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On May 17, we downgraded property and casualty insurer, RLI Corp. (RLI - Analyst Report) to Neutral from Outperform as it lagged the Zacks Consensus Estimate on both counts. In addition, the continued low interest rate environment remains a matter of concern.  RLI Corp. carries a Zacks Rank #3 (Hold).

Why the Downgrade?

Estimates for RLI Corp. have witnessed downward revisions since it reported first-quarter 2013 results on Apr 17. RLI Corp.’s first-quarter revenues as well as earnings per share of $160.7 million and $1.04 missed the Zacks Consensus Estimate of $164 million and $1.06, respectively.

Following the release of the first-quarter results, the Zacks Consensus Estimate for 2013 has gone down 0.2% to $4.30 per share. The Zacks Consensus Estimate for 2014 has also declined 1.9% to $4.27 per share.

Cause for Concern

Low interest rate environment continues to weigh on net investment income. The recent reported quarter also experienced lower reinvestment rates as well as increased allocation to tax-exempt municipal securities that have lower pre-tax yields than taxable alternatives. We expect the investment income to remain depressed if the current low interest rate environment persists.

Exposure to catastrophe losses remains a concern. Though the first quarter benefited from the absence of any significant cat occurrences, natural disasters can substantially affect the bottom-line and the unpredictable nature of such events pose significant operating risk to the company.

Additionally, RLI’s fluctuating cash position keeps us cautious about the company’s ability to meet its debt and liquidity needs as well as working capital requirements.

Stocks That Warrant a Look

While we prefer to remain on the sidelines for RLI Corp., other property and casualty insurers worth a look are AXIS Capital Holdings Limited (AXS - Analyst Report), Montpelier Re Holdings Ltd. (MRH - Analyst Report) and Homeowners Choice, Inc. (HCI - Snapshot Report).  All these are Zacks Rank #1 (Strong Buy) stocks.

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