Canadian Insurance Market Overview

February 18, 2010

Presented by: Murray Sali B.Admin, CMA, CAIB, CIP, CRM

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Financial Results

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• The insurance industry is cyclical and cycles between hard and soft markets

• The industry has been in a soft-market phase the past six years now

• The financial crisis which hit Q3 2008 created uncertainty about how the industry would be impacted - many expected that the insurance marketplace would soon harden

• This would have translated into rate (price) increases and reduced capacity (limits) being available

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Financial Results

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• Luckily, no news was good news for the industry• No major catastrophes occurred

• Few insurers experienced rating downgrades (which would have made capital more expensive and harder to secure)

• Reduced demand for insurance due to the economic slowdown has increased competition within insurers as the ability of troubled companies to absorb rate increases is not there

• Significant excess capacity in the industry has and continues to drive competition amongst insurers who want to increase their market share

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Financial ResultsIf history has proven one thing, it is that the insurance

industry is extremely good at raising new capital after a crisis. In the 15 months following Hurricane Katrina, the insurance industry raised $33.7 billion in capital.

When you consider that 60% of capital was raised over the first half of 2009 when the world was still recovering from the ‘credit crunch,’ this figure is more impressive.

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Financial Results• Insurers are not profitable with their insurance

operations alone as is demonstrated by the combined ratio

• Put simply, for every dollar of premium written (risk insured), insurers are spending more than a dollar on paying claims and operating expenses– Combined ratio for the industry at the end of 2008 was

101.51 – up from 94.27 at the end of 2007

• Reserve (claim) releases in 2008 are masking the losses being generated on business written today– If claims generated from a policy were matched with

the year the accident occurred (“accident-year” results), the combined ratio would be 105.8 in 2008.

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Canadian Insurance Industry Reserve Changes

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Financial Results• Over the past 25 years, insurance companies

have used investment returns to subsidize their rates

• Insurers invest very conservatively and therefore did not suffer significant investment losses from the stock market declining in value

– Investment income at the end of 2008 was approximately 2.7 Million which is down 36.6% from the year prior

• However, extremely low rates of return being earned on investments means that having underwriting profitability is again critical to an insurer’s long-term viability

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Financial Results

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Policy Subsidization by Investments Canadian Results

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Market Oversight

• Property and Casualty Insurance Industry in Canada is highly regulated – insurance companies must prove:• Their policy reserves are sufficient to pay claims

• Their capital is sufficient for the company to remain solvent

• Office of the Superintendent of Financial Institutions (OSFI) is currently refining the Minimum Capital Adequacy Test (MCT) in light of the events over the past year

• Canada’s regulatory framework for the insurance industry is still considered one the strongest in the world

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Insurance Market Security• Aon regularly reviews publicly available

information concerning an underwriter’s financial condition including:– Approval by various regulatory authorities;– Analyses by the major insurance rating agencies, such

as: A.M. Best, Standard & Poor’s, Moody’s and Fitch (f.k.a. Duff & Phelps);

– Key performance test results which consist of financial ratios established by the National Association of Insurance Commissioners (NAIC) for U.S. underwriters and Standard & Poor’s (S&P) for international underwriters; and,

– Input from Aon’s global affiliates and correspondents.

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Market Expectations• The profitability of insurance companies right

now is extremely poor• However, not all insurers are suffering equally

– Insurers who write personal lines property & personal lines automobile (particularly in Ontario) are more challenged to make a profit than those writing commercial lines insurance

– The loss ratio for commercial liability insurance is lower (indicating it has been more profitable) than commercial property insurance

• The results is that some markets are in a much better financial position and can compete to win market share based on continued price reductions– Less capitalized and unprofitable insurers could

possibly be squeezed right out from writing in certain segments

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Market Expectations•The 2009 Q3 results of the Canadian property and casualty industry represented a tale of two cities, including the "worst of times" for personal and multi-lines insurers and the "best of times" for commercial insurers, according to the latest data from the Q3-2009 MSA/Baron Outlook Report.

Source: CIP Society Advantage Daily (Feb 1, 2010)

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Market Expectations

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ROE Rolling

4 Quarters

ROE Rolling

4 Quarters

Combined Ratio

Combined Ratio

Q2 - Prior Year

Q2 - Current Year

2008 2009 YTD

Intact Insurance Company of Canada 9.7 0.9 98.3 97.6Aviva Insurance Company of 25.6 16.0 102.0 101.6AXA Assurances Inc. 18.5 7.2 96.9 91.4Royal & SunAlliance Insurance Company of Canada 9.6 10.0 101.0 94.5Allianz Global Risks 11.7 33.1 65.2 77.6Commonwealth Insurance Company -2.1 -3.0 144.7 76.3Factory Mutual Insurance 18.0 7.7 139.4 33.4Zurich Insurance Company 10.5 18.4 94.8 101.6St. Paul Fire and Marine 10.6 7.9 103.9 80.2Chartis (previously AIG Insurance Company) 21.1 19.0 70.2 88.9ACE INA Insurance Company 35.9 13.9 86.0 84.1Chubb Insurance Company 17.5 7.4 92.0 95.1Guarantee Company of North America 6.8 7.6 96.4 103.4XL Insurance 11.7 15.8 88.5 91.6

Source: MSA/Baron Outlook Report Q2-2009 & Q4-2008

Return on Equity Ratio (ROE) and Combined Ratio for Various Companies

•A good ROE for the insurance industry is between 12-15%, an ROE under 8% may indicate possible solvency issues

•With the low interest rate environment we are in, the combined ratio should be in the mid 80’s to achieve an acceptable rates of return on capital

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Market ExpectationsKey factors contributing to the end of the soft

market:1. Underwriting results are still deteriorating

-- combined ratio is actually at 105.8

2. Investment revenue remains low -- conservative investing and combined low rates of return

3. Capital in the world is less and liquidity is not guaranteed -- “Volatile conditions in capital markets persist and continue to create uncertainty over the availability of new capital in the event of significant need.” Source: Fitch 2009 Global Reinsurance Review and Outlook.

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Market Expectations• The Canadian insurance marketplace will eventually

harden – the question is when and how severely rates will increase…

• Some factors which might pre-cede a hardening in the marketplace are:– Spike in reinsurance pricing – July 2009 saw a slight

hardening of rates but the January 2010 reinsurance treaty renewals resulted in stable rates generally. The key will be how the July 2010 rates will fare.

– Rate hardening in the US – The US economy is starting to show signs of improvement but will take longer to recover than Canada. Poor economic results may repress rate increases into the foreseeable future.

– Major Catastrophic Loss – This would reduce capacity (an insurance company’s ability to write insurance premiums) which would decrease competition in the industry.

• Clients with poor loss histories should be prepared for rates increases regardless

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Questions?