Revised Results for Canadian Insurers Show $2.6 Billion Profit

Canadian property and casualty insurers posted net income of $2.63 billion for the 2003 financial year – showing significant improvement on the $340 million in net profit reported for 2002. Revised yearend figures from the Insurance Bureau of Canada (IBC) indicate a return on equity (ROE) of 11.32% (2002: 1.7%) which was achieved on the back of a combined ratio of 98.7% (2002: 105.8%).

The industry’s latest bottom-line return represents just an “average year” for ROE, observes the IBC chief economist Jane Voll. “The industry’s rate of return…remains lower than reasonable profitability targets accepted by government regulators and lower than levels seen in other financial services.” For example, the “big six” banks posted average profit of $1.8 billion, while each of the 207 insurers posted average profit of just $13 million.

Insurers’ direct written premiums for 2003 rose to $35.9 billion (2002: $29.8 billion) while net premiums earned hit $30.5 billion (2002: $25.3 billion). Although claims costs also grew year-on-year by nearly 10% to $21.4 billion (2002: $19.5 billion), the industry’s loss ratio fell to 70.2% (2002: 76.9%). Overall, insurers turned in an underwriting profit of $548 million versus an underwriting loss of $1.4 billion for 2002.

Investment gains grew significantly in 2003 to $709 million, up from the $69 million made for the year prior.

Despite the industry’s general financial turnaround, underwriting loss problems remain, specifically in private passenger auto. While the overall auto loss ratio fell last year to 89.6% from 96.6% in 2002, this remains unacceptably high, the IBC maintains. Perhaps the most difficult issue remains with the Facility Association (FA), the industry’s pool for high-risk drivers. Last year, the FA posted a loss of $550 million, double the loss recorded for the B.C. forest fires of last summer (this natural disaster ranks as the third-largest insured loss). The IBC says more work is needed to ensure FA rates are not competitive with the voluntary market.

Nonetheless, investors seem to recognize progress in the property and casualty insurance marketplace. 2003 saw $500 million in new capital injected into the Canadian industry. “Ultimately, in order to keep this capital within the industry, investors will need to earn returns comparable with other investment opportunities,” Voll says.