Swiss Re “cautiously optimistic” about European, US non-life recovery

In its annual “Insurance Review” held both in London and New York, Swiss Re said that if insurers can maintain underwriting discipline, results through 2004 should highlight recovery.In Europe, strong pricing in 2003 was hampered by several factors, notes Thomas Hess, chief economist for Swiss Re. “To a large extent, the price increases achieved this year served to compensate for previous under-pricing. Many insurers also appear to have under-reserved their liability business in the second half of the 1990s. A further reason for the lacklustre results is that accounting rules in some countries permit capital losses to be deferred.” He expects that 2004 will see hard market pricing more clearly manifested in balancesheets, although the pace of price increases will wane.In the U.S., Swiss Re speakers urged the need to maintain price discipline moving forward. “Industry-wide, there remains pressure from several factors, including a low interest rate environment and low capital market returns,” comments Patrick Mailloux, head of the US direct market for Swiss Re Americas. “Strong pricing, or what we call a ‘hard market,’ must continue to allow P&C insurers to return to underwriting profitability.”In terms of insurance stocks, there is cause for guarded optimism, suggests William Hawkins, insurance analyst for Swiss Re investment bank Fox-Pitt Kelton. “The sector has managed to rescue itself thanks to a rally in equity markets and a rise in bond yields since March, action by management and capital raising. The pricing cycle is holding firmer than feared in the middle of the year,” he says. “However, the industry’s solvency remains fragile and headline earnings remain geared to the risks of the past – 2003 suffered a hangover of the issues that we thought were cleared up in 2002.”He adds that many insurance stock valuations have been based on recovery expectations, so companies who disappoint will be punished.