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RLI Corp. Beats on Earnings

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RLI Corporation (RLI - Free Report) reported second-quarter 2013 operating earnings of $1.27 per share. The result surpassed both the Zacks Consensus Estimate of $1.18 by 7.6% as well as the year-ago level of $1.17 by 8.5%. Operating earnings in the quarter were $27.5 million, up 9.1% year over year.

The year-over-year improvement came on the back of better underwriting results at the Property and Casualty segments.

Second-quarter 2013 operating earnings include favorable development on casualty prior years’ reserves of 55 cents, favorable development on property prior years' reserves of 2 cents, favorable development on surety prior years' reserves of 13 cents, offset by the impact of net cat loss of 24 cents.

Including realized investment gains, net of tax, of $2.4 million or 11 cents per share, RLI Corp. reported net income of $29.9 million or $1.38 per share compared with $24.7 million or $1.15 per share in the second quarter of 2012. Net income in the year-ago quarter included realized investment loss, net of tax, of 2 cents per share.

Operational Performance

Net premiums earned by RLI Corp. in the quarter were $154.5 million, up 9.2% year over year. The upside was attributable to improvement at the Casualty segment. Premium generation also continues to benefit from better market conditions and new product offerings.

Underwriting income for RLI Corp. was $25.6 million, up 18.5% year over year. The improvement was primarily attributable to better underwriting performance in the Property and Casualty segments.

Investment income declined 13.3% year over year to $12.8 million.

Revenues in the quarter under review totaled $171.1 million, improving nearly 10% from $155.7 million in the prior-year quarter, attributable to higher premiums. Revenues outperformed the Zacks Consensus Estimate by 1.2%.

Total expenses of RLI Corp. during the second quarter of 2013 escalated 7.2% year over year to $132.2 million. Higher loss and loss settlement expense as well as higher policy acquisition costs and other insurance expenses primarily drove the increase.

The combined ratio in the reported quarter improved 130 basis points (bps) to 83.4%, largely due to improved performance at the Property and Casualty segments.

RLI Corp.’s total return from the investment portfolio was (1.8%) during the reported quarter. The bond portfolio returned (2.9%), while the equity portfolio yielded a return of 2.4%.

Financial Update

RLI Corp. exited the quarter with cash and cash equivalents of $23.6 million, down 68.5% from 2012-end.

Long-term debt remained at par with the 2012-end level of $100 million.

RLI Corp.’s book value stood at $38.64 per share as of Jun 30, 2013, compared with $37.45 as of Dec 31, 2012. The company recorded a return on equity of 12.5% along with an 11.7% return on a comprehensive basis. Return on equity was 12.8%, with 16.4% on a comprehensive basis in the prior-year quarter. Statutory surplus increased 12.9% over 2012-end to $742.5 million as on Jun 30, 2013.

Cash provided by operations was $33.1 million, compared with $28.8 million used in the year-ago quarter.

Dividend Update

In the second quarter of 2013, RLI Corp. paid a dividend of 34 cents per share. The dividend represents an increase of 6.25% approved in May. The hike also represents the 38th consecutive yearly dividend increase.

Our Take

During the quarter, RLI Corp.’s earnings and revenues beat both the Zacks Consensus Estimate as well as the year-ago result. The outperformance came on the back of better performances in the Property and Casualty segments.

The company continues to deliver underwriting income. Given the improving pricing scenario in the insurance market supported by strong infrastructure, widened product lines and strategic acquisitions, we expect RLI Corp. to perform well in the upcoming quarters. It remains focused on expanding the product portfolio as well.

It also continues to enhance shareholder value through regular dividend increases.

RLI Corp. currently carries a Zacks Rank #2 (Buy). Among other property & casualty insurers carrying a Zacks Rank #2 (Buy), The Hanover Insurance Group Inc. (THG - Free Report) is slated to release its second-quarter earnings on Jul 31, Endurance Specialty Holdings Ltd. is scheduled to report its second-quarter earnings results on Aug 5, while AXIS Capital Holdings Limited (AXS - Free Report) is scheduled to report its second-quarter earnings results on Jul 30.

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