By Alwyn Scott
NEW YORK (Reuters) - The expectation that hundreds of so-called zombie companies will fail over the next few years and drag on the economy is among the major concerns prompting insurers to reduce risk and charge higher premiums, a trend likely to continue as failures increase, Swiss Re (OTC:SSREY) AG said on Tuesday.
Zombies - which lack the cash flow to cover the cost of their debt - are "a ticking time bomb" whose explosive effects will be felt as governments and central banks withdraw measures that have 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 U.S. economy appears headed for 6.5% growth this year. Yet these strengths are illusory, Haegeli said, because they are based on temporary fiscal and monetary support.
Haegeli said the proportion of companies that are zombies certainly increased during the pandemic, as central banks flooded markets with money and governments provided relief. At the same time, U.S. company bankruptcies fell 5% in 2020, Swiss Re said in a report on Tuesday.
Before the pandemic, about 20% of listed firms in the United States and UK were zombies, and 30% in Australia and Canada, the Bank for International Settlements said in September. By comparison, zombies constituted about 15% of listed companies in 14 advanced economies in 2017 and 4% before the 2008 financial crisis.
Insurers are being cautious as they forecast where the economy will be in a year or more, Haegeli said. They are reining in underwriting risk, being more prudent about investment portfolio asset allocations and even taking precaution on insuring operations and supply-chain risk.
"They are not getting fooled by the short-term picture," Haegeli said. "If you look at the market today, everything looks great. However, it's illusionary to think that this environment can last" as "life support" is withdrawn in coming months. And that will bring an increase in long-overdue bankruptcies.
"I'm concerned that you're going to see a sudden spike in defaults because the default rates are so low," he said.
Insurers also are likely to continue raising prices to be sure they are adequately pricing the risks ahead, he said.
Global commercial insurance prices started rising in 2017 and have climbed since, including an 18% rise in the first quarter of 2021, according to data from Marsh & McLennan Companies Inc (NYSE:MMC).