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Will RLI Corp’s Cat Loss Exposure Hurt Underwriting Results?


On Nov 28, 2016, we issued an updated research report on RLI Corp. RLI.

RLI Corp.’s third-quarter 2016 earnings missed the Zacks Consensus Estimate and also deteriorated from the prior-year quarter. A significant decline in underwriting income contributed to the downside. RLI Group has underperformed Zacks-categorized Property and Casualty industry since it posted a weaker-than-expected third-quarter results. Price decreased 5.2% as against an increase of 7.31% displayed by the industry. In fact, the insurer lagged expectations in three of the last four quarters with an average miss of 13.4%.

The insurer’s substantial exposure to catastrophe losses will continue to weigh on its underwriting results. Thus, exposure to catastrophe losses will pose concerns due to the unpredictability of natural disasters.

In addition, a low interest rate environment has been weighing on net investment income over the last few years and the third quarter was no exception. Hence, we do not expect the company to turn around any time soon.

Moreover, the property and casualty insurer has been witnessing escalating expenses, primarily owing to higher losses and settlement expenses and policy acquisition costs. This in turn has been restricting operating margin expansion.

The Zacks Consensus Estimate for 2016 moved down 8.7% to $2.00 per share, over the last 30 days. For 2017, the same moved down 4.3% to $2.23 per share over the last 30 days. RLI Corp. carries a Zacks Rank #5 (Strong Sell).

Yet, RLI Corp. has a sound capital structure that helps it meet the interests of its policyholders, enhance operations in the insurance sector and aid growth in its book value for the long term. Also, the company has a low financial leverage, which provides significant financial flexibility to its operating subsidiaries. Moreover, consistent strategic investments to fortify the Casualty segment bode well.

Investors should note that the share price of RLI Corp. have been on an uptrend since its announcement of a special dividend of $2.00 per share on Nov 10. This marks the sixth straight special dividend payment by the company.

Stocks to Consider

Some better-ranked stocks from the same space include Alleghany Corporation Y, NMI Holdings, Inc. NMIH and Arch Capital Group Ltd. ACGL. Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany Corporation deals with Property & Casualty reinsurance and insurance businesses in the U.S. and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 20.52%.

NMI Holdings offers private mortgage guaranty insurance services in the U.S. The company delivered positive surprises in all of the last four quarters with an average beat of 62.80%.

Arch Capital offers property, casualty, and mortgage insurance and reinsurance products worldwide. It delivered positive surprises in all of the last four quarter with an average beat of 9.27%.

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