RLI Corp.: A Trusted Dividend Champion (NYSE:RLI)

Summary

RLI Corp. (NYSE: RLI) is a member of the esteemed “Dividend Insurance Champion” club, along with Aflac (AFL), Chubb (CB), Cincinnati Financial (CINF), and Old Republic (ORI).). Having recently reviewed Old Republic’s business model, profitability and valuationI decided to also review RLI Corp. since my the last article about this insurance carrier it was a year ago.

Despite its low dividend yield (below 1% excluding the special distribution of dividends), RLI is highly valued by investors for its consistent dividend growth over the past 49 years. In addition, the stock has outperformed the S&P 500’s total return over the past two decades.

Shareholder returns validate RLI’s story, which focuses on several pillars: prioritizing underwriting margin over premium growth at all costs, maintaining a stable investment portfolio with a highly rated bond. component and complementing it with active and passive stocks, resulting in gradual cautious but consistent dividend increases.

The recently published quarterly results once again showed the company’s strong position in the US real estate market. Year-to-date revenue increased approximately $33 million year-over-year, benefiting from higher investment income along with steady underwriting income.

Despite the strength of underwriting margins over the cycle and the increase in investment income driven by increased investment returns, the current valuation of 4.3 times book value suggests that the share price lacks a margin of safety.

Stable subscription results

RLI has proven to be a resilient and performing insurer, offering property, casualty and warranty insurance. Over the past 29 years, RLI has maintained a combined ratio below 100, beating the industry average by an average of 12 points over the past decade.

In the first six months of the year, RLI posted underwriting revenue of $147.7 million, resulting in a combined ratio of 80%, marking a year-over-year improvement of 2.7 points.

All three lines of business contributed to underwriting revenue, all delivering a combined ratio below 100%. The biggest contributor to earnings was the real estate segment, which generated an impressive 57.9% compounded rate at the start of the year, generating $110.9 million in underwriting revenue.

The higher underwriting gain in the property insurance segment resulted from higher releases of loss reserves from prior years and reduced non-catastrophe losses, which more than offset the impact of higher storm losses. In addition, the segment’s share of expenses fell to 29.8% in 2024 from 36.0% in the prior year, as growth in the earned premium base outpaced growth in expenses. In addition, the expense ratio benefited from an increase in overwriting expenses that the company earns for writing business on behalf of other carriers.

The property segment’s gross written premium rose 6% in the second quarter, led by the marine insurance division, which grew 20%, including a 5% rate increase. On a net basis, premiums rose 32% in the second quarter. Year-to-date, property segment net reinsurance grew 38% due to rate increases, new opportunities in marine insurance and reduced competitor appetite for Hawaii homeowner coverage, allowing other property businesses of insurance will increase by 4%.

The casualty insurance segment combined net premium growth of 12% year-to-date with a combined rate of 94.1% over the prior year, resulting in underwriting income of approximately $24 million, a reduction of approximately 14, $8 million compared to the same period last year. year. Lower levels of reserve releases in earlier accident years contributed to a higher loss ratio in 2024, while the expense ratio remained almost flat at 37.4%, up 0.1 points year-on-year period last year.

The warranty insurance business also saw lower underwriting income due to a higher combined ratio. The combined rate for the collateral segment totaled 81.4% in the first six months of 2024, compared to 75.8% for the same period in 2023. The segment’s loss rate was 9.2% in 2024, up from 9 .0% in 2023. The expense ratio was 72.2%, up from 66.8% the previous year. The impact of the reinsurance reinstatement premium on the earned premium base increased the loss ratio by 0.3 points and the expense ratio by 2.0 points. In addition, the increase in the expense ratio resulted from continued investments in technology and personnel to support growth and improve the customer experience.

Despite tight underwriting margins in the property and casualty insurance segments, RLI Corp. is well positioned to achieve stable underwriting results for 2024 as its insurance product portfolio remains healthy, benefiting from rate increases and underwriting expertise.

Consistent cash dividends paired with annual special dividends

The company is recognized as one of the dividend aristocrats due to its long history of dividend growth and also declares annual special dividends to redistribute excess capital to shareholders.

In 2022, the company distributed a special dividend of $7.0 per share, made possible by the sale of its minority interest in Maui Jim. In 2023, the special dividend returned to the pre-2022 level, with the company declaring a special dividend of $2 per share.

RLI has an outstanding track record of sharing success with shareholders: 49 consecutive years of dividend increases, a 5% growth rate over the last 10 years and 14 years of special dividends. To put it simply, the company serves its loyal shareholders well.

ASSESSMENT

RLI’s shareholders’ equity stands at $1.58 billion, compared to a market cap of about $6.85 billion. This results in a P/B ratio of about 4.3, close to the 5-year average and book price average of about 4.2 to 4.3.

In other words, RLI Corp. appears to be fairly priced compared to the 5-year average. However, peers typically trade at multiples ranging from 1.5 to 2.5. This high rating is determined by several factors:

• A combined report of the highest quality in the property and casualty insurance industry. Over the past decade, the combined ratio has remained consistently below 96.4%, with a 10-year average of 88.3%.
• Dividends have been growing steadily for 49 consecutive years.
• A positive perception of the company among investors, regarding RLI as a SWAN (Sleep well at night) stock.

Despite its impressive financial performance and underwriting expertise that results in consistent underwriting earnings along with incrementally higher investment income, I believe RLI is fairly priced with no margin of safety.

Final thoughts

Although RLI is a very profitable and well managed insurance company, the current valuation seems too high (or at least too high without a margin of safety) to start investing in the company. However, existing shareholders, whether dividend claimants or not, who purchased RLI shares at a lower price can continue to enjoy gradual dividend increases coupled with special dividend distributions.