Insurers expect fatter margins

(November 29, 2004) Canadian insurance firms are more confident they can grow their margins over the next three years than their U.S. counterparts are, according to a study released by KPMG. The survey covered both life and property and casualty industries.

“While U.S. insurers are reasonably optimistic, Canadian insurers are even more so,” said Neil Parkinson, national director of KPMG’s insurance practice. “Certainly Canadian non-life insurance results are sharply improved this year, after several grim years, and life results continue to be solid.”

The survey asked CEOs, CFOs, board members, senior and middle management in attendance at KPMG’s 13th Annual Insurance Issues Conference 2004, held October 19 in Toronto. Sixty-five per cent of U.S. respondents expect to see profit margins grow over the next one to three years, but Canadian insurers are even more optimistic, with 81% seeing fatter margins.

“U.S. insurers are facing greater regulatory pressure now, particularly from the cost and effort of Sarbanes-Oxley compliance,” said Neil Parkinson. “Also, there is bound to be some concern in the U.S. about the long-term economic consequences of their federal government deficits and balance of trade.”

Forty-two per cent of Canadian insurance executives said regulatory and market issues were the greatest threat to their business, compared to just 23% in the U.S. Americans were far more concerned about the ramifications of the Sarbanes-Oxley Act, with 83% saying it had a huge impact on their business. Canadian firms cited the legislation 31% of the time.

“This is not surprising, considering that U.S. public companies are making huge efforts to meet Sarbanes-Oxley compliance deadlines this year, while for most Canadian companies these requirements are out in the future,” said Parkinson. “However, Sarbanes-Oxley is still a very significant issue for Canadian companies. Even for insurers who are not public and will never have to comply, Sarbanes-Oxley has radically changed what is seen to be “best practice,” and even minimum practice.”

Canadian insurers seem fairly well convinced that the “pillars” of the Canadian financial services industry will remain intact, with only about one quarter seeing banks as this greatest competitive threat, and half of respondents citing rival insurance companies.

On both sides of the border, roughly half of respondents expect increased merger activity through the coming year.

Sixty-eight per cent of Canadian insurance companies expect their companies to perform significantly ahead of expectations over the next year, in contrast to 57 per cent of U.S. survey respondents.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com