© Reuters. FILE PHOTO: The logo of the insurance company Swiss Re can be seen in front of its headquarters in Zurich, Switzerland, February 12, 2019. REUTERS / Arnd WIegmann
By Alwyn Scott
NEW YORK (Reuters) – The expectation that hundreds of so-called zombie companies will fail and weigh on the economy in the next few years is a major concern driving insurers to reduce risk and charge higher premiums, a trend that is emerging likely as failures will continue to increase, said Swiss Re (OTC 🙂 AG on Tuesday.
Zombies – who lack the cash flow to cover the cost of their debt – are “a ticking time bomb” whose effects can be felt explosively as governments and central banks pull back on measures that helped keep these companies alive during the pandemic , Jerome Haegeli, chief economist at the Swiss insurer, told Reuters.
The sober prediction comes as stock prices hit records and the US economy looks set for 6.5% growth this year. However, these strengths are illusory, Haegeli said, as they rely on temporary fiscal and monetary support.
Haegeli said the proportion of companies that are zombies has certainly increased during the pandemic as central banks flooded markets with money and governments provided relief. At the same time, US company bankruptcies fell 5% in 2020, Swiss Re said in a report on Tuesday.
Before the pandemic, about 20% of publicly traded companies in the US and UK were zombies and 30% in Australia and Canada, the Bank for International Settlements said in September. For comparison, zombies made up about 15% of publicly traded companies in 14 advanced economies in 2017, and 4% before the 2008 financial crisis.
Insurers are cautious as they forecast where the economy will be in a year or more, Haegeli said. They curb underwriting risk, be more cautious in asset allocation to the investment portfolio, and even take precautions against insurance business and supply chain risk.
"Don't let the short-term picture fool you," said Haegeli. "Everything looks great when you look at the market today. However, it is an illusion to believe that this environment can last" as "life support" will be withdrawn in the coming months. And that will mean an increase in long overdue bankruptcies.
“I worry that defaults will suddenly increase because default rates are so low,” he said.
Insurers are likely to continue to raise prices to make sure they adequately assess the risks ahead, he said.
Global commercial insurance prices began to surge in 2017 and have grown since then, including an 18% increase in the first quarter of 2021, according to data from Marsh & McLennan Companies Inc (NYSE :).
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