We are reiterating our Neutral recommendation on the shares of Reinsurance Group of America (RGA) prior to its third quarter earnings release, scheduled on October 22, 2012.
Reinsurance Group holds a significant position in the U.S. and Canada. It has fully geared itself to maintain its competitive position in the in North American reinsurance market by growing Facultative Reinsurance, Automatic Reinsurance and In Force Block Reinsurance.
It is also focusing on its underwriting standards, prompt response on quotes, competitive pricing as well as capacity and flexibility to meeting customer needs, in an attempt to preserve its position. The acquisition of ReliaStar’s group life and health reinsurance business in 2010 has helped it to penetrate deeper in the North American market.
Reinsurance Group is aggressively growing its international operations to reap the benefits of diversification. Management eyes key Asian markets, particularly India and China, which represent long-term significant opportunities given the low reinsurance penetration in these markets.
Approximately 46% of the total company’s premium comes from its international operations, up from 43% last year. Going forward, management continues to see significant market opportunities in this segment.
As a result of consolidations in recent years within the life reinsurance industry, there are fewer competitors. As a consequence, we believe that the life reinsurance pricing environment will remain attractive for the existing life reinsurers, particularly for those with a significant market presence (RGA controlling approximately 19.4% of market share in North America ranks second only to Swiss Re holding 21.4% on the basis of individual life reinsurance in force) and strong ratings.
Some of the negatives include weak equity markets coupled with interest rates, which is expected to remain low in 2012, and put additional pressure on Reinsurance Group’s Asset Intensive business. Moreover, management’s conservative positioning of the investment portfolio is expected to exert pressure on yield.
Reinsurance Group competes primarily with Munich Re, Swiss Re, General Re, a subsidiary of Berkshire Hathaway Inc. (BRK.A) (BRK.B). Reinsurance Group currently retains a Zacks # 4 Rank, which translates into a short-term Sell rating.
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