RLI Corp’s (RLI) third quarter earnings of $1.18 per share were well ahead of the Zacks Consensus Estimate of 94 cents. Results reflected higher underwriting income and favorable reserve development from prior years’ loss reserves. The company had earned $1.12 per share in the year-ago quarter.

RLI’s underwriting income was $23.0 million, up 51.3% year-over-year. Book value was $38.23 per share at Sept. 30, 2009, up from 15.9% from year end 2008. For the trailing four quarters, the company recorded a 9.3% return on equity, with 16.1% return on a comprehensive basis. This compares to 13.8% return on equity, with 4.1% return on a comprehensive basis in the prior-year quarter.

Gross premiums written were $159.9 million, down 7.5% year-over-year. Net premiums written were $119.2 million, down 9.8% from the prior year quarter, primarily driven by a decrease in casualty writings, but partially offset by an increase in the Surety segment writings. A 7.4% increase in Surety Property segment’s net premiums written was more than offset by a 19.2% decline in the Casualty segment and a 0.8% decrease in the Property segment’s premiums writings.

RLI’s combined ratio for the quarter improved to 91.3% from 88.3% reported in the prior year period. Results reflected $15.1 million of pretax favorable reserve development from prior years’ loss reserves. As a result, the company’s loss ratio improved to 38.8% in the quarter from 50.4% reported in the prior-year period.

The favorable development came from its Casualty book of business. Underwriting margins were strong in the quarter, with the casualty segment reporting a combined ratio of 73.2%, reflecting an improvement over the prior year’s combined ratio of 75.9%.

Equity in earnings of unconsolidated investee, Maui Jim, totaled $1.1 million, compared to $0.2 million in the year-ago period. Prior year earnings of Maui Jim Inc, a producer of premium sunglasses, were affected by the increased value of dollar resulting in currency losses.

Investment income decreased 17.9% year-over-year to $16.3 million. The investment portfolio’s total return for the quarter was 5.0%, with the bond portfolio generating 3.8% return and the equity portfolio returning 12.8%. Current asset allocation strategies have focused on limiting the impact of volatility in the equity markets, while placing a higher portfolio allocation to short-term investments.

Founded in 1965, RLI Corporation is a specialty property-casualty (P&C) underwriter that caters primarily to niche markets. RLI distributes its products through branch offices to wholesale and retail brokers, independent agents and e-commerce channels throughout the United States including Puerto Rico, the Virgin Islands, and Guam. RLI and its subsidiaries – RLI Insurance Company, Mt. Hawley Insurance Company and RLI Indemnity Company – are rated “A+” (Superior) by A.M. Best Company.

While premium writings remain curtailed reflecting the continued soft environment in the Casualty segment, going forward, we expect the company’s underwriting discipline to bode well as the market stabilizes under restrictive premium growth for the near term.

In addition, we expect the company’s expansion drive, its strong local branch office network and new product launches to increase its earnings going forward. We continue with our Neutral recommendation on the stock.
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