Reinsurance Group of America Inc (NYSE:RGA) was sold off on heavy volume last Friday, dropping as much as 10.2% at one point after the company reported a loss for the second quarter thanks to larger than expected losses from its Australian unit.
However, despite this loss, the company still looks strong and after the recent sell-off, Reinsurance Group of America Inc (NYSE:RGA) looks to be an attractive value opportunity.
First off, the loss for the first quarter was, for the most part, superficial. The firm reported a larger than expected loss from its Australian operations due to higher provisioning for losses related to sums reinsured in the Australian disability market, in particular, the market for income protection and superannuation funds, which provide members access to funds for life and disability coverage. Unfortunately, in Australia the market for these products has become extremely aggressive over the past few years. With premiums shrinking and payouts rapidly rising, management has decided to remedy the situation by provisioning an after-tax sum of $184 million to deal with the issue of reserve liquidity adequacy. This provision was the reason for the company’s quarterly loss.
The group has also suspended all reinsurance activities in Australia, which when coupled with the loss provision, should stabilize company earnings for the future.
However, elsewhere the group remains strong. Indeed, excluding losses in Australia, the company reported EPS of $1.70 per diluted share for the quarter and EPS of $3.38 for the first six months of the year, up 7% from 2012. Premiums written were up 5% from the previous quarter.
Reinsurance An Undervalued Opportunity
Although Reinsurance Group of America Inc (NYSE:RGA)’s stock has outperformed the S&P 500 by about 10% so far this year, and the company still looks to be undervalued on several metrics. In particular, the firm trades at one of the lowest EV/EBIT figures in the life insurance sector. Reinsurance Group of America trades at an EV/EBIT multiple of 6.6, compared to its larger peers Prudential Financial and Metlife, which trade at EV/EBIT multiples of 70 and 44 based on TTM figures. Peer Torchmark trades at an EV/EBIT multiple of 11.
Moreover, Reinsurance Group of America Inc (NYSE:RGA) achieves a strong return on equity of 9%, once again more than peers Prudential and Metlife, which generate a return on equity of 1% and 2% respectively.
The group also trades at a discount to the value of its net assets although this is not uncommon in the life insurance sector. Book value stands at $82.97 per share.
Reinsurance Appears To Be Wisely Using Excess Capital
While Reinsurance Group of America Inc (NYSE:RGA)’s valuation does look attractive, what is more attractive is the company’s cash position. At the end of Q2, Reinsurance Group of America Inc (NYSE:RGA) had a $200 million capital surplus and management has stated that they intend to use this cash balance to repurchase shares, stating “while we evaluate other attractive uses of our excess capital”, indicating that the company is indeed proactive in creating shareholder value. Acquisitions or special dividends could be on the table.
Still, even a continuation of share repurchases would be a great use of capital. Management has already authorized a $300 million repurchase program for this year and recently added an extra $100 million, of which $230 million has already been spent this year, reducing the number of common shares in issue by 4.2% during the first two quarters—indicating that upon completion, 8.4% of shares in issue will have been repurchased.
Management also approved a 25% rise in the dividend for the quarter from $0.24 to $0.30.
Moreover, it would appear that for the last two years the company has been generating between $300 and $500 million in free cash per year, which is around 50% of net income. Additionally, the company has produced a free cash flow of around 200% of net income for the past five years, highlighting the strength of earnings and the company’s cash-generative nature.
All in all, the recent sell off of Reinsurance Group of America Inc (NYSE:RGA)’s stock presents a good opportunity for investment as the company now looks cheaper than its peers despite being more efficient. Furthermore, the firm is highly cash-generative and it looks as if investors are in for some serious capital returns over the next few years.