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Reinsurance Group (RGA) Up 0.5% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Reinsurance Group (RGA). Shares have added about 0.5% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Reinsurance Group due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Reinsurance Group Q2 Earnings & Revenues Beat Estimates

Reinsurance Group of America, Incorporated reported second-quarter 2021 adjusted operating income of $4 per share, which beat the Zacks Consensus Estimate by 70.2%. Moreover, the bottom line increased nearly three-fold from the year-ago quarter’s figure. Net foreign currency fluctuations had a favorable impact of 12 cents per diluted share on adjusted operating income. Reinsurance Group witnessed solid results in U.S. and Latin America, offset by soft performance at Canada, Asia/Pacific and Europe, Middle East and Africa (EMEA) segments.

Operational Update

Reinsurance Group's operating revenues of $4 billion improved 14.2% year over year. The top line beat the Zacks Consensus Estimate by 9.7%. Net premiums of $3.1 billion rose 11% year over year. Investment income (excluding spread related business) increased 25.6% to $383 million. Average investment yield increased 57 basis points from the prior-year period to 4.64% primarily due to higher variable investment income. Total benefits and expenses at Reinsurance Group increased 7.1% year over year to $3.6 billion. Higher claims and other policy benefits, interest credited and policy acquisition costs and other insurance expenses as well as other operating expenses resulted in cost escalation.

Quarterly Segment Update

U.S. and Latin America: Total pre-tax adjusted operating income was $283 million in the quarter under discussion against pre-tax loss of $78 million in the year-ago quarter. The Traditional segment reported pre-tax adjusted operating income of $134 million against the year-ago loss of $165 million, reflecting COVID-19 claim costs of approximately $57 million. Non-COVID-19 individual mortality experience was in line with expectations. Group and Individual Health experience was favorable. Variable investment income was strong due to favorable limited partnership performance and real estate joint venture realizations. Asset Intensive segment’s pre-tax adjusted operating income increased 100% to $126 million. The solid results were due to favorable overall experience, transaction and other fees, and positive longevity experience. Capital Solutions business reported pre-tax adjusted operating income of $23 million, which decreased 4.2% year over year. The results were in line with expectations.

Canada: Total pre-tax adjusted operating income declined 13.6% to $38 million.
Traditional segment’s pre-tax adjusted operating income decreased 15% to $34 million. Foreign currency exchange rates had a favorable impact of $34 million on net premiums. Results reflected approximately $21 million of COVID-19 claim costs. Non-COVID-19 experience was favorable. Foreign currency exchange rates had a favorable effect of $3 million on pre-tax income and pre-tax adjusted operating income. Financial Solutions segment’s pre-tax adjusted operating income of $4 million remained unchanged year over year. The results were in line with expectations. Foreign currency exchange rates had an immaterial effect on pre-tax income and a favorable effect of $1 million on pre-tax adjusted operating income.

Europe, Middle East and Africa (EMEA): Total pre-tax adjusted operating income of $71 million decreased 25.3% from the prior-year quarter’s figure. Pre-tax adjusted operating loss of the traditional segment was $12 million against the year-ago pre-tax adjusted operating income of $16 million. Foreign currency exchange rates had a favorable effect of $47 million on net premiums. Results reflected around $35 million of COVID-19 claim costs, primarily from the U.K. and South Africa. Non-COVID-19 experience was favorable. Foreign currency exchange rates had an adverse effect of $4 million on pre-tax loss and pre-tax adjusted operating loss. Financial Solutions segment delivered pre-tax adjusted operating income of $83 million, up 5.1% from the year-ago quarter, indicating favorable longevity benefits. Foreign currency exchange rates had a favorable effect of $10 million on pre-tax income and $9 million on pre-tax adjusted operating income.

Asia/Pacific: Total pre-tax adjusted operating income of nearly $8 million decreased 86.4% from the prior-year quarter. Traditional segment’s pre-tax adjusted operating loss was $12 million against the pre-tax adjusted operating income of $47 million a year ago. Foreign currency exchange rates had a favorable effect of $30 million on net premiums. Results reflected COVID-19 claims of around $55 million, of which approximately $51 million was from India. Non COVID-19 experience in Asia was favorable. Foreign currency exchange rates had an adverse effect of $1 million on pre-tax loss and pre-tax adjusted operating loss. Financial Solutions segment’s pre-tax adjusted operating income increased 66.7% to $20 million, attributable to favorable experience on existing treaties and contributions from recent transactions. Foreign currency exchange rates had an immaterial effect on pre-tax income and pre-tax adjusted operating income.

Corporate and Other: Pre-tax adjusted operating loss was $39 million, wider than $11 million in the prior-year period primarily due to lower investment income.

Financial Update

As of Jun 30, 2021, Reinsurance Group had assets worth $88.9 billion, up 10.2% year over year. As of Jun 30, 2021, Reinsurance Group’s book value per share, excluding accumulated other comprehensive income, grew 7.3% year over year to $138.29. Adjusted return on equity was 5.7%, reflecting a contraction of 210 bps year over year. The company exited the quarter with $1.2 billion in excess capital.

Capital Deployment

The board of directors approved a dividend hike of 4% to 73 cents. The dividend will be paid out on Aug 31, 2021 to shareholders on record as of Aug 17.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Reinsurance Group has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Reinsurance Group has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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