Why 2022 industry results could be one for the record books

Historically good underwriting combined with historically bad investment results have made the Canadian P&C industry’s 2022 Q3 financial results unique, per the latest quarterly report from the Property and Casualty Insurance Compensation Corporation (PACICC).

The decline in investment returns is primarily the result of the dramatic rise in interest rates, which caused the industry’s bond portfolio to fall, wrote Grant Kelly, PACICC’s chief economist and vice president of financial analysis and regulatory affairs, and research assistant Zhe (Judy) Peng. Canada’s P&C insurers hold approximately 75% of their invested assets in bonds.

“PACICC’s database of industry results traces back to 1975. Over this 47-year period, P&C insurers have never reported annual investment losses — not once,” Kelly and Peng wrote in the article, Bad investment results make good underwriting more important than ever. “This could change in 2022. In the first nine months of 2022, Canada’s P&C insurers reported return on investment of -1.2%.”

On the flip side, historic underwriting results were reported in the first three quarters of 2022. “The 52.4% loss ratio recorded for the first three quarters of 2022 represents the industry’s best start to an underwriting year since 1975,” the report said. “It beat the previous ‘best’ reported in 2021 [2021 Q3: 53.9%].”

The industry reported a return on equity of 13.3% in 2022 Q3. Although this is certainly much lower than the 18% reported one year earlier, the industry ROE remains above the long-run average of 10.1%.

Kelly and Peng said the 2022 Q3 financial results “represent the beginnings of an expected return to historically ‘normal’ levels of profitability.” That said, “based on historical patterns, there is more deterioration to come,” the report cautioned.

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PACICC president and CEO Alister Campbell warned last year the 18% ROE in 2021 Q3 could be cut in half in two years.

“Every single time that insurers have reported such above-average profits, competitive forces have quickly acted to cut the industry’s return on equity in half — to an average of 7.4% — within two years,” Campbell wrote in PACICC’s 2021 annual report.

In the past, such high levels of profitability have proven not to be sustainable, added PACICC’s board chairman Glenn Gibson. “Over the past 45 years, P&C insurers have reported return on equity of greater than 15% on 10 occasions.”

These years of high profitability generally appear in groups (1977 to 1978; 1983; 1986 to 1987; 2004 to 2006; and 2020 to 2021). Still, the 18% ROE was above all others — the average ROE in the P&C industry’s years of peak profitability was 16.8%.

The impact of poor investment returns on net income varied across PACICC’s 170 member insurers. Over the first nine months of 2021, 11.3% of insurers reported negative net incomes, despite this being the industry’s most profitable year on record. Over the first nine months of 2022, 27.8% of P&C insurers reported negative net incomes. “The 27.8 per cent figure is generally in line with the industry’s long-run average and so isn’t a source of huge concern — yet,” PACICC said in the report.

“The challenge for those insurers that are reporting negative net income is how quickly they can return to profitability,” the report said. “Consistent profitability is a very important solvency metric for PACICC. And not all insurers have shown the ability to achieve this.”

PACICC added that a small number of insurers consistently report negative net income, “and it is these member insurers the association continues to monitor most closely.”

Using stats from MSA Research (as of Nov. 28, 2022), PACICC said direct premiums written for the industry were $56.173 billion in 2022 Q3, up 7.9% from $52.066 billion the previous year. Underwriting income was $6.603 billion in the 2022 Q3, up from $6.338 billion in 2021 Q3. The combined ratio improved slightly from 85.4% to 85.2% in 2022 Q3.

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