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Jonathan Poland
Jonathan Poland
Articles (481)  | Author's Website |

Risk-Reward With Reinsurance Group of America

Jim Simons' Renaissance Technologies upped its position by 63% last quarter

March 08, 2018 | About:

Reinsurance Group of America (NYSE:RGA) has an incredible business, building a powerhouse over the last 50 years. From a financial standpoint, it is rock-solid and positioned for long-term success. Currently, it has a $10 billion market capitalization and generates north of $1 billion in net income on more than $12.5 billion in revenue annually.

In the last decade, it has seen incredible growth, with sales up 120%, profits up close to 300% and book value up 200%. The stock has followed suit, rising more than 230%, easily outperforming the S&P 500 Index.

Reinsurance Group of America’s free cash flow is 15% of its revenue, which is ultra impressive. For example, Berkshire Hathaway’s cash free cash flow is 14% of its annual revenue, possibly dragged down by non-insurance activities. In fact, Buffett’s main insurance business is reinsurance, or rather insurance for other insurance companies. Most other big insurers are unable to get the same level of growth that Reinsurance Group of America has seen, which speaks to the power of the industry as a whole.

Insurance companies have inherent advantages that make them generally recession proof, profiting from the reallocation of customer funds by offering a product that requires no innovation or inventory costs, and will likely withstand the test of time without much disruption thanks to increased safety and life-enhancing offerings across other industries. People live longer, safer lives than ever before, but still need insurance, which means insurers will continue seeking insurance themselves.

2017 was a big year at Reinsurance Group of America with earnings per share up 18% compared to the prior year. This year, the company is looking to earn north of $12 a share. And, the company’s management continues to focus on expanding its considerable foreign business into new markets that don’t use reinsurance as much as American firms.

Going forward, I can expect more of the same, with book value growing at double-digit rates. Especially with the risk today being more market-based instead of company-based. We are on an incredible bull market run, which continues thanks to lower corporate taxes despite counter policies on trade tariffs. While low tax rates will not save investors from a market correction, the insurance industry should weather the storm, and Reinsurance Group of America is better position than most.

On its current growth trajectory, Reinsurance Group of America is set to earn $20 per share in the next five years. If that happens and the stock gets priced at 15x, it’s a double. When money starts flowing out of the market it has to go somewhere, and insurance companies tend to be the safe trade. Only time will tell, but Reinsurance Group of America is a great company at a fair price right now.

Aside from Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) initiated a small stake in the company last quarter, but Blackrock is the major owner with over 9% of the shares outstanding, followed by Vanguard with 8.67%.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
Thanks for reading. Do your own analysis before investing. Good Luck.

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