We are reiterating a Neutral recommendation on the shares of Reinsurance Group of America Inc. (RGA) following the release of fourth quarter and fiscal 2010 results.
Reinsurance Group’s fourth quarter 2010 results were significantly ahead of the Zacks Consensus Estimate, aided by higher net written premiums coupled with an increase in net investment income.
Reinsurance Group has diversified its operations and holds a significant position in the U.S and Canada.It has fully geared itself to maintain its competitive position in the in North American reinsurance market by growing Facultative Reinsurance, Automatic Reinsurance and In Force Block Reinsurance. It is also focusing on its underwriting standards, prompt response on quotes, competitive pricing as well as capacity and flexibility to meeting customer needs, in an attempt to preserve its position. The acquisition of ReliaStar’s group life and health reinsurance business in 2010 will expectedly place it further in the North American market. Combined strength of RGA Canada and former ING Reinsurance makes for stronger offering to the Canadian market and may improve market share.
Reinsurance Group is also focused on growing its international operations. According to management, international markets have ample scopes for growth, with India and China representing significant longer-term opportunities. Management expects $100 million in earned premium from India in 3 years, and plans to apply for a license to operate in China in 2011. The company had also opened an office in the Middle East in September 2010. For 2011, management anticipates premium from Canada to increase in the range of 5–7%, while premiums from Asia-Pacific and Europe & South Africa to increase in the range of 10–15% each.
Reinsurance Group has recently completed capital management by converting Trust Preferred Income Equity Redeemable Securities into shares and has bought back shares worth $332.8 million to offset the dilution. This transaction would increase EPS by $0.17 and add 40 basis points to ROE annually. It would also remove $13 million of annual debt service along with eliminating securities that are inefficient from a rating standpoint. Therefore, following the PIERS transaction, which led to $332.8 million of share repurchases, we do not expect further capital deployment for share buybacks in 2011. However, with a remaining excess capital position of approximately $300 million and another $300–$400 million of leverage capacity, we note that the company would still have capital flexibility to pursue meaningful mergers and acquisitions.
Strong ratings by rating agencies form another positive for the Reinsurance Group. The company enjoys A+ financial strength rating from A.M. Best, A1 from Moody’s, and AA- from S&P. Its credit ratings for senior unsecured debt are A- from A.M. Best, Baa1 from Moody’s, and A- from the S&P. All the ratings are considered investment grades.
However, with interest rates likely to remain low in 2011, we expect to see additional pressure on the Reinsurance Group’s investment income. Moreover, management’s conservative positioning of the investment portfolio will likely exert pressure on yield.
Further, the evolving capital requirement with respect to the introduction of Solvency II could result in significant consolidation in the European insurance market. This could reduce the overall reinsurance demand and put life reinsurance margins under pressure. However, in the short term, there should be increased demand for reinsurance, as it is likely to be one of the main options available to insurers that need to improve capital positions under Solvency II. This will likely boost reinsurance business opportunities. However, at the same time, the increased regulatory will also affect the company because in order to comply with the regulatory requirements, it will also have to keep aside increased amount of capital, which could otherwise have been used for investment in business.
All said, we remain optimistic about the long term growth story for Reinsurance Group, which had approximately $2.5 trillion of life reinsurance in force and $29.1 billion in consolidated assets as of December 31, 2010. The company has once again been named Best Overall Life Reinsurer in the U.S. market based on a client customer survey in the reinsurance marketplace.
Reinsurance Group competes primarily with Munich Re, Swiss Re, General Re, a subsidiary of Berkshire Hathaway Inc. (BRK.A) (BRK.B).The stock carries a Zacks Rank # 3, which translates into a Hold recommendation over the short term (1–3 months).
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
REINSURANCE GRP (RGA): Free Stock Analysis Report
Zacks Investment Research
