Swiss Re economists: Global growth is solid, US is close to trend growth, biggest risk to outlook is still oil prices

27 June 2006, Zurich

Swiss Re's Chief Economist today said that inflation concerns will cause the Fed to raise the federal funds rate to 5.5 percent. Additionally, at the company's Mid-year Economic and Insurance Industry teleconference, Swiss Re's Senior Economist, Thomas Holzheu, asserted that despite record losses, the insurance industry posted solid profits in 2005.

"The Fed will most likely raise rates this week and again in August by 25 basis points because inflation indicators are rising," said Kurt Karl, Chief Economist, Swiss Re. "There is a chance that we will get 50 basis points this week, with a clear indication of the end of tightening for now."
Karl also noted:

  • Inflation is rising — core CPI inflation was 2.4 percent year-over-year in May, up from 2.1 percent in March, and it will probably rise further. Accelerating wage gains, rising capacity utilization, a weak dollar and high oil prices are all contributing to higher inflation.
  • Economic growth is slowing, but not dramatically, and real GDP growth should be close to 3 percent in the second half of this year and next year, about where the Fed would like to see it.
  • Next year, if growth is close to 3 percent and core inflation eases back to 2 percent, as expected, the Fed will likely ease, lowering the federal funds rate back to 5 percent.
  • The yield on the 10-year Treasury note should remain close to the fed funds rate – there is still a lot of liquidity in the world and this will keep the yield curve flat. An inversion of fed funds and 10-year T-note is possible, but should be temporary because the economy is in solid shape.

Regarding the property and casualty insurance business, Thomas Holzheu, Swiss Re's senior economist for that business sector, said, "2005 was dominated by record losses from hurricanes Katrina, Rita, and Wilma. Nevertheless, the industry showed resilience. Underwriting discipline and the benefits of reinsurance preserved the industry's surplus and profitability. Going forward, the realization of higher catastrophe exposures increases capital requirements and property premium rates.'
Among Holzheu's observations:

  • Insurers and reinsurers worldwide bore a record USD 83 billion of total insured property cat losses, with Hurricane Katrina alone estimated at USD 45 billion. US P&C insurers are expected to pay USD 58 billion losses for last year's natural catastrophes.
  • Despite the unprecedented cat losses, the 2005 combined ratio was 101 percent and is expected to improve in 2006.
  • The industry's ROE for 2005 was 11.6 percent; for 2006, the ROE is likely to be around 11 percent .
  • In the aftermath of the hurricane season, the pace of premium growth is likely to pick up slightly as commercial property prices firm.

PLEASE NOTE: Presentations and other relevant information are available on Swiss Re's Web site, www.swissre.com. A replay of the teleconference is also available on the website.

About Swiss Re

Swiss Re is the world's leading and most diversified global reinsurer. The company operates through offices in over 30 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company's traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated "AA-" by Standard, Poor's, "Aa2" by Moody's and "A+" by A.M. Best.