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RLI Corp Beats Bottom Line Est.

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RLI Corporation (RLI - Free Report) reported fourth-quarter 2012 operating earnings of 89 cents per share. The result surpassed the Zacks Consensus Estimate of 44 cents by 107% but missed the year-ago level of $1.13 by 32.1%. Operating earnings in the quarter were $19.2 million, down 31.9% year over year.

Lower underwriting results largely attributed the year-over-year downfall.

Fourth-quarter 2012 operating earnings include favorable development on casualty prior years’ reserves of 15 cents, favorable development on property prior years' reserves of 9 cents, unfavorable development on surety prior years' reserves of 2 cents, negative effect of 39 cents due to the impact of spring storms, gains from the tax benefit of a special dividend of 13 cents and gains from the change in tax rate applicable to Maui Jim.

Including realized investment gains, net of tax, of $5.9 million or 27 cents per share, RLI Corp. reported net income of $25.1 million or $1.16 per share compared with $29.9 million or $1.39 per share in the fourth quarter of 2011. Net income in the year-ago quarter included realized investment loss, net of tax, of $1.7 million or 8 cents per share.

Operational Performance

Net premiums earned in the quarter were $147.7 million, up 1.9% year over year. The upside was attributable to improvements at Casualty and Surety.

Underwriting income for RLI Corp. was $8.5 million, down nearly 66.8% year over year, primarily attributable to cat loss from Hurricane Sandy

Investment income declined 10.8% year over year to $14.5 million.

Revenue in the quarter under review totaled $171.4 million, improving 4.5% from $163.9 million in the prior-year quarter, attributable to higher premiums earned and augmentation in net realized investment gains. Revenue was in line with the Zacks Consensus Estimate.

Total expenses during the fourth quarter of 2012 escalated 15.9% year over year to $142.7 million. The increase was primarily driven by higher loss and settlement expense, as well as higher policy acquisition costs.

The combined ratio in the reported quarter deteriorated 1200 basis points (bps) to 94.3%.

The total return of RLI Corp.’s investment portfolio for the quarter was 0.4% with the bond portfolio yielding 0.7%, while the equity portfolio yielded a return of negative 0.8%.

Full Year Highlights

Operating earnings of $4.02 per share outpaced the Zacks Consensus Estimate of $3.56, but was down 25% year over year.  

Including net realized investment gains of 77 cents, the company reported net income of $4.79 per share, declining 19% year over year.

Total revenues increased 6.7% year over year to $660.8 million.

Underwriting gains dropped 15% year over year to $63.6 million. Combined ratio deteriorated 940 basis points.

Investment portfolio’s total return in 2012 was 7.5%, with a bond portfolio yield of 6.4% and equity portfolio yield of 11.5%.

Financial Update

RLI Corp. exited 2012 with cash and cash equivalents of $74.7 million, down 28.8% from the 2011-end level.

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

RLI Corp.’s book value stood at $37.45 per share as of Dec 31, 2012, compared with $37.46 as of Dec 31, 2011. The company recorded a 12.4% return on equity along with a 15.5% return on a comprehensive basis. Return on equity was 15.7% and 18.3% on a comprehensive basis in the prior year. Statutory surplus decreased 3.7% over 2011-end to $684 million as on Dec 30, 2012.

Cash from Operations declined 68.3% year over year to $37.4 million in 2012.

Dividend Update

In the fourth quarter, RLI Corp. paid a dividend of 32 cents per share, representing the 146th consecutive quarterly dividend payment.

Additionally, on Dec 20, 2012, RLI Corp. paid an extraordinary cash dividend of $5.00 per share. Its quarterly dividend has grown at an average of 13.8% over the last 10 years.

At Other Property and Casualty Insurers

The Travelers Companies Inc. (TRV - Free Report) reported earnings of 72 cents per share in the fourth quarter of 2012, surpassing the Zacks Consensus Estimate of 4 cents per share. However, results plunged 51% from $1.48 earned in the year-ago quarter.

The year-over-year downside was largely attributable to higher catastrophe losses, mostly due to Hurricane Sandy. However, higher underlying underwriting margins and higher net favorable prior-year reserve development limited the downside to some extent.

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

Our Take

Over the past three quarters, RLI Corp. has delivered positive earnings surprise with an average beat of 38.3%.

Given the improving pricing scenario in the insurance market supported by strong infrastructure, widened product lines and strategic acquisitions, we expect the company to perform well in the upcoming quarters. It also remains focused on expanding the product portfolio. The acquisition of Rockbridge Underwriting Agency bodes well with its strategy of capitalizing on the resources in the niche markets in order to induce growth. It also unveiled a new product line, where RLI Corp. will provide primary and excess liability insurance coverage for the security guard and patrol services, private investigation firms and alarm system installation, as well as maintenance and monitoring firms. Further, the company entered into a partnership with Recreation Insurance Specialists (RIS) to underwrite recreation vehicle (RV) insurance for RIS.  

It also continues to enhance shareholders value through regular and special dividends.

However, exposure to cat losses and continued low interest rate environment keep us on the sidelines.

RLI Corp. currently carries a Zacks Rank #4 (Sell). Among other property & casualty insurers carrying a Zacks Rank #1 (Strong Buy), Cincinnati Financial Corp. (CINF - Free Report) is scheduled to report its fourth-quarter earnings results on Feb 6 after the closing bell, while Fidelity National Financial, Inc. (FNF - Free Report) is scheduled to report its fourth-quarter earnings results on Feb 19 after the closing bell.

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