RGA - Reinsurance Group of America: Impressive Portfolio Performance And A Great Dividend History

2023-08-04 07:50:33 ET

Summary

• Reinsurance Group of America (RGA) has seen its share price more than double since March 2022, driven by strong performance in the face of rising inflation and higher interest rates.
• RGA operates in the reinsurance industry, providing insurance against losses for other insurance companies and diversifying its business internationally.
• The company's CEO highlighted a strong rebound in business activity in Asia, positioning RGA well for growth, and its investment portfolio is well positioned to generate strong earnings. However, rising interest rates and the possibility of an economic recession pose risks.

Introduction

Operating in the reinsurance industry Reinsurance Group of America ( RGA ) has been able to grow its valuation quite well over the last couple of years. From the lows of under $60 per share back in March of 2022, the share price has more than doubled. This return has been driven by the strong performance of the company in the face of rising inflation and higher interest rates causing lower volumes in the industry generally speaking.

Despite the runup the company is not trading at a very high multiple and the dividend yield together with the short-term upside potential paints a decent buy picture here right now I think. For investors that seek a solid reinsurance company that has a broad set of markets that it serves and benefits somewhat from foreign currency effects then I think RGA is a great bet right now. I am viewing the company as a buy right now.

Company Structure

Operating since 1973 RGA has managed to very well diversify its business and now has an international presence. The headquarters lie still in the United States but operations span notably through Asia and Europe too. As I mentioned earlier the company is working in the reinsurance industry. The industry can be quite vague and the operations revolve around taking on the risk portfolio of insurance companies. This offputs some of the risk from those companies and RGA for example takes it on for a fee or premium. Reinsurance companies essentially provide insurance against losses for other insurance companies. This industry helps ensure that the insurance industry is less prone to risk and can handle catastrophic events like hurricanes or earthquakes without falling apart.

The areas that RGA specializes in comes down to individual or group life and health insurance products like term life and credit life. Besides this, they also provide reinsurance for mortality and morbidity and investment-related risks associated with products. Since its start back in 1973 RGA has also begun delving deeper into other sources of revenues. Besides reinsurance, it also develops and markets technology solutions and outsources consulting solutions.

It seems that momentum is building up for RGA and the coming quarters will be interesting to watch. The opportunity that the yield environment is something that RGA is focusing on right now. The entire business model is essentially about taking on risk and managing that risk efficiently and identifying where they might be overleveraged and reigning that in. The new money rate is increasing and this is presenting a solid opportunity for growing earnings for RGA as corporate yields ended lower.

Q2 Earnings Brief

We very recently got the latest earnings report from the company and I think the results showcase another solid quarter for RGA. The EPS came in at $4.4, a result of strong delivery across several key markets and regions. With strong organic business momentum, RGA was further able to grow its revenues and earnings during the quarter.

The company may have seen a slight YoY EPS decline but the ROE of the business remained very solid and they achieved a TTM of 13%. Diving deeper into the regions that RGA operates in the Asia Pacific market continued to perform very well and both APAC traditional and APAC Financial Solutions showed strong YoY growth, growing nearly 20% each.

From the earnings release, the CEO Anna Manning had the following to say about the quarter.

"We continue to see strong momentum in our new business activities, both organic and in-force transactions. Favorable industry dynamics are creating many growth opportunities, and we continue to partner with our clients for shared success. Our balance sheet is strong, and we are benefiting from the higher yield environment while maintaining our risk discipline".

With a positive view of the business environment, I think that RGA is still likely to continue recovering earnings and deliver solid ROI for investors from here on out. With a strong balance sheet, RGA further positions itself to invest strategically.

With higher new money rates it is becoming somewhat easier for RGA to generate stronger earnings and with a well-positioned investment portfolio, I expect RGA to produce impressive results in the coming quarters. The majority of the portfolio consists of investment-grade bonds and with a rebound in bonds I think we are looking at a potential ROE growth for RGA going forward.

Valuation

In comparison to the sector, RGA is trading at a very appealing discount based on earnings multiples. The p/e is 17% below the sector 36% below where it has historically traded the last 5 years. For me, this falls right into the discount window that I am looking for in an investment. As the market conditions become more favorable I think that more and more investors are going to realize that RGA is quite the steal right now.

Where I might have an issue is the p/b sitting slightly above the sector at a multiple of 1.16. This is not sufficient however to completely neglect a buy case here though. I think as the market betters itself the asset base and in turn the book value of RGA are going to improve. This makes investing right now still very much appealing.

Risk Associated

As an investor assessing RGA's investment portfolio, several risks come to my attention that warrants careful consideration. One significant concern is the impact of rising interest rates on the portfolio's performance. As interest rates increase, the value of fixed-income securities in the portfolio may experience unrealized losses, which could erode overall returns. The prospect of having to meet claims out of a portfolio with such unrealized losses creates the potential for locking in those losses, affecting the portfolio's profitability.

Furthermore, the possibility of an economic recession poses another formidable risk for RGA's investment portfolio. In times of economic downturn, consumer spending tends to decline, and businesses may experience contraction, leading to lower corporate earnings. These recessionary pressures can exert downward pressure on RGA's investment returns, posing challenges to generating positive gains.

Investor Takeaway

Where RGA is setting itself apart in the fact it has a fantastic investment portfolio management team that has successfully directed the risk assessment and navigated the market environment very well. The share price has seen an impressive rebound since the lows of March 2020 but I would say that the price is too high right now. The company sits at a FWD p/e of just around 8 and with a yield of 2.2% I think we are looking at a decent investment opportunity here right now. The valuation sits 18% below the sector and 37% below the 5-year average p/e for RGA. The dividend has been growing for 14 consecutive years and the last 5 years at a CAGR of 9.8%. This is making RGA out to be a solid dividend income opportunity too. All these positives conclude to me rating RGA a buy right now.

For further details see: