We have retained our Neutral recommendation on RLI Corp. (RLI) as continued low interest rate environment and the company’s exposure to catastrophe losses are likely to weigh on company growth. This specialty property-casualty underwriter currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
RLI’s second-quarter earnings came in at $1.27 per share, ahead of the Zacks Consensus Estimate of $1.18 as well as the year-ago level of $1.17. RLI has managed to deliver positive earnings surprise in three out of the last four quarters with an average beat of 29.72%. Over the last 30 days, one out of three estimates moved up while one was nudged down to increase the Zacks Consensus Estimate by 0.5% to $4.26. It also translates to a year-over-year improvement of 5.89%.
RLI’s profit generating capabilities appear impressive. It has generated underwriting profits in 33 out of last 37 years, especially for the past 17 years at a stretch. Its business expansion strategy through acquisitions and product launches are the main contributors in this regard. Moreover, decent asset turnover, low financial leverage and dividend increases (6.25% dividend hike in the second quarter) are noteworthy.
However, RLI Corp has substantial exposure to losses arising from natural disasters, man made catastrophes and other catastrophic events. The company has incurred significant losses in the past from earthquakes that primarily hit the West Coast and from hurricane damage to commercial properties and homes throughout the Gulf and East Coast, and Hawaii. Although RLI benefited from lower catastrophe losses during the second quarter of 2013, the spring storms marred the results partially. However, this improvement might not be sustainable going forward, owing to the uncertain nature of catastrophes and thus catastrophe losses will always remain a matter of concern for the company.
Additionally, weak interest rate environment has been a drag on the investment income of RLI for the past few years. The second quarter of 2013 was also no exception. Given the poor interest rate environment, we expect net investment income to remain depressed over the coming period.
Other Stocks to Consider
Among other insurers, Berkshire Hathaway Inc. (BRK.B), EMC Insurance Group Inc. (EMCI) and Everest Re Group Limited (RE) carry a favorable Zacks Rank #1 (Strong Buy) and are worth considering.
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