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RLI Corp. Reports Mixed 3Q

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RLI Corporation (RLI - Free Report) reported third quarter 2012 operating earnings of $1.02 per share, surpassing the Zacks Consensus Estimate by 10.8%. Reported results, however, were 9.7% lower than the year-ago level of $1.13 per share. Operating earnings in the quarter were $21.9 million, down 9.1% year over year.

Lower underwriting results at Casualty induced lower operating income in the quarter.

Third quarter 2012 operating earnings include favorable development on casualty prior years’ reserves of 36 cents, favorable development on property prior years' reserves of 6 cents, favorable development on surety prior years' reserves of 9 cents, and the negative effect of 13 cents due to the impact of spring storms.

Including realized investment gains, net of tax, of $3.6 million or 17 cents per share, RLI Corp. reported net income of $25.5 million or $1.19 per share compared with $24.0 million or $1.12 per share in third quarter 2011. Net income in the year-ago quarter included realized investment loss, net of tax, of $0.1 million or 1 cent per share.

Operational Performance

Net premiums earned in the quarter were $149.9 million, up 2.3% year over year, attributable to improvements at Casualty and Surety.

Underwriting income for RLI Corp. was $18.5 million, down nearly 14% year over year. An increase in Surety underwriting income and lower loss at Property was more than offset by lower income from Casualty.

Investment income declined 10.9% year over year to $14.2 million.

Revenue in the quarter under review totaled $169.6 million, improving 4.5% from $162.3 million in the prior-year quarter, attributable to higher premiums earned and augmentation in net realized investment gains. Revenue comfortably surpassed the Zacks Consensus Estimate by 2.4%.

Total expenses during third quarter 2012 escalated 5.4% year over year to $135.0 million. The increase was primarily driven by higher loss and settlement expense, higher other insurance expense and corporate expense.

The combined ratio in the reported quarter deteriorated 240 basis points year over year to 87.7%. Higher combined ratio at Casualty partially offset the lower Surety and Property combined ratio.

The total return of RLI Corp.’s investment portfolio for the quarter was 3.0% with the bond portfolio edging up 2.6%, while the equity portfolio yielded a return of 4.5%.

Financial Update

RLI Corp. exited the quarter with cash and cash equivalents of $113.5 million, up 8% from 2011 end level.

Long-term debt remained at par with the 2011-end level of $100 million.

RLI Corp.’s book value stood at $42.15 per share as of September 30, 2012, up 12.5% from $37.46 as of December 31, 2011. The company recorded a 12.8% return on equity, with a 20.6% return on a comprehensive basis. The return on equity was 16.6% and 14.7% on a comprehensive basis in the prior year. Statutory surplus increased 12.9% over 2011-end to $801.2 million at quarter ended September 30, 2012.

Dividend Update

In the third quarter, RLI Corp. paid a dividend of 32 cents per share, representing the 145th consecutive quarterly dividend payment.

Effects of Adoption of Accounting Standard

Due to the adoption of deferred acquisition cost (DAC) guidance, deferred policy acquisition costs augmented by $0.3 million, which reduced net earnings by 1 cent.

For the nine months, policy acquisition costs recognized elevated $3.8 million, which decreased net earnings by 12 cents per share.

Peer Comparison

The Travelers Companies Inc. (TRV - Free Report) , which competes with RLI Corp., reported earnings of $2.22 per share in the third quarter of 2012, lagging the Zacks Consensus Estimate of $1.61. Results surged 181% from 79 cents earned in the year-ago quarter

Lower catastrophe losses and sturdy underwriting results fueled the outperformance.

Total revenue in the quarter under review was $6.5 billion, increasing 2 year over year, driven by the increase in premiums earned and net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.3 billion.

Our Take

With the improving pricing scenario in the insurance market supported by RLI Corp.’s strong infrastructure, we expect the company to perform well in the coming quarters. It also has a favorable loss reserve ratio when compared with the previous year along with strengthening statutory reserve. Solid underwriting results coupled with investment results aided the company to improve book value.

RLI Corp. scores strongly with the rating agencies and remains focused on returning value to its shareholders through incremental dividends and share buybacks.

However, continued low interest rate environment keeps us on the sidelines.

We retain our Neutral recommendation on RLI Corp. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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