Intact’s guesstimate of auto profitability improvement required by the industry

The Canadian auto insurance industry needs to improve its profitability by about 10 percentage points, executives with Canada’s largest property and casualty insurer suggest.

Canada-wide and industry wide, personal lines auto has a loss ratio of about 75%, said Darren Godfrey, senior vice president of personal lines at Intact Financial Corp.

So, with an industry-wide expense ratio in personal auto of about 30%, the combined ratio for Canadian auto insurers is roughly 105%, Godfrey suggested during a conference call on Feb. 6 discussing Intact’s financial results for 2018.

During the call, Intact officials were asked by an investment banking analyst whether the Canadian P&C industry as a whole needs to increase private passenger auto rates.

“It’s hard to figure out exactly what the industry needs but when we look at it high level, it’s about 10-ish points, we think,” replied Intact CEO Charles Brindamour.

For its part, Intact is aiming to have a combined ratio in personal auto of 95% or better, senior managers told analysts Feb. 6.

Intact is getting there. The Toronto-based insurer had a 2.2-point improvement in its personal auto combined ratio, from 101.7% in 2017 to 99.5% in 2018. For the last three months of the year, the combined ratio improved 3.9 points, from 101.2% in 2017 to 97.3% in 2018.

The underlying current year combined ratio in personal auto was 74.4% in 2018, down 7 points from 81.4% in 2017, Intact said in a securities filing last week.

Brindamour was asked Feb. 6 whether Intact is declaring “mission accomplished” in improving personal auto profitability, or whether there is more the firm can do.

“I think we found out over the last few years that declaring ‘mission accomplished’ is a tricky thing to do, so we are certainly not there,” Brindamour replied.

Distracted driving, the cost of repairing damage to late model vehicles, and the cost of litigating disputed claims are among the reasons cited by auto insurers – government and private – on why many are losing money.

“We know there is inflation in the system. We continue to fight it,” Godfrey said during Intact’s earnings call last week.

Nearly a year ago, during Intact’s Investor Day, Godfrey told analysts that Intact was prepared to lose market share – by hiking some clients’ rates, and losing their business as a result – in order to improve its performance in private passenger auto.

Intact reported last week its premiums dropped 2% in personal auto, from $3.818 billion in 2017 to $3.75 billion in 2018. This was partly because Intact was “ahead of the market” in rate increases, Brindamour suggested during the earnings call.

The drop in personal auto premiums was less pronounced – at 1% – for the fourth quarter. Personal auto premiums were $818 million during the three months ending Dec. 30, down 1% from $824 million in Q4 2017.

“Written rates were up 9% and earned rates up 6% in the fourth quarter,” Intact chief financial officer Louis Marcotte said Feb. 6 of personal auto during the earnings call. “Rate momentum will continue in 2019 with earned rate increases secured through year end.”

Marcotte was commenting on company-wide results and not on any province in particular.

One analyst asked whether Intact can now “turn up the dial” on market share in personal auto.

“We are not in the zone of saying, ‘Should we trade a point of [return on equity] for a point of growth?’ That’s not how we are thinking,” Brindamour replied.

Intact reported Feb. 5 its annual return on equity company-wide was 12.1% in 2018, compared to 12.9% in 2017.

“This business is not generating [a return on equity in the] upper teens, certainly, and that is the zone where you start to ask yourself the question, ‘Am I better off staying in the mid-teens for an additional point of [premium] growth?’ Past that point, it makes sense to have that discussion. I don’t feel that’s the space we are in yet,” Brindamour said Feb. 6 during the earnings call.