Reinsurance Group of America Inc. (RGA) reported second quarter 2011 operating earnings of $1.72 per share, below the Zacks Consensus Estimate of $1.83. Earnings were, however, 6% above $1.63 earned in the year-ago quarter. Operating income was $128 million, up 5% from $122 million in the second quarter of 2010.
The year-over-year improvement was largely driven by the increase in net premiums written along with an increase in net investment income.
Adjusting for capital gains, derivatives and other, included in investment related (gains) losses of $26.4 million, capital gains on fund withheld of $3.5 million, investment related gains related to derivatives of $10 million, interest credited related to derivatives of $13.7 million, policy acquisition costs and other insurance expenses related to derivatives of $1.3 million and DAC offset of $2.7 million, the company reported a net income of $132.9 million or $1.78 per share, comparing favorably with $127.0 million, or $1.70 per share in second quarter of 2010.
Operational Update
Total revenue increased 14% year over year to $2.2 billion, led by increased net premiums and higher net investment income, coupled with investment related gains. Results were also ahead of the Zacks Consensus Estimate of $2.1 billion.
Net premiums increased 13% year over year to $1.79 billion, contributed by business growth across all the business segments. Net investment income increased 16% to $337 million, primarily due to a larger average invested asset base, offset by lower effective investment portfolio yields.
Total expense increased 16% year over year to $2 billion due to increase in Claims and other policy benefits, higher amount of interest credited, higher operating and interest expense as well as increase in collateral finance facility expense and policy acquisition costs and other insurance expenses.
Segment Results
The U.S. segment delivered a 4% improvement in net premium to total $973.8 million in the quarter under review.
Pre-tax operating income was $120.3 million, up 3.5% year over year due to improved contribution from the sub-segments – Asset Intensive and Financial Reinsurance.
Canada segment posted premiums growth of 18% to gross $209.7 million in the quarter. Pre-tax operating income increased 27% year over year to $41.9 million in the quarter attributable to better-than-expected mortality experience.
Europe & South Africa segment recorded a 35% hike in premium in the quarter to total $283 million. Pre-tax operating income dipped 26% year over year to $15.5 million in the quarter, largely due to adverse mortality rate.
Asia-Pacific segment’s premiums increased 26% year over year to $316.4 million. Pre-tax operating income plummeted 62% year over year to $8.2 million in the quarter. The decline was largely due to adverse mortality experience in Australia and Japan, partially offset by favorable foreign currency fluctuations.
The Corporate and Other segment reversed the pre-tax operating loss to post a profit of $7.4 million, compared to a loss of $1.5 million in the second quarter of 2010.
Annualized operating return on equity was 12% in the quarter. Book value (excluding AOCI) increased 10% year over year to $57.51 per share, reflecting strong net income contributions and an improved investment portfolio position.
Dividend
The board of directors approved a 50% hike in quarterly dividend. The company will now pay a dividend of 18 cents per share. The dividend will be paid on August 23 to shareholders of record as of August 4.
We maintain our Neutral recommendation on Reinsurance Group. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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