Economical Insurance reports financial results for First Quarter 2017

HIGHLIGHTS

  • Acquired the market leader in the Canadian pet insurance industry, which we renamed Petline
  • Increased gross written premiums by 14.5% over first quarter 2016, driven by strong personal lines growth, including contributions from Sonnet and Petline
  • Reported a combined ratio of 107.2% for the quarter, including an impact of 6.5 percentage points related to Sonnet and the replacement of our personal lines policy administration system
  • Generated net income of $5.3 million for the quarter
  • Increased total equity by $35.1 million since December 31, 2016 to $1.8 billion

WATERLOO, ON, May 5, 2017 /CNW/ - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three months ended March 31, 2017.

"We generated significant growth in gross written premiums stemming from broker channel personal lines, Sonnet, and our newly-acquired Petline business. We are pleased to welcome Petline to the Economical family and are excited by the opportunities for this new line of business," said Rowan Saunders, President and CEO. "However, we continued to be challenged by the performance of our auto lines, and were impacted by increased levels of catastrophe losses and relatively worse winter weather conditions. Ongoing investments in Sonnet and the replacement of our personal lines policy administration system also contributed to the increase in the combined ratio. A number of measures including improvements in pricing, underwriting, and claims actions are being implemented, but will take time to be reflected in our results."

Economical Insurance Consolidated Highlights ($ in millions, except as otherwise noted)



Three months ended March 31



2017

2016

Change

Gross written premiums1


488.6

426.7

61.9

Net earned premiums


521.3

481.4

39.9

Claims ratio1


70.4%

66.0%

4.4 pts

Expense ratio1


36.8%

35.1%

1.7 pts

Combined ratio1


107.2%

101.1%

6.1 pts

Underwriting loss1


(37.8)

(5.4)

(32.4)

Investment income


57.8

42.6

15.2

Net income


5.3

28.5

(23.2)



As at




Mar 31, 2017

Dec 31, 2016

Change

Total equity


1,838.2

1,803.1

35.1

Minimum Capital Test1


279%

276%

3 pts

1These items are non-GAAP measures which are defined below. Claims ratio, expense ratio, combined ratio, and underwriting loss exclude the impact of discounting.

 

Gross written premiums for the first quarter of 2017 grew by $61.9 million or 14.5% over the same quarter a year ago from a combination of organic and inorganic growth. Personal lines premiums grew by $53.3 million or 20.5% primarily due to increased auto policy volumes in our broker channel, our digital direct distribution channel, Sonnet, and the acquisition of Petline. Commercial lines premiums grew by $8.6 million or 5.2% driven by targeted rate increases for commercial property and liability, and increased fleet business.

Underwriting activity for the first quarter of 2017 produced a loss of $37.8 million, resulting in a combined ratio of 107.2%, compared to an underwriting loss of $5.4 million and a combined ratio of 101.1% in the same quarter a year ago. Underwriting results were impacted by continued challenging auto performance, mainly in Ontario, British Columbia, and Alberta. The quarter was also impacted by $7.7 million of net catastrophe losses, compared to none in the same quarter a year ago. The first quarter saw relatively worse winter weather conditions compared to a benign first quarter of 2016. We continue to make significant investments in Sonnet and the replacement of our personal lines policy administration system, which impacted the combined ratio by 6.5 percentage points, compared to 2.5 percentage points in the same quarter a year ago. We expect that these strategic investments will continue to increase operating expenses during the implementation and start-up phases, but are expected to improve our operational efficiency and profitable growth in the longer term.

Line of Business Combined Ratios

In 2017, the results of the underwriting activity of Sonnet have been included in the line of business performance resulting in increased combined ratios, which will continue during the start-up phase. In addition, our investment in a new personal lines policy administration system has further increased the combined ratios. The collective impact of these strategic investments on the 2017 combined ratios has been noted in the table below to depict the adjusted combined ratios excluding these investments for comparative purposes.

