The Benjamin Graham Approach and Reinsurance Group of America

| About: Reinsurance Group (RGA)

By J. Royden Ward

Benjamin Graham is known as the father of value investing. He influenced many modern investors, including Warren Buffett. Ben Graham wrote books, taught investment courses, and created several methodologies to help investors evaluate stocks.

I have used one of Benjamin Graham’s methods for the past seven years in the Cabot Benjamin Graham Value Letter with great success. The method is based upon minimum price-to-earnings ratios, price-to-book value ratios and measures of quality. The full description of this analysis can be found in Benjamin Graham’s book, “The Intelligent Investor.”

Mr. Graham suggested that investors should buy stocks that fit all of the following criteria:

  1. The current price-to-earnings (P/E) ratio is 9.0 or less.
  2. The price-to-book value (P/BV) ratio is 1.20 or less.
  3. The long-term debt-to-current assets ratio is 1.10 or less.
  4. The current assets-to-current liabilities ratio is 1.50 or more.
  5. Earnings per share growth during the past five years is 1% or more.
  6. The company currently pays a dividend.
  7. The Standard & Poor’s Quality Rank is B+ or better.

The list of seven requirements is somewhat long, but several stock screening sites, as well as your favorite broker, can find stocks that meet most or all of them.

Using this analysis, my recommendations have soared 64% during the past 12 months through January 29, 2010 and have easily beaten the stock market indexes during the past seven years.

One of the stocks that currently stands out, because it easily fits all of the criteria, is Reinsurance Group of America (NYSE:RGS).

RGA is a reinsurer and offers life, annuity, critical care and group reinsurance. The company guarantees insurance contracts for insurance and other financial companies. RGA sells its products in 26 countries around the world. The reinsurance industry has declined during the past several years because of the availability of competing reserve financing solutions including derivatives. I believe this downward trend has begun to reverse recently because of the turmoil in the financial markets and the problems with derivatives.

Reinsurance Group is in position to capitalize on the significant growth opportunities provided by the resurgence of the reinsurance industry in the U.S., as well as China and India. The company has over $2.2 trillion of life reinsurance in force backed by a strong balance sheet with conservative bond investments. Revenues increased 15% in the quarter ending 12/31/09, which was well above our estimate. Earnings per share were up 17%, which also exceeded our estimate. I believe the reversal has begun and that EPS growth of 14% is realistic in 2010.

RGA is the second largest provider of life reinsurance in the U.S. The company’s shares are undervalued at 8.1 times current EPS with a 1.0% dividend yield. RGA shares sell at 0.86 times current book value. The balance sheet is strong, and the Standard & Poor’s Quality Rank is A-. Reinsurance Group’s shares offer a solid investment choice for dividend income and stock price appreciation during the next two to three years.

Disclosure: No positions