On Feb 25, 2015, we issued an updated research report on RLI Corp. (RLI).
The company delivered impressive results (announced on Jan 26) in the fourth quarter with both its earnings and revenues outperforming the Zacks Consensus Estimate. The stellar performance came on the back of better underwriting and investment performance.
RLI Corp. has been consistently generating underwriting profit since the last 19 years. In addition, RLI Corp. is focused on expanding its business with new products in professional liability and has formed the RLI Corp. Fidelity unit. In view of this, the company acquired Contractors Bonding Insurance Company, and Rockbridge Underwriting Agency in 2010 and 2012 respectively The company also acquired 20% stake in Prime Holdings Insurance Services – a specialty E&S Company in 2014 – thereby witnessing solid growth in gross premiums.
RLI Corp. remains focused on sharing more profits with its investors. The company has been increasing dividends over the last 39 years. The latest dividend hike of 5.9% was made in May 2014. The company has also been paying special dividends to its shareholders for the last few years, the latest one being $3.00 per share, disbursed in Dec 2014.
The company has a sound capital structure that helps it meet the interests of its policyholders and aid growth in its book value for the long term. The company also maintains a conservative underwriting and reserving policy which helps it achieve favorable reserve releases. Its statutory surplus levels are also strong and exhibit possibilities of increase.
However, being a property and casualty insurer, RLI Corp has substantial exposure to losses from natural and man-made disasters and other catastrophic events. If the company incurs huge cat loss, its underwriting results and combined ratio will be immensely affected. Nonetheless, the company has been able to mark the 19th consecutive year of maintaining a combined ratio below 100.
RLI Corp.’s expenses has been rising over the last few years, restricting operating margin expansion. Moreover, due to the persistent low interest rate environment the company’s net investment income has been declining over the past few years.
Additionally, the company’s cash balance has also been decreasing over the years along with fluctuating operating cash. The fluctuating cash position of the company makes us cautious about its ability to meet debt and liquidity needs as well as working capital requirements.
Currently, RLI Corp. carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks in the property and casualty insurance sector include Allied World Assurance Company Holdings, AG (AWH), Endurance Specialty Holdings Ltd. (ENH) and United Insurance Holdings Corp. (UIHC). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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