge Underwriting Agency and expects it to infuse $20 million in premium annually to its business. Further, it unveiled a new product line, where RLI will provide primary and excess liability insurance coverage for security guard and patrol services, private investigation firms and alarm system installation, maintenance and monitoring firms. It also entered into a partnership with Recreation Insurance Specialists (RIS) to underwrite recreation vehicle insurance for RIS. With the expansion of its business, we expect RLI to continue to deliver solid growth in gross premium written, which increased almost 12% in the first nine months of 2012.

RLI Corp. will be paying a special dividend of $5.00 in an effort to share more profit with shareholders. Over the last 5 years, the company has returned more than $570 million to shareholders in the form of share buybacks and dividends, both regular and special. Also, over the past 10 years, RLI’s total return to shareholders has been significantly better than that of the S&P 500. Additionally, though the company has not been buying back shares for over a year, it still has $87.5 million under its $100 million share repurchase program authorized in May 2010.

Among other positives, it scores strongly with the credit rating agencies. Besides, its asset turn-over and return on equity is better than the industry average.

However, on the flip side, exposure to cat loss and a low interest rate environment dwarfs these positives.

The company continues to suffer from the overhangs of cat losses. Following the occurrence of Superstorm Sandy, RLI Corp. expects to incur pre-tax loss of approximately $15–$20 million, after deducting reinsurance reimbursements.

Also, lower reinvestment rates in the fixed income portfolio as well as increased allocation to tax-exempt municipal securities induced a drop of nearly an 11% in net investment income.

Nevertheless, with the improving pricing scenario in the insurance market supported by strong infrastructure, widened product lines and strategic acquisitions, we expect the company to perform well in the upcoming quarters.

RLI Corp. carries a Zacks #3 Rank, translating into a short-term Hold rating. ACE Limited (ACE - Analyst Report) and The Travelers Companies, Inc. (TRV - Analyst Report), which closely compete with RLI Corp., also share the same Zacks rank.
 

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