The Aleph Blog » Blog Archive » Missing Earnings Estimates

Missing Earnings Estimates

Missing earnings estimates hurts in the short run, but it doesn’t mean much if there is no indication that the overall earnings trend has changed.  If the overall trend in earnings has turned down watch out.  Prices can fall as for Zynga and Facebook.

Then you have something like Reinsurance Group of America [RGA].  It recently missed earnings by 12 cents. $1.77 expected, $1.65 actual.  You should want your companies to miss estimates every now and then.  It raises the probability that the accounting is honest.  With a company like RGA, earnings comes down to how many/few large value life insurance policy deaths they have in a quarter.  You are subject to the “law of small numbers” even with the second largest life reinsurance block in the world, because it is the big policies that matter.

Even this does not qualify as a bad quarter for RGA.  Can’t remember a time when they lost money, but they have missed by far more.  Often I have bought shares on such a day; I did not get any on the brief lousy open after the earnings announcement.

With RGA, I hope the price goes down.  I will buy more.  Why?

  • It rarely misses earnings.  The company is conservative with guidance, and usually beats.  Cumulatively, over 2 years it always beats.
  • Life Reinsurance is an oligopoly.  It is one of the less competitive areas of the insurance industry.
  • It is valued at less than 8x current earnings, which are expected to grow, and less than book value, and even book value less AOCI.
  • You have actuaries running the place.  Actuaries have an ethics code.  I’ve met the management; talked with them on the phone.  Occasionally been on their conference calls.  They seem honest and competent.  I have worked for dishonest and/or incompetent insurance management teams occasionally.  I know what they feel like.  One thing dishonest insurers do is always make earnings by shorting reserves, and then, when the reserving imbalance is too great, deliver a lollapalooza of a bad quarter which more than erases the seeming excess earnings.

That RGA would deliver a slight miss is encouraging to me.  The accounting is honest.  RGA is the #2 or #1 firm globally in what it does.  Unlike the deceased Scottish Re, it was conservative in M&A.  It let Scottish Re overpay for deals, while it sat back and saw an undercapitalized competitor cobble together a life reinsurance block nearly as large, but one that was unprofitable, because of the high prices paid to get it, and the opaque holding company structure (worthy of AIG in miniature).

More generally, when a company misses earnings:

  • Does it revise current guidance?  If it doesn’t it may be temporary, and a fluke of accounting rules.  Look at the accruals to give you a clue.
  • How are industry dynamics?  If everyone is missing estimates, there is a reason to mark future prospects down.
  • Analyze where companies in similar industries have been taken private.  That serves as a ground floor for where valuations could go.

And with that, I leave you with RGA.  I have argued for years that Buffett should buy it.  Excellent company, does not need guidance.  Could take over his inferior #5 position in life reinsurance which has lost money and become #1 … and then the life reinsurance industry will have no more pure plays.  Kind of sad, but logical, because larger P&C reinsurers benefit from the diversification.

So RGA missed earnings.  Who cares?  A little lower and I load the boat.

Full disclosure: long RGA






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20 Responses to Missing Earnings Estimates

  1. [...] When you want a company to miss earnings estimates.  (Aleph Blog) [...]

  2. Conscience of a Conservative says:

    So true about wanting a company to not hit every time, it seems too many company “manage” their earnings number. Where I get very concerned about earnings surprises is when they point to irregularities(like we saw with JP Morgan and the whale story). In my mind these should not be taken as one offs and should serve as early warning signs of worse to come.

  3. cold.as.ice says:

    > A little lower and I load the boat.

    It has been on my perhaps list for a while. At what price do you load the boat?

  4. mcmaaaaath says:

    Is there a reason why life reinsurance companies are better positioned then life insurers?

    Don’t they face the same problems that they won’t be able to generate as they roll their portfolios into lower yielding bonds going forward (since rates have come down so much)?

    Basically just wondering why you think RGA is cheap at 84% of AOCI adjusted book but not the rest of the life insurance industry at 35%-75% of tangible book?

    Is it mostly due to your opinion of management?

  5. [...] get good questions from readers.  Here’s one from this post: Is there a reason why life reinsurance companies are better positioned then life [...]

  6. [...] Aleph Blog) I get good questions from readers.  Here’s one from this post: Is there a reason why life reinsurance companies are better positioned then life [...]

  7. [...] Aleph Blog) I get good questions from readers.  Here’s one from this post: Is there a reason why life reinsurance companies are better positioned then life [...]

  8. [...] I get good questions from readers. Here’s one from this post: [...]

  9. [...] On Life Insurance And Life Reinsurance admin I get good questions from readers. Here’s one from this post: [...]

  10. [...] Buy the Dip! Why an earnings miss can be OK. [...]

  11. [...] I get good questions from readers. Here’s one from this post: [...]

  12. [...] I get good questions from readers. Here’s one from this post: [...]

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  19. [...] Life Reinsurance admin (By Aleph Blog) I get good questions from readers.  Here’s one from this post: Is there a reason why life reinsurance companies are better positioned then life [...]

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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