Given that Swiss Re is likely to see significant mark-to-market losses on equity accounted investments in the first quarter of 2020, as well as the ongoing uncertainty to the financial market outlook on COVID-19, analysts at JP Morgan see a substantial risk that the reinsurer’s previously-announced buyback will not be launched following the annual general meeting.
Analysts note that Swiss Re’s Swiss Solvency Test (SST) ratio is sensitive to both interest rates and credit spreads, and that after recent market movements the reinsurer’s ratio is in the region of 200%.
This is below the 220% “respectability” level that Swiss Re sets for itself, which in our view undermines the logic for continuing to return “surplus” capital.
JP Morgan remains comfortable with Swiss Re’s overall financial position, and does not see any risk to the ordinary dividend.
The company has already flagged the risk to the buyback assumption, and has now formally removed it from its model.
Given this SST position, and also in light of the precedent set by US banks, JP Morgan no longer expects the buyback to be launched following the AGM.
Returning surplus capital is fourth in the capital management priority list for Swiss Re, with financial strength, the ordinary dividend, and deploying capital within the business all taking priority.
Given the important P&C renewals coming up in April and June/July, analysts believe retaining capital is sensible at this point.