Canadian insurers ‘in a tough time for investments,’ A.M. Best analysts warn

Mergers and acquisitions in the reinsurance sector sometimes involve carriers acquiring managing general agents, while in Canada, M&As have involved insurers trying to “beef up certain parts of their enterprise,” analysts from A.M. Best Company Inc. suggested at a recent conference in Toronto.

Alternative capital, such as catastrophe bonds, “has been driving” the reinsurance industry, said Susan Molineux, senior financial analyst for A.M. Best during the ratings firm’s Insurance Market Briefing – Canada, held Nov. 10.

“It has provided more capacity in an already oversaturated market,” Molineux said of alternative capital during the briefing, held at the Sheraton Centre in Toronto. “As we look more globally in the reinsurance space, it is believed that M&A activity will continue, not necessarily one company buying another company or merging completely.”

In its segment review on global reinsurance released Sept. 5, A.M. Best referred to the acquisition by XL Group PLC of Catlin Group Ltd. and Endurance Specialty Holdings Ltd.’s agreement to acquire Montpelier Re Holdings Ltd. XL ranked 15th, by life and non life premiums written in 2015.

“We might also see M&A activity in terms of buying underwriting teams,” Molineux said Nov. 10. “From a distribution perspective, the reinsurers are trying to get close to the customer. So they might be picking up an MGA along the way in order to do that.”

Also speaking at the briefing was Joel Silverthorn, senior financial analyst at Oldwick, N.J. based A.M. Best.

Silverthorn referred to a chart, listing the top 10 Canadian P&C insurers by market share, published in a recent report, titled Canadian Review/Preview 2016: A Return to Sustainable Growth? In that report, A.M. Best reported the top 10 P&C insurers in Canada in 2015 had direct written premiums of $33.5 billion. Of that, Intact Group had $8.1 billion or 15.8% market share.

“This slide is more or less the same as it was last year,” Silverthorn said. “There are a couple of flip flops. Lloyds moved up one and Aviva and Desjardins are about the same. All the movement mostly was in 2015.”

In 2015, Aviva and Desjardins Group had $4.1 billion each in direct written premiums, with 8% market share each. On Jan. 1, 2015, Desjardins closed the acquisition of the Canadian operations of State Farm.

Placing fourth through 10th respectively were Meloche Monnex/TD Bank, RSA, Wawanesa, Lloyds Underwriters CAB, The Co-operators, Economical and Travelers.

“There we have a pretty much unchanged picture for the year,” Silverthorn suggested. “That does not mean the mergers and acquisitions have not been happening. They are all targetted mergers and acquisitions as companies try to beef up certain parts of their enterprise. They try to gain size in certain markets and they also try to get certain expertise by buying entities and this is what we are seeing, not really the big buying market share at the moment.”

Silverthorn alluded to the sale announced earlier this year, of Winnipeg-based pet insurance carrier Western Financial Insurance Company. Economical Mutual Insurance Company acquired WFIC – which uses the brand name PetSecure – from Western Financial Group, a High River, Alta.-based subsidiary of Desjardins Group.

With that transaction, Economical Insurance “is going for a specific niche,” Silverthorn noted.

Silverthorn also discussed the combined ratio components in Canadian P&C.

A.M. Best reported the combined ratio in Canadian P&C, excluding Lloyd’s and Insurance Corporation of British Columbia, was 95.6% in 2015, down from 98.5% in 2014. The underwriting expense ratio was 32.2% in 2015, up from 31.6% in 2014 and 30.2% in 2011

“We see there is a slight uptick in the expense ratio,” Silverthorn said. “Companies are taking the opportunity during a cycle of profitability, to reinvest back in their companies and reinvest into their operations, into their technology. There are technologies that can data mine better. Their claims systems, their underwriting systems now have more ability to talk to one another. Their broker facing systems and the systems that face the end consumer are much more user friendly and all of these things are part of that expense ratio as things move forward.”

The picture was similar for the Canadian life and health insurance industry.

“When we talk to a lot of companies they are increasing their technology expenses, building out their websites, building out mobile apps, data mining … their social media presence,” said Edward Kohlberg, associate director of A.M. Best’s life and health division. “Companies are looking to improve their customer engagement and satisfaction at the point of sale. We are also seeing technology being leveraged to improve efficiencies within organizations.”

Kohlberg referred to an A.M. Best chart listing investment income in Canadian life. A.M. Best reported that for Canadian life and health insurers, interest dividends and income was $30.29 billion in 2015, down from $38.21 billion in 2016.

“It is unknown where interest rates are going to go,” said Kohlberg. “Recently there has been some sentiment about negative interest rates.”

In Canadian P&C, A.M. Best reported the net investment yield was 2.1% in 2015, down from 3.2% in 2014. Investment income in P&C dropped from $3.2 billion in 2014 to $2.2 billion in 2015.

“We are in a tough time for investments,” Silverthorn said. “The one good thing right now… is they are keeping their underwriting discipline.”

One member of the audience asked the speakers how a major earthquake in Canada would affect the insurance industry, given the low uptake of earthquake coverage in Quebec and high deductibles on some British Columbia property policies.

“The [primary insurers] will still be hit,” Silverthorn replied. “It’s not that the claim can be written off. It’s not, ‘you don’t have quake with us – you are done.’ That would not bode well for the industry at all. There will be losses and high ones that the industry will take.”

More coverage of the Insurance Market Briefing Canada

Impact of June Ontario auto changes ‘will be something to see going forward:’ A.M. Best

Canadian insurers covering Fort McMurray property ‘learned a lot’ from 2011 Slave Lake wildfire: A.M. Best’s Silverthorn