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On Feb 18, 2013, we upgraded our recommendation on RLI Corp. (RLI - Analyst Report) to Outperform from Neutral based on its focus on business expansion and an expected improvement in the rate environment. This property and casualty insurer carries a Zacks Rank #2 (Buy).

Why the Upgrade?

Fourth-quarter earnings came in at 89 cents per share, much ahead of the Zacks Consensus Estimate of 44 cents. Over the past four quarters, RLI Corp. has delivered an average surprise of 26.4%. Revenues increased 4.5% from the year-ago period to $171.4 million and was in line with the Zacks Consensus Estimate.

Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 has gone up 2.1% to $4.31 per share. Moreover, the Zacks Consensus Estimate for 2014 has also increased 2.1% to $4.29 per share.

Through a strong local branch office network, broad range of product offerings, and focus on specialty insurance lines, RLI Corp. has generated underwriting profits through the last 16 consecutive years. It has also remained focused on strategic partnerships and acquisitions to expand its operations and foray into new markets. We believe the company will continue on this path to reap benefits.

The company’s sound capital structure helps it meet the interests of its policyholders, enhance operations in the insurance sector and aid the growth in its book value in the long term. Its trailing 12 month Return on Equity (ROE) of 13.0% is much higher than the sector average of 6.7%. It’s low financial leverage and strong fixed charge coverage ratios also provide significant financial flexibility to its operating subsidiaries.

For the past 37 years the company has been increasing dividends paid to its shareholders, which include an average quarterly hike of 13.8% over the last 10 years. RLI Corp.’s dividend yield currently stands at 1.84%, better than the sector average of 1.73%. Over the last 5 years, the company has returned more than $570 million to shareholders in the form of share buybacks and dividends, and has an $87.5 million remaining under its $100 million share repurchase program authorized in May 2010.

Other Stocks to Consider

Among others from the industry, Cincinnati Financial Corp. (CINF - Analyst Report), XL Group Plc. (XL - Analyst Report) and Navigators Group Inc. (NAVG - Snapshot Report) carry a Zacks Rank #1 (Strong Buy) and are worth noting.  

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