We retain our Neutral recommendation on
) following its third-quarter results. Though the bottom line
surpassed the Zacks Consensus Estimate, it lagged the year-ago
numbers largely due to lower underwriting results at Casualty.
RLI Corp. is focused on expanding its business with new products
and increasing emphasis on niche markets. Recently, RLI Corp
acquired Rockbridge Underwriting Agency and expects it to infuse
$20 million in premium annually to its business. Further, it
unveiled a new product line, where RLI will provide primary and
excess liability insurance coverage for security guard and patrol
services, private investigation firms and alarm system
installation, maintenance and monitoring firms. It also entered
into a partnership with Recreation Insurance Specialists (RIS) to
underwrite recreation vehicle insurance for RIS. With the
expansion of its business, we expect RLI to continue to deliver
solid growth in gross premium written, which increased almost 12%
in the first nine months of 2012.
RLI Corp. will be paying a special dividend of $5.00 in an effort
to share more profit with shareholders. Over the last 5 years,
the company has returned more than $570 million to shareholders
in the form of share buybacks and dividends, both regular and
special. Also, over the past 10 years, RLI's total return to
shareholders has been significantly better than that of the
S&P 500. Additionally, though the company has not been buying
back shares for over a year, it still has $87.5 million under its
$100 million share repurchase program authorized in May 2010.
Among other positives, it scores strongly with the credit rating
agencies. Besides, its asset turn-over and return on equity is
better than the industry average.
However, on the flip side, exposure to cat loss and a low
interest rate environment dwarfs these positives.
The company continues to suffer from the overhangs of cat losses.
Following the occurrence of Superstorm Sandy, RLI Corp. expects
to incur pre-tax loss of approximately $15-$20 million, after
deducting reinsurance reimbursements.
Also, lower reinvestment rates in the fixed income portfolio as
well as increased allocation to tax-exempt municipal securities
induced a drop of nearly an 11% in net investment income.
Nevertheless, with the improving pricing scenario in the
insurance market supported by strong infrastructure, widened
product lines and strategic acquisitions, we expect the company
to perform well in the upcoming quarters.
RLI Corp. carries a Zacks #3 Rank, translating into a short-term
The Travelers Companies, Inc.
), which closely compete with RLI Corp., also share the same
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