Canadian P&C market outlook is stable, but with challenges

The Canadian property and casualty industry is stable, but not without its challenges, delegates of the A.M. Best Review & Preview Canada conference were told.In his presentation, Charles M. Huber, a senior financial analyst with A.M. Best, offered a rating outlook for the Canadian p&c market.”In our opinion, the market is stable and the key to this stability is the strong capitalization in the industry,” he said.”We believe that the industry is well capitalized to withstand the many challenges in the underwriting and investment markets today.”But, expect capitalization to weaken from the somewhat reduced profitability of underwriting income and the increasing of net loss ratios that is expected to continue on all major lines, Huber cautioned.Based on data A.M. Best gathered from approximately 220 companies, net income for 2007 was approximately Cdn$4.6 billion, marking a decrease of 3 or 4% over 2006, he said. “Through the first six months of 2008, however, the net income is only Cdn$1.2 billion, which is down 37% compared to the first six months of 2007.”Huber attributed the significant decline to lower underwriting income and lower capital gains. “So, the not so rosy picture on the underwriting side is putting greater reliance on companies’ investment earnings.”The volatility in the equity markets is going to challenge companies’ investment managers to better manage their investment portfolios. “Lower underwriting earnings is also going to result in slower growth in invested asset bases and this is also going to hinder investment growth,” he cautioned. He also pointed to the increasing cost of auto claims, the increased frequency and severity of storm activity, construction cost inflation and the continuing softening in commercial lines pricing as challenges to the industry.