2022 financials: Industry barely keeping pace with inflation

Editor’s Note: This updated version of the article corrects the industry’s net investment income from -$61,400 to -$61.4 million. And $1.1 million OCI has been updated to $1.1 billion. Canadian Underwriter apologizes for the errors.

A combined ratio of 85.4% and solid underwriting results at year-end 2022 collided with an escalating interest rate environment and a volatile equity market for investments, according to a new industry report by MSA Research.

“Examining year-end 2022 industry results reveals that the market more or less held its own and returned solid underwriting results with a combined ratio of 85.4. This is in large thanks to a historically large reserve release of over $7 billion,” wrote Joel Baker, president and CEO at MSA Research in MSA Quarterly Outlook Report Q4 2022. 

“Without that reserve release, the run rate COR [combined operating ratio] would have been closer to 96.”

Plus, the industry’s published underwriting results “benefited greatly” from the higher interest rate environment, since loss reserves are discounted at higher rates. “When discounting is backed out, the industry combined (even with reserve releases) comes to 90.91,” Baker wrote.

But the industry did not benefit from the escalating interest rate environment and the volatile equity markets on the investment side.

For Canadian P&C, investment income and other comprehensive income (OCI) took a hit—net investment income was -$61.4 million in 2022 Q4, and OCI was -$4.8 million. “Net income, comprehensive income and even capital are down compared to year-end 2021 as a result.”

The industry’s 2022 combined ratio is up 1.25% from the year previous, according to MSA Research figures, and direct premiums written (DPW) surpassed $85 billion.

But, of concern, DPW (an increase of 7.41% from year previous) are only narrowly keeping pace with inflation. Baker wrote: “Net premiums written are slipping behind with a tepid 1.5% growth. The industry is flooring the accelerator, but the car isn’t speeding up.”

For personal lines, this could indicate a softening cycle, but such is not the case for commercial lines and reinsurance, he suggested.

Commercial pricing stayed ahead of inflation, MSA Research observed.

DPW in 2022 was up by 12%, net premiums written (NPW) were up by 10.5%, and net premiums earned (NPE) were up by 10.2%. A 2% increase in claims was offset by rising acquisition and general expenses.

For commercial lines, the result was a COR of 76 (undiscounted COR of 84.6) and an ROE of 14.5%. OCI collapsed by over $1.1 billion and total comprehensive income dropped by 33%.

“Again, like the rest of the industry, the result is supported by generous year-end reserve releases,” Baker wrote.

But he poses, “…the persistently hard commercial market is imposing significant hardship on many policyholders. Just ask any rural snow clearing company. Can this pace continue?” 

Personal (and multi-line) writers, on the other hand, are broaching on soft market territory.  

DPW increased by almost 7% in 2022 and matched the inflation rate—but underwriting income dropped by nearly 32% from the year previous.  

“Further, if reserve releases are backed out, the COR sat at an unprofitable 102.1 (even worse if you back out discounting) with investment results on the ropes, the personal/multi-line sector is heading the wrong way.” 

For reinsurance, year-end 2022 results led to a difficult 2023 renewal season.  

However, trends show strong growth, coupled with lower losses, and yielded a COR of 74—10% better than the year previous.  

“There was a nearly twelve-point boost to the combined ratio of the reinsurer benchmark as a result of discounting (85.8 COR on an undiscounted basis). The pain on the investment side mirrored that of commercial writers,” Baker wrote. 

The improvement can be credited to higher CAT retention levels at the primary carrier level, well as the reinsurance rate. 

Feature image by iStock.com/fatido