Insurers’ 2004 performance suggests “growth peak”

The final 2004 financial results of the Canadian property and casualty insurance industry – as compiled by the Insurance Bureau of Canada (IBC) – point to a future decline in premium growth as well as reduced operating margins, the bureau’s chief economist Jane Voll predicted at the recently held Swiss Re Co. of Canada annual “Statistical Breakfast”. She says, “I expect the [industry’s] combined ratio will rise this year and [return on equity] ROE will decline”.

The IBC’s final data on the industry’s 2004 performance indicates a two and a half percentage point reduction of ROE at 18.1% versus the preliminary return of 20.6% previously announced. This, however, still represents a 56% increase on insurers’ 2003 ROE of 11.6%. “At 18.1%, industry aggregate ROE was improved over 2003, and for the first time in nearly a decade, was on par with earnings of other firms in the financial sector, ” Voll notes.

Notably, financial data collected by federal regulator – the Office of the Superintendent of Financial Institutions (OSFI) – indicates that insurers finished 2004 with an ROE of 18.7% (the OSFI data is regarded as less accurate in that it does not include only provincially licensed companies). A breakdown of the IBC data suggests primary insurers brought home an ROE of 19.7% for 2004 while reinsurers notched up a return of 16.6%.

The final 2004 industry data shows an unprecedented year-on-year decline in insurers’ claims costs (the preliminary IBC data pointed to a 1.2% annual increase in insurers’ claims costs totaling $20.6 billion), Voll observes. The industry finished 2004 with a combined ratio of 90.7%, showing marked improvement on 2003’s ratio of 98.4% and 2002’s 106.5% ratio. However, Voll says, “we expect there is only upside risk on the claims side for 2005”. And, based on the current investment environment – which saw insurers’ net investment income for 2004 decline from the previous year’s level – Voll says the industry will have to limit its combined ratio to 95% to achieve a double-digit ROE.

Furthermore, Voll is not confident that insurers will be able to maintain premium growth momentum. Insurers were able to lift both net earned and written premiums for 2004 by about 9%, she says, which is roughly half the rate of growth achieved during 2003 and 2002. “We don’t expect premium growth of 9% will be maintained through 2005.”

OSFI’s 2004 fourth quarter industry data appears to confirm that insurers’ earnings and premium growth peaked last year. Insurers saw net written premiums for the final quarter of last year rise by 9.8% to $20.9 billion compared with the previous year’s $19.1 billion. The fourth quarter also produced an uptick in claims costs which rose by 2.1% to $12.6 billion versus the $12.3 billion reported the year prior. However, the industry’s combined ratio for the final quarter of 2004 shows significant improvement at 92.4% compared with a 100%-plus ratio shown for the same period the year before. Last year’s final quarter also shows dramatic improvement in insurers’ underwriting profit and investment returns. The industry’s 2004 fourth quarter underwriting profit soared to $1.6 billion from the previous year’s $66.7 million, while the latest quarterly reporting period saw a 5% rise in net investment income (investment income and realized gains combined) at $1.9 billion – this was largely driven by an 8.5% year-on-year gain in investment income which came in at $1.5 billion.