We are upgrading our recommendation on RLI Corp. (RLI) to Outperform from Neutral on the back of strong second quarter results. The company posted a solid quarter, beating the Zacks Consensus Estimate substantially on the heels of lower expenses and better performance at the Casualty and Surety segment.
RLI Corp. continues to deliver consistent underwriting profit and remain focused on enhancing shareholders' value. RLI has generated underwriting profits in 30 of the last 34 years, including the last 15 consecutive years. A strong local branch office network, broad range of product offerings, and focus on specialty insurance lines appear to be the other contributors to the company’s superior profitability.
RLI Corp. has increased dividends for the past 36 years, the latest of which was a quarterly increase of 3.4% in May 2011. As of June 30, 2011, the company’s equity portfolio had a dividend yield of 0.4%.
RLI Corp. scores strongly with the rating agencies. A.M. Best Co. has reiterated its issuer credit ratings (ICR) of “a-” for RLI Corp. The rating agency has upgraded the outlook to positive from stable. The credit rating agency reiterated ICR of “aa-” and financial strength rating (FSR) of A+ (Superior) of RLI Group and its members.
On the flip side, the Casualty segment was under pressure owing to difficult economic conditions, especially in construction related coverages. General Liability, the largest product of the company under the Casualty segment, has remained soft over the past several quarters. Nearly 50% of the General Liability book relates to the construction industry.
RLI Corp.’s Casualty business is traditionally characterized by higher combined ratios and longer-tailed liabilities, which could pressure its overall underwriting margins in the long term. This business is price sensitive and therefore the continued decay of premium rates is raising additional concerns. Also, the Surety segment is reporting basically flat premium writings.
The Zacks Consensus Estimate for third-quarter 2011 is $1.01 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $4.96 per share and $4.28 per share.
The quantitative Zacks #1 Rank (short term Strong Buy rating) on the stock indicates upward pressure on the shares over the near term.
Headquartered in Peoria, Illinois, RLI Corp. is a specialty property-casualty (P&C) underwriter that caters primarily to niche markets through its main operating subsidiary, RLI Insurance Company. The company competes with ACE Limited (ACE), CNA Financial Corporation (CNA) and The Travelers Companies, Inc. (TRV).
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RLI CORP (RLI): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
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