Why Canadian P&C profitability is improving: AM Best

Good overall underwriting results and solid risk-adjusted capitalization left the industry in a resilient position in 2021, despite the headwinds Canada’s P&C industry has faced in the last two-and-a-half years, according to AM Best’s Canada Market Segment Report. 

Headwinds the industry faces include equity market declines, inflation, weather-related concerns, supply chain imbalances, broker consolidation and growing concerns around environmental sustainability. 

Despite this, AM Best’s outlook on the segment remains stable, due to the following factors:  

• Solid-risk adjusted capitalization  
• Three years of operating performance improvement, due primarily to increases in underwriting profits despite COVID-19, macro-economic challenges, and the growth of weather-related events  
• Continued expansion of distribution partnerships, despite growing consolidation of brokers and carriers 
• Ongoing enhancement of enterprise risk management (ERM) capabilities and the continued integration of ESG into companies’ risk management framework and strategic plans 

Strong underwriting performance in 2021 has built upon four years of improvements in operating results and an already-strong performance in 2020.  

Overall, net income rose 76% (Can$8.3 billion) from the year prior (Can$3.5 billion). Net earnings were largely driven by positive underwriting performance, which was only partially countered by a decline in investment income, says AM Best. 

“Despite weather-related catastrophe events, net underwriting performance was the most profitable year of the past five years. However, we expect this trend to moderate somewhat in 2022,” the report reads.  

Ninety-seven per cent of AM Best-rated entities had a Superior (A++ or A+) or Excellent (A or A-) financial strength rating in 2021. All entities had at least a FSR of B++ or higher, which AM Best says is consistent with recent years’ trends. 

Canada’s P&C industry also reported a 12.9% growth in shareholders’ equity — in line with 2020, and largely driven by a net income of roughly Can$8.3 billion.  

But after profitability in 2021 and years prior, what’s to come for 2022?  

Through 2022 Q1, overall industry profitability was under pressure despite an underwriting gain of approximately Can$1.9 billion, which was slightly higher than recorded in 2021 Q1, AM Best reports. 

In 2022 Q2, shareholders’ equity decreased by 2.4% (Can$48.5 billion) to approximately Can$1.2 billion, due to volatility in the investment markets and pressured by inflation and supply chain disruptions.  

“Nonetheless, the industry remains well-capitalized, with liquidity strong enough to withstand current economic and capital market conditions,” the report reads.  

Although underwriting performance was challenged in 2021 thanks to multiple Cat events, it was largely offset by the decline in frequency in the auto segment during lockdown periods.  

Insured losses from catastrophic events topped Can$2 billion in 2021, marking it as one of the worst five years in losses. Fourteen catastrophic events each resulted in more than  Can$25 million in insured losses, AM Best reports, including Western Canada’s wildfires, windstorms, and extreme flooding in British Columbia and the Prairies. 

Ontario and Quebec’s May 2022 derecho occurred in heavily-populated areas and caused widespread damage. Industry observers estimated it may be the sixth-largest storm ever for P&C carriers, with losses expected to exceed Can$1 billion, largely due to wind damage. 

Direct premiums written as of 2022 Q1 increased by 3.6% — a reflection of strong premium growth in the last few years, meaning the industry may be able to anticipate another favourable year in 2022. Underwriting performance so far has driven a pretax operating income of Can$1.5 billion for the quarter.  

 

Feature image by iStock.com/fatido