Economical Insurance reports financial results for Fourth Quarter and Full Year 2014

  • Increased gross written premiums by 0.8% for the quarter and 2.3% for the year compared to 2013
  • Recorded a combined ratio of 99.5% for the fourth quarter and 102.1% for 2014
  • Generated net income of $38.7 million for the quarter and $84.2 million for the year
  • Increased total equity by $108.0 million during 2014 to a record $1.68 billion

WATERLOO, ON, Feb. 20, 2015 /CNW/ - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three months and full year ended December 31, 2014.

"Despite a reduction in weather-related catastrophe losses from the record levels set last year, 2014 continued to be a challenging year for Economical which began with a particularly tough first quarter" said Karen Gavan, president and CEO. "While we continued to perform well in three of our four lines of business in 2014, the corrective underwriting and rate actions we have taken on our commercial property and liability business should begin to be felt in 2015. We will continue to focus our efforts on returning this important line of business to profitability. 2014 also saw the completion of our business transformation program, an investment which has improved the efficiency and effectiveness of our operating platform and which positions us strongly for future growth. As we continue to invest in our company in 2015, we can also reflect on the strong financial strength and significant increase in total equity, which grew to almost $1.7 billion by the end of the year."

Economical reported a combined ratio of 99.5% for the fourth quarter, compared to 101.0% in the same quarter a year ago, due primarily to lower weather-related catastrophe losses and reduced large loss activity offset by lower levels of favourable claims development. The company's consolidated net income was $38.7 million for the fourth quarter of 2014 compared to $31.3 million during the same period a year ago.

Full year net income was stable at $84.2 million compared to $87.7 million in 2013, although underwriting losses increased to $38.4 million from $2.3 million in 2013. This represents a combined ratio of 102.1% compared to 100.1% in 2013. While weather-related catastrophe losses of $46.7 million are down from record levels of $103.4 million in 2013, this has been more than offset by lower levels of favourable prior years' loss reserve development during 2014 and an overall increase in frequency of claims largely driven by the severe winter conditions experienced in the first quarter of 2014.

When including unrealized gains on the entire investment portfolio, Economical increased total equity by $108.0 million, or 6.9% in 2014.

Economical Insurance Consolidated Highlights


($ in millions, except as otherwise noted)


Three months
ended December 31


Year ended
December 31



2014

2013

Change

2014

2013

Change








Gross written premiums

492.5

488.6

3.9

1,963.0

1,919.2

43.8

Net premiums earned

468.0

451.8

16.2

1,845.3

1,769.2

76.1

Claims ratio*

67.2%

68.5%

(1.3%)

69.4%

67.2%

2.2%

Expense ratio*

32.3%

32.5%

(0.2%)

32.7%

32.9%

(0.2%)

Combined ratio*

99.5%

101.0%

(1.5%)

102.1%

100.1%

2.0%

Underwriting income (loss)*

2.5

(4.7)

7.2

(38.4)

(2.3)

(36.1)

Investment income

52.3

40.4

11.9

164.2

105.0

59.2

Net income

38.7

31.3

7.4

84.2

87.7

(3.5)















Total equity




1,681.1

1,573.1

108.0

Minimum Capital Test




295%

295%

(0%)








Note: *Claims ratio, expense ratio, combined ratio and underwriting
income exclude the impact of discounting and are non-GAAP measures
which are defined below.

 

Gross written premiums for the fourth quarter 2014 grew by $3.9 million, or 0.8%, over the same quarter a year ago. The personal lines premiums grew by $12.3 million, or 4.6% in the fourth quarter of 2014, driven primarily by increased volumes of auto policies in Ontario. The impact of the mandated rate decreases during 2014 on longer-term profitability for Ontario auto will continue to develop in 2015 as policies are issued and renewed at lower rates. Commercial lines premium declined by $8.3 million, or 3.7%, over the same quarter a year ago primarily due to the non-renewal of certain non-core fronting arrangements in the quarter.

Underwriting activity for the fourth quarter produced a $2.5 million underwriting profit despite incurring $7.6 million of net weather-related catastrophe losses, primarily related to Ontario wind and rain storms. The combined ratio for the fourth quarter 2014 was 99.5% compared to 101.0% in the same quarter a year ago.

Economical's personal auto business produced a fourth quarter 2014 combined ratio of 98.5%, compared to 100.5% in the fourth quarter of 2013 due to declines in frequency and net severity of claims. 

Personal property produced a very strong combined ratio of 80.0% in the fourth quarter of 2014, compared to 93.7% in the fourth quarter a year ago. Net weather-related catastrophe losses contributed 5.2 percentage points to the fourth quarter combined ratio, compared to 12.6 percentage points in 2013 which was heavily impacted by the December ice storm.   

Overall, the personal lines business produced a strong combined ratio of 92.9% in the fourth quarter of 2014, compared to 98.4% in the fourth quarter of 2013. For the full year 2014, personal lines produced a combined ratio of 97.1%, compared to 95.7% in the prior year, generating an underwriting profit of $32.8 million compared to $46.6 million in 2013.    

Commercial auto produced a combined ratio of 108.1% in the fourth quarter of 2014, compared to 91.9% in the fourth quarter of 2013. The deterioration in performance compared to the same quarter last year is due primarily to increases in both frequency and net severity of claims, particularly in Ontario and Western Canada.   

