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 AG said today. 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 released today. 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.
