Thanks to the Canadian wildfires in Alberta, Quebec, Ontario and Nova Scotia, New York City became the most polluted major city in the world for a brief moment in early June.

While everyone in the U.S. wanted to blame Canada for their poor air quality, here at home, we must deal with the harsh reality of these historically large wildfires.

More than four million hectares (9.88 million acres) burned as of June 6. Due to the damage and destruction caused by the wildfires, home insurance premiums in Canada will likely move higher in the next year.

If you own stock in Intact Financial (CA:IFC), the largest Canadian property and casualty insurance provider with a 20% market share, the implications are both good and bad.

IFC stock is in the top 25 portfolio holdings in the JPMorgan BetaBuilders Canada ETF (US:BBCA). The shares make up 1.35% of the exchange-traded fund’s 83-stock portfolio. IFC stock has beat that fund’s performance over the last 12 months, adding 12.3% while BBCA stock rose 2.58%.

Higher Premiums Ahead

DBRS Morningstar analyst Marcos Alvarez published a recent research note suggesting that the insured losses from the Canadian wildfires will be manageable despite a huge wildfire season.

However, the analyst sees higher home insurance prices ahead due to the losses and ongoing inflation concerns.

“Canadian property and casualty insurers have been exposed to larger and more frequent weather-related losses, which are driven not only by climate change but also by the rise of property values over time as well as changes in demographics and accumulation of insurable value in risk-prone zones,” The Globe and Mail reported Alvarez’s comments.

Home insurance premiums have been moving higher in recent years. According to the Insurance Bureau of Canada (IBC), prices have increased by 14% in the past three years, with about 36% of the increase in the past 12 months.

The good news for Canadians affected by wildfires is that fire insurance is standard for all home and business insurance policies. It typically covers food, clothing, hotel stays, etc.

While insurance companies consider all kinds of possible losses, including fires, premiums generally aren’t affected by single events but rather developing trends.

“No single event will impact the price of insurance premiums, but insurers track the ongoing trends over time, including when wildfire events happen,” Craig Stewart, IBC’s vice president of climate change and federal issues, said, as reported by The Globe and Mail.

“And based on those longer-term models, we have seen premiums rising. As an insurer prices risk, we have seen in recent years that Canada is a riskier place to insure.”

Intact Impact

Since 2013, Intact has tripled operating direct premiums written (DPW) to $21.1 billion in 2022, a compound annual growth rate of 12%. Its personal lines of insurance account for 51% of its premiums.

In its first-quarter 2023 results, Intact’s operating DPW was $4.81 billion, 4% higher than a year earlier, with its Canadian business accounting for 62% of its operating DPW. Its Canadian personal property premiums in the first quarter were $760 million, 6.1% higher than a year ago. Excluding lines of business exited, its Canadian personal property premiums increased by 4.9%.

So, the Canadian personal property premiums accounted for 16% of the company’s overall operating DPW. However, it accounted for 22% of Intact’s overall underwriting income for the quarter, a sign that it’s more than pulling its weight relative to the other parts of the insurer’s business.

To understand how Intact generated an underwriting income of $136 million in the first quarter, you need three figures: Operating net underwriting revenue; Claims ratio; and, Expense ratio. (See Intact’s glossary of terms here.)

The Claims ratio is defined as the net claims by policyholders divided by operating net underwriting revenue. The Expense ratio is the operating net underwriting expenses as a percentage of operating net underwriting revenue.

Add the two ratios together, and you get the Combined ratio, the level of underwriting profitability achieved. A combined ratio below 100% means you made money off underwriting. Above it, you lost money.

In Q1 2023, Intact’s personal property combined ratio was 84.5% of $878 million in operating net underwriting revenue, leaving $136 million in underwriting income.

Of all its businesses in Canada, the U.S., and the U.K., its Canadian personal property business had the lowest combined ratio in the first quarter, 380 basis points lower than a year ago.

Investors will want to pay attention to Intact’s catastrophe (CAT) losses in the coming quarters. The CAT loss ratio is the CAT losses divided by operating net underwriting revenue. In the first quarter, it was 3.4%, 270 basis points higher than a year ago.

On June 12, S&P Global Market Intelligence released a report that said the ongoing Canadian wildfires would not break 2016’s record for insured losses in Canada. Estimates suggest insured losses will be between $50 million and $200 million.

The losses from the Fort McMurray, Alberta, wildfires in 2016 resulted in $4.3 billion (2021 dollars) in insured losses.

If you are an Intact shareholder, it’s unlikely that its Canadian personal property business will be greatly affected, with premium increases offsetting higher CAT losses.

This article originally appeared on Fintel

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