Insurers stung in third quarter by falling investments

Canadian property and casualty insurers produced a record-low return on equity (ROE) of 1.8% for the first nine months of this year against the 7.4% return achieved a year previous, according to the latest quarterly Perspective financial report released by the Insurance Bureau of Canada (IBC).

The dramatic drop in the industry’s ROE is reflected by a 46.7% decline in net income to $165 million for this year’s third quarter compared with the $310 million made for the same period in 2000. The industry’s ROE for the third quarter of 2001 clocked in at 3.7% compared with 6.9% notched up at the end of September last year.

Direct written premiums for the latest third-quarter returns rose by 12.4% year-on-year to $6.4 billion (September 2000: $5.7 billion), resulting in a net written premium gain over the same period of 10.4%, which amounted to $5.7 billion (September 2000: $5.2 billion). Earned premiums for the latest quarter produced a more modest gain of 7.4% year-on-year to $5.3 billion, the growth rate of which was outstripped by an 8% rise in claims incurred that jumped to $4 billion. Growth in claims for the first nine months of this year rose by 12.3% to $12 billion (September 2000: $10.6 billion).

Plummeting equity values and declining interest rates played a significant role in the industry’s latest poorly return, observes Paul Kovacs, chief economist of the IBC. This has been particularly the case after the September 11 terrorist attacks, which also brought about “soaring” reinsurance costs. Investment income before realized gains rose by a meager 1.8% for the third quarter of this year to $573 million (September 2000: $562 million) while investment performance for the full nine months declined by 1.4% to $1.63 billion (September 2000: $1.65 billion). Realized gains suffered a heavy knock for the third quarter, clocking in 46.3% lower at $160 million (September 2000: $298 million), while gains for the nine months dropped by 63.3% to $449 million compared with the $1.2 billion reported at the end of September 2000.

The industry’s underwriting loss for the latest quarterly reporting period climbed by 11.6% to $465 million compared with a loss of $417 million reported at the end of September 2000. The underwriting loss for the full nine months of this year jumped by a staggering 46% to $1.3 billion (September 2000: $883 million). A minor rise in expenses added to the cost of underwriting, resulting in a combined ratio for the third quarter of this year of 109.2% (September 2000: 108.8%), while the ratio for the full nine months came in slightly lower at 108.6% — although still one and a half percentage points higher than that of a year previous.

Atlantic Canada and Ontario continue to be the problem children of the industry, observes Kovacs. “The industry is experiencing very large losses in Atlantic Canada. Premiums in Ontario haave not kept pace with alarming and persistent cost increases, particularly for auto insurance. Quebec is the healthiest insurance market in the country.” Quebec’s auto loss ratio for the first nine months of this year came in at 66%, Ontario at 84%, Alberta with 85%, and New Brunswick topping the stack at 108%. “Nevertheless, a foundation is emerging for improvement. Recent [price] adjustments have been larger and came somewhat sooner than expected. This may become the hardest market since the liability crisis 17 years ago,” says Kovacs. –