The global economic outlook, with focus on US and Canada Kurt Karl Swiss Re CIA Conference Toronto Sept. 2009

The global economic outlook, with focus on US and Canada

Kurt KarlSwiss Re

CIA ConferenceToronto

Sept. 2009

Slide 2

Global economic outlook: Overview

The outlook

What is driving the recovery?

What happens to assets and inflation in a recovery?

Risks to the outlook

Summary of the economic landscape

Impact on insurance industry

Swiss ReEconomic Research& Consulting

Slide 3

2007 2008 2009F 2010F

Real GDP growth

Euroland 2.7 0.6 -4.2 0.6 UK 3.1 0.7 -4.5 0.6

Japan 2.4 -0.7 -5.5 1.3 Canada 2.5 0.4 -2.6 2.0

Inflation

Euroland 2.1 3.3 0.5 1.1

UK 2.3 3.6 1.8 1.3 Japan 0.1 1.4 -1.3 0.4

Canada 2.1 2.4 0.0 1.0

Policy rates (eop)

Euroland 4.00 2.50 1.00 1.25

UK 5.50 2.00 0.50 0.75

Japan 0.46 0.10 0.05 0.50

Canada 4.25 1.50 0.25 1.50

Yields 10-yr govt bond (eop)

Euroland 4.3 2.9 3.5 4.2

UK 4.5 3.1 3.8 4.4

Japan 1.5 1.2 1.2 1.5

Canada 4.0 2.7 3.5 4.2 Sources: Swiss Re Economic Research & Consulting

Global overview: Weak recovery in 2010


Slide 4Sources: Blue Chips Economic Indicators, Moody’s, Federal Reserve Board, Swiss Re ER&C

U.S. Economic Outlook: Key country for global recovery


Slide 5

What is driving the recovery?

Substantial Central Bank easing, low interest rates

Fiscal stimulus

Lower oil/commodity prices, reduced inflation

Inventories low, production now increasing

Global markets improving, exports rising

Cost reductions profits up, investment returns

Need US consumer for sustainabilitySwiss ReEconomic Research& Consulting

Slide 6

Tensions in the money markets have eased

Source: Bloomberg

3m Libor – 3m overnight index swap

0

50

100

150

200

250

300

350

400

Oct 07 J an 08 Apr 08 J ul 08 Oct 08 J an 09 Apr 09 J ul 09

US Euroland UK

Value as of 02 Sep 09Euroland: 38.9US: 15.7UK: 32.7

basis points

Slide 7

Monetary policy is highly accommodative

Source: Federal Reserve Board, Bank of Canada, European Central Bank


0

1

2

3

4

5

6

7

8

9

10

88 90 92 94 96 98 00 02 04 06 08

CanadaUSECB

Percent

Slide 8

House prices have rebounded in US and UK …

Source: Bloomberg

House prices, %-change year-on-year

-20%

-10%

0%

10%

20%

30%

40%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

US S&P/Case Shiller UK Halifax

Value as of 31 J ul 09US: -15.1%*UK: -9.9%

* as of 30. Jun 09Swiss ReEconomic Research& Consulting

Slide 9

…but not in Canada

Source: National Association of Realtors (US) 3- month moving average, Statistics Canada


-20

-15

-10

-5

0

5

10

15

20

88 90 92 94 96 98 00 02 04 06 08

Canada US

Percent change year ago

Slide 10

100

120

140

160

180

200

220

240

260

88 90 92 94 96 98 00 02 04 06 08

Housing starts

Canadian housing starts, not a big bubble, but a big bust

Thousands, 3-mo. moving average

Source: Canadian Mortgage and Housing Corporation


Slide 11

400

800

1200

1600

2000

2400

88 90 92 94 96 98 00 02 04 06 08

Housing starts

US housing starts, weak recovery

Thousands, 3-mo. moving average

Source: US Dept of Commerce


Slide 12Source: Bloomberg

Manufacturing survey continues to improve

Purchasing Managers Indices

30

35

40

45

50

55

60

65

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Index

United States Euro area United Kingdom J apan

Value as of 31. Aug 09US: 52.9Euro area: 48.2UK: 49.7Japan: 53.6


Slide 13

Manufacturing: Purchasing managers index

Above 50 is expanding

30

35

40

45

50

55

60

65

70

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

50 US Canada

Source: Institute for Supply Management, Richard Ivey School of Business (3-mo. mov. avg.)

Slide 14

-6

-4

-2

0

2

4

6

J an 96 J an 98 J an 00 J an 02 J an 04 J an 06 J an 08-4

-3

-2

-1

0

1

2

real GDP growth Business Climate Indicator (rhs)

percent Index

Euro area business sentiment has rebounded

Euro area GDP growth (pct chg year-on-year) and business sentiment

Value as of Jun 09GDP: -4.7Value as of Aug 09Indicator: -2.2

Source: Bloomberg, European Commission


Slide 15

UK leading indicator has recovered somewhat

GDP growth (pct chg year-on-year) and business sentiment (pct chg year-on-year)

Source: Bloomberg, Conference Board

Value as of Jun 09GDP: -5.5Value as of Jun 09Indicator: -7.4

-8

-6

-4

-2

0

2

4

6

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009-25

-20

-15

-10

-5

0

5

10

real GDP growth Leading Economic Indicator (rhs)

percent Index


Slide 16

Key to global recovery: US consumer spending is still weak

Percent change year ago, 3-mo. moving average

Source: Bureau of Economic Analysis


-3

-2

-1

0

1

2

3

4

5

6

7

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Real ConsumptionReal disp. Income

Slide 17

Real retail sales: US and Canada


Source: US Dept. of Commerce, Statistics Canada


-15

-10

-5

0

5

10

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US Canada

Slide 18

What happens to assets and inflation in the recovery?

