RLI Corp. Upgraded to Outperform - Analyst Blog

We have recently upgraded RLI Corp. (RLI) to Outperform from Neutral as we believe the company will benefit from its diversification into crop and other assumed property reinsurance. Extensive product offerings, strong local branch network and focus on specialty insurance lines are expected to aid top-line growth going forward.

 

RLI Corp.’s diversification into crop and other assumed property reinsurance drove higher premiums in the Property segment. Geographical expansion also led to an increase in premiums in the Surety segment. RLI Corp. is also focused on expanding its business with new products in professional liability and has formed the RLI Corp. Fidelity unit.

 

These positives have helped the company to more than offset the weak performance from the Casualty segment, which remains affected by difficult economic conditions, especially in construction and transportation-related coverages.

 

RLI Corp. continues to be rated positively. A.M. Best has affirmed the financial strength rating (FSR) of “A+” (Superior) and issuer credit ratings (ICR) of “aa-” of RLI Group and its members, with a “stable” outlook. Fitch upgraded the holding company’s ratings, including the senior debt rating, to “BBB+” from “BBB”, as well as the insurer financial ratings of the operating subsidiaries to ”A+” from “A”, with a “stable” outlook.

 

RLI Corp. reported solid second-quarter 2010 operating earnings of $1.52 per share, beating the Zacks Consensus Estimate of $1.05 by a substantial 47 cents. The beat was largely attributed to better-than-expected premiums coupled with favorable reserve release.

 

RLI Corp. remains focused on boosting shareholder value by paying incremental dividends and repurchasing shares. On July 15, the board of directors authorized a 4% year-over-year increase in the annual dividend. The company has a record of increasing dividends in each of the last 35 years. Shareholders will be paid a quarterly dividend of 29 cents.

 

As the $200 million share repurchase program authorized in 2007 was exhausted in the second quarter of 2010, the board of directors has authorized a new $100 million share repurchase program.

 

The Zacks Consensus Estimate for third-quarter 2010 is 94 cents per share. For full years 2010 and 2011, the Zacks Consensus Estimates are, respectively, $4.43 per share and $3.95 per share.

 

We expect the company’s prudent underwriting discipline to bode well as the market stabilizes in a restrictive premium growth environment.

 

The quantitative Zacks #2 Rank (Buy) indicates a positive directional movement of the shares in the near term.