Economical Insurance reports financial results for Fourth Quarter and Full Year 2016

FOURTH QUARTER HIGHLIGHTS

  • Increased gross written premiums by 4.8% over fourth quarter 2015
  • Reported a combined ratio of 114.4% for the quarter, heavily impacted by a deterioration in auto performance
  • Generated a net loss of $38.3 million for the quarter

FULL YEAR HIGHLIGHTS

  • Increased gross written premiums by 3.8% over 2015, driven by strong personal lines growth including the launch of Sonnet
  • Incurred net catastrophe losses of $79.9 million inclusive of reinstatement premiums and the impact of the Fort McMurray wildfire
  • Reported a combined ratio of 109.1% for the year, including an impact of 6.0 percentage points related to the replacement of our personal lines policy administration system and the launch of Sonnet
  • Generated a net loss of $20.3 million for the year
  • Increased total equity by $24.1 million since December 31, 2015 to $1.8 billion

WATERLOO, ON, Feb. 22, 2017 /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, 2016.

"2016 was a mixed year for Economical," said Rowan Saunders, President and CEO. "We significantly progressed key elements of our strategy including launching Sonnet, the advancement of the demutualization process, and the acquisition of Western Financial Insurance Company which closed on January 1, 2017. However, our fourth quarter and full year operating performance was unsatisfactory and disappointing, notwithstanding the impact of the significant investments we have made in our infrastructure and advancing our strategy. Our results were impacted by a deterioration in personal auto performance particularly in Ontario, British Columbia and Alberta. To address the challenges in personal auto, we are implementing a number of measures including improvements in pricing, underwriting and claims actions. We are also heavily investing in the replacement of the personal lines policy administration system to support our broker distribution channel, which we expect will improve operating performance over the longer term, once implemented."

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


Three months ended December 31

Year ended December 31


2016

2015

Change

2016

2015

Change

Gross written premiums1

521.8

498.0

23.8

2,084.1

2,008.4

75.7

Net earned premiums

499.6

481.4

18.2

1,955.6

1,905.7

49.9

Claims ratio1

76.6%

65.7%

10.9 pts

71.9%

64.1%

7.8 pts

Expense ratio1

37.8%

32.8%

5.0 pts

37.2%

33.3%

3.9 pts

Combined ratio1

114.4%

98.5%

15.9 pts

109.1%

97.4%

11.7 pts

Underwriting (loss) income1

(72.1)

7.2

(79.3)

(178.4)

48.8

(227.2)

Investment income

1.0

47.7

(46.7)

135.4

179.5

(44.1)

Net (loss) income

(38.3)

41.9

(80.2)

(20.3)

176.0

(196.3)







As at December 31





2016

2015

Change



Total equity

1,803.1

1,779.0

24.1



Minimum Capital Test1

276%

285%

(9) pts



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

 

Gross written premiums for the fourth quarter of 2016 grew by $23.8 million or 4.8% over the same quarter a year ago. Personal lines premiums grew by $28.3 million or 9.5% driven primarily by increased auto policy volumes in our broker channel and the launch of Sonnet. Commercial lines premiums declined by $4.5 million or 2.2% over the same quarter a year ago. Excluding the earlier renewal date of certain large accounts in the third quarter of 2016, commercial lines premiums increased by $7.4 million or 3.7% due to targeted rate increases for commercial property and liability, and increased fleet business. For the year, personal lines premiums grew by $68.8 million or 5.5% and commercial lines premiums grew by $6.9 million or 0.9% over the prior year.

Underwriting activity for the fourth quarter of 2016 produced a loss of $72.1 million, resulting in a combined ratio of 114.4% compared to underwriting income of $7.2 million and a combined ratio of 98.5% in the same quarter a year ago. Underwriting results were impacted by challenging auto performance, which experienced a deterioration in Ontario, British Columbia and Alberta. The quarter was also impacted by increases in claims severity and frequency due in part to poor weather conditions, compared to relatively benign weather conditions a year earlier. We continue to make significant investments in the replacement of our personal lines policy administration system and Sonnet, including building the supporting infrastructure which impacted the fourth quarter 2016 combined ratio by 8.2 percentage points compared to 3.0 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 drive profitable growth and improve our operational efficiency in the longer term.

