Why Canada’s P&C industry saw investment income soar
Although Canadian P&C insurers’ claims expenses rose in 2023, the sector’s ballooning investment performance helped offset some of those costs, says a report released by ratings agency AM Best.
Improved investment performance also helped boost profitability for the P&C sector as a whole (see chart).
“This was achieved primarily by the favorable investment environment in 2023, in which many insurers saw significant returns on their investment portfolios due to a combination of higher interest rates and strong performance in financial markets,” the report says.
Investment returns for Canada’s P&C industry in 2023 reached C$5.1 billion, compared with a loss of C$1.2 billion in 2022. That’s a $C6.3-billion positive shift in just a year.
Back to bonds
Traditionally, insurance companies favour fixed investments like bonds and deposit certificates which provide predictable returns insurers can easily tap when claims must be paid.
But during the low interest rate environments preceding March 2022, some insurance companies expanded their portfolios to include more stocks and other equities in hopes of improving overall returns.
While P&C investment yields ended 2023 in positive territory, AM Best notes they were affected by continued market volatility, which caused fluctuations for equity returns.
“There has been an ongoing, sizeable shift in insurers’ investment portfolios towards bonds over the last three years,” the report says. “In 2023, bonds reached a 10-year high, accounting for 69.8% of invested assets, up significantly from 2021 when bonds amounted to less than half of invested assets.
“Given the higher interest rate environment, insurers have reallocated investments in affiliated invested assets and other loans and invested assets towards more attractive higher-yielding bonds.”
Other investments
Canadian P&C insurers also made some increases in investment allocations to stocks, real estate and mortgage loans, and cash during 2023.
“The drop in other loans and invested assets in 2023 is related to reclassification of pooled funds, which are required to be reported in the category that reflects their underlying credit profile (such as bonds, stocks, mortgage loans), as opposed to being separately disclosed in prior years as part of other loans and invested assets on the balance sheet,” says AM Best’s report.
“The rise in other loans and invested assets in 2016 was related to pooling arrangements and partnerships, which were reclassified from bonds to other loans and invested assets.”
Notwithstanding the Bank of Canada’s trims to the benchmark interest rate — which slid to 4.25% by August 2024, and experienced a further 50 basis point cut to 3.75% on October 23 — AM Best expects insurers will see solid investment returns in 2024.
Those returns, though, likely will be lower than 2023, driven primarily by favorable bond yields and mortgage loan returns. Despite that, AM Best’s report says, equity market performance, further interest rate cuts, and any changes in economic conditions will impact that outcome.
“Our thought here us that reinvestment yields will be lower as interest rates decline,” Rosemarie Mirabella, director, AM Best tells Canadian Underwriter. “Of course, despite the Federal Reserve cuts here in the U.S., we are seeing the opposite play out with rising rates.”
Feature photo by iStock/malerapaso
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