Swiss Re: Macroeconomic Pressures Causing Headwinds

Aug. 05, 2022 3:39 AM ETSwiss Re AG (SSREY), SSREF3 Comments
Discount Fountain profile picture
Discount Fountain
4.15K Followers

Summary

  • Swiss Re has seen an increase in its combined ratio across the Property & Casualty segment.
  • While net income growth has returned across Life & Health, this could decline in the winter months if a surge in COVID cases increases excess mortality.
  • I take the view that this stock will see low growth in the short to medium term.

Davos Cityscape, Switzerland

Orietta Gaspari/E+ via Getty Images

Investment Thesis: I take the view that Swiss Re will see low growth in the short to medium term.

Swiss Re (OTCPK:SSREY) (OTCPK:SSREF) has continued to see downside in 2022 - owing to broader macroeconomic risks and continued uncertainty over the ongoing situation in Ukraine.

investing.com

investing.com

While I originally made the argument back in April that Swiss Re could be in a position to benefit from rising inflation due to appreciating real estate prices - I also cautioned more recently that this could prove to be a double-edged sword, as higher interest rates could instead curb property demand and hence demand for property insurance.

The purpose of this article is to examine Swiss Re's business from a more holistic perspective, and determine whether the stock has scope to rebound given the current macroeconomic conditions.

Performance

Taking the growing macroeconomic pressures into account, investors are likely to pay more attention to cash flow, in order to ensure that Swiss Re can continue to finance its short-term liabilities while remaining profitable.

When looking at cash to short-term debt, we can see that while Swiss Re still has more than sufficient levels of cash to cover its short-term debts, the cash to short-term debt ratio has dropped. Long-term debt has increased slightly, but Swiss Re has also managed to raise its cash levels accordingly.

Item December 2021 June 2022
Cash and cash equivalents 5051 5277
Short-term debt 862 1539
Long-term debt 10323 10633
Cash to short-term debt ratio 5.859 3.428
Cash to long-term debt ratio 0.489 0.496

Source: Figures sourced from Swiss Re Half-Year 2022 Report. Cash ratios calculated by author. All figures in USD millions except cash ratios.

When looking at segment performance, we can see that the Life & Health segment benefited significantly from a drop in excess mortality across the United States in the second quarter.

Swiss Re Half-Year 2022 Results Presentation

Swiss Re Half-Year 2022 Results Presentation

With that being said, we did see an increase in the combined ratio across the Property & Casualty segment - meaning that the amount of claims relative to premiums collected has increased.

Moreover, while we can see that the Life & Health segment has returned to profitability - net income as a whole still remained quite low for H1 2022:

Swiss Re Press Release H1 2022

Swiss Re Press Release H1 2022

From this standpoint, the Property & Casualty sector as a whole has become more expensive to insure in the past year. Moreover, while net income has come back into positive territory across Life & Health - this has only been marginal and cannot compensate for the drop in net income growth across P&C. Additionally, while excess mortality has dropped in the most recent quarter - there is a possibility that this metric could increase once again if the coming winter results in a greater degree of COVID-related outbreaks.

Looking Forward

While the Life & Health sector has seen an encouraging recovery, the possibility of further COVID outbreaks this winter could result in a rise in claims and thus place pressure on the sector.

Additionally, inflation and higher property prices mean that the cost of insuring such properties will also rise. We can see that while the value of real estate investments for Swiss Re has increased from last year, the overall return on equity for the group has been lower - which would be expected given the broader decline that we have been seeing in the equity markets:

Investment Real Estate

Swiss Re Half-Year 2022 Report

Swiss Re Half-Year 2022 Report

Financial Highlights

Swiss Re Half-Year 2022 Report

Swiss Re Half-Year 2022 Report

Given that inflation shows no signs of abating for the foreseeable future - I take the view that this trend could continue as we head into the rest of this year, and Property & Casualty could become more expensive to insure as a whole.

This, coupled with the potential for a greater number of claims across Life & Health could place pressure on net income growth overall.

Conclusion

To conclude, I take the view that while Swiss Re remains a fundamentally strong insurance company - macroeconomic pressures, inflation and low equity market growth could lead to greater expense for the company going forward.

For these reasons, Swiss Re could see low to modest growth for the remainder of this year.

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: 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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