On Sep 22, we downgraded Reinsurance Group of America Inc. ( RGA) to Underperform from Neutral based on the disappointing second quarter earnings results.
Why the Downgrade?
Reinsurance Group witnessed declining estimates as it reported dismal second quarter earnings results on Jul 19. It reported second quarter 2013 operating loss of 99 cents per share, significantly worse than Zacks Consensus Estimate of $1.83 per share and $1.65 per share earned in the year-ago quarter. Results suffered due to high claims liability in the company’s Australia business.
Following Reinsurance Group's second quarter earnings release, the Zacks Consensus Estimate for 2013 declined 19.8% to $4.42 per share as 3 of 9 estimates were pulled down. The Zacks Consensus Estimate for 2014 also slipped 0.8% to $7.84 per share, as 3 of 9 estimates moved south. With the Zacks Consensus Estimates for both 2013 and 2014 going down, the company now has a Zacks #4 Rank (Sell).
Causes of Concern
Reinsurance Group has been suffering from its Australian group business from past many years. Results reflected underperformance from the company’s Australian business, which is suffering from high claims. Though the company has taken measures to improve the business condition, we do not expect a reversal in the situation any time soon.
Also weak equity markets coupled with interest rates that are likely to remain low until 2014, are expected to put additional pressure on Reinsurance Group’s Asset Intensive business.
With a significant chunk of international business (Canada, Europe, U.K, South Africa), Reinsurance Group’s results are exposed to foreign exchange volatility.
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