How the industry’s ROE is trending

The Canadian property and casualty insurance industry’s return on equity (ROE) last year dropped a few percentage points from the 17% to 18% level it was in 2021, but it’s still above the long-run average of 10.1%, a new industry report said.

Overall, Canada’s P&C insurance industry reported an ROE of 14% in 2022, said Grant Kelly, chief economist and vice president of financial affairs and regulatory affairs at the Property and Casualty Insurance Compensation Corporation (PACICC).

“Based on historical patterns, further ‘reversion to the mean’ is still expected,” Kelly wrote in PACICC’s latest Solvency Matters quarterly report. PACICC president and CEO Alister Campbell predicted as much last year, when he said the ROE could be cut in half in two years.

“Every single time that insurers have reported such above-average profits, competitive forces have quickly acted to cut the industry’s return on equity in half — to an average of 7.4% — within two years,” Campbell wrote in PACICC’s 2021 annual report.

Kelly noted that the ROE trends vary across PACICC’s membership.

“Our industry remains highly competitive,” Kelly wrote in Solvency Matters. “In 2021, 14% of insurers reported negative net income, despite it being the industry’s most profitable year on record. In 2022, this figure rose to 27.8%. The latter figure is more in line with the industry’s long-run average, and is not yet a significant source of concern.”

As also reported by the Office of the Superintendent of Financial Institutions (OSFI), Canadian P&C insurers took a massive hit on their net investment income in 2022. “For the first time ever, Canada’s P&C insurers reported, at an industry level, a combined investment loss [of -1.2%],” Kelly wrote. “This was the first time that this has occurred in the 47 years of PACICC’s historical database.”

The decline in investment returns was primarily the result of the dramatic rise in interest rates; between March 2022 and January 2023, the Bank of Canada increased interest rates eight times from 0.5% to 4.5% to combat inflation. “An unintended consequence of this policy was that, as interest rates rose, the value of the industry’s bond portfolio fell.”

Canadian P&C insurers hold about 75% of their invested assets in bonds, Kelly said in January.

OSFI stats show the industry’s net investment income in 2022 took more than a $2-billion hit. In 2021, the industry’s net investment income totalled $2.35 billion. Last year, it was only $156 million.

Luckily, the industry posted historically good underwriting results, with a 52.4% loss ratio recorded for the first three quarters of 2022 (beating the previous best of 53.9% in 2021 Q3).

“These strong underwriting results were evident in all major lines of insurance coverage,” Kelly wrote in the latest Solvency Matters report. “Results were particularly strong in liability insurance, with a loss ratio of 33.6% in 2022. This is both remarkably low and highly unlikely to be sustainable over the long term.”

On a year-over-year basis, loss ratios in other lines of business rose in 2022 compared to 2021. The national loss ratio for auto insurance was 62.2% in 2022, up from 58.4% in 2021. The national loss ratio for personal property also rose from 50.7% in 2021 to 58.7% in 2022. Commercial property rose from 45.6% in 2021 to 51% last year.

“While underwriting results were not as strong as the prior year, 2022 will long be remembered as a remarkably good year for the industry.”

 

Feature image by iStock.com/cnythzl