The commercial property and liability business produced a fourth quarter 2014 combined ratio of 110.7%, compared to 112.2% in the fourth quarter of 2013. Lower net weather-related catastrophe losses and reduced levels of large losses were partially offset by adverse development on prior years' reserves, primarily for the commercial liability business.

Overall, the commercial lines business posted a combined ratio of 109.8% in the fourth quarter of 2014 compared to 105.1% in the fourth quarter of 2013. For the full year 2014, the combined ratio was 109.9% compared to 107.2% in 2013, resulting in underwriting losses of $71.2 million compared to $48.9 million in 2013.

Economical continues to realize benefits from actions taken over the past two years related to its business transformation program, which was completed during the fourth quarter of this year. The total impact of the program, including restructuring expenses, was a release of $4.2 million for the fourth quarter 2014 and a $14.3 million expense for the full year 2014, compared to a $15.0 million expense for the quarter and a $37.7 million expense for the full year 2013. Costs solely in respect of underwriting results were $0.8 million for the fourth quarter 2014 and $13.0 million for the full year 2014, compared to $4.1 million for the fourth quarter and $14.3 million for the full year 2013. The resulting impact of these costs on the combined ratio was a 0.2 percentage point increase for the fourth quarter 2014 and a 0.7 percentage point increase for the full year 2014, compared to a 0.9 percentage point increase for the fourth quarter and a 0.8 percentage point increase for the full year 2013.

Market yields decreased during the fourth quarter of 2014 and 2013, resulting in a discounting expense of $11.5 million in the fourth quarter of 2014 compared to an expense of $10.0 million in the fourth quarter of 2013. The effect of the discounting on claims liabilities was more than offset by recognized investment gains of $13.2 million on the matched bond portfolio in the fourth quarter of 2014 and $10.0 million in the fourth quarter of 2013. For the full year 2014, market yields have decreased, resulting in a discounting expense of $16.1 million which was more than offset by recognized investment gains of $27.9 million on the matched bond portfolio over the same time period. For the full year 2013, market yields increased, resulting in a discounting recovery of $8.4 million. This was mostly offset by recognized investment losses of $5.2 million on the matched bond portfolio.

Investment income for the quarter increased $11.9 million over the fourth quarter of 2013, to $52.3 million. This increase was due primarily to increased levels of dividend income and higher recognized gains on the matched and non-matched portfolios.

For the full year 2014, overall investment income increased by $59.2 million. This was primarily due to year-to-date recognized gains of $27.9 million on the matched bond portfolio, compared with a loss of $5.2 million in 2013. In addition there was an increase in recognized gains on the non-matched portfolio of $23.0 million and a $3.2 million overall increase in interest and dividend income.

Investment quality remains strong with more than 75% of total investments held in government and investment-grade corporate bonds. The balance of investments is primarily held in common and preferred shares of large, well-established companies.

Economical's capital position remains strong. Total equity was $1.68 billion at December 31, 2014, an increase of $108.0 million, or 6.9% in 2014. Economical's minimum capital test ratio at 295% remains significantly in excess of regulatory requirements as of December 31, 2014.

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", or "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: the competitive market environment; 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; 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; Economical's  ability to obtain reinsurance coverage to alleviate risk; Economical's ability to successfully manage credit risk from its counterparties; unfavourable capital market developments or other factors which may affect the Company's investments; general economic, financial and political conditions; foreign currency fluctuations; Economical's ability to implement its strategy or operate its business as management currently expects; Economical's dependence on key employees; Economical's reliance on independent brokers to sell its products; Economical's ability to meet payment obligations as they become due; the risk of financial loss from an inadequate enterprise risk management framework; Economical's reliance on information technology and telecommunications systems; changes in government regulations; litigation and regulatory actions; and periodic negative publicity regarding the insurance industry. 

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


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 premiums earned for the same period.



Combined ratio

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



Expense ratio

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



Underwriting income

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



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 the investments used to support those liabilities (matched investments). Provisions for adverse deviation are also included when determining the discounted value.



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.



Matched bond portfolio

A subset of the company's bond portfolio that is identified as backing claim liabilities is matched in quantum and duration to those claim liabilities. The aim of this matching is to reduce the accounting mismatch in net income that would otherwise be generated by the fluctuations in the fair value of the claim liabilities due to changes in interest rates.



 

About Economical Insurance
Founded in 1871, Economical Insurance is one of Canada's leading property and casualty insurers, with approximately $2.0 billion in annualized premium volume and $5.2 billion in assets as at December 31, 2014. In 2010, Economical announced its decision to become the first federally-regulated mutual property and casualty insurance company to pursue demutualization. Economical Insurance conducts business under the following brands: Economical Insurance, Economical, Western General, Economical Select, Perth Insurance, Family Insurance Solutions, Federation Insurance and Economical Financial.

SOURCE Economical Insurance

For further information: Media Inquiries: Doug Maybee, manager, public and media relations, Economical Insurance, (T) 519.570.8249, (C) 519.404.0989, doug.maybee@economical.com; Investor Relations Inquiries: Max Weis, vice-president, corporate development, Economical Insurance, (T) 519.570.8291 (Waterloo), (T) 647.260.3679 (Toronto), max.weis@economical.com

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