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RLI Looks Poised to Gain From Solid Segmental Performance

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RLI Corp. (RLI - Free Report) has been gaining momentum on the back of product diversification, improved underwriting income and sufficient liquidity position.

Growth Projections

The Zacks Consensus Estimate for 2021 and 2022 earnings per share is pegged at $2.98 and $3.15, indicating year-over-year increase of 15% and 5.8%, respectively.

Estimate Revision

The Zacks Consensus Estimate for 2021 and 2022 has moved 3.5% and 0.6% north, respectively in the past seven days. This should instill investors' confidence in the stock.

Earnings Surprise History

RLI has a decent earnings surprise history. It beat estimates in each of the last four quarters, with the average being 160.65%.

Zacks Rank & Price Performance

RLI currently carries a Zacks Rank #2 (Buy). In the past year, the stock has rallied 37.8%, compared with the industry’s increase of 49.4%.

Return on Equity (ROE)

The company’s ROE for the trailing 12 months is 11.5%, better than the industry average of 5.6%. This reflects the company’s efficiency in utilizing shareholders’ fund.  The company has averaged a 12.2% return on equity over the past 10 years.

Business Tailwinds

Product diversification across the segments has fueled the insurer’s growth and financial success. The Casualty segment has contributed a lion’s share to the overall premium income of the company and continues to benefit from rate increases and expanded distribution base in personal umbrella, new production sources and geographic expansion.

The Surety segment continues to benefit from its compelling product portfolio, growth within existing accounts and writing bonds with new customers.

In 2020, RLI achieved the 25th consecutive year of underwriting profitability. In the first quarter of 2021, combined ratio improved 510 basis points (bps) year over year to 86.9%.

Also, underwriting income grew 73.8% year over year owing to solid performance of Casualty segment in the first quarter of 2021.

The insurer’s capital position remains strong along with improving leverage. Its debt to capital of 11.5% betters the industry average of 20.2%. A lesser debt burden relative to the industry is encouraging. Moreover, its times interest earned of 48.2 is better than the industry average of 32.4. This implies that its earnings are sufficient to cover interest obligations.

In the first quarter 2021, it generated $60.3 million of net operating cash inflows and has sufficient sources of liquidity to meet the needs over the next 12 to 24 months. Moreover, its revolving credit facility provides for a borrowing capacity of $60 million, which can be extended to $120 million. Additionally, its membership in Federal Home Loan Bank system provides a secured lending facility with an aggregate borrowing capacity of nearly $30 million. It ended the first quarter of 2021 with cash of $94.9 million that grew 52.6% from the 2020-end level.

Furthermore, RLI has a distinguished track record of success with 46 straight years of dividend increases This property and casualty insurer raised its dividend at a seven-year (2014-2021) CAGR of 5.7%. Its current dividend yield of 0.9% is better than the industry average of 0.4%, which makes the stock an attractive pick for yield-seeking investors.

It has not repurchased any shares so far in 2021. Currently, it has $87.5 million remaining under its share repurchase authorization.

Other Stocks to Consider

Some other top-ranked insurance stocks from the same space are HCI Group, Inc. (HCI - Free Report) , American Financial Group, Inc. (AFG - Free Report) and Alleghany Corporation (Y - Free Report) . While HCI Group sports a Zacks Rank #1 (Strong Buy), American Financial and Alleghany carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The bottom line of HCI Group surpassed estimates in three of the last four quarters and missed in the other one, the average being 42.91%.

American Financial surpassed estimates in three of the last four quarters and missed in the other one, the average earnings surprise being 32.2%.

Alleghany’s earnings surpassed estimates in each of the last four quarters, the average being 128.63%.

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