At first glance, 2022 Q1 results for Canada’s P&C industry would support the idea that high profits aren’t sustainable. Industry-wide return on equity dipped to 11.5% in 2022 Q1, compared to 19% in 2021 Q1.
But the profitability decline stemmed entirely from a drop in investment income (as opposed to any slip in underwriting discipline), notes Grant Kelly, vice president of financial analysis & regulatory affairs and chief economist at the Property and Casualty Insurance Compensation Corporation (PACICC).
“Canada’s P&C insurers reported $1.058 billion less in investment income in the first quarter of 2022, compared to the same period in 2021,” Kelly wrote in PACICC’s recent Solvency Matters quarterly. “This large decline is primarily due to the increase in interest rates in the first quarter of 2022.”
He noted P&C insurers hold most of their invested assets in bonds, which can suffer value declines in a rising interest rate environment.
That’s not great news for the industry’s short-term investment results, and it’s expected most insurers will hold these bonds until they mature. Which means any reported losses are essentially temporary and won’t harm the P&C industry’s long-term capital base.
Investment-side problems overshadowed ongoing strong underwriting results. Kelly noted the combined ratio in 2022 Q1 was 79.2% – an improvement from 81.2% reported in 2021.
“So, any ‘reversion to the mean’ for industry loss ratios does not yet appear to have begun,” he said.
Kelly also pointed out underwriting results were solid across major lines and markets.
The loss ratio for auto insurance in 2022 Q1 was 45.5%, compared to 53.1% in 2021 Q1. Homeowners insurance, meanwhile, saw a 50.8% loss ratio.
“While this is slightly higher than the 46% reported in 2021, the 2022 results are still remarkable because of the consistency of the result across Canada’s broad geography,” he wrote. “In fact, the only outliners to the good news were in Newfoundland and Labrador (loss ratio of 95.1%) and Prince Edward Island (loss ratio of 84.1%).”
Plus, commercial lines posted impressive 2022 Q1 underwriting results.
The loss ratio for commercial property was 48.6% in 2022 Q1, which was higher than the 42.4% reported in 2021. But that performance should be viewed within the context that 2021 recorded the industry’s lowest loss ratio for that line of business in the PACICC database.
“When sitting at a peak, there is often nowhere to go but down. But in this case, the industry does not yet appear to be suffering…with results only declining within a historically profitable range,” wrote Kelly.
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