Reinsurance Group Banks on Solid Premiums Amid Cost Concerns
Reinsurance Group of America, Incorporated RGA is well-poised for growth, driven by organic growth, new sales, new asset-intensive transactions in Asia, higher invested asset base and strong capital position.
The stock has a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.
The stock has seen its estimates for 2020 move up 7.7% in the past 60 days, reflecting investor optimism.
The company has a decent earnings surprise history. The company beat estimates in two of the last four quarters with the average surprise being 49.23%.
Factors Driving Reinsurance Group
The life insurer has been witnessing a positive trend in net premiums, driven by premium growth at its U.S. and Latin America, Canada Operations, Europe, Middle East and Africa and Asia Pacific segments.
It is well-poised to gain from growth in life reinsurance in force, organic growth, new sales, new individual life business production, increase in in-force business as well as new in-force block transaction, increase in business volume on new and existing treaties, new business as well as in force growth in Asian markets, and new asset-intensive transactions in Asia, which are expected to drive premiums going forward.
Given higher invested asset base from business growth, higher average investment yield, and solid variable investment income from real estate joint ventures and limited partnerships, investment income is expected to improve despite the current low interest rate environment. In the last five years, the metric increased 45%.
Such premium growth from the company’s business segments as well as improving investment income have been driving the top line of the company, which witnessed a five-year CAGR (2014-2019) of 5.6%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $14.3 billion and $14.8 billion, indicating a year-over-year increase of 1.6% and 3.6%, respectively.
Additionally, Reinsurance Group boasts a strong balance sheet with a stable capital mix and access to about $850 million syndicated credit facility and other sources. It exited the second quarter with total cash and cash equivalents of $4.3 billion, which is sufficient to cover the company’s debt obligations of $3.6 billion. Also, it has access to over $500 million of cash through membership in the Federal Home Loan Bank of Des Moines.
Robust cash flows enable Reinsurance Group to undertake shareholder-friendly moves via dividend hikes and share buybacks. Its dividend payments have witnessed a 6-year CAGR (2014-2020) of 15.2% and currently yields 3%. These make the stock appealing to yield-seeking investors.
However, shares of this life insurer, currently carrying a Zacks Rank #3 (Hold), have lost 42.4% in the past year compared with the industry’s decline of 17.3%.
Also, we remain concerned about the company’s high expenses incurred due to higher claims and other policy benefits, interest credited, operating costs. This, in turn, has been putting pressure on margins. Notably, in the second quarter, net margin contracted 30 bps sequentially and 180 basis points (bps) year over year.
Nevertheless, the Zacks Consensus Estimate for 2021 earnings is pegged at $12.56, indicating a year-over-year increase of 68.9%.
Stocks to Consider
Investors interested in the insurance industry may look at Donegal Group Incorporation DGICA, Manulife Financial Corp MFC and Sun Life Financial Inc SLF. While Donegal Group sports a Zacks Rank #1 (Strong Buy), Manulife Financial and Sun Life Financial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Donegal surpassed estimates in each of the last four quarters, the average being 86.44%.
Manulife Financial surpassed estimates in two of the last four quarters, the average being 6.79%.
Sun Life Financial surpassed estimates in each of the last four quarters, the average being 11.58%.
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Manulife Financial Corp (MFC) : Free Stock Analysis Report
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