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Flooded cars are stranded during a storm in Toronto July 8, 2013. TD Bank Group is expecting a third-quarter net loss of between $240-million and $290-million after tax due to flooding in Alberta and Toronto this year.

FRANK GUNN/THE CANADIAN PRESS

Toronto-Dominion Bank said Tuesday that it is setting aside $292-million in after-tax reserves to help protect its property and casualty business, highlighting trouble the unit has experienced in accounting for an increase in litigation and claims that come amid an Ontario government effort to lower insurance costs.

The bank said Tuesday that a "substantial" portion of the provision, its second in less than a year, was related to higher costs of settling bodily injury automobile claims in Ontario. TD warned shareholders in both the fourth quarter of 2012 and second quarter this year that the frequency and severity of prior-year claims had increased.

Vehicle insurance has been a sore spot for Canadian property and casualty insurers, especially in Ontario, where the provincial government aims to cut average auto insurance rates by 15 per cent. TD isn't the only insurer to provision against auto-related losses. Intact Financial Corp., Canada's largest property and casualty insurer raised reserves related to uncertainty in Ontario auto by about $40-million in its forth quarter last year.

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"TD Insurance experienced an increase in third-party bodily injury claims in 2012 related to pre-2010 automobile reform," the bank said in Tuesday's statement, referring to changes implemented by the Financial Services Commission of Ontario (FSCO) to counter rising costs for insurers by lowering the payout cap for minor injuries.

Analyst Robert Sedran of CIBC World Markets said the announcement would have a modest negative impact on shares, "since management has flagged a structural challenge to profitability and growth in a segment that is almost 10 per cent of the bank." Shares in the bank dropped more than 1 per cent on Tuesday.

"We understand why people would like to see insurance premiums go down. We would like to see insurance premiums go down, too. But you have to then change the underlying cost structure," TD's chief executive officer Ed Clark said on a conference call following Tuesday's announcement.

The bank will likely have to reassess its automotive insurance business in Ontario. "We may have a larger market share of the non-economic businesses than we want, and we're going to have to adjust that share, because we're obviously not going to put capital into a business where we can't get a good return," Mr. Clark said.

Ontario auto-loss ratios, which refer to amounts paid out plus expenses, relative to premiums taken in by insurers, have averaged between 75 per cent and 80 per cent for Canada's property and casualty insurers, and 90 per cent for TD, according to analyst Tom MacKinnon of BMO Nesbitt Burns.

As part of Ontario's plan to rein in insurance costs, the FSCO, overseer of the insurance and pension industries in Ontario, would gain new powers to fight fraudulent insurance claims, including oversight of health clinics and practitioners, who bill auto insurers for injuries sustained in accidents.

But without the right cost reduction measures, the decrease in premiums would be a challenge for insurers to implement, and could curtail the availability of coverage in the province.

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Intact insures 3.6 million cars and 477,000 commercial vehicles across the country, and does less than one-quarter of its business in Ontario.

BMO's Mr. MacKinnon said he does not expect more bad news when Intact reports earnings Wednesday. The insurer "had favourable reserve development in its auto insurance book in the last quarter," he wrote in a report to clients, which also cited the company's increased in reserves for auto-related bodily injury and accident benefits in Ontario.

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