SSREY - Swiss Re: Uncertain Environment Ahead

2023-03-16 08:54:45 ET

Summary

• Swiss Re saw resilient performance in the most recent quarter in the face of natural catastrophic losses.
• However, the stock has recently taken a tumble as a result of the contagion surrounding the recent Silicon Valley Bank failure.
• The outlook for Swiss Re remains uncertain and upside could be limited going forward.

Investment Thesis: While Swiss Re has seen resilient performance in the most recent quarter, the upside we have been seeing in the stock may not last.

In a previous article back in October, I made the argument that Swiss Re ( OTCPK:SSREY ) might see limited upside in the short to medium-term, owing to an anticipated increase in claims resulting from Hurricane Ian as well as it being deemed unlikely that Swiss Re might meet its Property & Casualty combined ratio target of 94% this year.

In spite of these concerns, the stock is up by over 30% since my last article - albeit with a sharp recent drop back to $87.98 at the time of writing:

The purpose of this article is to assess whether my previously cautious sentiment on Swiss Re was unwarranted and whether the stock could continue to see upside from here.

Performance

When looking at Swiss Re annual results for 2022, we can see that the combined ratio for Q4 2022 is substantially lower than that for the year as a whole - at 91% and 102.4% respectively.

Additionally, it is notable that the normalized combined ratio (which makes the assumption of an average large natural catastrophe loss burden and also excludes prior-year reserve development) remains below 100% - with a ratio of 96.9% for the year and 98.9% for Q4 2022.

Overall performance for Q4 was impressive taking into account that natural catastrophe claims came in at USD 2.7 billion as a result of Hurricane Ian as well as the effects of winter storms in Europe and the U.S. along with floods in Australia and South Africa. While the normalized combined ratio of 96.9% came in at above the target of 94% - this was cited as being primarily due to inflation.

In addition, Swiss Re continues to maintain quite a strong Group Swiss Solvency Test ratio above the 200-250% target range as of the most recent quarter.

For the year as a whole, we can see that while net income growth across P&C Reinsurance showed significant moderation - that of L&H Reinsurance has seen a strong recovery across this metric, even with a slight decrease in net premiums earned and fee income:

With that being said, overall net profit of $472 million for 2022 represented a 67% drop from that of the previous year as a result of inflationary pressures as well as the war in Ukraine and a higher than usual level of natural catastrophe losses.

Overall, Swiss Re is targeting net income of more than USD 3 billion for this year, on the basis of lower levels of COVID-19 claims and higher interest rates.

Risks and Looking Forward

Going forward, the main risk for Swiss Re is that net income growth does not reach its target for this year as inflation remains elevated and the macroeconomic situation continues to remain challenging.

In particular, the recent drop that we have seen in the price has been in large part due to contagion from the failure of Silicon Valley bank, which has been affecting the financial industry as a whole due to fears over the solvency and liquidity of banks across the United States and Europe.

While it remains unknown as of yet whether the bank failures we have been seeing in the past week will ultimately have a significant impact on the overall economic trajectory - it could nevertheless pose risk to Swiss Re. As a reinsurance company, Swiss Re assumes risk on behalf of other insurance companies. Part of this process involves raising capital on the markets in order to provide sufficient liquidity to absorb losses incurred by such companies.

To date, rising interest rates have allowed for a continued uplift to recurring income.

However, should recessionary conditions warrant a slowing down of rate hikes - then this could place downward pressure on fixed income.

Conclusion

To conclude, Swiss Re showed resilient performance against natural catastrophic losses in the most recent quarter and the stock saw upside as a result. However, the macroeconomic outlook remains uncertain overall and thus it is not a given that the upside we have been seeing in the stock can be sustained in the short to medium-term.

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