Personal insurance




Three months ended March 31


2017
Combined
Ratio

2017 Impact
of strategic
investments

2017
Adjusted
Combined
Ratio2

20161

Change

Personal auto

115.8%

(11.7)%

104.1%

101.2%

2.9 pts

Personal property

91.5%

(6.3)%

85.2%

88.5%

(3.3) pts

Total personal lines

108.0%

(10.1)%

97.9%

97.4%

0.5 pts

1 In 2016, the personal lines of business results excluded certain expenses associated with the development and launch of Sonnet as it was in the pre-launch phase for the majority of the year.

2 This item is a non-GAAP measure which is defined below.

 

The adjusted personal auto combined ratio for the first quarter increased due to continued profitability challenges mainly in Ontario, British Columbia, and Alberta. Despite reforms to Ontario auto insurance, many insurers have recently filed or implemented rate increases to address rate deficiencies in this line of business. To address these challenges we are implementing a number of measures including improvements in pricing, underwriting, and claims actions. However, these measures will take time to be reflected in our results.

The adjusted personal property combined ratio continues to be strong and now includes the results of Petline. Increased catastrophe losses in this line of business were largely offset by a decrease in large losses. Overall, on an adjusted basis, personal lines produced underwriting income of $6.9 million compared to underwriting income of $7.9 million in the same quarter a year ago.

Commercial insurance



Three months ended March 31



2017

2016

Change

Commercial auto


113.9%

103.0%

10.9 pts

Commercial property and liability


100.9%

100.1%

0.8 pts

Total commercial lines


105.9%

101.0%

4.9 pts

 

The commercial auto combined ratio was impacted by an increase in claims frequency compared to the first quarter of 2016, which benefited from unusually low frequency primarily due to benign weather conditions. Pricing improvements are being implemented, and we are reviewing this line of business to determine if additional actions are required.

The commercial property and liability combined ratio was relatively unchanged. Decreases in favourable claims development and increased catastrophe losses were largely offset by a decrease in large losses, a decrease in the expense ratio, and the beneficial impact of increased rate resulting from our underwriting and pricing actions. Previous actions have stabilized this book of business and we continue to develop our plans for future profitable growth. Overall, commercial lines produced an underwriting loss of $10.8 million compared to an underwriting loss of $1.8 million in the same quarter a year ago, primarily due to the deterioration in commercial auto underwriting performance.

Investment income



Three months ended March 31



2017

2016

Change

Interest income


15.0

15.4

(0.4)

Dividend income


8.9

8.2

0.7

Total interest and dividend income


23.9

23.6

0.3

Total recognized gains on investments


33.9

19.0

14.9

Total investment income


57.8

42.6

15.2

 

Recurring investment income was relatively stable during the first quarter of 2017, compared to the same quarter a year ago, as the decline in interest income was more than offset by an increase in dividend income. Recognized gains increased significantly due to strong performance by global equities, increased sales of domestic equities, and higher bond valuations arising from a decline in yields.

Net income decreased by $23.2 million over the same quarter a year ago as higher investment income was more than offset by higher underwriting losses driven largely by increased spend on our strategic initiatives, as well as continued challenges in auto performance, relatively worse winter weather conditions, and increased catastrophe losses.

Economical's capital position remains strong. Total equity exceeded $1.8 billion at March 31, 2017, an increase of $35.1 million or 1.9% since December 31, 2016, primarily due to market value increases within the investment portfolio. Economical's minimum capital test ratio is at 279%, which remains significantly in excess of both internal capital management and external regulatory requirements as of March 31, 2017.

Forward looking statements

Certain of the statements in this press release regarding our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements, or any other future events or developments constitute forward-looking statements. The words "may", "will", "would", "should", "could", "expects", "plans", "intends", "trends", "indications", "anticipates", "believes", "estimates", "predicts", "likely", "looking to", "potential", or the negative or other variations of these words or other similar or comparable words or phrases, are intended to identify forward-looking statements.

