RLI Corp. Downgraded - Analyst Blog

On the back of lackluster performance at the Casualty segment along with escalating expenses we are downgrading RLI Corp. (RLI) to Underperform. The Casualty segment was under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages.

General Liability, the largest product of the company under the Casualty segment, has remained soft over the past several quarters. Nearly 50% of the General Liability book relates to the construction industry. 

The significant reduction in construction activity, along with continued rate deterioration, has had a negative impact on General Liability gross premiums written. Given the sluggish economic recovery and the continued soft rate environment, a decline in premium is expected in the near term.

RLI Corp.'s Casualty business is traditionally characterized by higher combined ratios and longer-tailed liabilities, which could exert pressure, overall, on its underwriting margins in the long term. This continued decay in premium rates in this very price-sensitive business is raising additional concerns.

However, RLI Corp. is focusing to turn around through various strategic actions. In November 2010, RLI Corp. announced the merger of three of its existing products - design professionals, technology professionals, and target professionals – to form a new unit named the Professional Services Group.

The bringing together of three of its product offerings under one business group would bolster the company's professional products offering, differentiating it from competition. In this context, the growing number of professional services firms is creating new opportunities.

Also, in December 2010, the company acquired Contractors Bonding Insurance Company. The acquisition is expected to be accretive to earnings of RLI Corp. in the first year as well as provide new market and product expansion opportunities. The acquisition will also offer Contractors Bonding's exclusive product to RLI Corp. thereby adding value to the latter's operations.

During the third quarter of 2010, RLI Corp. had experienced a decline in premiums written, largely due to lower premiums written in the Casualty segment and the Surety segment. We expect this acquisition will broaden its client base and help it to write higher premiums in the upcoming quarter.

The Zacks Consensus Estimate for fourth-quarter 2010 is 99 cents per share. For full years 2010 and 2011, the Zacks Consensus Estimates are, respectively, $4.64 per share and $3.78 per share.

The quantitative Zacks #4 Rank (short term Sell rating) on the stock indicates downward directional pressure on the shares over the near term.

Headquartered in Peoria, Illinois, RLI Corp. is a specialty property-casualty (P&C) underwriter that caters primarily to niche markets through its main operating subsidiary, RLI Insurance Company. The company competes with ACE Limited (ACE), CNA Financial Corporation (CNA) and The Travelers Companies, Inc. (TRV).

 
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