Canada’s publicly traded home and auto insurers are designed to be boring and predictable businesses. But stellar stock market returns have catapulted them into rarefied air, allowing them to dethrone the Big Six banks as the country’s hottest financial companies.

Shares of Intact Financial Corp. IFC-T and Definity Financial Corp. DFY-T trounced those of Canada’s largest lenders this year, climbing 21 per cent and 30 per cent respectively, as of the market’s close on Dec. 23. The banks were down 15 per cent on average.

The insurers also beat the broader market: The S&P/TSX Composite Index is down 8 per cent since the start of the year.

Intact and Definity are property and casualty insurers, meaning they insure personal automobiles and residential homes, and also offer commercial insurance for the likes of contractors and financial and legal professionals, among others. Despite their presence in day-to-day life, they aren’t household names in the same way as banks or life insurers such as Sun Life and Manulife.

Because retail investors tend to favour the brand names they know, many are missing out on a rare bright spot in the gloomy financial services sector. The smart money on Bay Street, meanwhile, sees P&C insurers as one of the safer places to invest.

Banks often struggle with surging loan losses during economic downturns, but P&C insurers do not face the same threats. A recession doesn’t, for instance, spark more flooding that sends property claims soaring. These insurance companies are designed – and regulated – to be boring.

“The biggest topic of conversation right is now is whether we’re going into a recession in 2023,” Barclays Canada analyst John Aiken said. “At least within financials, the property and casualty insurers have the most recession-proof business models that I cover.”

Intact and Definity are expected to benefit from what made them so popular with institutional investors in the first place: They have been able to raise their premiums, particularly on commercial insurance; they have found ways to make money off of auto insurance, which is notoriously hard to do in Canada; and they are starting to generate better investment returns on the premiums they collect and hold in fixed-income securities.

They have also been lucky. Claims have been rather benign over the past few years, both for their personal-auto businesses and for catastrophic losses stemming from severe weather events. The calm has been particularly surprising for autos, because Intact recently disclosed that its data suggests car usage is back to pre-COVID-19 levels. And yet accident frequency is still subdued.

“The stability has been surprising in the past six to nine months,” Intact chief executive Charles Brindamour said on the company’s latest quarterly conference call. “We expected more change, let’s just say, come September or October, and we’re just not seeing it.”

Lately, P&C insurers have been making constant references to operating in a “hard market.” What that means is the opposite of how it sounds.

Just like economic cycles, the insurance market ebbs and flows. In a soft market, insurers drop their prices and increase their risk tolerance in hopes of gaining market share.

Right now, contrary to the economy, the market is in an upswing, with premiums going up, particularly for commercial insurance. Insurers are also cutting back on riskier clients and business lines. Put together, this means rising prices and better profits.

Intact and Definity’s success in personal auto insurance has been notable. Many of the smaller, privately owned insurance companies have combined ratios for autos above 100 per cent, meaning their claims exceed their premiums. Last quarter at Intact, the same ratio was 93 per cent, and Definity’s was 96 per cent.

Some of the strength comes from higher premiums. Even though raising prices is tough to do for personal auto insurance because of provincial regulations, many of the COVID-19 relief measures insurers instituted are ending, and the impact on revenue is the same as a price hike. But the real structural tailwind is in an investment in data and sophisticated risk models, which has helped both insurers determine which clients are worthy of underwriting.

As for investment income, P&C insurers earn a lot of money up front, in the form of premiums, and they don’t pay that money out until clients file claims. In the meantime, they invest the cash in fixed-income and highly liquid securities. Because interest rates were so low for so long, the interest they earned on short-term bonds was next to nothing. Now that the Bank of Canada has hiked rates by four percentage points this year, insurers are getting an immediate lift.

While Intact and Definity’s stock market returns were similar this year, because they benefitted from the same underlying trends, the two companies have some differences.

Intact, based in Toronto, is Canada’s largest P&C insurer. Lately it has been growing its business abroad, with multiple acquisitions in the United States, as well as a major deal to buy RSA Insurance Group PLC, based in Britain. The growth abroad has impressed investors, because Intact has successfully integrated its takeover targets and increased profits in the process. Intact even recently disclosed that it expects to generate better cost savings from the RSA takeover than it originally estimated.

This success, coupled with strong operating fundamentals, has allowed Intact to offer annual dividend increases continually. That, in turn, has given investors confidence, because it has shown the company is confident that its cash flows won’t shrivel in a bad market.

Waterloo, Ont.-based Definity, the parent company of Economical Insurance, is a much smaller P&C business, currently ranked seventh by market share in Canada. Its management launched a direct-to-consumer brand, Sonnet, a few years ago, and then took the company public in late 2021. Definity operates only in Canada, and it generates about 70 per cent of its premiums from personal insurance. But it has been expanding in commercial insurance, where premiums are rising more quickly.

Unlike Intact, whose shares have soared 208 per cent over the past decade because of strong operating performance, Definity has been more of a turnaround story over the past five years. In 2018, its combined ratio was 111.8 per cent, meaning it was paying out more in claims than it was bringing in through premiums. By the end of 2021, the ratio had fallen to 93.1 per cent, and its continued success on this front is the main reason Definity’s shares are up 75 per cent since it went public a year ago.

The question now is whether both companies’ share prices are vulnerable to a correction. Not so long ago, the banks were also flying high, yet their shares suffered in the second half of the year.

Even though the stocks are on a tear, National Bank Financial analyst Jaeme Gloyn said, “valuations aren’t exactly rich.” Intact is currently trading around 2.5 times its book value, which is an important metric in the insurance world. In the past, the company has traded for more, close to three times book value.

Many portfolio managers who specialize in financial stocks are looking for a place to park their money now that banks and life insurers have sold off. Intact in particular is a large company with a liquid stock – a safe option for them. The risk of a sharp correction, Mr. Gloyn said, “is not something that has us too concerned.”