Most stocks of the world’s biggest reinsurance companies have made new all-time highs, surpassing their decades-long tops. One rare exception is the world’s number two, Swiss Re. With the painful zero interest rate period being over and despite what it looks like another rate lowering cycle, the business is benefiting in two ways: higher insurance premiums as well as higher yields on investments. Is an all-time high for the stock only a question of time?

Summary and key takeaways from today’s Weekly
– Swiss Re is the world’s second biggest reinsurance company.
– It is also the only one of the top five where the stock has not made a new all-time high.
– Still 50% below its former glory, despite current tailwinds, I do not see a lucrative entry point. To the contrary, the valuation is now on a decade-high even.

Reinsurance businesses, respectively their stocks, for long have been among the darlings of more conservatively oriented investors who wanted to own shares of financial companies without the risks and black-box character of banks.

While of course reinsurance companies are not risk-free either, their business profile is clearly different from the one banks posses.

So is the cash flow profile.

While banks give away money by lending it out first, hoping to receive it back (plus interest), insurance companies (all types) first collect the money via insurance premiums and then put that money to work to generate an extra income. Their hope is that they pay out less to satisfy claims than they have received in insurance premiums.

Today very popular also thanks to Warren Buffett’s Berkshire Hathaway, (re)insurance stocks often have their place in many portfolios due to being perceived less risky financial stocks.

On top, their dividends often are higher, but also safer.

Like banks, insurance companies likewise suffered kind of a drought period when interest rates in the world’s major economies were quasi non-existent post the Great Financial Crisis of 2008.

Most of the insurers’ “floats” are invested in bonds thanks to their better predictable yields (but also regulatory requirements). As central banks drove up interest rates again in the last years, despite the recent lowering, this has been kind of like a major resurgence for these businesses.

Stocks price in the future and higher interest rates means higher reinvestment yields. This is clearly still the case, despite the peak in interest rates likely being behind us.

Now, there’s a positive yield again to be earned from bonds!

It clearly makes a difference whether the yield is 0.5% or maybe 4–5%! Many of the world’s biggest reinsurance companies of which most are located in Europe, have seen their stocks reach new all-time highs which is not a surprise in light of this tailwind.

One exception is the world’s number two, Swiss Re (ISIN: CH0126881561, Ticker: SREN). Their shares have seen a good performance, too. However, they still have about 50% to go to reach their more than a quarter-century old all-time high.

With the business running well and in light of the freshly updated new financial targets, this should be just a matter of time, shouldn’t it?

With my risks-first approach (paired with high upside), I am able to find stocks with great returns. Despite still being slightly behind my benchmarks, yesterday’s panicky sell-off clearly showed that tech stocks are the most vulnerable ones. It should be only a matter of time until tech comes down back to a more realistic level.

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The most lucrative option among European Reinsurance stocks?

Before we start looking at Swiss Re in more detail, first an overview of the world’s biggest names in this sector.

As already teased above in the intro, this “old-school” sector indeed is dominated by the old continent. Four of the six and five of the eight biggest reinsurance companies, measured by net premiums written, are domiciled in Europe.

Interestingly, the three leaders all come from German-speaking countries.

Munich Re (ISIN: DE0008430026, Ticker: MUV2) and Hannover Rück (ISIN: DE0008402215, Ticker: HNR1) are number one and three.

Sandwiched in between is the Swiss competitor Swiss Re, today’s center of focus.

The Swiss company has been in existence since 1863. Last year, it celebrated its 160th birthday. While I do not necessarily put too much weight on such series as one bad decision can ruin a company quickly, it is nonetheless worth a note.

I am highlighting this, as banks are not so well known for having such long histories.

Of course, there are exceptions, but taking the sector as a whole, banks definitely have a shorter shelf-life due to either disappearing through a merger or due to having gone belly up entirely because something blew up in their face.

Speaking of blowing up in the face and financial companies, Swiss Re made a negative experience on its own when it suddenly posted huge losses during the financial crisis.

This was not due to mistakes in the core business – reinsurance – but due to having experimented outside their circle of competence with bank-like services and derivatives. While competitor Munich Re was smarter by staying in the core business (thus not suffering as much during the financial crisis), Swiss Re suddenly saw its assets erode in market value.

The result was a major shortfall in required capital as suddenly almost 40% of equity was non-existent. As a consequence, in a single day Swiss Re’s stock lost a quarter and caught the market by surprise.

