Swiss Re‘s stock price fell by 4.26% to SFr89.90 ($68.63) on March 2, the day it announced its 2005 results, even though the firm made a profit. It posted net earnings of SFr1.5 billionn for 2005, compared with SFr2.5 billion in 2004. The profit was SFr1 billion lower mostly because of 2005 hurricane losses.
A big reason for the drop in share price was that the company missed analysts’ targets. “The earnings were 17% below market consensus,” says Frank Stoffel, analyst at investment bank WestLB Equity Markets.
But he adds that Swiss Re may also have suffered because investors are wary of the reinsurance industry as a whole. “There is a general feeling that reinsurance is a bad place to put your money,” says Stoffel. “Reinsurance stocks have started to become more cyclical stocks. If there is a mild hurricane season, things may change. Investors are very sensitive to any losses at the moment.”
Analysts feel Swiss Re did not deserve to take such a beating over its full-year results. “The market has been tough on it. The shares are down 4%,” says Tim Dawson, analyst at Swiss investment bank Helvea. “I thought that was a bit harsh.”
Stoffel agrees. “I don’t think the results are as bad as the price reaction suggests,” he says. But Stoffel does not believe the results were particularly good either. “The company continues to have adverse reserve development. And it missed its combined ratio target.”
In the first half of 2005, Swiss Re added SFr255 million to its reserves for old years, and in the second half it released SFr31 million of these reserves, resulting in an overall reserve deficiency of SFr224 million for the year. Swiss Re’s 2005 combined ratio for traditional business was 110.3%.
Stoffel believes the results contained some highlights. “On the positive side it posted strong net investment income that, according to the company, is sustainable. It was stronger than we expected,” he says. Swiss Re’s 2005 net investment income was SFr5.4 billion, up from SFr4.9 billion the year before.
But he adds that this is not necessarily a compelling reason to buy the stock. “The company doesn’t have a positive story to tell in the short term,” he says.
Dawson at Helvea is more upbeat about the firm’s prospects. Swiss Re recently got approval from shareholders to buy GE Insurance Solutions, which will make it the world’s biggest reinsurer.
“From a long-term point of view, Swiss Re has got tremendous potential,” he says. “It is the undisputed leader in property/casualty and life business and it is the leader in alternative and capital markets risk transfer. It has got the right chief executive for the job. The shares are not bad value. If you invest on a two- or five-year basis, Swiss Re looks quite good.”