Swiss Re Says Continued Emphasis on Underwriting Essential in ’03

At Swiss Re’s Year-End Economic and Insurance Industry Review 2002 and Outlook 2003, held mid-December 2002 New York, various speakers discussed the precarious situation most of the world’s major economies and insurance markets find themselves in, and identified possible strategies to begin returning to more stable conditions in the new year.

“In our view, the global outlook is improving,” said Kurt Karl, the head of Swiss Re Economic Research and Consulting, commencing an overview of both global and U.S. economic conditions. “We do have a struggling Europe, Japan unfortunately is ever doubtful in its recovery. Mexico is generally coming along with the U.S. recovery, and the outlier happens to be Canada, who is doing quite well despite this whole slowdown, growing significantly faster than the U.S.”

Karl continued, “Recently the U.S. economy has faltered, but generally things are improving … We had a disappointing number last Friday on the unemployment number jumping up, but we do know industrial production is down. (Consumer) confidence was low, but is rising. Housing has remained pretty robust throughout this cycle. Investment … is improving, and is going to be a driver of growth next year, we expect. Inflation is moderate, so not a worry …

“For insurance companies, not an easy time to make money in investments, and not just in the U.S.,” Karl said. “It’s a little bit worse in Europe … Canada is doing much better, but still a bit of a bubble and a bit of a burst. Japan seems to be going in one direction, and it is decidedly not up. The interest rate outlook is also very important because insurance companies tend to hold a lot of bonds—it’s just a very, very different environment than it was 10 or 20 years ago.”

Focusing on the U.S. economy in particular and how the current recovery differs from previous post-recession cycles, Karl said, “Housing starts were very different in this cycle—they didn’t go down as much, maybe a little bit, and they’re still at this fairly high level. You don’t get this kind of big 6 percent growth in the GDP this cycle because we don’t get this big movement in housing or in autos. Autos are a very similar story—a very high level. Last year, the year before, and this year are virtually the same as far as business cycles go. So no growth from those two things.

“Where we’re looking for growth next year—the consensus is in business investments,” he explained. “You can see a very different pattern in this recession compared to last recession … It just kept falling in the last cycle. In this cycle it’s turned around decidedly, orders are up and shipments are up. I think that trend will continue.”

Karl identified issues that could in fact derail the outlook he described. These included corporate problems such as excess capacity, weak profits, scandals, and excess leverage, which could lead to slower investments. He also mentioned stagnant private sector employment rates, continuing problems in the telecommunications and energy sectors, rising oil prices in the event Iraq is invaded, and the specter of what could become a double-dipped recession. (Karl placed the odds of another downturn at 20 percent.)

However, Karl also pointed out several trends that could bode well for the economy in 2003. Namely, the easing of the U.S. monetary policy late in 2002 and increased government spending on defense could boost short-term growth. In addition, mortgage refinancing and moderation could help consumers, and the dollar’s weakening performance against the Euro could lead to increased exports.

Thomas Holzheu, senior economist at Swiss Re Economic Research and Consulting, outlined what the company believes to be in store for the U.S. property/casualty market in 2003. “We see now, after two years of challenges and turbulences, that things are lining up for a positive outlook for the underwriting core business of the insurance industry,” he said.

Holzheu identified record high insured losses in 2001, persistent terrorist threats, stock market collapses, recession and low interest rates as major hindrances faced by the industry over the past 18 months. All these issues drastically depleted capital available to the industry—losses of between $30 and $50 billion from Sept. 11, $3 billion from the Enron fallout, and another $7 billion from other problem bonds. However, Holzheu pointed out that the single biggest loss driver for the industry over the past few years has been the poor performance of stock markets. U.S. insurers lost $24 billion in equity investments in 2001, and another $35 billion in 2002. European insurers have faired even worse—their losses in 2001 totaled $54 billion, and $56 billion in 2002.

“The impact on the capital base is not across the board, but is concentrated particularly on commercial lines and reinsurance companies,” Holzheu said. “Starting with a year-end surplus if $157 billion in 2001, insurers faced $17 billion in unrealized capital losses, $25 billion in reserve shortfalls, and $55 billion in estimated asbestos and environmental costs.

“There are several uncertainties in the capital base, and they’re all focused on the commercial lines insurers,” he continued. “For 2002, we estimate some $184 billion on new business. It’s important to realize also that reserve shortfalls will not be realized in one year. There’s no solvency threats, but it’s potentially—over there years, there may be some earnings impairments further down the road.”

Holzheu starkly illustrated how daunting the task will be of raising new capital to offset the massive depletions occurring during the past several months—gross capital declines total $205 billion, while net capital raised since 2000 totals only $22 billion.

“Since the year-end of 2000, we have lost over $200 billion due to capital losses primarily on equity investments,” Holzheu said. “New capital of $22 billion can only offset a very small part. So we are off $180 billion, 0r 25 percent of the total capital base. So that’s quite substantial. Capital shortage reinforces the pressure on underwriting conditions. We see underwriting improvements in the technical results … We expect for 2003 for underwriting cash flow to be positive, and then improve very, very strongly.”

Topics USA Europe Underwriting Swiss Re