Due to the then used mark-to-market accounting (see here), lots of hot air was left out of the ballon as illiquid assets lost much of their previous value. Swiss Re saw itself in the midst of the financial meltdown and was forced to raise capital.

With the bond market practically closed, the company issued a convertible bond in a quasi-private transaction – Warren Buffett like in several other cases during the Financial Crisis said thank you and secured himself a right to own a quarter of the company.

Not too long after, Swiss Re repaid the rescue package, though.

You can read about the debacle in the midst of the financial crisis here (German language, but you can translate it with your translator of choice). See also this English source here.

Buffett is said to have netted in a nice 40% return over a two-year period.

Below, you can see from their annual report 2008 how shares tanked and the erosion of equity.

Long story short, Swiss Re survived and is today as alive as ever.

The only difference is, the stock hasn’t made a new high, while many competitors have done that. In fact, Swiss Re is the only one of the top five names that has not seen a new record-high of its stock price.

I think I do not need to explain that Buffett’s stock has made new highs, either.

But you can see above Munich Re, Hannover Rück and Great-West Lifeco (the parent of Canada Life, ISIN: CA39138C1068, Ticker: GWO) all made new all-time highs. The only exception is the French company SCOR (ISIN: FR0010411983, Ticker: SCR), but it’s neither in the top five nor today’s topic.

And here’s the long-term chart of Swiss Re – there’s still much ground to be made. Despite the pre-2008 high being taken out, there’s still a higher top left from the turn of the century.

So, is Swiss Re in a similar position where the biggest competitor Munich Re was 2–3 years ago?

The first thought I had was to check share count. This is important because a heavy dilution does not allow for an apples to apples comparison. Regarding the era of the financial crisis, today’s share count of Swiss Re is even a good chunk lower.

Between 2007–2009, shares outstanding were 370 mn., 363 mn. and again 370 mn.

So no dilution during the financial crisis which was quite an achievement, given the dire circumstances the company saw itself in.

Today, there are 308 mn. shares in circulation. The amount outstanding has dropped remarkably over the last decade.

What about the turn of the century?

14.3 mn. compared to ~300 mn. sounds nuts.

But there was a big 20–1 stock split in 2001, hence the difference.

So effectively, we had on an adjusted basis ~286 mn. shares vs. ~309 mn. shares today. That is a difference of 10%, which is not nothing. But it also does not justify the wide price gap between today’s stock price of ~130 CHF and the former all-time high above 200 CHF. Swiss Re’s stock needs to rise by 50% to reach its ATH.

Let us now assess the prospects.

Looking at the business, Swiss Re is a diversified reinsurer, active in the areas of property & casualty (P&C) as well as life and health (L&H). Both together account for more than 80% of Swiss’ entire premiums written. There’s also a third “Corporate Solutions” unit, but it’s by far the smallest and not a key driver. Around half of Swiss’ business is conducted in the Americas.

The reporting currency is the USD.

The next charts greatly shows the development of the business environment.

After a temporary slump in the core underwriting business with low pricing power for new insurances, this eventually turned for the better. Especially the last couple of years have been very strong which is to a big part due to several big disasters like earthquakes and storms which caused much destruction and thus insurance claims.

With perceived higher risks, (re)insurance companies have a strong hand to hike insurance premiums which is what happened in the recent past.

That’s the first part of the business.

The second is the investment portfolio.

The first years after the financial crisis of 2008–2009 were still relatively strong – thanks to old bonds with higher yields bought pre-crisis and thus before interest rates were effectively abolished.

As with time more and more of these matured, the money had to be put to work again. Unfortunately, given the dire interest rate environment until 2022, this segment caused much headache. The more so if bond maturities expired soon post 2008–2009.

Below, we see only a chart starting in 2019.

But nonetheless, it shows the dynamic. The greenish line is the reinvestment yield, i.e. the average yield for fresh money put to work into new investments. The difference between 2021, the last year before interest rates rose again and now is almost five-fold.

Almost 5x – these are worlds.

While we likely have seen peak interest rates, at least for now, the current level is still decisively higher than pre-2022.

Together with the strong pricing power in underwriting, (re)insurance has seen strong improvements in their financial results.

Here’s the development of premiums written (blue) as well as interest and dividend income (black) over the last decade. The former made new highs and saw a more dynamic move over the last couple of years, while the investment side is still a bit below potential – older, lower-yielding investments are holding this category back.