Forward-looking statements are based on estimates and assumptions made by management based on management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Many factors could cause Economical's actual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors: Economical's ability to appropriately price its products to produce an acceptable return; its ability to accurately assess the risks associated with the insurance policies that it writes; its ability to pay claims in accordance with our insurance policies; Economical's ability to obtain reinsurance coverage to alleviate risk; litigation and regulatory actions; management's ability to accurately predict future claims frequency or severity including the frequency and severity of weather-related events; the occurrence of unpredictable catastrophic events; unfavourable capital market developments or other factors which may affect our investments; Economical's ability to successfully manage credit risk from its counterparties; foreign currency fluctuations; Economical's ability to meet payment obligations as they become due; Economical's dependence on key employees; Economical's ability to manage the appropriate collection and storage of information; Economical's reliance on information technology and telecommunications systems; changes in government regulations, supervisory expectations or requirements, including risk-based capital guidelines; Economical's ability to respond to events impacting its ability to conduct business as normal; Economical's ability to implement its strategy or operate its business as management currently expects; general economic, financial and political conditions; the competitive market environment; Economical's reliance on independent brokers to sell its products; success and timing of the demutualization process; the outcome of a demutualization transaction; and periodic negative publicity regarding the insurance industry or Economical.

All of the forward-looking statements included in this press release are qualified by these cautionary statements. These factors are not intended to represent a complete list of the factors that could impact Economical, however, these factors should be considered carefully, and readers should not place undue reliance on forward-looking statements we make. We are under no obligation and have no intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Definitions



Catastrophe loss

Generally, an event causing greater than 100 claims and gross losses in excess of $2 million.

Discounting

To reflect the time value of money, the expected future payments of claim liabilities are discounted back to present value using the market yield rate of investments used to support those liabilities. Provisions for adverse deviation are also included when determining the discounted value.

Frequency

A measure of how often a claim is reported as a function of policies in force.

Large loss

A single claim with a gross loss in excess of $1 million.

Severity

A measure of the average dollar amount paid per claim.

Total equity

Retained earnings plus accumulated other comprehensive income.

Also included in this press release are a number of measures which do not have any standardized meaning prescribed by generally accepted accounting principles ("GAAP"). These non-GAAP measures may not be comparable to any similar measures presented by other companies.

Claims ratio

Claims and adjustment expenses (excluding the impact of discounting) during a defined period expressed as a percentage of net earned premiums for the same period.

Claims development

The difference between prior year end estimates of ultimate undiscounted claim costs and the current estimates for the same block of claims. A favourable development represents a reduction in the estimated ultimate claim costs during the period for that block of claims.

Combined ratio

Claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses (net of other underwriting revenues) and premium taxes during a defined period expressed as a percentage of net earned premiums for the same period.

Adjusted combined ratio

Combined ratio excluding the impact of our investment in a new personal lines policy administration system and the results of the underwriting activity of Sonnet.

Expense ratio

Underwriting expenses including commissions, operating expenses (net of other underwriting revenues) and premium taxes during a defined period, expressed as a percentage of net earned premiums for the same period.

Gross written premiums

The total premiums from the sale of insurance during a specified period.

Minimum Capital Test

A regulatory formula, defined by The Office of the Superintendent of Financial Institutions, that is a risk-based test of capital available relative to capital required.

Underwriting loss

Net earned premiums for a defined period less the sum of claims and adjustment expenses (excluding the impact of discounting), net commissions, operating expenses (net of other underwriting revenues) and premium taxes during the same period.

 

About Economical Insurance

Founded in 1871, Economical Insurance is one of Canada's leading property and casualty insurers, with more than $2.1 billion in annualized premium volume and over $5.4 billion in assets as at March 31, 2017. Based in Waterloo, Ontario, this Canadian-owned and operated company services the insurance needs of more than one million customers across the country.

SOURCE Economical Insurance

For further information: Media Inquiries: Doug Maybee, Manager, Public and Media Relations, (T) 519-570-8249, (C) 519-404-0989, doug.maybee@economical.com; Stakeholder Relations Inquiries: Max Weis, Vice-President, Corporate Development, (T) 519-570-8291 (Waterloo), (T) 647-260-3679 (Toronto), max.weis@economical.com

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