RLI Corp. Beats Estimates - Analyst Blog

RLI Corp. (RLI) reported fourth-quarter 2010 operating earnings of $1.66 per share, beating the Zacks Consensus Estimate of 99 cents by 67 cents. Operating earnings were 49 cents ahead of $1.17 the year-ago period.

Operating earnings for the quarter were $35.1 million versus $25.3 million in fourth-quarter 2009. The improvement over the prior-year quarter may primarily be attributed to lower expenses and better performance at the Property and Surety segment.                       

Fourth-quarter 2010 operating earnings include gains from casualty prior years' reserve development of 49 cents, gain from property prior years' reserve development of 5 cents per share, gain from surety prior years' reserve development of 3 cents, gain from change in tax rate applicable to Maui Jim of 10 cents and gain from tax benefit of special dividend to ESOP of 17 cents.

Including realized investment gains, net of tax of $5.2 million or 24 cents per share, the company has reported a net income of $40.3 million or $1.90 per share compared with $30.6 million or $1.41 per share in fourth-quarter 2009. Net income in the year-ago quarter included realized investment gains, net of tax, of $5.3 million or 24 cents per share.

For full year 2010, RLI Corp. reported operating earnings of $112.3 million or $5.29 per share, higher than $102.1 million or $4.70 per share for full year 2009.  The result surpassed the Zacks Consensus Estimate of $4.64. Including realized investment gains of $15.1 million or 71 cents a share, the company reported net income of $127.4 million or $6.00 per hare, compared with $93.8 million or $4.32 a share. Strong performing Property and Surety segment aided the solid results.

Operational Performance

Gross written premium during the fourth quarter of 2010 was $146.4 million, up 1.9% year over year from $144 million during fourth-quarter 2009. Net premium written was $107.7 million, an improvement of 3.5% from the year-ago quarter.

The decline was attributable to lower premiums written in the Casualty segment. The Casualty segment was under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages.

However, higher premiums written in Property were a partial offset. Diversification into crop and other assumed property reinsurance aided better performance in the segment.

For full year 2010, gross written premium was $636.3 million, compared with $631.2 million in 2009. Net premium written was $485.1 million, higher than $469.9 million in 2009.

Underwriting income was $30.2 million, up 28% year over year. Higher Casualty and Property underwriting income was more than offset by lower Surety underwriting. Results reflected $18.4 million of pre-tax favorable reserve development from the prior year's loss reserves. With reporting underwriting income of $95.4 million for full year 2010, the company recorded the fifteenth consecutive year of underwriting profits.

Investment income declined 1.2% year over year to $16.7 million. The investment portfolio's total return for the quarter was 0.2%; the return in the bond portfolio was a negative 1.5% while the equity portfolio was 9.2%. For full year 2010, investment income declined to $66.8 million from $67.3 million in 2009. The investment portfolio's total return for the quarter was 7%; the return in the bond portfolio was 5.6% while the equity portfolio was 13.9%.

Revenue in the quarter under review totaled $151.7 million, up 3.9% from $145.9 million in the prior-year quarter. Revenue also surpassed the Zacks Consensus Estimate of $139 million. Revenue for full year 2010 improved 6.7% year over year to gross $583.4 million.

Total expenses during fourth-quarter 2010 were $100.9 million, down 0.1% year over year. The decrease was primarily driven by lower policy acquisition costs. For full year 2010, total expense declined 1.7% year over year to $412 million.

Combined ratio in 2010 improved 160 basis points year over year to 80.7%. Higher combined ratio at the Casualty was more than offset by lower combined ratio at Property and Surety, inducing improvement of the overall combined ratio.

Book value was $37.75 per share as of December 31, 2010, down 3.6% from $39.14 at year-end 2009. For 2010, the company recorded a 15.0% return on equity, with a 17.2% return on a comprehensive basis. This compares with a return on equity of 12.2% and 20.3% on a comprehensive basis in the prior year. Statutory surplus decreased 6.6% year over year to $732.4 million at year end.

Dividend Update

In the fourth quarter, RLI Corp. paid a special dividend of $7.00 per share to shareholders of record as of December 16, 2010. Excluding the special dividend, RLI Corp.'s quarterly dividend has increased at an average of 14.7% over the last ten years.

Share Repurchase

In full year 2010, RLI Corp. bought back 0.4 million shares at an average cost of $54.37 totaling $23.9 million. The company has $94.1 million remaining in stock repurchases at the end of third-quarter 2010.

Acquisition

Through an acquisition of the holding company, Data and Staff Service Co., RLI Corp. (RLI) will acquire Contractors Bonding Insurance Company. RLI Corp. will pay a cash consideration of $137 million. The acquisition is expected to close in the first quarter of 2011 subject to regulatory approval.

The acquisition is expected to be accretive to earnings of RLI Corp. in the first year. The company also expects the acquisition will also provide new market and product expansion opportunities.

Our Take

The company is focused on diversifying its product mix as well as expanding its product offering. The company also continues to enhance shareholder value by increasing dividends complemented by share buybacks. The company's underwriting discipline is also expected to bode well given the stabilization in the markets. Also, the acquisition will broaden its client base and help it to write higher premiums in the upcoming quarter. However, the Casualty segment is still affected by lower premium writings. 

We maintain our Underperform rating on RLI Corp. The quantitative Zacks #4 Rank (short term Sell rating) on the stock indicates downward pressure on the shares over the near term.

Headquartered in Peoria, Illinois, RLI Corp., through its subsidiaries, underwrites property and casualty insurance primarily in the United States. It competes with ACE Limited (ACE), CNA Financial Corporation (CNA) and The Travelers Companies Inc. (TRV).

 
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