Temporary investment opportunities: Credit and equities

– Late in recession, early recovery

Government bond yields likely to remain low

– But likely to rise in 2010, 2011

Risk of inflation rises after 2010, low inflation now

– Risk is low through end-2010, may not be a problem until 2012 or later

– Fiscal/monetary restraint will keep growth moderate

– Central banks are familiar with how to tighten monetary policy

– Risk is essentially political


Slide 19

0

1

2

3

4

5

59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

Spread, %

Spread of Baa to 20-year T-bond, quarterly avg

Source: Moody’s, Federal Reserve Board, NBER, SR Economic Research & Consulting

Credit spreads rise into, then fall after a recession

Slide 20

0

5

10

15

20

25

30

79 82 85 88 91 94 97 00 03 06 09

Forward P/EAvg. since '79

Source: Standard & Poor’s

12-Month Forward P/E Ratio

S&P 500, Forward P/E ratio:Close to fair valuation

Slide 21

8

10

12

14

16

18

20

01 02 03 04 05 06 07 08 09

P/E Avg. since '01

Source: Standard & Poor’s

P/E Ratio, Composite 60, S&P/TSX

S&P/TSX 60, P/E ratio:Close to fair valuation

Slide 22Source: EcoWin

0

2

4

6

8

10

12

14

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Canada

US

10 yr long-term bond yields (since 1988), monthly data

Long-term bond yields: mostly up from here

Slide 23

Percent

Source: Bureau of Labor Statistics, NBER, SR Economic Research & Consulting

Inflation rises into a recession, then falls, rates follow

Inflation is year-over-year rate

US All-items CPI and yield on 10-yrTreasury note

-202468

10121416

59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

T-note CPI


Slide 24

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

00 02 04 06 08

US UK

Long-term inflation expectations appear well-contained

Source: Bloomberg

Break-even Inflation, 10yr Bonds

percent

Value as of 31 Aug 09US: 1.7UK: 2.3

Slide 25

Source: Bureau of Labor Statistics (BLS), Federal Reserve Board of St. Louis

West Texas Intermediate, $bbl, and real 2000 dollars, bbl

Oil prices down, better for consumers, but not Canadian GDP

0

20

40

60

80

100

120

140

160

78 81 84 87 90 93 96 99 02 05 08

WTIReal


Slide 26

-2

-1

0

1

2

3

4

5

6

7

88 90 92 94 96 98 00 02 04 06 08

US Canada

Lower oil prices: Inflation turnsto deflation, but this will reverse this year


Source: Bureau of Labor Statistics, Statistics Canada


Slide 27

“Another bout of weakness” (25%)

Negative growth in 2010 from steep employment declines, consumers can’t come back

Credit crisis is more severe than currently anticipated, prolonging and deepening the recession

Pandemic is more severe than expected?

Upside risk – US begins a V recovery = strong global growth in 2010-11 (15%) due to:

Fiscal/monetary stimulus

Low inflation, low interest rates

Housing/vehicle replacement boom

Risks to the outlook


Slide 28

Summary

Monetary/fiscal stimulus, low commodity prices and lean inventories boost growth sustaining recovery

Fiscal/monetary restraint after 2010 moderates growth

Consumer and business loans strained through 2011, also implies a weak recovery

Inflation remains low

Yield on Canadian government bonds low until further notice – 3.5% end of 2009, 4.2% at end 2010; 4.5 – 5.0% thereafter. Similar in US, Euroland and UK

Equity and bond markets continue to recover

Market volatility continues into 2010 due to uncertainty about strength of recovery


Slide 29

Canada life market trends

The financial crisis has strained Canadian life companies, particularly those with large asset management operations.

Still, Canada’s economy has been less affected than other countries. Due to conservative regulatory standards and practices, its life insurers suffered fewer investment losses than their US counterparts.

Life companies issued debt and equity this year to replenish capital, keeping their capital ratios well above regulatory and company target minimums.

This year, economic and financial headwinds will continue to pressure operating margins, due to investment losses, lower fee revenue from assets under management, low government bond yields, higher funding costs, reduced access to funding, higher hedging costs, and weakened demand for new business.

In line with the sluggish economy, our forecast of inflation-adjusted L&H premium growth is: - 5% in 2009, 2% in 2010 and 4% in 2011 and beyond.

Despite its challenges, the industry remains well financed and its outlook is improving.

Slide 30

Canadian P&C insurance

Recession has lowered investment yields (4% in 2008 and 2009), but there has only been a slight erosion in capital

– Low government bond yields will continue to put pressure on investment returns

– Annual average ROE: 8% 2008, down to 5% 2009

Direct premiums written expected to be up about 2% in 2009

– Weak economic growth is reducing premium growth as companies increase the retention of their risks

Combined ratio likely to rise to 103% in 2009 from 100% in 2008

– Property and motor loss ratios are increasing


Slide 31

Questions?

To be put on the e-mail distribution list for Swiss Re’s US and Canadian Economic Outlooks contact:

kurt [email protected]

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The global economic outlook, with focus on US and Canada Kurt Karl Swiss Re CIA Conference Toronto Sept. 2009