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Morningstar | Swiss Re Reports Less-Than-Stunning First Half; Shares Undervalued

Swiss Re reported first-half 2018 net income of USD 1,006 million, slightly ahead of our expectations. Though the headline result is down on the prior year, these results reflect a USD 265 million negative U.S. GAAP accounting impact. We retain our CHF 94 fair value estimate and no-moat rating.

Property and casualty reinsurance, a business we like, increased net income from USD 546 million to USD 752 million; moreover, this was on a lower premium number. The business also improved this combined ratio from 97.4 to 92.9%. This has partially been driven by positive renewals in terms of volume and pricing, where pricing has showed positive development.

In the smaller reinsurance segment, life and health, another line we like, net income was down slightly on the comparable to USD 398 million from USD 432 million. Net operating margin declined 130 basis points to 9.9%.

Corporate solutions, a segment we have expressed concern about, improved net income markedly to USD 58 million, and net operating margin rose to 3.8%. However, we are still way off the USD 248 million net income we saw in first-half 2016, when operating margin was 18.5%. Additionally, premium income has risen since the time of entering into primary lead. We're still unconvinced that this is a good use of the company’s capital, given the very subpar return on equity.

Life capital net income declined from 143 million to USD 34 million. Swiss Re has announced its intention to explore the possibility of IPOing the U.K. closed-book part of its life capital division. Life capital does not sit very well within the business at present, in our opinion.

While this was not a stunning earnings release, we would like to see more of the life capital unit disposed of. Additionally, our first preference is for an exit of corporate solutions. Still, in the event that the firm doesn't pursue this, the unit is improving, albeit very gradually.