Swiss Re Economists Say U.S. Economy Entering Slow Patch, Industry Looking At Prolonged Hard Market

Swiss Re’s Chief Economist said on Wednesday that the U.S. economy is growing slowly – weakness consistent with a Fed cut later today – but will grow more rapidly in the second half of the year.

Additionally, at the company’s Mid-year Economic and Insurance Industry teleconference, Swiss Re’s Senior Economist asserted that underwriting profitability was further improving and, due to capacity constraints, the industry is in the midst of a prolonged hard market.

“Because of the spike in energy prices and the uncertainty surrounding the Middle East military actions, the U.S. economy has been weak for the past nine months,” said Kurt Karl, Chief Economist, Swiss Re. “However, positive indications are increasing, as deflationary risks decline and interest rates remain low and stable. Fed actions along with tax cuts and deficit spending should slowly improve economic activity.”

Karl also noted:

* The U.S. economy is currently in a “slow patch” of growth – industrial production is weak, investment is flat and consumer spending is moderate.

* In the second half of the year, the economy will get a boost as tax
cuts, the weak dollar, falling oil prices and low interest rates work their magic. Yields on the 10-year Treasury note will rise as the
economy gains strength.

* Due to the economic weakness and the threat – however small – of
deflation, the Fed is expected to cut rates by at least 25 basis points (0.25 percent) today. With this cut, yields on the 10-year Treasury note will likely test the 3.0 percent barrier in the near term.

Regarding the property and casualty insurance business, Thomas Holzheu, Swiss Re’s senior economist for that business sector, said, “Underwriting profitability has staged a rapid comeback, but overall profitability in the industry has still suffered due to higher reserving and poor stock markets.

“This points to a continued hard market due to capacity constraints, and a push by insurers to pull back from expansion and focus on core areas of expertise,” he added.

Among Holzheu’s observations:

* The U.S. property & casualty industry is still on a path of strengthening the core business and restoring underwriting profitability. However, capital losses and adverse reserves development overshadowed this positive trend in last year’s financial results.

* Capital remains tight despite active capital management, also reserve deficiencies are contributing to the capacity shortage. Rating
agencies’ actions are still biased toward downgrades.

* The pressure to increase rates will continue to come from a tight
capital base, deficient loss reserves, high loss-cost trends, and low
investment income. The industry’s profit potential will trend upward
for the next couple of years.