Canadian insurers gain early 2002 profit momentum

Canadian property and casualty insurers lifted net profit by 25% to $123 million for the first quarter of this year compared with the $99 million in profit posted at the end of March 2001. Much of this recovery came on the heels of rate increases implemented last year across nearly all lines of business, as well as regions within Canada.

However, despite this improvement to the bottom-line, the industry only achieved a 2.5% return on equity for the latest quarterly reporting period, according to financial data collected by the Insurance Bureau of Canada (IBC). “At this pace [of recovery], 2002 will be the second worst year on record,” observes the IBC’s chief economist Paul Kovacs.

The latest industry numbers do reflect an extremely positive turn in that the first quarter returns show positive growth in both net earned and written premium growth, Kovacs says. As such, the growth momentum reflected in stronger pricing will continue into 2003 as current written premium earnings feed through to the bottom-line. Notably, net written premiums rose by 10% year-on-year to $5 billion (1-Q 2001: $4.5 billion) while net earned premiums clocked up a steady 7.4% gain to amount to $5.3 billion (1-Q 2001: $4.9 billion). In contrast, claims crept up by 4.4% to $4.1 billion for the first quarter of this year against the $3.9 billion shown for the same period a year prior. “This is the first time in five years that growth in industry revenues exceeded growth in claims costs.”

Insurers finished the first quarter of 2002 with an underwriting loss of $474 million, showing significant improvement on the $579 million loss reported at the end of March 2001. This resulted in the loss ratio falling back to 108.9% from the 111.7% ratio from a year ago. The industry’s latest quarter performance was aided by improved realized investment gains, which jumped up by 28.3% year-on-year to $154 million. However, part of this gain was negatively offset by a drop in investment income to $534 million, primarily as a result of the lower interest rate environment, Kovacs comments.

Although the industry’s underwriting results show marked improvement across nearly all the major markets, cost problems continue to be experienced in Ontario commercial property, as well as the auto markets in Ontario, Atlantic Canada and Alberta. The auto markets referred to saw the largest premium rate increases applied over recent months, Kovacs notes, which bodes well for the industry’s profit recovery. In this regard, he adds, “…this journey [toward adequate profit recovery] will take time. Surging claims, the absence of provincial reforms in auto insurance and lower interest rates have contributed to the depth of the challenge.”