On May 17, we downgraded property and casualty insurer,
) to Neutral from Outperform as it lagged the Zacks Consensus
Estimate on both counts. In addition, the continued low interest
rate environment remains a matter of concern. RLI Corp.
carries a Zacks Rank #3 (Hold).
AXIS CAP HLDGS (AXS): Free Stock Analysis
HOMEOWNERS CHCE (HCI): Free Stock Analysis
MONTPELIER RE (MRH): Free Stock Analysis
RLI CORP (RLI): Free Stock Analysis Report
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Why the Downgrade?
Estimates for RLI Corp. have witnessed downward revisions since
it reported first-quarter 2013 results on Apr 17. RLI Corp.'s
first-quarter revenues as well as earnings per share of $160.7
million and $1.04 missed the Zacks Consensus Estimate of $164
million and $1.06, respectively.
Following the release of the first-quarter results, the Zacks
Consensus Estimate for 2013 has gone down 0.2% to $4.30 per
share. The Zacks Consensus Estimate for 2014 has also declined
1.9% to $4.27 per share.
Cause for Concern
Low interest rate environment continues to weigh on net
investment income. The recent reported quarter also experienced
lower reinvestment rates as well as increased allocation to
tax-exempt municipal securities that have lower pre-tax yields
than taxable alternatives. We expect the investment income to
remain depressed if the current low interest rate environment
Exposure to catastrophe losses remains a concern. Though the
first quarter benefited from the absence of any significant cat
occurrences, natural disasters can substantially affect the
bottom-line and the unpredictable nature of such events pose
significant operating risk to the company.
Additionally, RLI's fluctuating cash position keeps us cautious
about the company's ability to meet its debt and liquidity needs
as well as working capital requirements.
Stocks That Warrant a Look
While we prefer to remain on the sidelines for RLI Corp., other
property and casualty insurers worth a look are
AXIS Capital Holdings Limited
Montpelier Re Holdings Ltd
Homeowners Choice, Inc
). All these are Zacks Rank #1 (Strong Buy) stocks.