Insurers achieve record return for 2004

The Canadian property and casualty insurance industry will likely finish 2004 with a 65% increase in net profit of $4.2 billion compared with the $2.5 billion reported the previous year, according to preliminary financial data recently released by the Insurance Bureau of Canada (IBC). The industry’s return on equity (ROE) for 2004 shows a record performance at 20.6%, almost double the 11.6% return achieved for 2003. The robust return in industry earnings confirms renewed financial strength of insurers, and therefore improved market stability, of the p&c insurance sector after several years of weak performance, says Stan Griffin, president of the IBC. “Last year we returned to profitability and today with some relief we can say to policyholders, government and shareholders that the industry is strong again.”

The strong earnings gain made by insurers for 2004 was achieved through underwriting, with companies lifting underwriting income by almost five times to $2.7 billion compared with the $559 million posted the year prior. Commenting on the earnings rebound and the improvement in underwriting, Griffin notes that “the insurance industry’s ROE for 2004 is strong but insurance is a cyclical business – years of profit are often preceded by years of low returns. Over the last five-year period the [industry] ROE was 8.6% [average].”

Mark Yakabuski, the bureau’s vice president, federal affairs & Ontario, observes that the improved financial performance of insurers has seen a significant return of market capacity across the personal and commercial business segments. Notably, last year saw about 150,000 auto policies leave the Facility Association (FA), he adds.

However, in contrast to the stellar underwriting performance of companies, the industry’s net investment income (investment income and realized gains combined) for last year deteriorated marginally to $2.9 billion versus the $3 billion reported for 2003. In this respect, insurers’ 2004 profit from investments (primarily interest and dividend income) fell by $92 million from the previous year’s level to $2.3 billion while realized gains dropped by $27 million to $637 million.

The industry’s financial return for last year also shows a marked reduction in both premium and claims expense growth. Insurers’ net earned premiums for 2004 rose by 11.2% to $32.5 billion compared with the $29.2 billion reported the year before while net written premiums grew at a more sedate 6% over the same period to reach $33.3 billion (2003: $31.4 billion) – suggesting that business is being renewed at lower rates. Insurers’ claims costs for 2004 rose year-on-year by a modest 1.2% to $20.6 billion (2003: $20.4 billion) which, combined with the gains made on underwriting, resulted in a more than a six percentage point improvement in the industry’s combined ratio at 92% versus the 98.4% ratio reported the previous year.