Can Canada’s P&C industry withstand the 20% stock market drop?

Given that insurers rely on investments to supplement their underwriting income, how big of a concern is the recent nosedive in stock markets?

“Right now, from the standpoint of reduction in equity values, the Canadian P&C segment as a whole can withstand that,” Greg Williams, senior director at A.M. Best Ratings Services, said in a recent interview.

It used to be that, when interest rates were higher, insurers could easily offset underwriting losses with investment income. In general, P&C insurers’ investments are tied up in relatively safe investment options such as bonds. Now, however, not only are interest rates at an all-time low, but stock prices are also dropping.

The S&P/TSX Composite Index – at 17,994 on Feb. 20 – dropped 38% to 11,222 on Mar. 23, which was 12 days after the World Health Organization called COVID-19 a pandemic. The same index opened Tuesday at 13,916, so the S&P/TSX Composite is still down nearly 23% from six weeks ago. Meanwhile, the S&P 500 opened Tuesday at 2,736, down about 20% from 3,386 in late February.

But stocks are only one type of egg in an insurance company’s investment basket. Moreover, A.M. Best suggests that some Canadian insurers could be more affected than others by declines in equity prices.

“That is what we are looking at,” Williams told Canadian Underwriter. “As rating analysts, we are going through our portfolios, identifying the companies that we think may not have as robust capitalization, or may have an over-reliance on equity exposure.”

Oldwick, N.J-based A.M. Best Company Inc., which rates the financial health of individual insurers, was asked by Canadian Underwriter to comment on the impact of the COVID-19 pandemic.

Related: How Canada’s P&C industry will weather the economic storm from COVID-19

Last week, A.M. Best announced it is revising its outlook to negative for the Canadian life and health insurance industry. The firm is keeping its outlook at stable for Canadian P&C. One concern about life and health is a significant contraction of the global economy is expected to “challenge the top line growth” for life and health.

Meanwhile, the P&C industry has “solid risk adjusted capital,” but some insurers may need to reassess their investment portfolios and exposures to address a potential decline in investment earnings, A.M. Best said in the report.

The P&C industry in Canada as a whole is not heavily involved in equities, Williams told Canadian Underwriter.

“The more equities in the portfolios, the more concerns we would have at the moment. Most property and casualty writers have pretty diverse portfolios, without generally having an out-sized emphasis on equities, so they will certainly experience negative volatility, but from that perspective they should be able to weather the storm for the near- to mid-term,” said Raymond Thomson, director of A.M. Best Rating Services, in an interview.

“Companies are well prepared to sustain short-term reductions to their capital because, when we take a look at the P&C segment in general, we see robust capital positions there,” said Williams.

So what about interest rates, now that the Bank of Canada reduced the overnight rate to 0.25% in March?

“We are clearly in a ‘lower-for-longer’ environment in terms of interest rates,” Williams told Canadian Underwriter. “So over the medium and long term, you are just not going to get the investment income you would have had several years ago. So it really heightens the focus on underwriting for these insurance companies going forward.”