Worsening Climate Events And Shrinking Pricing Power Will Impede Profitability

Key Takeaways

• Intensifying climate risks and industry competition threaten profitability through higher claims, margin pressure, and commoditized pricing, challenging Swiss Re's ability to sustain growth and market share.
  
• Earnings and reserve stability face ongoing threats from volatile investment income, legacy liabilities, and slow revenue growth in core insurance segments.
  
• Strategic underwriting discipline, operational efficiency, and focus on high-growth specialty lines position Swiss Re for resilient profitability and long-term growth amid evolving global risks.

Catalysts

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

• Worsening climate conditions have the potential to significantly increase the frequency and severity of natural catastrophes, directly driving up claim payouts and introducing volatility into Swiss Re's earnings and capital requirements, which could erode net margins and threaten the sustainability of current profitability levels.
  
• Sustained rate pressure and softening terms and conditions in key Property & Casualty segments, coupled with aggressive pruning of higher risk portfolios, may limit Swiss Re's ability to offset the negative impacts of lower risk-adjusted pricing, potentially causing long-term stagnation or decline in revenues as well as shrinking future earnings potential.
  
• Persistent exposure to ongoing legacy liabilities and negative experience variance within smaller Life & Health portfolios threaten future reserve stability; this could result in further unpredictable reserve charges and drag on reported profits, increasing the risk of earnings volatility.
  
• Investment returns remain vulnerable to an unpredictable interest rate environment. Unexpected central bank policy shifts or prolonged lower rates would compress investment income, undermining a crucial contributor to overall profitability and limiting the company's ability to support dividend growth and buybacks.
  
• Competition from alternative capital sources and industry-wide adoption of advanced analytics are likely to reduce traditional reinsurers' pricing power, accelerate margin compression, and commoditize risk selection. This puts at risk Swiss Re's ability to grow fee-based income and maintain market share, especially as clients demand more flexible and customized products that may cannibalize existing revenue streams.

Swiss Re Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Swiss Re compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Swiss Re's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.4% today to 10.5% in 3 years time.
• The bearish analysts expect earnings to reach $4.7 billion (and earnings per share of $nan) by about August 2028, up from $3.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 14.7x today. This future PE is lower than the current PE for the GB Insurance industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 2.88% 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

• Swiss Re's focus on disciplined underwriting, portfolio pruning (notably the significant reduction of exposure in underperforming casualty lines), and reserve strengthening has substantially increased the firm's resilience, which mitigates earnings volatility in future market stress scenarios and supports more stable net income.
  
• Despite cyclical pricing pressure in certain areas, Swiss Re is increasing its exposure to high-growth specialty and property lines where margins remain attractive, highlighting an ability to proactively pivot to profitable segments, thereby helping to protect and potentially grow revenue and underlying earnings.
  
• The company continues to deliver strong operating results, as seen in the first half net income of $2.6 billion, high return on equity, and robust combined ratios well below target, reflecting operational excellence and strong risk selection, which suggests core profitability is resilient.
  
• Swiss Re is successfully implementing cost reduction and operational efficiency programs, such as the commitment to achieve $300 million of cost savings by 2027, which should directly enhance operating margins and long-term bottom-line growth.
  
• Continued investment in proprietary risk models, data analytics, and the ability to provide structured and alternative risk solutions positions Swiss Re to benefit from increasing global insurance and reinsurance demand, especially in areas like climate risk and emerging markets, supporting multi-year top-line and profit growth.

Valuation

• The assumed bearish price target for Swiss Re is CHF102.59, which represents two standard deviations below the consensus price target of CHF142.57. This valuation is based on what can be assumed as the expectations of Swiss Re's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF172.52, and the most bearish reporting a price target of just CHF99.28.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $45.1 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 3.8%.
  
• Given the current share price of CHF146.2, the bearish analyst price target of CHF102.59 is 42.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.