RLI Corp. (RLI) reported second-quarter 2010 operating earnings of $1.52 per share, beating the Zacks Consensus Estimate of $1.05 per share by 47 cents. Results also compare favorably with operating earnings of $1.32 per share in the year-ago period.
Operating earnings for the quarter were $32.2 million versus $28.7 million reported in second-quarter 2009. The earnings beat in the reported quarter may primarily be attributed to lower expenses overriding the lackluster performance at the Casualty segment.
Second-quarter 2010 operating earnings include a gain from casualty prior years’ reserve development of 47 cents, a loss from property prior years’ reserve development of 2 cents per share and a gain from surety prior years’ reserve development of 13 cents.
Including realized investment gains, net of tax of $2.8 million or 13 cents per share, the company has reported a net income of $34.9 million or $1.65 per share compared with $34.0 million or $1.57 per share in second-quarter 2009. Net income in the year-ago quarter included realized investment gains, net of tax, of $5.4 million or 25 cents per share.
Gross written premium during the second quarter of 2010 was $190.9 million, up 6.6% year over year from $178.8 million during second-quarter 2009. Net written premium was $150.4 million, up 12.3% from the year-ago quarter.
The improvement was facilitated by increased premiums written in the Property segment, led by diversification into crop and other assumed property reinsurance, as well as in the Surety segment, led by geographical expansion.
However, lower premiums written in Casualty were a partial offset. The Casualty segment was under pressure owing to difficult economic conditions, especially in construction and transportation-related coverages.
Underwriting income was $30.8 million, up 22.8% year over year, led by an increase in Property and Surety underwriting income, partially offset by a decline again in Casualty underwriting. Results reflected $19.0 million of pre-tax favorable reserve development from the prior year’s loss reserves.
Investment income improved 1.8% year over year to $16.8 million. The investment portfolio’s total return for the quarter was 0.4%; the return in the bond portfolio was 2.7% while the equity portfolio ran negative with a return of -10.8%.
Total expenses during second-quarter 2010 declined 6.9% year over year to $94 million led by a 24.5% decline in general corporate expenses and an 18.9% decline in other insurance expenses.
Combined ratio for the quarter improved 480 basis points year over year to 74.7% driven by an improvement in Casualty and Surety combined ratios, partially offset by decline in the Property combined ratio.
Book value was $40.02 per share as of June 30, 2010, up 4.8% from $39.14 at year-end 2009. For the trailing four quarters, the company recorded a 14.6% return on equity, with an 18.7% return on a comprehensive basis. This compares with a return on equity of 6.4% and 5.1% on a comprehensive basis in the prior-year quarter. Statutory surplus decreased 0.2% year over year to $782.5 million at quarter end.
Dividend Update
On July 15, RLI Corp. paid the second quarter dividend of $0.29 per share to shareholders of record as of June 30, 2010. This dividend represented an increase of 4.0% year over year. On an annualized basis, the dividend now totals $1.16 per share. The company has a record of increasing dividends in each of the last 35 years.
During the second quarter of 2010, RLI Corp. repurchased 189.4 million shares at an average cost of $55.78 per share, totaling $10.6 million.
During the quarter, the company exhausted the $200 million share repurchase program authorized in 2007. The board of directors of RLI Corp. has authorized a new $100 million share repurchase program during the quarter.
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 stabilizing markets.
However, the Casualty segment is still affected by lower premium writings. We maintain our Neutral recommendation on RLI Corp. with a quantitative Zacks #3 Rank (Hold) indicating no clear directional pressure on the shares over the near term.
Read the full analyst report on “RLI”
Zacks Investment Research
