On Nov 8, 2013 we upgraded our recommendation on RLI Corporation (RLI) to Outperform from Neutral, based on its earnings outperformance in the third quarter of 2013 that included 47.4% positive earnings surprise. This Zacks Rank #1 (Strong Buy) property and casualty insurer delivered an average positive surprise of 38.8% over the past four quarters.
Why the Upgrade?
Estimates for RLI Corporation have been strengthening since the company reported its third-quarter 2013 results on Oct 16. Earnings per share for the reported quarter stood at $1.40, surpassing the Zacks Consensus Estimate by 47%. RLI Corporation’s quarterly revenues of $188.3 million also beat the Zacks Consensus Estimate by 7%.
Moreover, both top and bottom line increased from the year-ago results by 11% and 37.2%, respectively. The improvement came on the back of better underwriting results at property and casualty. The top-line growth was fueled by higher premiums on the back of better market conditions and new product offerings. These positives, in turn, reinforce the long-term expansion plans of the company.
RLI Corporation’s strong local branch office network, broad range of product offerings and focus on specialty insurance lines also served as catalysts aiding the company’s profits.
RLI Corporation has a sound capital structure that helps it meet the interests of its policyholders, enhance operations in the insurance sector and support growth in its book value in the long term. As of Sep 30, 2013, equity portfolio had a dividend yield of 3.0%.
Following the solid earnings results, the Zacks Consensus Estimate for 2013 moved up 8.4% to $4.65 as 2 of 3 estimates were raised in the last 30 days. Additionally, the estimate for 2014 also rose 8.1% to $4.55 as the 2 of estimates moved north over the same time frame
Although continued low interest rate environment and the exposure to cat losses remain as significant causes of concern, we expect RLI Corporation to perform well in the upcoming quarters, given the improving pricing scenario in the insurance market and widened product lines. Moreover, the company also plans to focus on leveraging its expertise in niche markets and enhance shareholders’ value through regular and special dividends. The long-term expected earnings growth rate for this stock is 15%
Other Property and Casualty Insurers that Warrant a Look
Along with RLI Corporation other outperformers in the Property and Casualty insurance space include Allied World Assurance Co. (AWH), Alleghany Corp. (Y) and Platinum Underwriters Holdings Ltd. (PTP), each with a Zacks Rank #1.