Insurers' quarterly financial results presented in accordance with the new International Financial Reporting Standards (IFRS 17) still create uncertainty and confusion. According to Grant Kelly, Chief Economist of the Property and Casualty Insurance Compensation Corporation (PACICC), understanding comes through the primary indicator that has always provided the most relevant information about the solvency of an insurance company: profitability.
PACICC is the compensation organization that intervenes in the event of a property and casualty insurer's bankruptcy. The organization published its latest quarterly bulletin, Solvency Matters, last September, in which Kelly authored two revealing articles.
The first article deals with the analysis of financial statements presented under the IFRS 17 standard. Kelly compares the ongoing adaptation period to the transition from the imperial to the metric system in Canada in the 1970s. Even though the distance between Montreal and Toronto had not changed when the new measurement system was adopted, drivers needed time to adapt.
"History teaches us that the most important factor for the solvency of an insurance company is sustained profitability. A profitable insurer is able to both honour the promises made in the insurance contract and grow its capital base," says Kelly.
Insurance result
During the first half of 2023, about 31 insurers out of the 168 members of PACICC reported a negative net result, which is 18% of them. This percentage corresponds to the average of the previous five years, and Kelly notes that it is normal for some property and casualty insurers to report losses.
Insurers have two main sources of revenue: sales through insurance subscriptions and investments. Kelly presents the results based on data provided by MSA Research.
About 127 insurers reported a positive result in both insurance and investment results. 'Insurance result' is the new name resulting from IFRS 17, which was previously presented as technical profit or loss.
About 25 insurers noted that their investments had offset their negative insurance results. Nine other insurers reported negative investment results, but all reported positive insurance results. This means that no member insurer reported losses in both aspects for the first half of 2023.
"In general, IFRS 17 provided a small one-time jump in the result for Member’s Minimum Capital Test (MCT) or Branch Adequacy of Assets Test (BAAT)," notes Grant Kelly.
The test was therefore adjusted by regulatory authorities to preserve the industry's capital base consistency. During the first six months of 2023, all insurers conducting property and casualty operations in Canada maintained a sufficient level of capital according to this standard.
"While it will take time to develop new, industry-wide performance metrics, the fundamentals haven’t changed. Sustained underwriting profitability and prudent levels of capital remain the critical benchmarks that PACICC will continue to monitor at a Member and industry level," says Kelly.
First half of 2023
In another article in the quarterly bulletin, Grant Kelly comments on the results of Canadian property and casualty insurers in the first half of 2023, comparing them with those of 2022, with adjustments required by IFRS 17.
He points out that 'insurance revenue' are derived from the total value of premiums collected by insurers. This concept is comparable to what was formerly referred to as 'gross written premiums,' but it is not equivalent. It is closer to what was once referred to as 'earned premiums,' explains the economist.
'Insurance services expense' accumulate amounts paid to settle claims and related expenses. The increase in expenses was greater than that of revenues, as can be seen in the table below. The net result of insurance activities reached $4.4 billion in the first half of 2022, up 4% compared to the same period in 2022.
The net insurance activities ratio is quite similar to the old claims-to-premiums ratio, but the figures are higher because it also includes acquisition expenses, including commissions and reinsurance, as well as the impact of deficit contracts.
In personal property insurance, the net ratio of personal property insurance activities was 94.1%, while the net ratio in automobile insurance was 92.7%. In commercial property insurance, the net ratio was 86.1%, and in liability insurance, it was 82.3%.
Investment income
In the most recent annual report of PACICC, published last summer, the Chairman of the Board, Glenn Gibson, noted that for the first time in its 48-year history, property and casualty insurers were likely to report annual losses on their investments. The figures provided by Grant Kelly confirm this prediction based on the results of the first nine months of 2022.
The decline in investment income is directly related to the rapid and unexpected rise in interest rates. When rates rise, the value of the industry's bond portfolio follows the opposite curve. Bonds represent about 75% of insurers' investments, Gibson noted in the annual report.
During the first half, insurers' investment yields rebounded to an annualized rate of 3.5%, which is a more normal pace.
The industry's annualized return on equity (ROE) reached 11.6% in the first half, which is quite close to the long-term average of 10.5% achieved by Canadian property and casualty insurers between 1975 and 2022, reports Grant Kelly.
According to him, despite significant changes to financial statements, 2023 is shaping up as an average year for property and casualty insurers in the country, as natural disasters are likely to have an impact on the third quarter.
The climate at Intact
On August 31, Intact Financial Corporation estimated the impact of catastrophe-related claims at $570 million for the first two months of the third quarter. On October 12, 2023, Intact revised this estimate to $611 million, with $600 million for catastrophes in Canada.
More than 90% of Canadian claims result from 14 severe weather events, according to the insurer. Approximately one-third of claims are attributable to wildfires in British Columbia and the Northwest Territories.
