RLI (RLI)

Specialty insurance provider RLI (NYSE:RLI) reported revenue ahead of Wall Street’s expectations in Q3 CY2025, with sales up 8.4% year on year to $509.3 million. Its non-GAAP profit of $0.83 per share was 19% above analysts’ consensus estimates.

Company Overview

Founded in 1965 and named after its original focus on "replacement lens insurance" for contact lens wearers, RLI (NYSE:RLI) is a specialty insurance company that underwrites property, casualty, and surety products through wholesale brokers, independent agents, and carrier partnerships.

Property & Casualty (P&C) insurers protect individuals and businesses against financial loss from damage to property or from legal liability. This is a cyclical industry, and the sector benefits when there is 'hard market', characterized by strong premium rate increases that outpace loss and cost inflation, resulting in robust underwriting margins. The opposite is true in a 'soft market'. Interest rates also matter, as they determine the yields earned on fixed-income portfolios. On the other hand, P&C insurers face a major secular headwind from the increasing frequency and severity of catastrophe losses due to climate change. Furthermore, the liability side of the business is pressured by 'social inflation'—the trend of rising litigation costs and larger jury awards.

RLI's competitors include major insurance providers such as AIG, Chubb, Liberty Mutual, Travelers, and Zurich, as well as specialty insurers like Arch, Beazley, Berkley, Kinsale, Markel, and RSUI.

In general, insurance companies earn revenue from three primary sources. The first is the core insurance business itself, often called underwriting and represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from various sources such as policy administration, annuities, or other value-added services. Luckily, RLI’s revenue grew at an exceptional 14.5% compounded annual growth rate over the last five years. Its growth beat the average insurance company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. RLI’s annualized revenue growth of 13.6% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, RLI reported year-on-year revenue growth of 8.4%, and its $509.3 million of revenue exceeded Wall Street’s estimates by 12.4%.

Net premiums earned made up 80.9% of the company’s total revenue during the last five years, meaning RLI barely relies on non-insurance activities to drive its overall growth.

Markets consistently prioritize net premiums earned growth over investment and fee income, recognizing its superior quality as a core indicator of the company’s underwriting success and market penetration.

When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are:

• Gross premiums - what’s ceded to reinsurers as a risk mitigation and transfer strategy

RLI’s net premiums earned has grown at a 13.5% annualized rate over the last five years, better than the broader insurance industry and in line with its total revenue.

When analyzing RLI’s net premiums earned over the last two years, we can paint a similar picture as it recorded an annual growth rate of 13.3%. This performance was similar to its total revenue.

This quarter, RLI’s net premiums earned was $407.7 million, up 4.7% year on year and in line with Wall Street Consensus estimates.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at the combined ratio rather than the operating expenses and margins that define sectors such as consumer, tech, and industrials.

The combined ratio is:

• The costs of underwriting (salaries, commissions, overhead) + what an insurer pays out in claims, all divided by net premiums earned

If a company boasts a combined ratio under 100%, it is underwriting profitably. If above 100%, it is losing money on its core operations of selling insurance policies.

Given the calculation, a lower expense ratio is better. Over the last five years, RLI’s combined ratio has swelled by 9.3 percentage points, going from 88.8% to 84%. It has also improved by 4 percentage points on a two-year basis, showing its expenses have consistently grown at a slower rate than revenue. This typically signals prudent management.

RLI’s combined ratio came in at 85.1% this quarter, beating analysts’ expectations by 323.3 basis points (100 basis points = 1 percentage point). This result was 4.5 percentage points better than the same quarter last year.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

RLI’s EPS grew at a remarkable 19.3% compounded annual growth rate over the last five years, higher than its 14.5% annualized revenue growth. However, we take this with a grain of salt because its combined ratio didn’t improve and it didn’t repurchase its shares, meaning the delta came from factors we consider non-core or less sustainable over the long term.

We can take a deeper look into RLI’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, RLI’s combined ratio improved by 9.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For RLI, its two-year annual EPS growth of 10.3% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q3, RLI reported adjusted EPS of $0.83, up from $0.66 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects RLI’s full-year EPS of $3 to grow 1.6%.

Insurance companies are balance sheet businesses, collecting premiums upfront and paying out claims over time. The float – premiums collected but not yet paid out – are invested, creating an asset base supported by a liability structure. Book value captures this dynamic by measuring:

• Assets (investment portfolio, cash, reinsurance recoverables) - liabilities (claim reserves, debt, future policy benefits)

BVPS is essentially the residual value for shareholders.

We therefore consider BVPS very important to track for insurers and a metric that sheds light on business quality because it reflects long-term capital growth and is harder to manipulate than more commonly-used metrics like EPS.

RLI’s BVPS grew at an impressive 10.8% annual clip over the last five years. BVPS growth has also accelerated recently, growing by 19.7% annually over the last two years from $14.24 to $20.41 per share.

Over the next 12 months, Consensus estimates call for RLI’s BVPS to grow by 9.5% to $21.31, mediocre growth rate.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

RLI has no debt, so leverage is not an issue here.

Return on equity, or ROE, represents the ultimate measure of an insurer's effectiveness, quantifying how well it transforms shareholder investments into profits. Over the long term, insurance companies with robust ROE metrics typically deliver superior shareholder returns through a balanced approach to capital management.

Over the last five years, RLI has averaged an ROE of 28.1%, exceptional for a company operating in a sector where the average shakes out around 12.5% and those putting up 20%+ are greatly admired. This shows RLI has a strong competitive moat.

We were impressed by how significantly RLI blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates on a better combined ratio. On the other hand, its book value per share missed. Overall, this print had some key positives. The stock remained flat at $60 immediately following the results.

Updated: December 4, 2025 at 11:16 PM EST

Are you wondering whether to buy RLI or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

RLI possesses a number of positive attributes. To kick things off, its revenue growth was exceptional over the last five years. And while its projected EPS for the next year is lacking, its stellar ROE suggests it has been a well-run company historically. On top of that, its remarkable EPS growth over the last five years shows its profits are trickling down to shareholders.

RLI’s P/B ratio based on the next 12 months is 3.2x. At this valuation, there’s a lot of good news priced in. This is a good one to add to your watchlist - there are better opportunities elsewhere at the moment.

Wall Street analysts have a consensus one-year price target of $66.25 on the company (compared to the current share price of $63.17).