Definity Financial Corporation president and CEO Rowan Saunders doesn’t expect the Canadian P&C insurance industry’s return on equity to remain as elevated as it was last year.
In 2021, the industry’s ROE hit 17%. The industry also recorded the lowest-ever combined ratio (85.2%), making it the third-most profitable year since 1975. Only in 2003 and 2004 did the industry post a higher ROE than the 17% recorded last year, the Property and Casualty Insurance Compensation Corporation (PACICC) said April in its quarterly Solvency Matters report.
But PACICC president and CEO Alister Campbell also cautioned that “every single time that insurers have reported such above-average profits, competitive forces have quickly acted to cut the industry’s return on equity in half – to an average of 7.4% – within two years.”
Saunders said Friday during a conference call on Definity’s first quarter 2022 results that he “expects market conditions to remain conducive to solid industry results, but we don’t believe the industry will be able to deliver the ROE outperformance that it did in 2021.
“We expect firm market conditions in property lines will persist over the next 12 months while conditions in auto lines should begin to firm as claims frequency normalizes and/or inflationary pressures persist,” Saunders says. “We expect the combination of normalizing auto claims frequency and higher severity related to inflation to bring the industry’s return on equity closer to its long-run average.”
For Definity, the parent company of Economical Mutual Insurance Company, which demutualized late last year, Saunders expects its “operating outlook to support an upper single digit to below teen operating ROE.
“We continue to expect these results to be driven by double-digit, top-line growth and mid-90s underwriting profitability,” Saunders says during the earnings call. “Our current capital structure, with elevated levels of excess capital and no debt, reflects our operating history as a mutual company.
“As a still relatively-new public company, we’re putting the tools in place to enable future balance sheet optimization which should result in a capital structure more aligned with our publicly listed peers over time, enabling us to target an operating ROE in the low-teens.”
Overall, Saunders says he continue to expect “top line to continue to increase at approximately 10% over the next couple of years.”
Definity reported a combined ratio of 92.2% in 2022 Q1, up 0.9 points from 91.3% in 2021 Q1, “driven by solid personal property profitability and strength in our commercial business, bolstered by favourable industry conditions and low large loss and Cat activity,” Saunders says.
In personal auto, the 2022 Q1 combined ratio increased six points to 96.2%, up from 90.2% during the same quarter last year. “As expected, results in personal auto normalized somewhat from last year’s performance as claims frequency moved on pandemic-related lows and inflation continued to impact claims severity.”
Saunders also pointed to innovation initiatives in the first quarter of 2022, when it announced a strategic partnership with digital insurance broker and MGA Apollo Insurance Solutions and a new relationship with Google Cloud. “These concrete examples illustrate that we are not satisfied to rely solely on past investments but rather that we will continue to seek avenues to innovate.”
The Apollo partnership will help strengthen Definity’s commercial distribution reach and grow its small business portfolio, Saunders says, while the Google Cloud relationship will allow the insurer to collaborate and leverage Google’s advanced data, analytics, artificial intelligence and machine learning technology. Definity also maintains over $1 billion in financial capacity to fund strategic growth initiatives for upcoming years.
Growth in its digital direct business Sonnet also remained robust, with premiums up nearly 23% in the first quarter. “The business is now over $300 million in annual premiums for the first time and benefitting from continued scale efficiencies,” Saunders says. “As we continue to improve our segmentation, pricing and fraud prevention capabilities, I’m confident the business can develop to be a contributor to overall company profitability over the next couple years.
“I’m confident we’re positioned for long-term success. I’ve spoken before about our belief that the significant investments made in our growth platforms and to improve talent company-wide position us to be a leader in the industry for years to come.”
Feature image by iStock.com/Sezeryadigar