RGA Misses on Higher Claims

Reinsurance Group of America Inc. (RGA - Analyst Report) reported its third quarter 2012 operating earnings of $1.35 per share, significantly lagging the Zacks Consensus Estimate of $1.84 per share and also the year-ago quarter’s earnings by 28%. The earnings miss was the result of a higher-than-expected claims incidence in the U.S. and Australian markets along with an increase in claims liability in Australia.

Total revenue increased 23% year over year to $2.45 billion, led by increased net premiums, net investment income along with investment related gains. Net premiums increased 8% year over year to $1.91 billion.

Investment income surged 48% year over year to $369.8 million, primarily due to an increase in the fair value of option contracts.

Total benefits and expenses soared 22% year over year to $2.25 billion owing to an increase in claims and other policy benefits, operating expenses as well as interest expense, partly offset by a decline in collateral finance facility expense.

Segment Results

The U.S. Operations Traditional sub-segment reported pre-tax operating income of $72.5 million, down 10% year over year. Premiums improved 8% year over year to $1.05 billion.

The Asset Intensive business reported pre-tax operating income of $27.1 million, up 18% year over year. Result benefited from favorable equity market performance and the addition of a large block of fixed deferred annuities, effective April 1, 2012.

The U.S. Financial Reinsurance business continued to perform well and reported operating income of $8.3 million, up 30% year over year.

The Canada segment’s premium jumped 23% year over year to $227.9 million. Pre-tax operating income decreased 20% year over year to $28.1 million.

The Europe & South Africa segment recorded a 6% hike in premium to $303.1 million. Pre-tax operating income more than doubled to $25.1 million year over year, primarily due to the better-than-expected performance across all the markets.

The Asia-Pacific segment reported a pre-tax operating loss of $20.7 million, in contrast with operating income of $27.3 million in the prior-year quarter. Premium was up by a modest 0.6% year over year to $330.4 million.

Adjusted book value per share, a measure of net worth, increased 11.9% year over year to $62.05 per share.

The company announced the payment of its quarterly dividend of 24 cents per share on November 30, 2012.

2012 Guidance

In the absence of any update on 2012 outlook, we believe that the company is reiterating its earlier earnings per share guidance range of $6.70–$7.30.

Reinsurance’s peer Everest Re Group Ltd. (RE - Analyst Report) is expected to release its earnings on October 24, 2012.

Reinsurance Group currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on the shares.