2023 investment income saves insurers’ bacon

A very strong fourth quarter in 2023 turned an ‘average at best’ year into quite a good year for Canada’s P&C insurance companies, according to a new report from the Property and Casualty Insurance Compensation Corporation (PACICC). 

“Reflecting on the historical record and recent year’s performance, it would be accurate to say that Canada’s P&C insurers are experiencing a ‘golden era’ with significantly higher levels of profitability (even after adjusting for the impact of inflation) than the industry’s long-run real return on equity (ROE),” writes Grant Kelly, PACICC’s chief economist, in the latest Solvency Matters report. “Since 2020, the industry’s real returns are collectively higher than the other 40 years in PACICC’s database.” 

The industry’s 2023 ROE of 16.2% was the fifth-highest since 1975, as well as the fifth-highest inflation-adjusted ROE recorded by Canada’s P&C insurers over this period, writes Kelly, who is also PACICC’s vice president of financial analysis and regulatory affairs. 

Since 2020, the average ROE has been 14.4% — the highest sustained level since 1975-79 in PACICC’s database. “This remains true even after adjusting for the impact of inflation,” Kelly says. 

Why is the industry seeing such strong profitability? 

The main reason was a rebound in investment income. Year 2022 marked the first time in the past 50 years that P&C insurers lost money on their investment portfolio, approximately two-thirds of which is bonds.  

Dramatic impact 

In 2022, the Bank of Canada aggressively increased interest interest rates to combat inflation, which “had a dramatic and very negative impact on P&C insurers’ investment income,” Kelly says. The following year, however, interest rates remained steady and the industry return on investment rebounded to normal levels. 

“This resulted in a $7.7-billion swing in industry income, which represents 72% of total industry profits and 115% of the increase in net income from 2020-23,” Kelly writes. “Last year’s massive increase in interest rates was unprecedented and is not likely to be repeated. This year’s jump in investment income is equally unprecedented, and it too is unlikely to be repeated.” 

2022 was unusual because strong underwriting profits allowed insurers to survive the dramatic increase in interest rates and resulting collapse in investment returns. 2023 was a return to more normal underwriting conditions. 

Underwriting remained profitable overall, but certainly not for all markets, Kelly notes. “There is evidence of growing cost pressures in auto insurance markets in Nova Scotia, New Brunswick, Ontario and Alberta,” he says. “In addition, insurance results in personal property insurance markets in Prince Edward Island, Nova Scotia, Manitoba and British Columbia are eroding the capital base of insurers operating in these markets.” 

Property insurers faced the challenges of more than $3.1 billion in catastrophic insurance claims last year. Conversely, results in commercial property and liability insurance appear to be allowing insurers active in those sectors to significantly grow their capital bases, Kelly writes. 

Profitability is never shared equally across Canadian P&C insurers. In 2023, 20 PACICC member insurers reported negative net incomes, representing 12% of PACICC’s 168 member insurers, Kelly says. But this number is better than normal — on average over the past five years, 31.6 insurers report losses each year. 

“The question facing regulators (and PACICC) is always whether the financial losses of these insurers represent a temporary blip that can be quickly corrected, or are part of a long-term trend of losses that will erode capital and undermine insurer solvency.” 

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