Third-quarter results stall on claim losses

The Canadian property and casualty insurance industry’s net income for the first three quarters of 2000 rose by 9% to $261 million against the $239 million reported at the end of September 1999. This modest growth in earnings for the quarter, which was almost entirely driven by investment gains, produced a slightly better return on equity (ROE) of 7.6% for the nine month period of this year compared with the 6.2% posted at the end of the same period for 1999, according to data collected by the Insurance Bureau of Canada (IBC).

However, an underlying weakness to the latest industry revenue/earnings quarterly performance is a stark and persistent rise in claim costs which rose by 11.5%, or $288 million, over the cost reported at the end of September 1999. The increase in claim costs boosted the combined loss/expense ratio to 107.4%, showing moderate deterioration on the ratio level of recent quarters.

The significantly higher cost of claims for the quarter also negated the healthier growth in premiums which became apparent from the second through to the third quarter, observes IBC chief economist Paul Kovacs. The industry’s earnings savior for the latest reporting period emerged through a 41.2% increase in total investment gains, made largely on the back of realized gains, which more than offset the rise in underwriting losses. The auto line based on results across the country (excluding Quebec) is regarded as the main culprit for the latest rise in the industry’s claim costs. “In many markets it is encouraging that revenues are increasing at the fastest pace in several years. However, claims costs are often growing even faster,” Kovacs says.

Furthermore, Kovacs points out that the IBC’s “momentum index, which is comprised of loss ratio performance of 15 markets across Canada in the auto, commercial and personal property lines, is currently at its weakest level on record. The IBC also formulated a weighted “market strength index” which essentially balances the impact of markets against each other to provide a more accurate national analysis of industry performance, and this too is at its lowest point since late 1993, Kovacs observes (see chart) “…results for the first nine months continue to show negative momentum that will hold down earnings into next year.” However, on a slightly more positive note, Kovacs adds, “the 7.6% ROE [for the third quarter of this year] was higher than the 6.2% posted last year [same quarter], and net income for the first nine months [of this year] has already reached a level equivalent to that achieved for the entire year in 1998 and 1999.”