RLI CORP (RLI) stock intrinsic value fair value estimate & owner earnings analysis

RLI Corp, Illinois-domiciled specialty P&C and surety insurer (CIK 0000084246), analyzed through Q2 FY2026 (10-Q filed 2026-07-24). No foreign operations, no VIEs, no going-concern issues. Debt/capital 14.5%, GAAP premium-to-surplus 0.94x, LTM ROE 25.2%, BVPS $19.09 (P/B 3.16x). METHOD. GAAP net income is unusable as a starting point for RLI: equity marks run through income under FV-NI (EquitySecuritiesFvNiUnrealizedGainLoss swings from -$121M in 2022 to +$82M in 2024), and FY2022 net income of $583M contains a $588.5M realized gain from the Maui Jim disposition -- a minority stake RLI acquired by accident in 1996 when RLI Vision Corp merged with Hester Enterprises, sold to Kering Eyewear in 2022 for $686.6M pre-tax proceeds. Owner earnings were therefore rebuilt from the ground up as Revenues - PremiumsEarnedNet - NetInvestmentIncome = investment gains and other; subtracting that from pre-tax income (NetIncomeLoss + IncomeTaxExpenseBenefit) leaves core pre-tax = underwriting profit + net investment income, taxed at 21%. Reconstruction validates: LTM GAAP EPS computes to $4.76 against a quoted trailing P/E of 12.66 at $60.28. SBC is NOT subtracted from net income -- it is already expensed in GAAP underwriting expenses and diluted share count captures the dilution. CORE OPERATING HISTORY (core pre-tax $M / combined ratio incl. corporate overhead and interest, so ~1-2pts above reported CR): 2017 80.2/96.6%, 2018 102.9/94.8%, 2019 137.1/91.9%, 2020 139.9/91.7%, 2021 214.8/85.1%, 2022 253.2/85.4%, 2023 280.0/87.7%, 2024 325.9/88.0%, 2025 397.6/85.3%. Nine-year mean CR 89.6%. LTM (Q3'25-Q2'26): premiums $1,642.6M, NII $172.0M, core pre-tax $389.0M, CR 86.8%, core owner EPS $3.33. DETERIORATION IN H1 FY2026 -- the decisive input. Premiums earned +3.5% y/y (vs a 10.3% eight-year CAGR), underwriting profit -16.3% ($127.9M to $107.1M), combined ratio 84.0% to 87.1%, operating cash flow -32.4% ($278.2M to $188.0M). This is the leading edge of a softening specialty P&C market, already in the filings rather than hypothetical. SCENARIOS. Two-stage, 10 years explicit plus Gordon terminal; starting owner EPS set by normalizing combined ratio against LTM premiums and NII. Bear: CR 93% (recession plus catastrophe year, near 2019-20 experience) -> $2.46 OE/sh, 3% growth yrs1-5 / 2% yrs6-10, 11% discount, 2.0% terminal, no credit for portfolio gains -> $29. Base: CR 88% mid-cycle -> $3.16 OE/sh, 6%/4%, 10% discount, 2.5% terminal -> $52 core, plus $5.90 for the equity portfolio's return above dividends (avg $68.9M pre-tax/yr excluding 2022, capitalized as a no-growth perpetuity) -> $58. Bull: CR 87% holds -> $3.30 OE/sh, 9%/6%, 9% discount, 3.0% terminal -> $81 core + $6.56 -> $88. REVERSE DCF. At $60.28 with a 10% discount and 2.5% terminal, the market prices 7.9% owner-earnings growth for five years off normalized earnings (7.2% off actual LTM). Implied IRR on the base cash-flow path is 9.8% -- you earn the discount rate and nothing more. Base value ~$58 against a $60.28 price means no margin of safety; buy_price set at a 30% discount to base (~$41). DIVERGENCE FROM PRIOR ANALYSIS id 1908 (2026-08-27, base $78, buy $55). Substantially all of the $20 gap is the starting owner-earnings figure: $3.85 there vs $3.16 here. Holding every other assumption of that model constant (6% flat growth, 9.5% discount, 2.5% terminal, ~19x multiple), that single change moves $73 to $60; the discount rate accounts for ~$5 and the growth taper ~$4.50. The $3.85 is a multi-year average of GAAP net income minus SBC that includes FY2022 -- roughly $5.08/share of Maui Jim gain, which adds $0.55-0.70/share to a five-year average, is then grown at 6% for a decade and capitalized into terminal value. A one-time harvest of a 26-year-old accidental stake was capitalized at ~19x into perpetual earnings power. Prior analysis also subtracted SBC from net income (double-count) and predates the Q2 FY2026 filing. CAVEATS. (1) RLI has run consistent favorable prior-year reserve development which flatters every combined ratio above; it could not be isolated from the tagged XBRL, and a stricter treatment would haircut the base case further. (2) Zero value assigned to excess capital -- at 0.94x premium-to-surplus there is no obvious excess; RLI returns it through special dividends instead ($2.00/share special declared Q2 FY2026), which is partly why book value looks low against earnings. (3) The franchise itself is not in question: 30+ consecutive years of underwriting profit, 25.2% ROE, conservative balance sheet. This is a quality-vs-price call, not a quality call.