Reinsurance Group of America (RGA)

measurement

Key Statistics

Enterprise Value = $10.10 billion

Operating Income = $1.159 billion

EV/Operating Income = 8.71x

Price/Revenue = .73x

Earnings Yield = 19%

Debt/Equity = 41%

The Company

RGA is a Missouri based holding company for multiple reinsurance entities all over the world.

What is reinsurance? Simply put, reinsurance is insurance for insurance companies. Typically, insurance companies buy reinsurance policies to cover themselves in the event of catastrophic losses that occur outside of the assumptions in their risk models. Insurance companies would depend on reinsurance after an extreme event – a major disaster like a historically unprecedented hurricane, earthquake, or a terrorist attack.

RGA is unique in that it focuses on insurance for claims related to health insurance and life insurance. One example of this niche is their focus is longevity reinsurance, a business where RGA insures health insurance companies for the risk that insured people will live longer than the models project. (If Ray Kurzweil’s predictions are true, RGA is screwed. I don’t think we will find the fountain of youth anytime soon, though.) Another area that they focus on is “asset-intensive reinsurance,” which insures annuities for the possibility that their annuity returns might fall short and annuitants will live longer.

RGA has often changed its ownership structure. RGA initially went public in 1993 after years as a division of General American Life Insurance Company (General American retained a majority stake in the company after it went public). It operated publicly from 1993 until 2000, at which point MetLife bought it and took it private. MetLife then spun off RGA in 2008, and it has operated as an independent public company ever since.

A key risk for RGA would be a global disaster affecting human mortality. An example would be a pandemic. Bill Gates has sounded the alarm on this issue for a long time. In addition to an event causing mass casualties, such an event would also create chaos in the financial markets, which would affect RGA’s investment portfolio. A bet on RGA is a bet that such an extreme event won’t happen in the near future.

Reinsurance is also a dull, slow-growing industry that doesn’t command high multiples. Regardless of this, it is essential for insurance companies to maintain reinsurance policies to protect themselves.

My Take

RGA operates a good business that has been steadily growing since it was spun off in 2008. It has grown premiums and investment income steadily since going public, as you can see from the below chart (in billions of dollars):

rgarevenue

While the industry grows slowly, it grows steadily and methodically as the need for insurance grows and more of the world’s population enters the middle class, creating a need for insurance where none existed in the past. Each year, 160 million people globally become middle class. As they enter the middle class, they need home insurance, car insurance, and health insurance. As demand for insurance grows, demand for reinsurance grows. Because RGA has a global footprint, they benefit from the global growth in insurance, as you can see from their results over the last decade.

RGA trades at a discount to industry averages. The average price/revenue for the industry is 1.37 compared to .73 for RGA. The price/revenue multiple implies that RGA’s stock has an 87% upside. From a P/E multiple standpoint, RGA trades at 5.37x versus an industry average of 19.48, giving the stock a 262% upside potential.

Much of RGA’s high earnings in the last year are due to positive gains realized from the tax bill. Even with temporary tax gains taken into consideration, RGA’s forward P/E of 12 is still a discount from the industry average. RGA also trades at a discount to book value, which is currently $147 per share.

RGA is not only at a discount to the industry average, but it is also posting better results than industry peers. RGA achieved a 21% return on equity last year, which is better than the industry average of 6.71%.

RGA compares favorably to two of its biggest competitors, Everest Re and Renaissance Re, both of which paradoxically trade at a higher valuation. Concerning return on assets, RGA beats both of them. RGA delivered a 2.97% ROA in the last year, compared to 1.4% for Everest and -1.55% compared to Renaissance.

comparison

In short, I think RGA represents an attractive discount to the valuation of its peers even though it is performing better than them. Simple multiple appreciation could provide an attractive return for RGA.

I also think it is a possibility that RGA could be bought by a larger insurance company, as it was back in 2000 by Met Life.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.