New Rigorous Measures Will Strengthen Resilience And Reduce Volatility In P&C And Life & Health Segments

Key Takeaways

• Strong pricing environment and disciplined underwriting in P&C Re segment drive revenue growth, despite volatility in markets.
  
• Strategic cost reduction initiatives and robust dividend growth signal confidence in enhancing shareholder value and future profitability.
  
• Persisting volatility and external pressures, such as catastrophes and currency fluctuations, pose challenges to Swiss Re's earnings, revenues, and net margins.

Catalysts

Provides wholesale reinsurance, insurance, other insurance-based forms of risk transfer, and other insurance-related services worldwide.

• Swiss Re has implemented a more rigorous approach to addressing pockets of volatility and assumption updates in both the P&C and Life & Health segments. This should enhance resilience and reduce earnings volatility, impacting earnings growth positively.
  
• The company has projected net income growth through to 2025, with a target net income of over $4.4 billion, suggesting stronger future profitability. This aims to add value to earnings and return on equity.
  
• Swiss Re is targeting a reduction in operating costs by $300 million by 2027, with $100 million in savings anticipated in 2025. This reduction is expected to improve net margins and contribute positively to earnings.
  
• The strong pricing environment and disciplined underwriting practices, especially in the P&C Re segment, have allowed Swiss Re to realize 7% volume growth in the renewal period. This is expected to bolster revenue growth.
  
• Swiss Re aims to continue growing its dividend by at least 7% per year for the next three years, reflecting management's confidence in the company's earnings power. This could drive value in terms of shareholder returns and stock price appreciation.

Swiss Re Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swiss Re's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $5.2 billion (and earnings per share of $17.83) by about April 2028, up from $3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.0 billion in earnings, and the most bearish expecting $4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the GB Insurance industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.82%, as per the Simply Wall St company report.

Swiss Re Future Earnings Per Share Growth

Risks

• The reserving actions and assumption reviews in various lines, particularly in Life & Health, suggest underlying volatility and may lead to significant adjustments impacting earnings (earnings risk).
  
• The occurrence of major catastrophes like the LA wildfires, with substantial initial loss estimates, could strain the catastrophe budget and impact net income if such events continue (net margins risk).
  
• The financial targets hinge on positive renewals; any deviation in market discipline or unforeseen competitive pressures could impact achieved price levels and volume growth, affecting revenues (revenue risk).
  
• Currency exchange rate fluctuations have already impacted the capital position and CSM balance, which could further affect profitability and reported earnings if such volatility persists (earnings and capital position risk).
  
• The high sensitivity to changes in investment income, due to the flattening of the yield curve, implies potential risk to the profitability if interest rates do not perform as expected (net margins and investment income risk).

Valuation

• The analysts have a consensus price target of CHF135.763 for Swiss Re based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF168.91, and the most bearish reporting a price target of just CHF89.58.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $51.5 billion, earnings will come to $5.2 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 3.8%.
• Given the current share price of CHF140.15, the analyst price target of CHF135.76 is 3.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.