RLI Corp. (RLI) reported first-quarter 2011 operating earnings of $ 1.11 per share, beating the Zacks Consensus Estimate of 94 cents by 17 cents. Operating earnings were 18% ahead of 94 cents earned in the year-ago period.
Operating earnings for the quarter were $ 23.6 million, up 18% year over year. The improvement over the prior-year quarter may primarily be attributable to lower expenses and better performance at the Property and Surety segment.
First-quarter 2011 operating earnings include favorable development on casualty prior years' reserves of 23 cents, favorable development on property prior years' reserves of 5 cents and favorable development on surety prior years' reserves of 4 cents.
Including realized investment gains, net of tax of $ 2.9 million or 13 cents per share, the company has reported a net income of $ 26.5 million or $ 1.24 per share compared with $ 24.2 million or $ 1.13 per share in first-quarter 2010. Net income in the year-ago quarter included realized investment gains, net of tax, of $ 4.2 million or 19 cents per share.
Operational Performance
Gross written premium during the first quarter of 2011 was $ 143.4 million, up 1.4% year over year from $ 141.3 million during first -quarter 2010. Net premium written was $ 112.6 million, an improvement of 4.1% from the year-ago quarter.
Higher premiums at Property and at Surety were partially offset by lower premiums at the Casualty segment.
Diversification into crop and other assumed property reinsurance aided better performance in the Property segment.
The Casualty segment was under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages.
Underwriting income was $ 19.0 million, up 50% year over year. Higher underwriting income across all the segments fueled the overall improvement.
Investment income declined 1.8% year over year to $ 16.3 million resulting form lower reinvestment yields. The investment portfolio’s total return for the quarter was 1.6%; the return in the bond portfolio was 0.8% while the equity portfolio was 5.7%.
Revenue in the quarter under review totaled $ 136.8 million, down 1.8% from $ 139.3 million in the prior-year quarter. Revenue fell behind the Zacks Consensus Estimate of $ 138 million.
Total expenses during first-quarter 2011 were $ 100.5 million, down 5.8% year over year. The decrease was primarily driven by lower loss and settlement expense.
Combined ratio in the first quarter improved 550 basis points year over year to 83.6%. Lower combined ratio across all the segments helped to report a better number in the quarter.
Book value was $ 38.94 per share as of March 31, 2011, down 3.2% from $ 37.75 as of March 31, 2010. In the quarter under review, the company recorded a 15.3% return on equity, with a 17.0% return on a comprehensive basis. This compares with a return on equity of 15.0% and 23.6% on a comprehensive basis in the prior year. Statutory surplus increased 4.7% year over year to $ 766.7 million at quarter end.
Dividend Update
In the first quarter, RLI Corp. paid a cash dividend of 29 cents per share.
Share Repurchase
The company has $ 94.1 million remaining in stock repurchases at the end of third-quarter 2010. RLI Corp. did not buy back any shares during the quarter under review.
Our Take
The company is focused on diversifying its product mix as well as expanding its product offering. The company pays dividend regularly. 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 quarter.
In an effort to widen its exposure in the reinsurance marketplace, RLI Corp. has created a new Property Treaty Group within its RLI Reinsurance Division. We expect such new initiatives to add to the already existing operations, thereby enabling the company to fuel further growth. However, the Casualty segment is still affected by lower premium writings.
We maintain our Outperform rating on RLI Corp. The quantitative Zacks #2 Rank (short term Buy rating) on the stock indicates upward 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).
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