At the end of July, Reinsurance Group of America Inc (NYSE:RGA) caught my attention after a seemingly disastrous fiscal second quarter, for which the market punished the company by wiping 10.2% off the company’s valuation in a single day. Back then, the company looked like a good recovery opportunity and I wrote about its potential here. I also built up a position myself.
Since then, the company has recovered from its losses and reported a solid fiscal third quarter. Net premiums written grew 6% year-on-year; 9% in original currencies. Year-on-year, net income fell slightly due to falling returns on the company’s investment portfolio but earnings per share only declined $0.02, thanks to a lower number of shares outstanding. The company repurchased 471,000 shares during the quarter, or 4.2 million year-to-date, that’s around 5% of the company’s total number of shares outstanding.
RGA’s income before taxes
What’s more, thanks to a lower level of claims being paid out across the industry, Reinsurance Group of America Inc (NYSE:RGA)’s combined ratio ticked down to 90% for the third quarter, from 92% at the end of the second quarter. Actually, the lower combined ratio and a rise in the value of premiums written boosted Reinsurance Group of America Inc (NYSE:RGA)’s third quarter income before tax by 0.1%. Unfortunately, the company’s tax bill expanded by 12% and this higher tax bill was the main reason for the company’s year-on-year decline in net income of 5%.
Indeed, on a per share basis, Reinsurance Group of America Inc (NYSE:RGA)’s income before taxes came in at $2.71 during the fiscal third quarter 2012 and $2.80 during the fiscal third quarter 2013, or 3.7% growth.
Elsewhere, the company’s Australian arm, which was the reason for the company’s huge second quarter loss, returned to break even, a major step in the division’s recovery. To recap quickly, Reinsurance Group of America Inc (NYSE:RGA) reported a $184 million loss provision during the second quarter to cover rising losses from its Australian operations. The Australian insurance market has seen payouts rise rapidly during the past few years, but due to competition within the Australian insurance market, premiums have not risen to the same extent. As a result, the group has suspended all reinsurance activities in Australia.
Reinsurance Group has plenty of scope for growth
Now that its Australian losses are behind it, Reinsurance Group of America Inc (NYSE:RGA) has plenty of scope for growth and the management’s decision to undertake a $400 million share repurchase program for this year should boost EPS growth.
In addition, RGA’s strong cash generation continues and management stated that the company sat on a solid excess capital position of $600 million at the end of the third quarter, up from only $200 million reported at the end of the second quarter.
Room for further growth?
Now that Reinsurance Group of America Inc (NYSE:RGA) has returned to the level it was trading at before the pull-back inspired by second quarter results, does it have room to grow further? Well, management’s commitment to repurchase stock should boost EPS over the near-term and a beneficial insurance environment is boosting the company’s profit margins. That said, the company still remains highly reliant upon returns from its investment portfolio, which declined by 7% year-on-year for the third quarter. What’s more, uncertainty over the Federal Reserve’s asset purchase operations is likely to increase volatility for investment returns.
Additionally, 2013 has been an especially good year for reinsurance companies with many peers reporting good levels of profitability and lower combined ratios. If this trend continues then Reinsurance Group of America Inc (NYSE:RGA) could be well placed for further growth. However considering that Reinsurance Group of America Inc (NYSE:RGA) is currently trading at a historically high forward earnings multiple of 13.4, compared to its historic average of around 9, perhaps the company is no longer as attractive as it once was.