Recent analysis by Jefferies Equity Research has shed light on Swiss Re’s strategic shift in underwriting, reserving, and earnings recognition practices, following the company’s latest earnings release.
The research notes that, despite the clear intent demonstrated by Swiss Re to enhance its financial prudence, market consensus remains divided, with ongoing casualty concerns exerting pressure on its stock price.
Jefferies’ research points to a mixed outlook for Swiss Re, with revenue projections showing negligible movement in 2024 and a slight increase in 2025. Earnings per share (EPS) estimates, however, indicate a decrease in 2024 and 2025, contrasting with a more optimistic consensus that forecasts growth in these years. The research firm notes that this divergence highlights the varying interpretations of Swiss Re’s financial health and strategy within the investment community.
The earnings release and subsequent conference call showcased Swiss Re’s commitment to adjusting its business approach. In it, Swiss Re reported a -2% change in risk-adjusted pricing, suggesting the onset of a deflationary cycle. This stands in contrast to the risk-adjusted figures reported by its peers. Swiss Re attributes part of its reported cost inflation to prudent forecasting, indicating a cautious approach to financial management.
The company’s property and casualty reinsurance segment exhibited significant reserve strengthening and a high casualty combined ratio in the last quarter of 2023. While this could signal social inflation, Jefferies interprets the increase in incurred but not reported (IBNR) reserves as a move towards greater financial prudence.
Swiss Re’s guidance on a $500 million reserve build for future underwriting years suggests a strategy of profit smoothing, similar to practices adopted by German insurance companies. This approach aims to mitigate the impact of unforeseen financial pressures.
Finally, management’s comments on expected US mortality rates post-pandemic indicate a conservative outlook, with predictions of slightly higher mortality in the coming years. However, Jefferies anticipates a quicker normalization of mortality rates than Swiss Re’s projections suggest.
Jefferies also notes that Swiss Re’s impending transition from US GAAP to IFRS 17 accounting standards is likely to provide a smoother financial reporting process compared to its peers, due to less volatile interest rate environments.
Despite minor adjustments to the operating profit and EPS for 2025, underlying earnings remain largely unchanged. The firm’s analysis concludes that while there is cautious optimism around Swiss Re’s financial direction, the broader market’s reception remains mixed, reflecting ongoing uncertainties in the insurance sector.
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