RLI Corporation: A High-Yielding Insurance Play with Undervalued Potential Amid a Favorable Rate Environment

RLI Corporation (NYSE: RLI), a stalwart in the specialty insurance sector, delivered a mixed but ultimately compelling Q2 2025 earnings report, offering investors a blend of growth, stability, and disciplined underwriting. While the stock initially dipped post-earnings, a closer look at its fundamentals, valuation metrics, and strategic positioning suggests it may be undervalued in the context of a competitive insurance landscape and a tailwind-friendly interest rate environment.

Earnings Highlights: Growth, Discipline, and Resilience

RLI's Q2 2025 results were marked by 20% year-on-year revenue growth to $499.8 million, driven by robust net premiums earned and a 16% increase in net investment income to $39.4 million. Net earnings surged 50.6% to $1.34 per share, with operating earnings of $0.84 per share outpacing estimates by 7.3%. The company's combined ratio of 84.5%—a key metric for insurance firms—improved from 81.5% in Q2 2024, reflecting its ability to balance loss costs and expenses while maintaining profitability.

Notably, favorable development in prior years' loss reserves added $24.4 million to underwriting income, underscoring RLI's expertise in managing long-tail liabilities. CEO Craig Kliethermes emphasized the company's “commitment to long-term profitable growth,” a mantra that resonates in an industry where short-term volatility often overshadows durable fundamentals.

Valuation Metrics: Attractive on a Relative Basis

RLI's valuation metrics paint a picture of a company that is both profitable and reasonably priced. As of July 2025, the stock trades at a trailing P/E ratio of 11.3x and a P/B ratio of 3.83x, with a book value per share of $18.89—a 16% increase year-over-year. These figures compare favorably to industry peers like Hanover Insurance Group (THG, P/E: 12.1x) and Selective Insurance Group (SIGI, P/E: 13.8x), which trade at higher multiples despite weaker underwriting discipline.

The company's 2.2% dividend yield and a 50-year streak of consecutive dividend increases further enhance its appeal for income-focused investors. With a payout ratio of just 12% of net earnings, RLI has ample room to sustain or even accelerate its dividend growth.

The Role of the Interest Rate Environment

RLI's investment portfolio, which contributed 7.9% of total revenue in Q2 2025, has benefited from a favorable interest rate environment. The 2.9% total return in Q2 and a 4.2% six-month return highlight the company's ability to leverage its float—capital derived from premiums collected before claims are paid—into market-beating returns. This is particularly relevant in a sector where investment income can be a significant earnings driver.

A Cautionary Note on Market Sentiment

Despite its strong fundamentals, RLI's stock fell 1.1% post-earnings, partly due to revenue missing the high-end consensus estimate of $579.72 million. This reaction, however, may present a buying opportunity. Institutional investors remain divided: some funds have increased stakes, while others have trimmed positions. The mixed sentiment reflects broader uncertainty about near-term challenges in the insurance sector, such as rising loss costs and regulatory pressures.

Historically, however, RLI has demonstrated a favorable post-earnings performance. Backtesting from 2022 to the present shows a 60% win rate over 3 days, a 70% win rate over 10 days, and an 80% win rate over 30 days following its 15 earnings releases. The highest return—2.28%—occurred 22 days after an earnings report, suggesting a strong medium-term potential despite short-term volatility.

Is RLI a Compelling Long-Term Buy?

RLI's underwriting discipline, consistent capital returns, and strategic focus on niche markets position it as a compelling long-term investment. The company's 85 combined ratio, while slightly elevated, remains below the industry average, and its 10.1% five-year annualized book value growth outpaces most peers. In a specialty insurance sector where margins are razor-thin, RLI's ability to generate underwriting profits for 29 consecutive years is rare and valuable.

For investors with a 5–10 year horizon, RLI offers a compelling risk-reward profile. Its current P/E and P/B ratios suggest it is trading at a discount to its intrinsic value, especially when factoring in its $971 million in cumulative dividends over the past five years and its long-standing reputation as a Ward's 50® Top Performer.

Conclusion: A High-Yielding, Undervalued Insurance Play

RLI Corporation's Q2 2025 earnings reaffirm its status as a blue-chip insurance name with a unique combination of underwriting expertise, capital efficiency, and shareholder-friendly policies. While the stock's near-term volatility may deter short-term traders, long-term investors should view the current valuation as an opportunity to acquire a company with a durable competitive edge in a sector poised to benefit from prolonged high interest rates.

In a world where insurance premiums are rising and investment yields are attractive, RLI's disciplined approach to risk and capital management makes it a standout candidate for those seeking stable, value-driven growth.
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