Swiss Re Stock: Fair Valuation for This 5.4% Yield (OTCMKTS:SSREF)

Swiss RE ( OTCPK:SSREF ) has reported positive operating performance in recent quarters, but its valuation appears to be right and upside potential appears limited at this time.

As I have described in previous articles, I see Swiss Re as a good income investments in the European insurance sector as the company offers a high dividend yield that is sustainable over the long term. As the following chart shows, my guess was correct and over the past year its stock has risen over 43%, including dividends, beating the market by a good margin over the same time frame.

Since I haven’t covered Swiss Re in a few months, I think now is a good time to update its latest financial and investment performance case to see if it remains an interesting reinsurance income pick. industry.

H1 2024 Revenue Analysis

Swiss Re recently released its first half of 2024 (H1 2024) earnings, showing positive operational momentum even as its earnings fell short of Q2 expectations.

As we have described in previous articles on Swiss Re, the operating landscape for the major reinsurance players has improved significantly since mid-2022 as tighter funding conditions due to rising interest rates have led to less competition from alternative competitors, plus higher catastrophe losses. led to price increases throughout the industry.

This context was quite positive for higher earnings in 2023, profitability improved quite significantly from a weak year in 2022. In the last six months, operating conditions remained favorable for reinsurance companies, but naturally growth rates have “normalized” as the reinsurance industry is mature and relatively stable over the long term.

Indeed, Swiss Re’s net income was $3.2 billion in 2023 (compared to just $472 million in 2022, which was an exceptionally bad year), and in the first half of 2024 its income net was slightly over $2 billion, up 17% from last year. The company is on track to achieve its annual goal of reporting net income of more than $3.6 billion in 2024, representing at least 12.5% ​​annual growth. This increase comes both from the higher profitability in insurance operations, but more significantly from the increase in investment income, as the company’s investment portfolio benefits from higher interest rates.

Indeed, in the first half of 2024, Swiss Re’s insurance income amounted to USD 22.5 billion, up 3.2% from last year, driven mainly by higher income in the life and health, but the main driver of earnings growth was investment income, which rose to $2.2 billion in the half (up 89% from the same period in 2023). This is justified by the higher return on investments, which increased to 4% in H1 2024 compared to only 2.9% in H1 2023.

In the P&C reinsurance segment, Swiss Re reported an 8% increase in net written premiums compared to H1 2023 due to slightly higher prices and new volumes. In this segment, its premiums are renewed annually, with January and July being two key dates, with around 92% of premiums being renewed, which is a good retention rate given the price increases in recent quarters.

This shows that higher prices are a common trend in the industry, which is good for the profitability of established players. This has allowed Swiss Re and its reinsurance peers to increase prices in the P&C segment, while claims costs have been relatively contained as catastrophe losses have been within forecasted expenses.

This explains why Swiss Re’s combined ratio was better than target, given that in H1 2024 its combined ratio in P&C was 84.5%, against a target of less than 87% in 2024 , and in enterprise solutions its combined ratio was 88.7%, also well below the target of less than 93% for the full year.

However, investors should be aware that hurricane season is most active in Q3, so Swiss Re’s good combined first-half report should be taken with some caution as catastrophe losses are in a somewhat seasonal, and the second half of the year. year may have higher claim costs than the first semester. This explains why, despite a strong first half, Swiss Re did not change its guidance for the full year, as natural catastrophe events are unpredictable and insurance companies typically prefer to be conservative in their outlook of business.

In the life segment, its business is performing well even after a few tough years related to the pandemic, and net profit was $883 million in H1 2024, very close to the reported net income for the full year 2023. Its target is to have a net profit of around $1.5 billion in 2024, which seems achievable given its performance in H1 2024. This is quite encouraging and a significant boost to Swiss Re’s bottom line, showing the benefit of higher rates in its life segment, being the best result in this unit since 2017.

As for other business lines, Swiss Re recently decided to exit its iptiQ digital insurance business, which was launched in 2015 and reported strong premium growth in recent years, but the company failed to profitable and decided it no longer made sense to continue this line of business. Indeed, iptiQ had an annual loss of around $250 million in 2023 (on gross written premiums of $1.1 billion) and was also expected to report a loss in 2024. Swiss Re reviewed strategic position of iptiQ and decided that it is no longer the best owner of this operation, and its earnings in H1 2024 include a full write-down of intangible assets related to this business of approximately $110 million.

Overall, net income was $2.09 billion in H1 2024 and return on equity (ROE), a key measure of profitability in the insurance industry, was above 20% (stable compared to H1 2023), which represents a high level of profitability in the reinsurance industry.

In terms of capitalization, Swiss Re does not provide quarterly updates on the Swiss Solvency Test (SST) ratio, but it was around 300% at the end of 2023, which is a very comfortable position and given Swiss Re’s earnings in the first half of the year. 2024, the capital ratio is likely to have improved over the past two quarters.

Investors should be aware that the target range for the capital ratio is around 200-250%. Thus, Swiss Re has an excess capital position and does not need to retain much earnings, which bodes well for its dividend growth and sustainability in the near future.

Indeed, one of its key priorities is to deliver a recurring dividend over the long term, which it has achieved during a difficult period in 2020-22 when its business was hit by both the pandemic and losses higher than expected, demonstrating that the commitment to offer an attractive shareholder remuneration policy.

Its annual earnings-related dividend in 2023 was $6.80 per share, up 65% from last year, which at the current share price results in a dividend yield of about 5.4%. That’s lower than when we last covered Swiss Re, which at the time was yielding close to 6%, but it’s still an interesting yield for investors.

The dividend payout ratio was 61%, which is an acceptable ratio for a company like Swiss Re that has an excess capital position and operates in a relatively stable industry. Thus, it has good prospects for dividend growth. Indeed, according to analyst estimates, its dividend per share is expected to grow by about $8 per share by 2026, meaning its dividend is expected to grow by single digits over the next few years, which seems be a sensible expectation. .

In terms of its valuation, Swiss Re currently trades at 10x earnings, which is roughly in line with its historical average over the past five years. Compared to its peers such as Hanover Re (OTCPK:HVRRY) or Munich Re ( OTCPK:MURGY ), the company is trading at a slight discount to peers trading at 11 times earnings, but that means Swiss Re’s upside potential looks limited after a strong share price rally over the past year.

Conclusion

Swiss Re has reported positive operating performance over the past two quarters due to higher prices in the P&C segment and relatively low catastrophe losses, but its valuation is now closer to its peers, making income its most attractive feature. his investment case. Since I no longer see its stock as undervalued, I think a “Hold” recommendation seems appropriate at this time.

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