RGA Misses Earnings Estimates but so What?

 

 

Missing earnings estimates hurts in the short run, but it doesn’t mean much if there is no indication that the overall earnings trend has changed.  If the overall trend in earnings has turned down watch out.  Prices can fall as for Zynga and Facebook.

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Then you have something like Reinsurance Group of America Inc (NYSE:RGA).  It recently missed earnings by 12 cents. $1.77 expected, $1.65 actual.  You should want your companies to miss estimates every now and then.  It raises the probability that the accounting is honest.  With a company like RGA, earnings comes down to how many/few large value life insurance policy deaths they have in a quarter.  You are subject to the “law of small numbers” even with the second largest life reinsurance block in the world, because it is the big policies that matter.

Even this does not qualify as a bad quarter for Reinsurance Group of America Inc (NYSE:RGA).  Can’t remember a time when they lost money, but they have missed by far more.  Often I have bought shares on such a day; I did not get any on the brief lousy open after the earnings announcement.

With RGA, I hope the price goes down.  I will buy more.  Why?

  • It rarely misses earnings.  The company is conservative with guidance, and usually beats.  Cumulatively, over 2 years it always beats.
  • Life Reinsurance is an oligopoly.  It is one of the less competitive areas of the insurance industry.
  • It is valued at less than 8x current earnings, which are expected to grow, and less than book value, and even book value less AOCI.
  • You have actuaries running the place.  Actuaries have an ethics code.  I’ve met the management; talked with them on the phone.  Occasionally been on their conference calls.  They seem honest and competent.  I have worked for dishonest and/or incompetent insurance management teams occasionally.  I know what they feel like.  One thing dishonest insurers do is always make earnings by shorting reserves, and then, when the reserving imbalance is too great, deliver a lollapalooza of a bad quarter which more than erases the seeming excess earnings.

That RGA would deliver a slight miss is encouraging to me.  The accounting is honest.  RGA is the #2 or #1 firm globally in what it does.  Unlike the deceased Scottish Re, it was conservative in M&A.  It let Scottish Re overpay for deals, while it sat back and saw an undercapitalized competitor cobble together a life reinsurance block nearly as large, but one that was unprofitable, because of the high prices paid to get it, and the opaque holding company structure (worthy of AIG in miniature).

More generally, when a company misses earnings:

  • Does it revise current guidance?  If it doesn’t it may be temporary, and a fluke of accounting rules.  Look at the accruals to give you a clue.
  • How are industry dynamics?  If everyone is missing estimates, there is a reason to mark future prospects down.
  • Analyze where companies in similar industries have been taken private.  That serves as a ground floor for where valuations could go.

And with that, I leave you with RGA.  I have argued for years that Buffett should buy it.  Excellent company, does not need guidance.  Could take over his inferior #5 position in life reinsurance which has lost money and become #1 … and then the life reinsurance industry will have no more pure plays.  Kind of sad, but logical, because larger P&C reinsurers benefit from the diversification.

So RGA missed earnings.  Who cares?  A little lower and I load the boat.

Full disclosure: long RGA

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.