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Reinsurance Group Down 46% YTD: What's Behind the Drop?
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Reinsurance Group of America, Incorporated (RGA - Free Report) is being adversely impacted by escalating costs which, in turn, are putting pressure on margin expansion. Being a life insurer, exposure to several rate-sensitive products also pose threat to the company’s underwriting results.
Shares of this Zacks Rank #4 (Sell) life insurer have lost 46.3% on a year-to-date basis, compared with the industry’s decline of 26.1%.
It has a trailing four-quarter negative earnings surprise of 9.55%, on average.
The company’s trailing 12-month return on equity of 7.2% is lower than the industry’s 11.8%, which indicates inefficient utilization of shareholders’ funds.
Factors Impacting Reinsurance Group
This life insurer continues to suffer from increased costs due to higher claims and other policy benefits, interest credited, operating costs and interest expenses. Such costs tend to limit margin expansion. In first-quarter 2020, net margin contracted 180 basis points (bps) sequentially and 170 bps year over year.
Reinsurance Group has been witnessing escalating claims in its U.S. individual mortality business. Due to the pandemic, the company estimates pre-tax mortality claims in the range of $400 million and $500 million.
Furthermore, the life insurer deferred its share buyback programs in the first quarter. We believe the decision has been taken in a bid to enhance its operational and financial flexibility amid the financial turmoil induced by the pandemic.
Being a life insurer, Reinsurance Group has exposure to a diverse range of rate-sensitive products and investments. Low interest rates do not bode well for life insurance companies as they can potentially harm the company’s earnings and liquidity position. In the prevailing lower interest rate environment, the income from investments of life insurers become insufficient to meet the contractually guaranteed obligations of policyholders that cannot be lowered.
Additionally, the company’s solvency position remains a concern. As of Mar 31, 2020, its total debt to total capital of 24.3% was higher than the industry’s 11.5%. The life insurer’s interest coverage ratio of 5.71 compares unfavorably with the industry’s 14.56, which implies that its earnings are not sufficient to cover interest obligations. We believe that such potential headwinds are likely to dent prospects going forward.
The Zacks Consensus Estimate for 2020 earnings per share is pegged at $7.23, indicating a decline of 45.8% from the year-ago reported figure. Further, the same for earnings for the second quarter has been revised downward by 87.4% over the past 30 days.
EverQuote provides online marketplace for insurance shopping, primarily in the United States. It beat estimates in each of the trailing four quarters, the average positive surprise being 86.67%.
Amerisafe is a specialty provider of workers’ compensation insurance, which markets and underwrites its insurance through subsidiaries. It beat estimates in each of the trailing four quarters, the average positive surprise being 50.67%.
CNO Financial is a top-tier holding company for a group of insurance companies operating throughout the U.S. It has a trailing four-quarter positive earnings surprise of 12.51%, on average.
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Reinsurance Group Down 46% YTD: What's Behind the Drop?
Reinsurance Group of America, Incorporated (RGA - Free Report) is being adversely impacted by escalating costs which, in turn, are putting pressure on margin expansion. Being a life insurer, exposure to several rate-sensitive products also pose threat to the company’s underwriting results.
Shares of this Zacks Rank #4 (Sell) life insurer have lost 46.3% on a year-to-date basis, compared with the industry’s decline of 26.1%.
It has a trailing four-quarter negative earnings surprise of 9.55%, on average.
The company’s trailing 12-month return on equity of 7.2% is lower than the industry’s 11.8%, which indicates inefficient utilization of shareholders’ funds.
Factors Impacting Reinsurance Group
This life insurer continues to suffer from increased costs due to higher claims and other policy benefits, interest credited, operating costs and interest expenses. Such costs tend to limit margin expansion. In first-quarter 2020, net margin contracted 180 basis points (bps) sequentially and 170 bps year over year.
Reinsurance Group has been witnessing escalating claims in its U.S. individual mortality business. Due to the pandemic, the company estimates pre-tax mortality claims in the range of $400 million and $500 million.
Furthermore, the life insurer deferred its share buyback programs in the first quarter. We believe the decision has been taken in a bid to enhance its operational and financial flexibility amid the financial turmoil induced by the pandemic.
Being a life insurer, Reinsurance Group has exposure to a diverse range of rate-sensitive products and investments. Low interest rates do not bode well for life insurance companies as they can potentially harm the company’s earnings and liquidity position. In the prevailing lower interest rate environment, the income from investments of life insurers become insufficient to meet the contractually guaranteed obligations of policyholders that cannot be lowered.
Additionally, the company’s solvency position remains a concern. As of Mar 31, 2020, its total debt to total capital of 24.3% was higher than the industry’s 11.5%. The life insurer’s interest coverage ratio of 5.71 compares unfavorably with the industry’s 14.56, which implies that its earnings are not sufficient to cover interest obligations. We believe that such potential headwinds are likely to dent prospects going forward.
The Zacks Consensus Estimate for 2020 earnings per share is pegged at $7.23, indicating a decline of 45.8% from the year-ago reported figure. Further, the same for earnings for the second quarter has been revised downward by 87.4% over the past 30 days.
Stocks to Consider
Some better-ranked stocks in the insurance space include EverQuote, Inc. (EVER - Free Report) , Amerisafe, Inc. (AMSF - Free Report) and CNO Financial Group, Inc. (CNO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
EverQuote provides online marketplace for insurance shopping, primarily in the United States. It beat estimates in each of the trailing four quarters, the average positive surprise being 86.67%.
Amerisafe is a specialty provider of workers’ compensation insurance, which markets and underwrites its insurance through subsidiaries. It beat estimates in each of the trailing four quarters, the average positive surprise being 50.67%.
CNO Financial is a top-tier holding company for a group of insurance companies operating throughout the U.S. It has a trailing four-quarter positive earnings surprise of 12.51%, on average.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.1% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>