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RLI Corp. Lags Earnings Est, Beats Y/Y

Zacks Equity Research

RLI Corporation (RLI) reported first-quarter 2013 operating earnings of $1.04 per share. The result lagged the Zacks Consensus Estimate of $1.06 by 1.89% but surpassed the year-ago level of 96 cents by 8.3%. Operating earnings in the quarter were $22.5 million, up 8.9% year over year.

The year-over-year improvement came on the back of better underwriting results at Casualty and Surety.

First-quarter 2013 operating earnings include favorable development on casualty prior years’ reserves of 30 cents, favorable development on property prior years' reserves of 1 cent, as well as unfavorable development on surety prior years' reserves of 1 cent.

Including realized investment gains, net of tax, of $2.4 million or 11 cents per share, RLI Corp. reported net income of $24.8 million or $1.15 per share compared with $28.0 million or $1.30 per share in the first quarter of 2012. Net income in the year-ago quarter included realized investment loss, net of tax, of $7.4 million or 34 cents per share.

Operational Performance

Net premiums earned by RLI Corp. in the quarter were $144.1 million, up 5% year over year. The upside was attributable to improvements at Casualty.

Underwriting income for RLI Corp. was $19.8 million, up nearly 33% year over year, primarily attributable to better underwriting performance across all the segments.

Investment income declined 15.7% year over year to $12.9 million. Lower reinvestment rates coupled with higher allocation to tax-exempt municipal bonds, which have lower pre-tax yields than taxable alternatives, induced low investment income.

Revenue in the quarter under review totaled $160.7 million, declining 2% from $164.0 million in the prior-year quarter, attributable to lower Investment income and decline in net realized investment gains. Revenue fell short of the Zacks Consensus Estimate by 4.7%.

Total expenses of RLI Corp. during the first quarter of 2013 escalated 1.9% year over year to $128.3 million. Higher general corporate expense as well as higher policy acquisition costs and other insurance expenses primarily drove the increase.

The combined ratio in the reported quarter improved 290 basis points (bps) to 86.2% largely due to better performance at Casualty and Surety.

The total return of RLI Corp.’s investment portfolio for the quarter was 2.5% with the bond portfolio yielding 0.2%, while the equity portfolio yielded a return of 11.0%.

Financial Update

RLI Corp. exited the quarter with cash and cash equivalents of $25.8 million, down 65.4% from the 2012-end level.

Long-term debt remained at par with the 2012-end level of $100 million.

RLI Corp.’s book value stood at $39.16 per share as of Mar 31, 2013, compared with $37.45 as of Dec 31, 2012. The company recorded an 11.9% return on equity along with a 15.8% return on a comprehensive basis. Return on equity was 15.5%, with 18.8% on a comprehensive basis in the prior year quarter. Statutory surplus increased 9.3% over 2012-end to $747.9 million as on Mar 31, 2013.

Cash used in operations was $6.3 million, compared with $3.2 million used in the year-ago quarter.

Dividend Update

In the first quarter of 2013, RLI Corp. paid a dividend of 32 cents per share, representing the 147th consecutive quarterly dividend payment.

Our Take

Though RLI Corp. failed to meet the Zacks Consensus Estimate, it topped the year-ago numbers riding on the back of better performances across all the segments.

The company continues to deliver underwriting income. 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 remains focused on expanding the product portfolio.

It also continues to enhance shareholder value through regular dividends.

RLI Corp. currently carries a Zacks Rank #2 (Buy). Among other property & casualty insurers carrying a Zacks Rank #1 (Strong Buy), W.R. Berkley Corporation (WRB) is slated to release its first-quarter earnings on Apr 23, Montpelier Re Holdings Ltd. (MRH) is scheduled to report its first-quarter earnings results on Apr 24, while AXIS Capital Holdings Ltd (AXS) is scheduled to report its first-quarter earnings results on Apr 25.

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