RLI Corp. Keeps Earnings Streak Alive with Q1 - Analyst Blog

RLI Corporation RLI has, yet again, successfully kept its earnings streak alive with its first quarter earnings release.  With its first-quarter 2014 operating earnings of 57 cents per share exceeding the Zacks Consensus Estimate by 5.6%, RLI Corporation delivered four straight quarters of positive surprises. The result also outpaced the year-ago quarter's earnings by 9.6%.

The improvement came on the back of an improved top line driven by higher premiums and investment income.

First-quarter 2014 operating earnings include favorable developments in Casualty's prior years' reserves of 14 cents, in Property's prior years' reserves of 2 cents, in Surety's prior years' reserves of 3 cents and catastrophe impact of 1 cent.

Including realized investment gains, net of tax of 9 cents per share, RLI Corp. reported net income of 66 cents per share compared with 57 cents per share in the first quarter of 2013. The prior-year quarter net income included realized investment gains, net of tax, of 5 cents per share.

Operational Performance

Revenues in the quarter under review totaled $181.2 million, improving 12.8% year over year, driven by 12% higher net premiums earned, 5.4% increase in net investment income and 76% increase in net realized investment gains.

Net investment income improved on the heels of a larger invested asset base and stable reinvestment rates.

Total expense of RLI Corp. during the first quarter scaled up 11.2% year over year to $142.6 million. Higher interest expense and loss and settlement expense primarily drove the increase.

Underwriting income for RLI Corp. was $22.9 million in the quarter, up 13.6% year over year.

The combined ratio in the reported quarter improved 20 basis points (bps) to 86%, driven by solid performance across all the segments.

RLI Corp.'s total return from the investment portfolio was 2.7% during the reported quarter. The bond portfolio returned 2.4%, while the equity portfolio yielded a return of 3.6%.

Financial Update

RLI Corp. exited first quarter with total investments and cash of $1.9 billion, up 1.6% from 2013-end.

Long-term debt was $149.6 million at the quarter-end, flat with the 2013-end level.

RLI Corp.'s book value stood at $20.23 per share as of Mar 31, 2014, up 5% from Dec 31, 2013. The improvement came on the back of solid underwriting performance and positive total return in the investment portfolio.

The company has recorded a return on equity of 15.5% along with a 14.7% return on a comprehensive basis compared with a return on equity of 11.9%, with 15.8% on a comprehensive basis, in the prior year. Statutory surplus increased 3.2% over 2013-end to $886.5 million as on Mar 31, 2014.

Cash used in operations was $2 million, lower than $6.3 million used in the prior-year quarter.

Dividend Update

On Mar 20, 2014, RLI paid a quarterly cash dividend of 17 cents per share. Over the last five years, the company payout totals more than $540 million.

Our Take

Besides posting healthy earnings, RLI Corp. continues to deliver robust underwriting income. 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 plans to focus on leveraging its expertise in niche markets as well.

Further, the company's focus upon returning value to shareholders, through regular and special dividends, helps it retain investor confidence as well as attract potential investors toward the stock.

Zacks Rank

RLI Corp. currently carries a Zacks Rank #3 (Hold). Some better-ranked property & casualty insurers that carry a Zacks Rank #1 (Strong Buy) are Everest Re Group Ltd. RE, Alleghany Corporation Y and EMC Insurance Group Inc. EMCI. All these companies are slated to release their first-quarter earnings soon.