Swiss Re offers a good combination of income and value (OTCMKTS: SSREF )

Swiss Re ( OTCPK:SSREF ) is currently offering a dividend yield of over 6% and trading at just 9x forward earnings, making it attractive to income investors.

As I have covered in previous articles, Swiss Re is an interesting income investment Its high-dividend yield is supported by the company’s strong fundamentals and capitalization. Since then, its share price is up close to 38%, beating the market by a wide margin during this period.

As Swiss Re reported a few weeks ago its annual results for 2022, in this article I update its investment case to see if it remains an attractive income play or not, after its strong recent share price run.

Income analysis

Swiss Re reported a mixed performance in 2022, as its premiums increased due to better pricing. industry, but on the other hand its results were affected by a number of negative impacts including high inflation, Covid-19 claims, higher-than-expected losses due to natural calamities and weak capital markets.

Its net premium written increased 0.9% YoY to $43.1 billion, negatively impacted by currency movements. Excluding the impact of foreign exchange, its premiums increased by 5.3% year-on-year, as pricing in the reinsurance industry improved in the second half of the year.

However, Swiss Re’s net income fell to just $472 million in 2022 from $1.4 billion the year before, despite higher premiums year over year. Its return on equity ratio (ROE), a key measure of profitability within the insurance industry, was 2.6% in 2022 (vs. 5.7% in 2021).

This level of profitability is not particularly impressive and this relatively poor performance is largely explained by external factors that have put pressure on the company’s profitability. In fact, significant headwinds from higher inflation and other one-off effects negatively impacted its net income by about $2.8 billion, including about $1.1 billion in provisions to address the risk of higher claims due to inflation in its property and casualty (P&C) portfolio. ) segments, some of which are expected to be ‘normal’ in 2023.

Given that a large portion of these impacts were temporary and did not affect Swiss Re’s structural profitability, its guidance is for net profit to exceed $3 billion in 2023, the highest annual profit since 2016.

This is supported by the end of the pandemic and more modest disaster losses expected this year, as well as higher returns from investments. Additionally, the January renewals were positive for the company, as Swiss Re was able to capitalize on attractive market conditions and increase value in the P&C business.

In terms of its capitalization, Swiss Re had a strong position at the end of 2022 with its Swiss Solvency Test (SST) ratio exceeding 280%, above the internal target range of 200-250%. This strong surplus capital position is a major support for the company’s dividend policy, enabling it to deliver sustainable dividends over the long term.

In fact, related to 2022 earnings, Swiss Re decided to distribute an annual dividend of $6.40 per share, which is flat compared to the previous year in USD. Investors should note that Swiss Re changed its dividend currency from CHF to USD in 2022 earnings, thus its previous dividend of CHF 5.90 per share is unchanged when converted to USD, considering the current exchange rate.

This means that at its current share price, Swiss Re offers a dividend yield of over 6%, which is very attractive to income-oriented investors, although this is down from 8%+ in October when I previously covered it. Very high share price.

However, investors should note that due to last year’s poor financial performance, its dividend is not covered in earnings, considering that its EPS was only $1.60 in 2022. This is clearly not sustainable in the long term, given its current dividend. Funding primarily from the company’s excess capital position.

The company has a clear dividend commitment to provide a regular income stream, despite its earnings volatility, its sustainability based on current earnings is not great. On the other hand, if the company is able to return to a normal level of profitability, its earning power is much higher than what it has achieved in the past few years, and more than enough to cover its annual dividend.

In fact, according to analyst estimates, Swiss Re is expected to achieve earnings above $11 per share in 2023, and that will reach $13.50 per share by 2026. These improved earnings and the company’s strong capital position will provide a strong backdrop for sustained growth. Dividends in the coming years, if there are no unexpected hits to its bottom line during this period.

Given that in January Swiss Re was able to increase both value and volume in the P&C reinsurance segment, these expectations are well justified by improving operating trends, with a positive financial impact of approximately $800 million. As the company’s reserve position strengthened last year, it is not expected to report higher-than-normal claims losses in 2023, thus achieving its $3 billion net profit guidance and looking strong support for a higher dividend next year.

Current market expectations are for Swiss Re to increase its dividend by approximately 6% YoY relative to 2023 earnings to $6.80 per share, indicating that Swiss Re’s dividend growth prospects are good. In the medium term, Swiss Re maintains a target of ROE of 14% and financial growth of around 10% per share by 2024, which appears to be achieved through a combination of low claims costs, high pricing. P&C segment, and overall strong cost control.

conclusion

Although its recent results can be considered relatively weak, this is justified by cyclical factors rather than structural issues, a background that is expected to change in the near future. Swiss Re has a strong position in the reinsurance industry, a key factor behind the company’s good pricing in recent reinsurance renewals, which represents strong support for higher earnings in 2023.

It will also improve its dividend sustainability, with its high-dividend yield key to its investment case. Its shares have had a big run in recent months, with Swiss Re currently trading at 9x forward earnings, at a discount to the historical average of around 10.7x over the past five years. Therefore, Swiss Re remains an interesting income investment within the reinsurance industry, due to its attractive combination of income and value.

Editor’s Note: This article discusses one or more securities not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.