Zacks_Analysts' Blog : RLI Corp. Surpasses Estimates - Analyst Blog

RLI Corp. (RLI) reported second-quarter 2011 operating earnings of $1.91 per share, beating the Zacks Consensus Estimate by a substantial 86 cents. Operating earnings were 26% ahead of $1.52 earned in the year-ago period.

Operating earnings for the quarter were $40.8 million, up 27% year over year. The improvement over the prior-year quarter may primarily be attributed to lower expenses and better performance at the Casualty and Surety segment.                      

Second-quarter 2011 operating earnings include favorable development on casualty prior years' reserves of 90 cents, favorable development on casualty prior years' reserves of 26 cents, favorable development on casualty prior years' reserves of 15 cents and adverse effect of 36 cents due to the spring storms.

Including realized investment gains, net of tax, of $6.5 million or 31 cents per share, the company has reported a net income of $47.4 million or $2.22 per share compared with $35.0 million or $1.65 per share in second-quarter 2010. Net income in the year-ago quarter included realized investment gains, net of tax, of $2.8 million or 13 cents per share.

Operational Performance

Gross written premium during the second quarter of 2011 was $210.5 million, up 10% year over year from $191 million during second -quarter 2010. Net premium written was $170.1 million, an improvement of 13% from the year-ago quarter.

All the segments posted year-over-year improvement in premiums.

Underwriting income was $45.8 million, up 49% year over year. Higher underwriting income at Casualty and Surety fueled the overall improvement.

Investment income declined 10% year over year to $15.2 million attributable to the closure of the CBIC acquisition, as RLI sold bonds to fund the purchase and acquired relatively lower yielding bonds with higher credit quality and shorter duration characteristics. The investment portfolio’s total return for the quarter was 2.0%; the return in the bond portfolio was 2.3%, while the equity portfolio was 0.4%.

Revenue in the quarter under review totaled $156.1 million, up 9.3% from $142.8 million in the prior-year quarter, driven by higher premiums earned.

Total expenses during second-quarter 2011 were $88.5 million, down 5.8% year over year. The decrease was primarily driven by lower loss and settlement expense.

Combined ratio in the second quarter improved 970 basis points year over year to 65%. Lower combined ratio at Casualty more than offset the higher ratios at Property and Surety to enable a better number in the quarter.

Book value was $41.02 per share as of June 30, 2011, up 8.7% from $37.75 as of December 31, 2010. The company recorded a 16.7% return on equity, with a 20.2% return on a comprehensive basis. This compares with a return on equity of 14.6% and 18.7% on a comprehensive basis in the prior year. Statutory surplus increased 7.2% over 2010-end to $785 million at quarter-end.

Dividend Update

In the second quarter, RLI Corp. paid a cash dividend of 30 cents per share.

Share Repurchase

In the quarter, RLI Corp. spent $2.8 million to buy back 47,100 shares at an average cost of $59.06. The company has $91.3 million remaining in stock repurchases at the end of second-quarter 2011.

Our Take

The company is focused on diversifying its product mix, as well as expanding its product offering. The company’s underwriting discipline is also expected to bode well given the stabilization in the markets. Also, acquisitions broaden its client base and help it to write higher premiums in the upcoming quarters.

The new Property Treaty Group within its RLI Reinsurance Division also widens its exposure in the reinsurance marketplace. We expect such new initiatives will likely add to the already existing operations, thereby enabling the company to fuel further growth.

The company scores strongly with the rating agencies and remains focused on enhancing its shareholders value through dividend increase and share buybacks.

We maintain our Neutral rating on RLI Corp. The quantitative Zacks #4 Rank (short-term 'Sell' rating) on the stock indicates downward pressure on the shares over the near term.

Headquartered in Peoria, Illinois, RLI Corp., through its subsidiaries, underwrites property and casualty insurance primarily in the United States. It competes with ACE Limited (ACE), CNA Financial Corporation (CNA) and The Travelers Companies Inc. (TRV).