Reinsurance Group of America Stock Has A 30% Upside

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Reinsurance Group of America stock (NYSE: RGA) currently trades at $119 per share, around 23% below its pre-Covid-19 peak, and offers a good investment opportunity. Reinsurance Group of America, a leading provider of traditional life and health reinsurance and financial solutions, saw its stock trading close to $155 in February 2020 just before the outbreak of the pandemic and is still almost 23% below that level. The stock has gained 108% since its March lows of 2020 compared to the S&P 500 which almost doubled during this period. While the easing of the lockdown restrictions and successful vaccine rollout has boosted economic activity, Covid-19 related claim costs of around $595 million have weighed on the company’s profitability numbers in the first half of 2021. The stock witnessed a sharp fall after RGA reported lower than expected results in the first quarter – adjusted operating income per diluted share was -$1.24 as compared to the $1.41 figure in the year-ago period. Further, its adjusted operating income for the first half of the year was around $2.78 per diluted share, which was at the same level as the prior year. This has made the investors somewhat cautious about the stock, despite positive growth in the Reinsurance Group of America’s revenues.

Returning to the pre-Covid level means that RGA stock will have to increase by 30% from here. We do believe that the upside is possible in the near term, once the life and health claims normalize to the pre-Covid-19 levels – the life and health claims have significantly increased due to the impact of the pandemic. The gradual improvement in the economic conditions is likely to boost the total premiums. Further, some recovery in the investment yields will help the net investment income. Overall, consistent improvement in the economy is likely to help RGA’s top-line and drive an upside of around 30% in the stock in the near term, making it a good investment opportunity.

But pre-Covid levels can be attained only once the claim expenses normalize and the economic recovery is not hindered by a sudden increase in the Covid-19 cases. Our conclusion is based on the detailed comparison of Reinsurance Group of America’s stock during the 2008 recession vs. now in our dashboard analysis.

Covid-19 Crisis

Timeline of Covid-19 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 97% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections..

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In contrast, here’s how RGA stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

RGA and S&P 500 Performance During 2007-08 Crisis

We see RGA stock declined from levels of over $46 in September 2007 (pre-crisis peak) to levels of around $27 in March 2009 (as the markets bottomed out), implying RGA stock lost 41% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $48 in early 2010, rising by 75% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

RGA Fundamentals Over Recent Years

Reinsurance Group of America’s revenues increased from $12.5 billion in 2017 to $14.3 billion in 2019, primarily due to growth in net premiums. However, the net income declined from $1.8 billion to $870 million over the same period, mainly due to an increase in operating expenses as a % of revenues and a one-time tax benefit in 2017. This reduced the EPS figure from $28.28 to -$13.88. Further, the company’s revenue growth rate slowed in 2020, restricting it to $14.6 billion, due to slower growth in net premiums and net investment income. This coupled with higher operating expenses resulted in an EPS of $6.35 per share during the year – down 54% y-o-y.

Does RGA Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Reinsurance Group of America’s total debt has increased from $2.8 billion in 2017 to around $4 billion in 2020, while its total cash increased from around $1.3 billion to $3.4 billion over the same period. Further, the company reported a cash outflow of $2.7 billion from investments and a cash inflow of $3.3 million from operating activity. Overall, the company has a strong cash inflow from operations and a comfortable cash cushion to meet its obligations in the near term.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Despite a rise in the number of new Covid-19 cases in the U.S., we expect a gradual improvement in demand to buoy market expectations. As investors focus their attention on expected full-year 2021 and 2022 results, we believe Reinsurance Group of America stock has the potential for full recovery once fears surrounding the Covid pandemic are put to rest.

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