We have retained our Neutral recommendation on
) 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.
EMC Insurance Group Inc.
Everest Re Group Limited
) carry a favorable Zacks Rank #1 (Strong Buy) and are worth
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis
EMC INSURANCE (EMCI): Free Stock Analysis
EVEREST RE LTD (RE): Free Stock Analysis
RLI CORP (RLI): Free Stock Analysis Report
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