RLI Corporation (RLI) posted operating earnings of 68 cents per share in the third quarter of 2014, outperforming the Zacks Consensus Estimate by 13%. Earnings, however, fell year over year by a couple of cents.
Though the top line improved, a higher magnitude of expense increase weighed on the earnings upside. Management stated that competition continued to restrict price-driven premium growth in the quarter, in particular the property segment.
Third-quarter operating earnings per share include the favorable impact of a 17-cent increase in the Casualty segment’s prior-year reserves and a 6-cent improvement in the Surety segment’s prior-year reserves. Also included is the unfavorable catastrophe impact of a penny.
Including realized investment gains, net of tax of 8 cents per share, RLI Corp. reported net income of 76 cents per share, down 11.6% year over year. The prior-year quarter net income included realized investment gains, net of tax, of 16 cents per share.
Operational Performance
Revenues in the quarter under review totaled $192 million, improving 8.2% year over year, driven by 8.6% higher net premiums earned and 4.4% increase in net investment income.
Total expense increased 12.1% year over year to $152 million. Higher loss and settlement expense, policy acquisition cost, interest and general corporate expenses prompted the increase.
Underwriting income for RLI Corp. was $30.4 million in the quarter, down 4.4% year over year.
The combined ratio deteriorated 240 basis points (bps) to 84.2% due to higher combined ratio at Casualty.
RLI Corp.’s total return from the investment portfolio was 0.2% during the reported quarter. The bond portfolio returned 0.6%, while the equity portfolio yielded a return of -1.1%.
Financial Update
RLI Corp. exited the quarter with total investments and cash of $2.06 billion, up 7.4% from 2013 end.
Long-term debt was $149.6 million at quarter end, flat with the 2013-end level.
RLI Corp.’s book value was $21.70 per share as of Sep 30, 2014, up 12.5% from Dec 31, 2013.
The company has recorded a return on equity of 15.0% along with a 19% return on a comprehensive basis. This compares favorably with a return on equity of 14%, with 10.4% on a comprehensive basis, in the prior-year quarter. Statutory surplus increased 4.9% over 2013 end to $902 million as of Sep 30, 2014.
Cash from operations decreased 13.8% year over year to $47.4 million in the quarter.
Dividend Update
On Sep 19, 2014, RLI Corp. paid a quarterly cash dividend of 18 cents per share, representing 153 consecutive quarters of payout.
Our Take
With the recent quarterly earnings, RLI Corp. is back on a positive surprise track. Given the improving pricing scenario in the insurance market and widened product lines, we expect RLI Corp. to perform well in the upcoming quarters. It also remains focused on expanding its product portfolio. The company also focuses on leveraging its expertise in niche markets as well.
Further, the company’s focus on returning value to shareholders, through regular and special dividends, helps it to retain investor confidence as well as attract investors.
Zacks Rank
RLI Corp. currently sports a Zacks Rank #1 (Strong Buy). Investors interested in property and casualty insurers can look at Alleghany Corporation (Y), Aspen Insurance Holdings Ltd. (AHL) and Endurance Specialty Holdings Ltd. (ENH). All these share the same Zacks Rank with RLI Corp.
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