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Reinsurance Group has maintained its competitive position in North America by growing Facultative Reinsurance, Automatic Reinsurance and In Force Block Reinsurance, emphasizing its underwriting standards, prompt response on quotes, competitive pricing, capacity and flexibility in meeting customer needs.
The acquisition of ReliaStar’s group life and health reinsurance business in 2009 has consolidated its position in the North American reinsurance market. The combined strength of RGA Canada and former ING Reinsurance makes for a stronger company in the Canadian market and a larger market share.
Reinsurance Group is focused on growing its international operations to reap the benefits of diversification. Management eyes key Asian markets particularly India and China, which represent longer-term significant opportunities given the low reinsurance penetration in these markets.
Management expects $100 million in earned premium in 3 years in India and it will be applying for a license to operate in China in 2011. It has also opened an office in September 2010 in Middle East. For 2011, management expects premium from Canada to increase in the range of 5–7%, and premiums from Asia-Pacific and Europe & South Africa to increase in the range of 10–15% each.
Moreover, consolidation within the life reinsurance market in recent years makes it attractive for the company which holds a leading position in the same.
However, the primary factors to our Neutral recommendation are Reinsurance Group’s reliance on availability for affordable retrocession. The company had increased the maximum amount of coverage that it retains per life in the U.S. from $6.0million to $8.0million. This reduces the amount of premiums it pays to retrocessionaires, but increases the maximum effect a single death claim can have on its results, and therefore may result in additional volatility to its results.
Also interest rates are likely to remain low in 2011 and spreads narrow further. We expect to see additional pressure on the Reinsurance Group’s investment income. Moreover, management’s conservative positioning of the investment portfolio is expected to exert pressure on yield.
Over the long term we expect the company to fare well given its active capital management. Recently it retired Trust Preferred Income Equity Redeemable Securities (PIERS Units) and bought back enough shares to offset the dilution for the PIERS transaction. This has reduced the company’s debt burden.
The company also has excess capital to pursue meaningful mergers and acquisitions if opportunities arise. The recent dividend hike of 50% further reflects the company’s strong capital and liquidity position.
Reinsurance Group domiciled in Timberlake, Missouri, competes primarily with Munich Re, Swiss Re, General Re, a subsidiary of Berkshire Hathaway Inc. ( BRK.A - Snapshot Report ) ( BRK.B - Analyst Report ) . The stock carries a Zacks #3 Rank, which translates into a Hold recommendation over the short term (1–3 months).
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