How bad can it get? Industry’s early 2019 results trigger insolvency watch

Posting its lowest level of profitability in almost 20 years, the Canada’s property and casualty industry’s ugly financial results in 2019 Q1 have raised concerns about an elevated insolvency risk.

Canada has not had an insurer go bankrupt for more than 10 years, with one high-profile example being the wind-up of Markham General in 2002. But sustained losses since 2015 are definitely on the radar screen of the Property and Casualty Insurance Compensation Corporation (PACICC), which protects eligible policyholders from financial loss in case a Canadian insurer becomes insolvent.

“Insolvency risk—the risk that an insurer becomes insolvent—in Canada’s property and casualty (P&C) insurance industry has been rising,” Grant Kelly, vice president of financial analysis and regulatory affairs at PACICC, observed in the June issue of PACCIC’s quarterly report, Solvency Matters. He goes on to note that one measure of insolvency risk is the number of companies that report losing money.

“In 2015, 83.4% of companies that competed in the marketplace reported profits,” Kelly writes. “However, in the first quarter of 2019, just 63.2% of insurers that competed in the marketplace reported profits. This is the lowest level of insurer profitability since 1990.”

The first quarter of 2019 was particularly rough for the industry, with a total underwriting loss of $756 million. That’s compared to an underwriting loss of $119 million over the same period last year.

The industry’s total net income in the first quarter of 2019 (a $103-million loss) decreased by $152.6% over the same period last year. And the industry’s poor return on equity (ROE) during the first quarter of last year, 4.3%, plummeted to 2.4% in 2019 Q1.

The results may in fact have been worse, were it not for a 119% increase in the insurers’ investment income in the first quarter this year.

Deteriorating results for the industry were seen across all lines of business, Kelly writes.

• Auto private passenger loss ratios were higher than 90% in four provinces (Alberta, Ontario, New Brunswick and Nova Scotia).
• In three personal property markets in Canada (Quebec, New Brunswick and P.E.I.), loss ratios were reportedly higher than 85%.
• Seven commercial property markets in Canada recorded loss ratios higher than 90% (Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Newfoundland & Labrador and Nunavut).

“There was little good news in these numbers,” Kelly commented. “Loss ratios at these levels over time increase the risk of insolvency and are simply not sustainable.”

Overall, Kelly observes, the capital base of Canada’s P&C industry has never been larger.

“However, insolvencies don’t happen on average,” he adds. “They happen to individual insurers. Current trends are troubling and will need to be watched closely.”