Swiss Re: Ukraine Losses And Rising Interest Rates Could Pose Risks

Jun. 17, 2022 7:13 AM ETSwiss Re AG (SSREF)5 Comments
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Discount Fountain
4.15K Followers

Summary

  • Swiss Re saw strong growth up until February of this year when the situation in Ukraine materialized.
  • Rising interest rates could curb property demand, which, in turn, could curb demand for property insurance.
  • Swiss Re could come under pressure in the short to medium term.

Geneva aerial view Switzerland

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Investment Thesis: Swiss Re could come under some pressure in the short to medium-term, as losses from Ukraine and rising interest rates pose risks to profitability.

In a previous article on Swiss Re (OTCPK:SSREF) back in August of last year, I made the argument that significant potential upside could lie ahead for the company.

My reasons for making this argument were the fact that performance across the Property & Casualty sector was expected to remain strong. Additionally, Swiss Re had been showing significant growth in earnings and cash flow.

Despite this, the stock is down by over 15% since my last article:

investing.com

investing.com

With that being said, the stock had actually seen upside past the CHF 100 mark before falling steeply in February when the ongoing geopolitical situation in Ukraine transpired. According to Life Insurance International, Swiss Re had to set aside $283 million in losses as a result.

Given that recent events will have had an impact on Swiss Re's business - the purpose of this article is to assess whether Swiss Re could see upside to previous highs once again once the global macroeconomic situation starts to become more stable.

Performance

When looking at the combined ratio for P&C insurance, we can see that losses related to Ukraine significantly pushed up the combined ratio beyond the 94% target that the company is aiming for in 2022.

Swiss Re: First Quarter 2022 Results

Swiss Re: First Quarter 2022 Results

For reference, the combined ratio refers to the ratio of expenses and losses relative to the earned premium. A lower ratio is better, as it indicates that the earned premium generated is sufficient to cover expenses and losses. When looking at the historical combined ratio for Swiss Re from Q1 2016 to Q3 2021, the ratio came in at a mean of 101.7 with a standard deviation of 7.8.

Figures sourced from historical quarterly reports for Swiss Re. Graph generated by author.

Figures sourced from historical quarterly reports for Swiss Re. Graph generated by author.

It was decided to run a Monte Carlo simulation of 10,000 trials using these parameters - it is calculated that the combined ratio would fall below 94% just over 16% of the time.

Author's calculations

Author's calculations

From this standpoint, while the trajectory regarding Ukraine is uncertain - I would deem it more unlikely than likely that Swiss Re would see a normalized combined ratio of below 94% this year, based on both historical performance as well as the expectation that losses in Ukraine will continue to have an impact.

For Property & Casualty as a whole, we can see that while net premiums grew by 5.8% due to volume and price growth - net operating margin showed a decline from the same period last year.

Swiss Re: First Quarter 2022 Results

Swiss Re: First Quarter 2022 Results

Therefore, while Swiss Re may be in a position to benefit from inflation (as rising property prices makes it more likely that property owners will seek insurance) - it is unclear whether such gains will be sufficient to offset catastrophic losses - as we have seen with the situation in Ukraine.

Moreover, while it is increasingly accepted that the emergency phase of COVID-19 is over in many parts of the world - Q1 2022 still showed a significant degree of excess mortality as a result of COVID.

Swiss Re: First Quarter 2022 Results

Swiss Re: First Quarter 2022 Results

This could become a seasonal pattern for the foreseeable future, and thus the Life & Health segment could also face ongoing pressure.

Looking Forward

With a bear market recently being indicated by the S&P 500, markets seem to be pricing in a period of decline in economic growth, if not a recession outright.

This, combined with the effects of inflation, could affect the demand for insurance as a whole.

Particularly, given the fact that we are seeing a trend in rising interest rates to combat inflation - with the Federal Reserve having recently risen rates to the highest level since 1994 - this could have the impact of slowing down property demand in the medium term. As a case in point, housing starts in the United States fell by over 14% in May, which was the largest drop since April 2020.

In turn, this could also have the impact of lowering demand for property insurance. In this regard, while Swiss Re originally saw significant gains from the P&C segment which helped shield the company from losses on the Life & Health side - there is a risk that demand for insurance could start flattening out more broadly, as property demand potentially slows and demand for life and health insurance slows as the pandemic abates.

Conclusion

To conclude, Swiss Re has come under some pressure as a result of the ongoing situation in Ukraine. However, an environment of inflation and rising interest rates may be challenging if this significantly reduces demand across the property market.

From this standpoint, the stock might come under some pressure in the short to medium-term.

This article was written by

Discount Fountain profile picture
4.15K Followers
I am an independent investor with an interest in analyzing stocks across the consumer, finance, telecommunication, and travel sectors. As a data scientist, I also have a great interest in using data tools to better understand a company's financial position.Some examples include:- Aggregating quarterly churn and ARPU data for Deutsche Telekom (DTEGY) and analysing trends over time using SQL: https://seekingalpha.com/article/4516805-deutsche-telekom-growth-potential-remains- Building a Monte Carlo simulation in Python to analyze loss ratios for Zurich Insurance Group (ZURVY): https://seekingalpha.com/article/4459821-zurich-insurance-stock-solid-insurance-company-still-faces-risks- Examining ADR and RevPAR trends by brand for Hilton Worldwide Holdings (HLT) using SQL: https://seekingalpha.com/article/4517248-hilton-worldwide-holdings-an-analysis-of-adr-and-revpar-trendsDisclaimer: All of the author's articles are written on an "as is" basis and without warranty. They represent the author's opinion only and in no way constitute professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in any articles published.

Disclosure: I/we have a beneficial long position in the shares of ZURVY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long Zurich Insurance Group (SWX: ZURN).

This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in this article.

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