RLI Corp. (RLI) reported fourth-quarter 2011 operating earnings of $1.35 per share, beating the Zacks Consensus Estimate by 21 cents. Operating earnings were 18.7% below $1.66 earned in the year-ago period.
Operating earnings for the quarter were $28.9 million, down 17.7% year over year. The decline over the prior-year quarter resulted primarily from a lower underwriting income at Casualty and Surety, partially offset by higher income at Property.
Fourth-quarter 2011 operating earnings include favorable development on casualty prior years’ reserves of 32 cents, unfavorable development on property prior years’ reserves of 2 cents, favorable development on surety prior years’ reserves of 2 cents, adverse effect of 5 cents due to Hurricane Irene and gain from tax benefit of special dividend to ESOP of 13 cents.
Including realized investment losses, net of tax, of $1.7 million or 8 cents per share, the company reported a net income of $30.7 million or $1.43 per share compared with $40.3 million or $1.90 per share in fourth-quarter 2010. Net income in the year-ago quarter included realized investment gains, net of tax, of $5.2 million or 24 cents per share.
Full year 2011 operating earnings came in at $5.58 per share, up 5.5% from $5.29 per share earned in 2010. Full year operating earnings were $119.5 million, up 6.4% year over year.
Including realized investment losses, net of tax, of $11.1 million or 51 cents per share, the company reported a net income of $130.6 million or $6.09 per share compared with $127.4 million or $6.00 per share in 2010. Net income in the year-ago included realized investment gains, net of tax, of $15.1 million or 71 cents per share.
Operational Performance
Net premiums earned in the quarter were $145.0 million, up 14.2% year over year. Full year net premiums earned rose 9% year over year to $538.4 million.
Premiums earned were healthy across all segments.
Underwriting income was $26.8 million, down 11% year over year. An increase in Property underwriting income was more than offset by lower income at Casualty and Surety.
Full year underwriting income improved 30% over 2010 to $116.3 million.
Investment income declined 2.6% year over year to $16.2 million attributable to lower reinvestment rates. Full year investment income declined 4.7% year over year to $63.7 million.
The investment portfolio’s total return for the quarter was 3.4%; the return in the bond portfolio was 1.5%, while the equity portfolio yielded 12.1%. For 2011, the investment portfolio’s total return was 7.3%; the bond portfolio gave back 7.1% and equities returned 7.1%.
Revenue in the quarter under review totaled $163.9 million, up 8.1% from $151.7 million in the prior-year quarter, driven by higher premiums earned. Revenue also surpassed the Zacks Consensus Estimate of $154 million. Full year revenue improved 6.1% year over year to $619 million.
Total expenses during fourth-quarter 2011 escalated 20.8% year over year to $121.9 million,. The increase was primarily driven by higher loss and settlement expense and higher policy acquisition costs. Full year expense increased 5.8% to $435.9 million.
The combined ratio in the fourth quarter deteriorated 520 basis points year over year to 81.5%. Higher combined ratio at Casualty and Surety was partially offset by a lower Property combined ratio.
Book value was $38.69 per share as of December 31, 2011, up 2.5% from $37.75 as of December 31, 2010. The company recorded a 15.7% return on equity, with an 18.3% return on a comprehensive basis. This compares favorably with a return on equity of 15.0% and 17.2% on a comprehensive basis in the prior year. Statutory surplus decreased 3% over 2010-end to $710 million at 2011-end.
Dividend Update
In the fourth quarter, RLI Corp. paid an extraordinary cash dividend of $5.00 per share totaling $105.8 million.
The company did not buy back any shares during the quarter. Nevertheless, over the year the company spent $6.6 million to repurchase 111,956 shares at an average cost of $59.16 per share.
The company has $87.5 million available in its stock repurchase program at the end of second-quarter 2010.
Peer Comparison
The Travelers Companies Inc. (TRV), which competes with RLI Corp., reported operating earnings of $1.48 per share in the fourth quarter, lagging the Zacks Consensus Estimate of $1.52 per share. Results were far behind earnings of $1.89 in the prior-year quarter.
The decline was primarily due to lower net investment income and lower underwriting gains stemming form lower net favorable prior-year reserve development.
Full year 2011 operating earnings were $3.28 per share, 2 cents behind the Zacks Consensus Estimate. Operating income slumped $1.39 billion, from $3.04 billion in 2010.
Our Take
RLI Corp. is focused on diversifying its product mix, as well as expanding its product offering. The company’s underwriting discipline is also expected to bode well given the stabilization in the markets. Also, acquisitions broaden its client base and help it to write higher premiums in the upcoming quarters.
The company scores strongly with the rating agencies and remains focused to return value to its shareholders value through incremental dividends and share buybacks.
The quantitative Zacks #2 Rank (short-term Buy rating) on the stock indicates upward 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.
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