Strengthened US Liability Reserves Will Reduce Risk And Support Future Earnings

Key Takeaways

• Strengthening U.S. liability reserves and disciplined underwriting in P&C support enhanced stability and sustainable revenue growth.
  
• Strategic divestitures and strong capital position bolster future profitability, growth, and reliable dividends.
  
• Significant U.S. liability reserve challenges and cautious underwriting could negatively affect profitability, net margins, and future revenue growth opportunities.

Catalysts

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

• Swiss Re has significantly strengthened its U.S. liability reserves, enhancing the resilience and stability of its financial base, which is likely to positively impact future earnings by reducing the risk of negative reserve developments.
  
• The company's disciplined underwriting, particularly in the Property & Casualty (P&C) segment, is expected to contribute to sustainable revenue growth and maintain strong underwriting profits.
  
• Swiss Re's focus on high-quality portfolio steering and disciplined underwriting decisions, as well as the implementation of prudent initial loss assumptions, is anticipated to improve net margins by reducing the likelihood of unexpected claims.
  
• The divestiture of iptiQ EMEA P&C to Allianz Direct and ongoing efforts to maximize the value of remaining parts of the business indicate strategic streamlining that could enhance future profitability and positively impact net income.
  
• Swiss Re's strong capital position, with an SST ratio of 284%, provides a robust platform for future growth and investment opportunities, supporting sustained earnings growth and a reliable dividend policy.

Swiss Re Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swiss Re's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $16.13) by about February 2028, up from $2.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.5 billion in earnings, and the most bearish expecting $3.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 15.5x today. This future PE is lower than the current PE for the GB Insurance industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.1%, as per the Simply Wall St company report.

Swiss Re Future Earnings Per Share Growth

Risks

• The significant strengthening of the U.S. liability reserves, with an addition of $3.1 billion, suggests potential ongoing challenges in managing liabilities, which could negatively affect net margins and earnings.
  
• The substantial reserve additions, driven by adverse scenarios, highlight the potential for future liability losses, indicating financial strain that may impact future profitability and earnings.
  
• The company anticipates no negative net reserving impacts going forward, but the previous need for reserve strengthening reflects the underlying challenges that could affect future earnings.
  
• The cautious stance on new business, including a 21% pruning of the portfolio, could limit future revenue growth opportunities, impacting overall revenue generation.
  
• The focus on U.S. liability reserve challenges and the need for increased caution in underwriting indicates ongoing risks in this market, which could continue to affect profitability and net margins.

Valuation

• The analysts have a consensus price target of CHF139.132 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 CHF160.86, and the most bearish reporting a price target of just CHF100.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $52.3 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 4.1%.
  
• Given the current share price of CHF139.95, the analyst price target of CHF139.13 is 0.6% 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.