What does sound negative, indeed is positive insofar as there’s plenty of room for improvements. Case in point, management just recently gave their guidance for the next year. Expectations are that there’ll be a meaningful improvement – a solid ground to push the stock higher.

Management guided for lower combined ratios. The lower the ratio the better, because costs and claims are lower in comparison to premium income.

On a more aggregated level, management expects 4.4 bn. USD in net income in 2025.

In comparison, over the last twelve months, net income was just 2.9 bn. USD (2.2 bn. USD over the first nine months 2024). It should be realistic to achieve more than 3 bn. USD this year – which is the current guidance as of the last earnings release (see here).

The expected damage due to hurricane Milton is considered to be less than 300 mn. USD, due in the current fourth quarter.

Comparing that to the last ten years, Swiss is clearly on an upward trajectory.

The high from 2015 at 4.7 bn. USD might seem a bit out of reach, though. At least for now. But the envisioned 4.4 bn. USD would be the second-best result since 2014.

Higher earnings, higher shareholder returns.

In the case of Swiss Re, but also typical for the European reinsurance companies, the dividend is the primary tool of choice. Swiss Re aims to hike the cash payout at least by 7% each year over the next three years.

The current yield is slightly below 5%.

Note: keep in mind to convert the USD dividend into CHF to compare it to the share price in CHF.

All that said, even despite the business environment likely having seen peak interest rates, at least for now, operations are still strong. With an expected massively improved bottom line next year and a likely higher dividend on the horizon, the question that remains is: how much of that is already priced in?

Unfortunately, I might be disappointing many who saw a bargain.

Do yourself the favor and do not focus too much on the old all-time high. By anchoring / fixating yourself to that point, you might fool yourself by thinking there’s pretty much upside left.

The truth is though, insurance (respectively finance) companies can be valued very accurately by their book value / equity on the balance sheets. Swiss Re has a current market cap of ~38 bn. CHF or ~42 bn. USD.

As a rule of thumb, a (tangible!) book value of 1x is akin to a fair valuation.

Ideally, such businesses are bought even below book value which might only happen very occasionally and not be the norm. But this is the best scenario from a risk and reward perspective. I know that some investors argue that quality has its price. But, honestly, I hate to overpay. This is exactly the risk I am seeing here. This train has likely already left the station. Here’s why.

Equity on the balance sheet, i.e. the book value, is rounded up 23 bn. USD. That alone would be already 1.8x book value (42 bn. USD / 23 bn. USD). But we need to subtract intangibles which are 4 bn. USD and thus not nothing. The remaining tangible book value is 19 bn. USD – giving us a price to TBV of 2.2x.

I know management guided for a massively higher result next year.

The dividend costs them 1.85 bn. USD and should be close to 2 bn. USD for next year, after the promised hike. So, more than 2 bn. USD would come on top of the equity portion on the balance sheet in retained, i.e. not paid out earnings.

The price to TBV ratio drops only slightly below 2x in this case.

That’s still too expensive, pricing in growth. What I hope for is that management does NOT act stupidly by throwing out the remaining earnings via buybacks at these elevated valuations. If history is an indicator, at least in the past this was luckily not the case. The majority of buybacks occurred during 2016–2019 – when the stock traded for around 1x tangible book value.

Not the absolutely best, but also not the very worst timing.

Unfortunately, in TIKR the valuation section is blank and without data… hence I had to make this workaround.

The bottom line for me is, despite the prospect for higher net income and a hiked dividend, this has the potential to be a big disappointment.

With interest rates for now having seen their peak and premium growth at some point also slowing down, I do not see enough margin of safety to justify paying more then 2x the current and close to 2x next year’s book value.

But when would have been good entry points?

Taking the two big German competitors as a reference, I highlighted below good entry points from a valuation perspective. Munich RE never dropped below 1x tangible book value, but 1.5x was achievable – for the biggest and what it looks like most successful company of the sector.

But now, the valuations are on a decade-high – seldom a good entry point.

Even buying only post the first rate hike of the FED in March 2022, we can see that Munich Re’s stock appreciated by ~150%, Hannover’s by 83% and Swiss’ by 77%.

These are only price appreciations – dividends come on top.

So no, from a risk and reward perspective, this one isn’t worth it.

Conclusion

Swiss Re is the world’s second biggest reinsurance company.

It is also the only one of the top five where the stock has not made a new all-time high.

Still 50% below its former glory, despite current tailwinds, I do not see a lucrative entry point. To the contrary, the valuation is now on a decade-high even.

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