November 7, 2019 by Greg Meckbach
With the Canadian industry experiencing its lowest return on equity in 17 years, Intact’s senior leadership is not foreseeing a soft market in the short term.
“To find similar [hard market] conditions, you have to go back to 2002-03,” Charles Brindamour, CEO of Intact Financial Corp., said Wednesday during a conference call, referring to premium increases.
Brindamour alluded to the fact that the return on equity through much of 2018 was in the neighbourhood of 4%. He was asked by a securities analyst what sort of conditions would change the current hard market and whether it is fair to say that a hard market cannot persist if the industry-wide ROE approaches 10%.
“I think it is fair, and we are not there,” Brindamour replied. “Because it is tough across all lines of business, the odds of upsetting the momentum [in premium increases] we are seeing, in my mind, is fairly small.”
Intact reported Tuesday its direct premiums written were $3 billion in the three months ending Sept. 30, up 11% from $2.7 billion during the same period in 2018. Personal auto premiums were up 12% and personal property premiums were up 8% in the latest quarter compared to Q3 2018. Its combined ratio for 2019 Q3 was 92.3%, which it attributed to “solid underlying results in Canada and lower catastrophe losses.”
Industry wide ROE was 4.6% in first six months of 2019, up from 4.1% in same period in 2018, the Property and Casualty Insurance Compensation Corporation reported this past September. ROE was 2.4% in Q1 2019.
“In Canada, the hard market is not a surprise on the back of estimated industry ROE running below 4% in the 12 months to June 2019,” Brindamour said Wednesday. By comparison, the industry-wide ROE was 7.83% in 2017 and 6.25% in 2018, MSA Research reported earlier.
For its part, Insurance Bureau of Canada reports that from 1994 through 2016, ROE was below 5% in two years only, 2001 and 2002, at 2.6% and 1.7% respectively. ROE was 10% in 2015.
Right now the P&C industry invests heavily in fixed-income securities (maturing in less than three years), Brindamour said Wednesday during the call discussing his firm’s financial results for the quarter sending Sept. 30. The P&C industry “is seeing not only underwriting pressure – that is being corrected – but it is coming at the same time there is headwinds on the investment side of things,” Brindamour said.
The Bank of Canada announced Oct. 20 it is holding the overnight interest rate steady at 1.75%. South of the border, the Fed announced it is cutting U.S. interest rates. In Canada, today’s overnight rate (the interest banks charge other banks to borrow money) is up from 0.25% in 2009 but still lower than the long-term average. For example, the same rate was 4.5% in 2007 and more than 20% in the summer of 1981.
Low interest rates make it more difficult for property and casualty insurers to offset underwriting losses with investment income.
Intact reported Tuesday its combined ratio improved 1.5 points from 93.8% in Q3 2018 to 92.3% in the latest quarter.
Intact Financial – which sells through brokers under its own brand and directly under the belairdirect brand – is Canada’s largest P&C insurer. An agreement to acquire The Guarantee Company of North America is expected to close before the end of 2019.