RLI Corporation (RLI) posted operating earnings of 71 cents per share for the fourth quarter of 2014, outperforming the Zacks Consensus Estimate by 18.3%. Earnings, however, fell year over year by a penny.
A higher magnitude of expense increase weighed on earnings, resulting in a slight year-over-year decline. Intense competition too checked profitability. Yet, better premiums and investment results drove the top line. Underwriting profit improved as well.
Fourth-quarter operating earnings per share include the favorable impact of a 14-cent increase in the Casualty segment’s reserves from the prior year and a 1-cent improvement in both the Property and Surety reserves. Also included is the unfavorable catastrophe impact of 2 cents, gain of 8 cents from the tax benefit of a special dividend and a 4-cent gain from the change in tax rate applicable to Maui Jim.
Including realized investment gains, net of tax of 14 cents per share, RLI Corp. reported net income of 85 cents per share, up 10.4% year over year. The prior-year quarter net income included realized investment gains, net of tax, of 5 cents per share.
Operational Performance
Revenues for the quarter under review totaled $194 million, improving 6.5% year over year, driven by 6.8% higher net premiums earned and a 3.1% increase in net investment income. Results outperformed the Zacks Consensus Estimate by 2.6%.
Total expense increased 8.3% year over year to $157 million. Higher loss and settlement expense, policy acquisition cost, and general corporate expenses prompted the increase.
Underwriting income for RLI Corp. was $107 million, up 0.2% year over year.
The combined ratio deteriorated 140 basis points (bps) to 84.5% due to a higher combined ratio at Casualty.
RLI Corp.’s total return from the investment portfolio was 2.2% during the reported quarter. The bond portfolio returned 1.2%, while the equity portfolio yielded a return of 6.1%.
Full-Year Review
Full-year 2014 operating earnings came in at $2.61 per share, surpassing the Zacks Consensus estimate by about 4% and improving 1.6% year over year.
Revenues improved about 8.6% year over year to $743 million in 2014.
Financial Update
RLI Corp. exited 2014 with total investments and cash of $1.96 billion, up 2.2% from 2013 end.
Long-term debt was $149.6 million at 2014 end, flat with the 2013-end level.
RLI Corp.’s book value was $19.61 per share as of Dec 31, 2014, up 1.7% from Dec 31, 2013.
The company recorded a return on equity of 15.4% in 2014 along with a 19.4% return on a comprehensive basis. This compares favorably with a return on equity of 15.3%, with 14.4% on a comprehensive basis, in the prior-year quarter. Statutory surplus increased 1.2% over 2013 end to $849.3 million as of Dec 31, 2014.
Cash from operations decreased 8.8% year over year to $123.1 million in 2014.
Dividend Update
On Dec 22, 2014, RLI Corp. paid a special cash dividend of $3.00 per share and quarterly dividend of 18 cents per share totaling $137.1 million.
Our Take
With the recent earnings, RLI Corp delivered back-to-back surprises. The insurer also boasts 19 successive years of combined ratio below 100.
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. While it has a solid and uninterrupted track of divided payout, its dividend has increased at an average 9.9% in the last decade.
Zacks Rank
RLI Corp. currently carries a Zacks Rank #3 (Hold). Better-ranked property and casualty insurers include The Allstate Corporation (ALL), Arch Capital Group Ltd. (ACGL) and The Chubb Corporation (CB). All these stocks sport a Zacks Rank #1 (Strong Buy).
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