SSREF - Swiss Re: Premium Growth And Combined Ratio Remains Impressive

2023-10-09 05:22:25 ET

Summary

• Swiss Re has continued to show strong premium growth for the Property & Casualty segment as well as a decline in the combined ratio.
• Performance across the Life & Health Reinsurance segment has also been very encouraging.
• I continue to take a bullish view on Swiss Re.

Investment Thesis

I take the view that Swiss Re has the potential to see further growth going forward, on the basis of continued premium growth and a drop in the combined ratio across the Property & Casualty segment.

In a previous article back in July, I made the argument that Swiss Re ( SSREF ) is in a good position to meet its 95% combined ratio target by the end of this year, and could see further upside on the basis of its ability to bolster net income in spite of higher catastrophic losses.

Since then, the stock has descended slightly to a price of $103.15 at the time of writing:

The purpose of this article is to assess whether Swiss Re has the ability to see continued growth from here taking recent performance into consideration.

Performance

I had previously remarked that the Property & Casualty segment of Swiss Re had seen encouraging performance, by way of growth in net premiums earned and net income - as well as a decrease in the combined ratio.

When looking at half-year results , we see that this trend has continued, with growth in net premiums earned and net income, as well as a further decrease in the combined ratio.

Moreover, when we look at the longer combined ratio trend on a heatmap - we can see that the combined ratios for the first two periods of this year have been lower than that of the corresponding period last year.

The reason for the lower combined ratio in the most recent period was down to a low natural catastrophe burden in the second quarter, as well as strong P&C Re renewals of USD 4.3 billion in treaty premium volume, with a price increase of 21% achieved in this renewal round.

From this standpoint, the fact that performance across this segment has continued to improve is encouraging. Additionally, when looking at performance as a whole, overall net premiums earned and fee income were up from USD 21.2 billion in H1 2022 to USD 22.1 billion in H1 2023, with annualised return on equity up significantly from 1.6% to 22.8%.

Not only has the strong performance across Property & Casualty been welcoming, but it is also notable that Life & Health Reinsurance has also seen a rebound to pre-pandemic levels. The segment recorded a net income of USD 393 million in H1 2023, which is clearly a strong improvement on the net income of USD 2 million recorded for the same period in 2022.

My Perspective

Taking the above into consideration, my view is that Swiss Re's performance has been quite impressive on the whole. As regards the Property & Casualty sector, I had previously remarked that the fact premium growth had been continuing in spite of higher catastrophic losses had been impressive.

In this regard, the fact that catastrophe losses have been more contained in the first half of this year and L&H Re's performance has returned to pre-pandemic levels - along with strong performance for Corporate Solutions - Swiss Re has seen strong growth on the whole.

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the fact that stock price has seen little movement over the past three months in light of encouraging results is notable.

We can see that the company's price to book ratio saw significant growth up until the beginning of this year towards a 10-year high and has remained more or less stationary since then.

Price to Book

With that being said, we can see that notwithstanding a recent drop in the P/B ratio for competitor Reinsurance Group of America ( RGA ), Swiss Re was trading at a similar price to book ratio for both Zurich Insurance Group ( ZURVY ) and Reinsurance Group of America.

From this standpoint, I take the view that Swiss Re is fairly valued at this point.

We also see that return on equity has increased substantially since the beginning of the year.

Return on Equity

In this regard, I am of the opinion that while Swiss Re appears to be trading at fair value - growth in return on equity along with strong premium and net income growth could see the stock go higher if these trends continue.

Risks and Looking Forward

In terms of the potential risks to Swiss Re at this time, there is the risk that the combined ratio across P&C could see a rise again if catastrophic losses rise in the latter half of the year.

As we have seen in the heatmap above - the combined ratio has seen higher values in the latter two periods of the year as compared to the former. Should we see a rise in the combined ratio as well as a plateau in premium growth following impressive performance in the first half of the year, then the stock may see downside in the short to medium term.

Conclusion

My overall view on Swiss Re is that performance across the P&C and L&H segments has been quite encouraging. In particular, the premium growth and fall in the combined ratio across the P&C segment is quite encouraging.

I take the view that Swiss Re is currently trading at fair value. However, I envisage that the stock has the potential to see further upside on the basis of further anticipated premium growth and impressive combined ratio performance across the P&C segment. In this regard, I continue to take a bullish view of Swiss Re.

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