Canadian Insurers’ 3-Q Results Dampened by Large Cat Hits

The Canadian property and casualty insurance industry saw its net profit for the third quarter of this year fall by 20% to $517 million compared with the previous quarter’s $644 million. The biggest single cost impact incurred by insurers during the latest quarterly reporting period resulted from claims arising from the B.C. fires (now regarded as being Canada’s third largest natural insured disaster) which will likely amount to a total insured loss of about $250 million, according to the latest preliminary industry financial data released by the Insurance Bureau of Canada (IBC). Overall, insurers produced a return on equity (ROE) of 7.6% for the third quarter of this year, showing modest improvement on the 5.9% ROE achieved for the previous quarter.

While the industry’s bottom-line for the third quarter of this year shows moderate weakness on the preceding quarter’s result (which is historically not abnormal based on seasonal and accounting adjustment factors), insurers were able to boost net income by more than 3.5-fold to $1.62 billion for the first nine months of 2003 compared with the $450 million shown for the same period in 2002. As a result, the industry’s ROE for the latest nine month reporting period clocked in at 7.6% versus the 2.9% shown for the same period last year. Of particular note is the marked decline in the industry’s loss ratio at 71.2% for the first nine months of this year versus the 76.6% ratio reported for the same period in 2002, while a more alarming trend revealed in the latest three month return is a 17% year-on-year increase in operating expenses (in addition to claims costs) which reached just over $6.2 billion (first three months 2002: $5.3 billion).

Although the industry’s quarter-to-quarter growth in net written premiums dropped by 2% for the third quarter of this year to $8.3 billion (2-Q 2003: $8.5 billion), insurers lifted net premiums written for the latest nine month reporting period by 16.5% to $23.5 billion compared with the $20 billion posted for the same period in 2002. As such, the industry’s growth in net written premiums over the nine month period continued to outstrip the growth in net earned premiums (which rose year-on-year by 16% to $21.3 billion), suggesting that rate increases overall have remained firm throughout 2003.

Insurers’ underwriting profit for the third quarter of this year slumped to $6 million from the previous quarter’s profit of $113 million (again, seasonal factors distort accurate comparison), which the IBC ascribes to mainly higher catastrophe losses – namely the B.C. fires and Hurricane Juan – as well as the ongoing claims bleeding incurred through the auto line. Claims costs for the third quarter of 2003 amounted to $5.3 billion against the $4.9 billion reported for the same period last year, with the B.C. property loss ratio jumping to 77% for the latest quarter from the previous reporting quarter’s ratio of 55% (which is attributed to losses stemming from the forest fires). In contrast, the industry realized an underwriting profit of $50 million for the first nine months of this year compared with a $931 million underwriting loss made for the first three months of 2002.

The biggest drain on industry profitability remains auto, the IBC notes, with several of the provinces having applied rate freezes over recent months while the governments concerned have not taken action to control the rise in claims costs. Notably, Ontario auto finished the third quarter of this year with a loss ratio of 93% and a combined ratio of 118%, according to the IBC. “Auto insurance reforms remain the key everywhere with the exception of New Brunswick where meaningful reforms are working and drivers are seeing lower premiums and rebates,” says Jane Voll, chief economist at the IBC.

The IBC warns that insurers’ financial results for the last quarter of 2003 will likely remain weak primarily as a result of losses suffered by the industry’s Facility Association (FA), the high-risk auto “market of last resort”. The FA is expected to end 2003 with a loss of about $600 million, which its member insurers will have to absorb within their own accounting for the last quarter of this year. “The industry expects the weak results of the current quarter will continue through to the yearend. At this point, the fourth quarter of 2003 is expected to continue the trend of disappointing results for the industry. Further auto losses will be absorbed by every company when [the] Facility Association, the auto insurer of last resort, posts an expected loss of up to $600 million at the end of the year for higher than expected claims costs,” Voll observes.