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Insurance Stocks Are a 'Glacial' Theme

NEW YORK ( TheStreet) -- The title of this article and the topic is partly influenced by a moving experience I had over the weekend. Perhaps I should call it a "movie" experience but, whatever I call it, the outcome was a desire to write what you're reading.

The movie was a documentary I highly recommend titled "Chasing Ice." You can see the official movie trailer on YouTube. It is an unforgettable masterpiece of cinematography and the official "synopsis" follows.

In the spring of 2005, National Geographic photographer James Balog headed to the Arctic on a tricky assignment: to capture images to help tell the story of the Earth's changing climate.

Even with a scientific upbringing, Balog had been a skeptic about climate change . . . . But that first trip north opened his eyes to the biggest story in human history and sparked a challenge within him that would put his career and his very well-being at risk . . . .

Within months of that first trip to Iceland, the photographer conceived the boldest expedition of his life: The Extreme Ice Survey. With a band of young adventurers in tow, Balog began deploying revolutionary time-lapse cameras across the brutal Arctic to capture a multi-year record of the world's changing glaciers.

I've taken the liberty to condense the synopsis, but you get the drift.

You can do your own investigation about "The Extreme Ice Survey" which is beyond the scope of this article. The takeaway I'm focusing on is that the kind of extreme weather we've been witnessing the past 10 years, including a tremendous wildfires and powerful hurricanes like Katrina and Sandy has the insurance industry's attention.

One opportunistic outcome is that state insurance regulators are coming up with new rules for insurance companies when it comes to setting aside reserves for future claims. Ironically, that may eventually free up billions of dollars for acquisitions, stock buybacks and more dividend increases.

You see, insurance companies need to boost the industry's anemic return-on-equity and return-on-assets. For example, Reinsurance Group of America (RGA - Get Report) has a paltry trailing-12-month ROA of only 1.98%. Their ROE is a more respectable 9.7%.

Reinsurance Group is in life and health reinsurance business. The company offers reinsurance for mortality, morbidity, lapse, investment-related risks associated with various life and health insurance products, such as term life, credit life, universal life, whole life, group life and health, joint and last survivor insurance, critical illness and disability income, as well as longevity, annuities, and financial reinsurance products. It also develops and markets technology solutions for the insurance industry.

While the world's calamity and mortality rates remain near normal, RGA looks like a decent investment theme. It's 10.10% operating margin (TTM), 26% quarterly year-over-year revenue growth, and $1.81 billion levered free cash flow (TTM) are above average and help sustain their 1.9% dividend yield.

With operating cash flow of $2 billion (TTM) and a year-over-year 7.3% increase in quarterly earnings growth (as of Sept. 30), it's no wonder the dividend represents a payout ratio of only 10%. RGA could double its dividend and still have lots of cash as long as worldwide catastrophes don't increase substantially.

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