RLI Corporation (RLI) reported first-quarter 2012 operating earnings of 96 cents per share, lagging the Zacks Consensus Estimate by a dime. Reported results, however, were 17.9% lower than the year-ago level of $1.17 per share. Operating earnings in the quarter were $20.6 million, down 16.9% year over year.
The year-over-year decline in operating earnings per share was due to lower underwriting income at Casualty and Surety, partially offset by higher income at Property.
First-quarter 2012 operating earnings included favorable development on casualty prior years’ reserves of 18 cents, favorable development on property prior years’ reserves of 8 cents, unfavorable development on surety prior years’ reserves of 5 cents, and the positive effect of 3 cents due to Hurricane Irene.
Including realized investment gain, net of tax, of $7.4 million or 34 cents per share, RLI Corp. reported net income of $28.0 million or $1.30 per share compared with $27.7 million or $1.30 per share in first-quarter 2011. Net income in the year-ago quarter included realized investment gains, net of tax, of $2.9 million or 13 cents per share.
Operational Performance
Net premiums earned in the quarter were $137.3 million, up 18.3% year over year, attributable to improvement across all segments.
Underwriting income for RLI Corp. was $14.9 million, down 28.7% year over year. An increase in Property underwriting income was more than offset by lower income from Casualty and Surety.
Investment income declined 6.2% year over year to $15.3 million. This decrease can be attributed to continued low reinvestment rates.
RLI Corp.’s investment portfolio’s total return for the quarter was 2.4% with the bond portfolio edging up 1.0%, while the equity portfolio yielding 7.6%.
Revenue in the quarter under review totaled $163.9 million, up 19.9% from $136.8 million in the prior-year quarter, driven by nearly threefold increase in net realized investment gains, supported by an 18% increase in premiums earned.
Total expenses during first-quarter 2012 increased 27.6% year over year to $125.8 million. The increase was primarily driven by higher loss and settlement expense, higher policy acquisition costs and other insurance expenses.
The combined ratio in the reported quarter deteriorated 710 basis points year over year to 89.1%. Higher combined ratio at Casualty and Surety was partially offset by a lower Property combined ratio.
RLI Corp.’s book value stood at $39.07 per share as of March 31, 2012, up 4.3% from $37.46 as of December 31, 2011. The company recorded a 15.5% return on equity, with an 18.8% return on a comprehensive basis. The return on equity was 15.8% and 17.6% on a comprehensive basis in the prior year. Statutory surplus increased 7.5% over 2011-end to $763.2 million at quarter ended March 31, 2012.
Dividend Update
In the first quarter, RLI Corp. paid a dividend of 30 cents per share, representing the 143rd consecutive quarterly dividend payment.
Effects of Adoption of Accounting Standard
Due to the adoption of deferred acquisition cost (DAC) guidance, deferred policy acquisition costs asset declined by $40.3 million and consolidated shareholders’ equity went down by $26.2 million. As a result, book value decreased by $1.24 per share.
There was a deferred income tax benefit of $14.1 million as of December 31, 2011.
Based on RLI Corp.’s new accounting standard, policy acquisition costs decreased by $1.9 million and combined ratio decreased by 160 basis points in first-quarter 2011. Revised net earnings in first-quarter 2011 increased by 6 cents per share.
On the contrary, policy acquisition costs recognized increased by about $1.6 million on the adoption of new guidance, thereby lowering net earnings by 5 cents a share in the first quarter of 2012.
The new standard will help RLI Corp. recognize various costs and expenditures in a timely manner. The standard will accelerate the recognition of expenses associated with expansion and decelerate the same during contraction.
Our Take
With the improving pricing scenario in the insurance market supported by RLI Corp.’s strong infrastructure, we can expect the company to perform well in the coming quarters. The company also has a favorable loss reserve ratio when compared with the previous year along with increasing statutory reserve.
RLI Corp. scores strongly with the rating agencies and remains focused on returning value to its shareholders through incremental dividends and share buybacks.
However, continued low interest rate environment keeps us on the sidelines.
We retain our Neutral recommendation on RLI Corp. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Headquartered in Peoria, Illinois, RLI Corp., through its subsidiaries, underwrites property and casualty insurance primarily in the United States. The Travelers Companies Inc. (TRV), which competes with RLI Corp., is releasing its earnings today before the bell.
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