Recent Dip A Buying Opportunity For Shares Of Reinsurance Group Of America

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RGA shares dipped 14.12% on August 2 and 5, presenting a buying opportunity.The company specializes in life and health reinsurance, showing steady growth and financial strength.Strong Buy rating with ...

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JHVEPhoto Investment thesis The shares of Reinsurance Group of America, Incorporated (NYSE:RGA) dipped 14.12% on Friday, August 2, 2024 and Monday, August 5. Some might consider that a warning of trouble ahead.   RGA 1-month price chart (Seeking Alpha) However, I see it as an opportunity to buy a strong stock at a discounted price, and probably for a limited time. I have a one-year price target that is nearly 19% above the current price and have rated it a Strong Buy. What’s more, the Quant system gives it one of its rare Strong Buys as well. About the company When I talked about insurance (I used to write and publish an insurance company newsletter), friends would sometimes ask if insurance companies had to insure themselves too. I would explain that they do, and that they buy their policies from reinsurance companies. This is what this company, which calls itself RGA in regular communications, does, with a twist. Unlike most other reinsurers, RGA handles only life and health risks. It does not cover property insurance, which would expose it to hurricanes, tornadoes, and a host of other risks. Still, life and health exposures can be a challenge, too. For example, RGA wrote in its 10-K for 2023 (released February 26, 2024) that “An increase in the number of future COVID-19 cases or a future epidemic or pandemic may again raise mortality rates in certain jurisdictions and populations and cause additional disruptions in international and U.S. economies and financial markets, which could severely impact our business, results of operations and financial condition.” The firm also offers Financial Solutions, described on its website as “Our understanding of each client’s specific capital and investment needs, as well as extensive knowledge of local markets and global best practices, uniquely positions RGA to find solutions that improve capital efficiency and promote long-term stability and growth.” Historically, the company originated out of a reinsurance arrangement by General American Life Insurance Company in 1973. It was incorporated under its current name in 1993 and made its initial public offering in the same year. According to its website, it has had a “greater than 17% compound annual growth rate for total assets” between its IPO and December 31, 2021. RGA segments its operations geographically, and most of its operating income is earned outside the U.S. These segments are U.S. and Latin America; Canada; Europe; Middle East, and Africa; and Asia Pacific. It also has a segment called Corporate and Other. At the close on August 8, it traded at $201.21 and had a market cap of $13.01 billion. Competition and competitive advantages RGA noted in the 10-K that new business in the industry is very price competitive. However, it added, “companies that consistently win business are financially strong, provide flexible terms and conditions, have a positive reputation, deliver excellent service, and demonstrate execution certainty and a long-term commitment to the business underwritten.” To put that another way, insurers may want low prices, but they know that they also need to reinsure with firms that are financially solid and more. Sometimes a cheap price is not a bargain. RGA competes not only with other reinsurers, but also with traditional insurers, private equity firms, and other financial services companies. Seeking Alpha lists the following as peers and/or competitors: RenaissanceRe Holdings Ltd. (RNR), SCOR SE (OTCPK:SCRYY), Hannover Rück SE (OTCPK:HVRRY), and Swiss Re AG (OTCPK:SSREY). As the following chart shows, RGA’s price returns have been outperforming the competition over the past four months: RGA Price Returns chart (Seeking Alpha ) Competitive advantages The company claims on its website that it is the only global reinsurance company to focus primarily on life and health. That should give it a couple of advantages. First, by specializing it develops greater expertise in these fields. Second, it also gives it more experience in rating complex risks. In the 10-K, it said its strengths are in its underwriting, knowledge of mortality trends, efficient handling of transactions, and customer service. When reviewing its margins, though, RGA does not look dominating at all. This is an excerpt from its Profitability page at Seeking Alpha (comparisons with the Financial sector): RGA margins chart (Seeking Alpha ) Where does it get the A grade, then? It receives an A+ for cash from operations and cash per share, while net income per employee gets an A grade (all data TTM). Comments: Despite the low grades for gross, EBITDA, and net margins, it has maintained investors’ trust, so I believe it has at least a narrow moat. Most recent financial report  RGA released its second-quarter 2024 earnings report on August 1, and its highlights included:  Consolidated net premiums totaled $3.9 billion, which was 17.5% greater than the same period last year. Foreign currency effects reduced the total by $33 million, and it had a $282 million gain from a single premium pension risk transfer. Investment income increased 10.9%, helped in part by a higher average investment yield (4.65% versus 4.42% last year). Net income available to shareholders was $203 million or $3.03 per share, compared to $205 million or $3.05 per share in the same quarter last year. Adjusted operating income was $365 million or $5.48 per diluted share, up from last year’s Q2 results of $297 million and $4.40.  