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Here's Why You Should Retain RLI Corp. in Your Portfolio

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RLI Corp. (RLI - Free Report) is well-poised to gain from improved premiums, higher investment income and prudent capital deployment.

RLI Corp’s return on equity was 11.8% in the trailing 12-month period, higher than the industry average of 6.5%. Return on equity is a profitability measure that identifies a company’s efficiency in utilizing its shareholders’ funds.

The company has a decent earnings surprise history. It surpassed estimates in three of the trailing four quarters, the beat being 12.88%, on average.

The Zacks Consensus Estimate for 2021 earnings per share is pegged at $2.40, indicating increase of nearly 2.1% from the year-ago reported figure.

Factors Driving RLI Corp.’s Performance

RLI Corp. is one of the most profitable property and casualty underwriters, having a track record of underwriting profits in 38 of the past 41 years, particularly the last 23 years. Strong local branch office network, a wide range of product offerings, improved pricing and focus on specialty insurance lines are likely to drive the company’s profits.

Growth of the company is measured in terms of gross premiums written, which drives the top line of the company. The metric witnessed a four-year CAGR (2015-2019) of 5.7%. Further, it increased 6% year over year to $245.8 million in the first quarter of 2020. Products in the casualty and property segments are expected to drive the momentum going forward.

RLI Corp.’s top line has been improving over the years on the back of higher net premium earned and net investment income across the company’s segments. Compelling product portfolio, new products and business expansion will continue to drive momentum in the future.

Notably, the Zacks Consensus Estimate for the company’s 2020 revenues is pegged at $935.5 million, indicating an increase of 3% from the year-ago reported figure.

Furthermore, net investment income, one of the components of revenues, grew at a two-year CAGR of 12%. In the first quarter of 2020, it grew 7.3% year over year to $17.8 million. Despite the current low interest rate environment, a larger asset base will continue to drive net investment income.

Additionally, the company’s debt levels have remained relatively stable in the past few years. As of Mar 31, 2020, the company’s long-term debt was $149.3 million, which remained flat with the 2019-end level. Its total debt to total capital of 14% lies below the industry’s average of 21.8%. Further, the company’s times interest earned of 10.4 is good when compared with the industry's figure of 4.3, implying that its earnings are sufficient to cover interest obligations.

By virtue of its sound capital and liquidity position, this Zacks Rank #3 (Hold) company is engaged in prudent capital deployment. It paid out dividends in 170 consecutive quarters and hiked dividends in 45 straight years at a six-year CAGR (2014-2020) of 5.9%. In May 2020, it hiked its dividend by 4.3%, which marked the 45th straight year of dividend increase. The company also pays special dividend. Its dividend yield of 1.2% is better than the industry average of 0.5%, making the stock an attractive pick for yield-seeking investors.

However, RLI Corp. has been witnessing rising expenses due to higher policy acquisition costs, insurance operating expenses, interest expense on debt and general corporate expenses. Such costs tend to weigh on the company’s margins. Notably, net margin contracted 970 basis points (bps) over the past five years (2015-2020), however in 2019, it expanded 1130 bps year over year.

Also, exposure to catastrophes like hurricanes, earthquakes, floods, wildfires and volcanic eruptions, results in earnings volatility.

Shares of this property and casualty insurer have lost 9.3% on a year-to-date basis, compared with the industry’s decline of 20.7%. The company’s policy to ramp up its growth profile and capital position should drive shares higher.

Stocks to Consider

Some better-ranked stocks in the insurance industry include Fidelity National Financial Inc (FNF - Free Report) , Palomar Holdings Inc. (PLMR - Free Report) and Aflac Incorporated (AFL - Free Report) . While Fidelity National sports a Zacks Rank #1 (Strong Buy), Palomar Holdings and Aflac carry a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National provides various insurance products in the United States and offers title insurance, escrow, other title related services and home warranty insurance. It surpassed estimates in each of the last four quarters, with the average positive surprise being 21.13%.

Palomar Holdings provides specialty property insurance. It offers personal and commercial specialty property insurance products. It surpassed estimates in two of the last four quarters, with the average positive surprise being10.93%.

Aflac, through its subsidiaries, provides supplemental health and life insurance products. It came up with four-quarter average positive surprise of 6.25%.

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