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RLI Corp. Posts Strong Q3 Earnings

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RLI Corporation (RLI - Free Report) reported third-quarter 2013 operating earnings of $1.40 per share. The result surpassed both the Zacks Consensus Estimate of 95 cents by 47% as well as the year-ago level of $1.02 by 37.2%. Operating earnings in the quarter were $30.5 million, up 39.3% year over year.

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

Third-quarter 2013 operating earnings include favorable developments in Casualty’s prior years’ reserves of 51 cents and Property’s prior years' reserves of 7 cents, offset by unfavorable development on Surety’s prior years' reserves of 1 cent and the impact of net cat loss of 2 cents.

Including realized investment gains, net of tax, of $7.2 million or 33 cents per share, RLI Corp. reported net income of $37.6 million or $1.73 per share compared with $25.5 million or $1.19 per share in the third quarter of 2012. The prior-year quarter net income included realized investment gains, net of tax, of $3.6 million or 17 cents per share.

Operational Performance

Net premiums earned by RLI Corp. in the quarter were $163.7 million, up 9.2% year over year. The upside was attributable to improvement in the Casualty segment. Premium generation also continues to benefit from better market conditions and new product offerings.

Underwriting income for RLI Corp. was $31.8 million, up 72% year over year. The improvement was primarily attributable to better underwriting performance in the Property and Casualty segments.

Investment income declined 4.4% year over year to $13.6 million.

Revenues in the quarter under review totaled $188.3 million, improving 11% from $169.6 million in the prior-year quarter. The increase was owing to higher premiums and net realized investment gains. Revenues outperformed the Zacks Consensus Estimate by 7%.

Total expenses of RLI Corp. during the third quarter of 2013 increased 0.4% year over year to $135.6 million. Higher policy acquisition costs and other insurance expenses primarily drove the increase.

The combined ratio in the reported quarter improved 720 basis points (bps) to 80.5%, due to improved performance in the Property and Casualty segments.

RLI Corp.’s total return from the investment portfolio was 1.3% during the reported quarter. The bond portfolio returned 0.9%, while the equity portfolio yielded a return of 3.0%.

Financial Update

RLI Corp. exited the quarter with cash and cash equivalents of $110.4 million, up 47.6% from 2012-end.

Long-term debt was $250 million at the end of the third quarter, up from $100 million at 2012-end. The increase was attributable to the issuance of $150 million 4.875% senior unsecured notes due Sep 2023.

RLI Corp.’s book value stood at $39.85 per share as of Oct 31, 2013, compared with $37.45 as of Dec 31, 2012. The company has recorded a return on equity of 14% along with a 10.4% return on a comprehensive basis, compared with a return on equity of 12.8%, with 20.6% on a comprehensive basis in the prior-year quarter. Statutory surplus increased 18.3% over 2012-end to $809.2 million as on Oct 31, 2013.

Cash provided by operations was $55 million, up 21.6% year over year.

Dividend Update

In the third quarter of 2013, RLI Corp. paid a dividend of 34 cents per share, representing its 149th dividend payout.

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 robust underwriting income. Given the improving pricing scenario in the insurance market and widened product lines, we expect RLI Corp. to perform well in the upcoming quarters. It remains focused on expanding the product portfolio as well. The company plans to focus on leveraging its expertise in niche markets as well.

RLI Corp. currently carries a Zacks Rank #3 (Hold). Among other property & casualty insurers that carry a Zacks Rank #1 (Strong Buy), ACE Limited and The Chubb Corporation (CB ) are slated to release their third-quarter earnings on Oct 23,  while Everest Re Group Ltd. (RE - Free Report) is scheduled to report its third-quarter earnings on Oct 24.

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