The following slide, from its Q2 investor presentation, shows it continues to be well funded, maintaining its leverage ratio, and increasing its liquidity: RGA capital and liquidity slide (investor presentation) The number of common shares outstanding came down from 66.212 million last year to 65.824 million this year. Comments: Excluding the pension risk transfer gain, Q2-2024 was generally consistent with previous results. And consistency is a good thing in an insurance stock, albeit investors would undoubtedly like to have seen net income and earnings per share grow along with revenue. RGA’s dividend At the same time that it announced its Q2 results, the firm also announced a 4.7% increase in its quarterly dividend, to $0.89 from $0.85. It is payable August 27 to shareholders of record on August 13. The yield is currently 1.80%, based on the August 8 closing price of $201.21, and is well above the average S&P 500 dividend yield of 1.32%. It has increased the dividend every year for the past 15 years, and over the past five years it has averaged 8.83% per year. And the dividend safety grade is A-minus. It does not report buying back any shares in Q2. Growth prospects Let’s begin with an overview of how RGA has fared over the past decade: RGA revenue, EBITDA, net income chart (Seeking Alpha ) Obviously, revenue has grown steadily over the years, while net income and EBITDA have been highly volatile and relatively flat. EBITDA and net income most recently peaked in Q3-2023, dropped in Q4-2023 and Q1-2024 before leveling out in Q2 this year. The question, then, is where net income and earnings will go next. Will they drop further, stay flat, or will they grow again? The 11 Wall Street analysts following RGA expect a double-digit boost in earnings this year, followed by more modest growth in 2025 and 2026 and then a nearly double-digit increase in 2027: RGA EPS estimates table (Seeking Alpha ) RGA also has a growth history, as shown in this excerpt from its Growth page at Seeking Alpha: RGA growth grades table (Seeking Alpha ) Here’s another, and longer, company perspective on its history of growth: RGA Growth chart (investor presentation) Comments: I have no reason to believe RGA will not continue growing as it has in the past. Most importantly, bottom-line results should move ahead steadily. Valuation Over the past 10 years, the RGA share price has risen rapidly: RGA 10-year price chart (Seeking Alpha) On the right side of the chart, we see a dip, with the share price falling 7.48% on Friday, August 2. That’s the day after earnings were released. The price also fell on Monday, August 5, by another 6.64%. The declines partially reflected a revenue miss of $260 million; still earnings beat the estimates by $0.39. August 2 was also the day the S&P 500 fell by 1.86% and on the following Monday it lost another 2.91%. The combination of the revenue miss and broader market selloff caused RGA to take the hits it did. Despite the long-term, rising share price, the valuation metrics remain reasonable, as shown in this excerpt from its Valuation page at Seeking Alpha: RGA valuation ratios table (Seeking Alpha ) I would have expected the stock price to follow earnings, but its earnings have been muted over most of the past decade, as shown above. Based on these metrics, and especially the recent dip, I believe RGA is undervalued, that the pre-August 2 prices were closer to fair value than the current price, since both the RGA and S&P 500 have been recovering. Wall Street analysts believe the company is due for an uptick in earnings this year, as we saw above. They expect this year’s EPS to grow by 10.12% and next year’s to be another 4.40% higher. They have a one-year median price target of $239.09, which represents an 18.83% increase. Whether coincidentally or not, that’s roughly equivalent to the sum of an earnings increase of 10.12% and average dividend increase of 8.83% (for a total of 18.95%). I’ll use that as my one-year price target as well, since it is consistent with the capital gains and dividend growth. That deserves a Strong Buy rating; one other Seeking Alpha analyst has contributed a rating, a Buy, in the past 90 days. The Quant system gives it a rare Strong Buy rating, as do six of the 11 Wall Street analysts. Three analysts gave it a Buy rating and two placed Hold ratings. Risk factors Since RGA specializes in reinsurance for life and health insurers, it has a higher exposure than other reinsurers to epidemics, pandemics, and other health disasters. That’s mitigated, to a greater or lesser extent, by its lack of exposure to property and casualty risks, and by advances in medicine that are prolonging lives. Other threats to human longevity include natural disasters, war, and potentially by climate change. The company is unable to predict the long-term implications of the latter. It prices its products on the assumption that mortality, longevity, morbidity, and lapse rates are reasonably predictable. It expects some fluctuations, but not enough to impair its underwriting. A situation like that created by COVID-19 can challenge those assumptions. The company operates globally, which raises the specter of geopolitical threats, especially in emerging markets. It also means changes in exchange rates can pull earnings up or down. Everything the company does is in data, including personal data. Any failure of its information security systems could seriously hurt its business. Any breach that involves the loss of personal or client data could seriously diminish its reputation (and ultimately, its viability). Conclusion Overall, Reinsurance Group of America is a strong and growing company that should continue to produce capital gains and growing dividends for medium and long-term investors. The recent drops in the share price provide these investors with an entry opportunity, to get in at a bargain price, and to enjoy higher dividend yields.  I believe RGA is currently undervalued and have a one-year price target of $239.09, which earns it a Strong Buy rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2458572032"}