RGA Lives Up to Expectations - Analyst Blog


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Reinsurance Group of America Inc. ( RGA ) reported first quarter 2012 operating earnings of $1.52 per share, in line with the Zacks Consensus Estimate and up 4.8% year over year. The earnings growth came on the back of a modest increase in revenue, coupled with lower effective tax rates and lower share count.

Total revenue increased 0.5% year over year to $2.29 billion, led by increased net premiums, offset by lower net investment income and lower investment related losses.

Net premiums increased 7% year over year to $1.86 billion, primarily attributable to growth in life reinsurance and foreign currency fluctuations.

Investment income was down 8% year over year, totaling $340.9 million, primarily due to a decline in fair value of the options contracts. A low interest rate environment continues to drain income from investments.

Total benefits and expense increased 2.8% year over year to $2.1 billion due to an increase in claims and other policy benefits, and higher operating expense partly offset by lower interest expense and decline in collateral finance facility expense.

Segment Results

US Operations reported pre-tax operating income of $93.9 million, a nominal 1% increase year over year. Premiums were up 9.2% year over year to $1.02 billion.

The Asset Intensive business, a sub-segment of U.S. operations, benefited by an improved performance in the equity markets during the quarter and reported a pre-tax operating income of $24.5 million, up 17% year over year.

The U.S. Financial Reinsurance business, another sub-segment, continued to perform well and reported operating income of $6.5 million, up 4.8% year over year.

The Canada segment posted a modest 1.5% year-over-year increase in premiums to $218.2 million.  Pre-tax operating income increased a whopping 83% year over year to $46.7 million, primarily led by favorable mortality experience.

The Europe & South Africa segment recorded a 9% hike in premium in the quarter to total $292.8 million. However, pre-tax operating income decreased significantly by 79% year over year to $4.6 million, primarily due to higher-than-expected critical illness claims in the U.K. Adverse mortality claims and unfavorable foreign currency movements also contributed to the decline, though at a lesser degree.  

The Asia-Pacific segment reported a pre-tax operating profit of $26.9 million, up 20.6% year over year, led by favorable mortality experience and expected levels of disability claims. Premiums rose 4% to $325.4 million, led by favorable foreign exchange movement.

Adjusted book value per share, a measure of net worth, increased 12.2% year over year to $58.57 per share.

The company also declared a quarterly dividend of 18 cents per share, which will be paid on June 1, 2012.

2012 Guidance

In the absence of any update on the 2012 outlook, we believe that the earlier EPS guidance range of $6.70 - $7.30 should hold true.

Our Take

Despite higher global claims during the quarter, overall results reflect that Reinsurance Group has performed  well.  The company has diversified its operations and holds a significant position in the U.S.

An expanding international business also boosts long-term growth. It is poised to benefit from consolidations within the life reinsurance industry. However, headwinds such as reliance on retrocession, increased retention and compliance with Solvency II requirements in the European region remain a concern. Nevertheless, a stable balance sheet and strong ratings inspire our confidence in the company.

Reinsurance Group competes primarily with Munich Re, Swiss Re, and General Re, subsidiaries of Berkshire Hathaway Inc. ( BRK.A )( BRK.B ). The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.

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
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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