Declining capital worrisome to Canadian (re)insurers as claims costs rise: Swiss Re

Investment and capital losses associated with Canada’s economic recession are happening at a time when the country’s industry is in need of capital to offset claims costs, a Swiss Re online newsletter reports.
In its report, “Implications of the Financial Crisis on the Canadian P&C Industry,” Swiss Re figures show that as of nine months’ end in 2008, the average yield on invested assets declined to 4.2%, down from 5.1% last year.
Year-to-date invested assets grew by only 1% through the first nine months of 2008, significantly down from 7% growth in 2007.
The reinsurer also observes that Canadian P&C insurers reported realized and unrealized net investment gains of Cdn$1.1 billion during nine months’ end in 2008, resulting in a 3% decline in industry capital funds.
“With only few public companies, the Canadian P&C industry generally has little access to capital, and a declining capital base therefore raises more concerns at a time of rapidly rising claims costs,” Swiss Re notes. “Declining share prices and widening spreads have increased the cost of capital for insurers and made it harder to raise funds.”
All the same, the Canadian economic downturn is not likely to be as steep as that in the United States, meaning relatively fewer investment losses for Canadian (re)insurers than for their U.S. counterparts.
“Canadian P&C companies have experienced fewer investment losses and less capital erosion than their U.S. counterparts due to a strong regulatory and strategic emphasis on capital quality,” Swiss Re says. “Canadian P&C insurers have immaterial exposure to subprime mortgages and also hold significantly less equity investments than the average insurer in Europe or the United States.
“At the peak in [2007 Q2], common stocks were only 12% of total invested assets and are down to 7% by [2008 Q3].”