Swiss RE (OTCPK:SSREF) has reported a positive operating performance in recent quarters, but its valuation seems to be fair and upside potential seems limited right now.

As I’ve covered in previous articles, I see Swiss Re as a good income investment in the European insurance sector, as the company offers a high-dividend yield that is sustainable over the long term. As shown in the next graph, my view was right and over the past year its shares are up by more than 43%, including dividends, beating the market by a good margin during the same time frame.

As I’ve not covered Swiss Re for some months, I think it’s now a good time to update its most recent financial performance and investment case, to see if it remains an interesting income pick within the reinsurance industry.

H1 2024 Earnings Analysis

Swiss Re has recently released its earnings related to the first semester of 2024 (H1 2024), showing a positive operating momentum even though its earnings were below expectations related to Q2.

As I’ve covered in previous articles on Swiss Re, the operating landscape for large reinsurance players improved significantly since mid-2022, as tighter funding conditions due to the rising interest rate environment led to less competition from alternative competitors, plus higher catastrophe losses also led to increasing pricing across the industry.

This backdrop was quite positive for higher earnings during 2023, with profitability improving quite significantly from a weak year in 2022. During the past six months, operating conditions have remained supportive 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 (vs. only $472 million in 2022, which was an exceptional bad year), and during H1 2024 its net income was slightly above $2 billion, up by 17% YoY. The company is well on track to achieve its annual goal of reporting a net income above $3.6 billion in 2024, which represents annual growth of at least 12.5%. This growth comes both from higher profitability in the insurance operations, but more significantly from increasing investment income, as the company’s investment portfolio benefits from higher interest rates.

Indeed, during H1 2024, Swiss Re’s insurance revenue amounted to $22.5 billion, up by 3.2% YoY, driven mainly by higher revenue in the life & health segment, but the major driver of higher earnings was investment income, which increased to $2.2 billion in the semester (up by 89% from the same period of 2023). This is justified by higher return on investments, which increased to 4% in H1 2024, compared to just 2.9% in H1 2023.

In the P&C reinsurance segment, Swiss Re reported 8% growth in net premiums written compared to H1 2023, due to slightly higher pricing and new volumes. In this segment, its premiums are up for renewal on an annual basis, with January and July being two key dates, with about 92% of premiums having been renewed, which is a good retention rate considering price increases over the past few quarters.

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

This explains why Swiss Re’s combined ratio has been better than its target, given that during H1 2024 its combined ratio in P&C was 84.5%, compared to a target of less than 87% in 2024, and in the corporate solutions its combined ratio was 88.7%, also much lower than its target of less than 93% for the full year.

Nevertheless, investors should be aware that the hurricane season is most active in Q3, thus Swiss Re’s good combined ratio in the first half of the year should be taken with some caution, as catastrophe losses are to some extent seasonal and the second half of the year can have higher claims costs than the first half. This explains why despite a strong first half, Swiss Re has not changed its guidance for the full year, as natural catastrophe events are unpredictable and usually insurance companies prefer to be conservative regarding their business outlook.

In the life segment, its business is also performing well after some difficult years related to the pandemic, and its net profit was $883 million in H1 2024, being very close to its net income reported in the whole year 2023. Its target is to have a net profit of about $1.5 billion in 2024, which seems achievable considering its performance in H1 2024. This is quite encouraging and is 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.

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

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

Regarding its capitalization, Swiss Re doesn’t provide quarterly updates on its Swiss Solvency Test (SST) ratio, but this was about 300% at the end of 2023, which is a very comfortable position and considering Swiss Re’s earnings during the first half of 2024, it’s likely that is capital ratio has improved in the past two quarters.

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

Indeed, one of its key priorities is to provide a recurring dividend over the long term, something that it has delivered in a tough period during 2020-22, when its business was hit both by the pandemic and higher catastrophe losses than expected, showing its commitment to provide an attractive shareholder remuneration policy.

Its annual dividend related to 2023 earnings was $6.80 per share, representing an increase of 65% YoY, which at its current share price leads to a dividend yield of about 5.4%. This is lower than when I last covered Swiss Re, which at the time was yielding close to 6%, but it’s still an interesting yield for investors.

Its 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 dividend growth prospects. Indeed, according to analysts’ estimates, its dividend per share is expected to increase by about $8 per share by 2026, which means its dividend is expected to grow by mid-single digits over the next few years, which seems to be a sensible expectation.

Regarding its valuation, Swiss Re is currently trading at 10x earnings, which is practically in-line with its historical average over the past five years. Compared to its peers, such as Hannover Re (OTCPK:HVRRY) or Munich Re (OTCPK:MURGY), the company is trading at a slight discount given that its peers trade at 11x earnings, but this means Swiss Re’s upside potential seems limited after a strong share price rally over the past year.

Conclusion

Swiss Re’s has reported a positive operating performance during the past couple of quarters due to higher pricing in the P&C segment and relatively low catastrophe losses, but its valuation is now closer to its peers, making income the most attractive feature of its investment case. As I no longer see its shares as undervalued, I think a ‘Hold’ recommendation seems appropriate right now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.