Insurers profitable in Q2, but Cats to hound earnings in Q3

Canada’s P&C insurers reported strong net earnings in the first half of the year, but can expect challenges to their underwriting profitability once this summer’s NatCat claims fully shake out, Morningstar DBRS reports.

Earnings in the first half of 2024 were driven by solid underwriting performance and investment returns — a reflection of low natural catastrophe losses during the second quarter in Canada, says the credit ratings agency. These factors contributed to ongoing favourable pricing environment, elevated interest rates, and low catastrophe losses — across the personal lines insurance market and most commercial lines.

Insurers benefited from low Cat losses in the second quarter of 2024, but that might not be the case in the third quarter.

Cats pressure earnings

Although it won’t affect Canadian P&C insurers’ capital positions, severe weather-related catastrophes in Canada (notably, widespread flooding in Toronto, and wildfire damage in Jasper) will “add some pressure to the underwriting profitability” in the second half of 2024, Morningstar DBRS writes.

Intact estimated total catastrophe losses of approximately $1.1 billion, on a pre-tax basis and net of reinsurance, the company said in an update on the first two months of its third quarter. Even so, the company noted that’s “well above expectations for a third quarter.”

Definity estimated catastrophe losses would have “a negative impact on operating income of approximately $150 million net of reinsurance recoveries,” which is net of taxes and reinsurance. The company said that’s materially above what they expected, and that it’s fully used its reinsurance recoveries of $25 million from its catastrophe aggregate treaty.

Both Intact and Definity credit these losses to four severe weather events across the country that occurred in July and August — torrential rains in Southern Ontario, wildfires in Jasper, hailstorm in Calgary and flooding in Quebec.

However, the Cats will remain an earnings event and won’t “invade” capital.

The companies all have “heathy financial positions with regulatory capital levels that are well above supervisory targets,” DBRS says.

Select public insurer earnings

Morningstar DBRS looked at the results of four publicly traded P&C insurers in Canada: Intact Financial, Fairfax Financial, Definity Financial, and Trisura Group.

In addition to strong top-line growth, the companies reported solid underwriting profits, with combined ratios below 95% in the second quarter, especially in personal lines.

Trisura reported the lowest combined ratio of 87.5% in Q2, a benefit of primarily writing its specialized commercial P&C insurance business “that is typically associated with significant pricing flexibility and low combined ratios,” DBRS writes.

DBRS reports the companies all showed a “relatively healthy” return on equity (ROE) and experienced significant growth in premiums written. Each company reported its results as follows:

Intact reported its year-to-date operating ROE at 17% and, for its Canadian business, $4.5 billion in direct premiums written in Q2

Definity reported its YTD operating ROE at 10.8% and $1.25 billion in premiums — which grew 14.2% in Q2

Trisura reported its operating ROE at 19.6% (for both H1 and Q2), and insurance revenue of $772 million

Fairfax’s results appear differently, as they are reported in U.S. dollars for its general company, and thus, don’t compare as effectively.