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Fitch Affirms RLI Corp.'s Ratings Following Acquisition; Outlook Stable

^{Published on 2010-12-28 11:50:44 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Following RLI Corp.'s (NYSE: RLI) acquisition of Contractors Bonding Insurance Company (CIBC), Fitch Ratings has affirmed RLI's holding company ratings, including the senior debt rating at 'BBB+'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of RLI's operating subsidiaries at 'A+'. A complete list of rating actions follows at the end of this release.

On Dec. 22, 2010, RLI announced plans to acquire CIBC for $137 million in cash. The transaction is expected to close during the first quarter of 2011. CBIC is a privately held insurance company specializing in surety bonds and related niche property/ casualty insurance products.

RLI has not traditionally pursued an acquisition oriented strategy, and therefore does not have a track record of pricing and integrating new operations. While CIBC is a moderate sized transaction that complements RLI's existing contractor and surety operations, the success in integrating CIBC and maintaining profitability is an important element for ratings consideration going forward. Fitch generally views growth during a soft pricing market as well as P&C acquisitions with skepticism.

Fitch's affirmation of RLI's ratings reflects the company's solid capitalization and strong balance sheet following the acquisition. The ratings also reflect continued strong operating performance despite persistent competitive insurance market conditions and a weak global economy.

Following the acquisition, and a previously-announced $147 million extraordinary cash dividend to shareholders Fitch's estimate of RLI's pro forma operating leverage (net premiums written to surplus) would increase to approximately 0.76 times (x) from 0.60x at year-end 2009. While both capital measures remain better than most peer companies, RLI's profile dictates a greater capital requirement than peers in order to maintain current ratings, in Fitch's opinion.

Through Sept. 30, 2010, RLI reported an 82.2% combined ratio, which includes almost 15 points of favorable prior year loss reserve development.

RLI's current ratings are constrained by its size and limited resources in comparison to its peers, reliance on reinsurance, and exposure to catastrophe events, which is primarily related to west coast earthquakes and hurricanes in the gulf and east coasts as well as Hawaii. As a result, Fitch does not envision an upgrade in RLI's ratings is achievable over the intermediate term.

Items that could cause a downgrade to RLI's ratings include the following:
--Further deterioration in capitalization, such as operating and net leverage above 1.0x and 3.0x, respectively;
--A material deterioration in underwriting results (on both an accident and calendar year basis)
--A meaningful deterioration in reserve adequacy, such as adverse development that exceeds 5% of prior year surplus;
--A meaningful reduction in balance sheet strength, via financial leverage above 20% and/or a more risky investment profile;
--Catastrophe losses that exceed 20% of prior year surplus;
--Any transactions that further reduce capital quality over the next 12-18 months could result in a downgrade.

Fitch has affirmed the following ratings with a Stable Outlook:

RLI Corp.
--Issuer Default Rating (IDR) at 'A-';
--$100 million 5.95% senior unsecured notes due Jan. 15, 2014 at 'BBB+'.

RLI Insurance Company
Mt. Hawley Insurance Company
RLI Indemnity
--IFS at 'A+'.

Additional information is available at [ www.fitchratings.com ].

Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Aug. 13, 2010);
--'Non-Life Insurance Rating Methodology' (March 24, 2010);
--'Short-Term Ratings for Corporate Finance' (Nov. 2, 2010).

Applicable Criteria and Related Research:
Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766 ]
Non-Life Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369 ]
Short-Term Ratings for Corporate Finance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726 ]

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