Underwriting activity for the year produced a $178.4 million underwriting loss, resulting in a combined ratio of 109.1% compared to underwriting income of $48.8 million and a combined ratio of 97.4% in the prior year. Our underwriting results in 2016 were significantly impacted by a deterioration in personal and commercial auto, which experienced increases in claims severity and frequency, and historically high natural catastrophe losses. There was also increased spend on our strategic initiatives which had an incremental impact of 3.9 percentage points compared to the prior year.

Line of Business Combined Ratios1


Three months ended December 31

Year ended December 31


2016

2015

Change

2016

2015

Change

Personal auto

121.3%

97.6%

23.7 pts

103.9%

94.7%

9.2 pts

Personal property

83.7%

79.2%

4.5 pts

98.8%

88.0%

10.8 pts

Total personal lines

110.3%

92.1%

18.2 pts

102.4%

92.7%

9.7 pts

 

Commercial auto

112.9%

101.9%

11.0 pts

101.7%

92.9%

8.8 pts

Commercial property and
liability

91.9%

101.0%

(9.1) pts

107.2%

103.6%

3.6 pts

Total commercial lines

99.9%

101.3%

(1.4) pts

105.1%

99.9%

5.2 pts

1The above combined ratios exclude certain operating expenses for the aforementioned investments in Sonnet.

 

The personal auto combined ratio for the quarter was significantly impacted by a deterioration in Ontario, British Columbia and Alberta. During the quarter, reserves were strengthened as a result of the ongoing trends we are seeing in this line of business. To address the challenges in personal auto, we are implementing a number of measures including improvements in pricing, underwriting and claims actions. The personal property combined ratio, while continuing to be strong, increased due to higher catastrophe losses which were partially offset by higher average premiums. Overall, personal lines produced an underwriting loss of $32.9 million compared to underwriting income of $24.0 million in the same quarter a year ago.

For the year, personal lines produced an underwriting loss of $29.7 million compared to an underwriting profit of $86.5 million in 2015. Personal auto was impacted by an increase in claims severity, and lower levels of favourable development largely due to a deterioration in British Columbia and Alberta auto, whereas 2015 was positively impacted by the benefit from the one-time Ontario auto regulatory reforms. Personal property was significantly impacted by increased catastrophe losses, including the Fort McMurray wildfire, which had an incremental impact of 10.5 percentage points on the claims ratio.

The commercial auto combined ratio was impacted in the fourth quarter of 2016 by a deterioration in Ontario due to higher claims severity and an increase in claims frequency. This was partially offset by lower large losses. The commercial property and liability combined ratio decreased due to lower large losses and a decrease in claims frequency and severity. Overall, commercial lines produced an underwriting profit of $0.1 million compared to an underwriting loss of $2.4 million in the same quarter a year ago.

For the year, commercial lines produced an underwriting loss of $36.4 million compared to underwriting income of $1.5 million in 2015. Commercial auto was impacted in the year by the same factors noted above for the quarter, whereas 2015 benefited from the favourable development associated with the one-time Ontario auto regulatory reforms. Commercial property and liability was impacted by increased catastrophe losses, including the Fort McMurray wildfire, which had an incremental impact of 2.9 percentage points. This was somewhat offset by the beneficial impact of increased rate resulting from our underwriting and pricing actions.

Investment income


Three months ended December 31

Year ended December 31


2016

2015

Change

2016

2015

Change

Interest income

15.5

15.8

(0.3)

61.1

67.7

(6.6)

Dividend income

9.8

15.4

(5.6)

39.2

37.9

1.3

Total interest and
dividend income

25.3

31.2

(5.9)

100.3

105.6

(5.3)

Total recognized (losses)
gains on investments

(24.3)

16.5

(40.8)

35.1

73.9

(38.8)

Total investment income

1.0

47.7

(46.7)

135.4

179.5

(44.1)

 

Bond yields increased significantly in the fourth quarter of 2016 resulting in recognized losses, which were partially offset by a recovery from discounting our claim liabilities. Dividend income declined due to the timing of distributions resulting from the change in one of our pooled funds. Excluding this, dividend income was relatively flat compared to the prior year quarter.

Investment income for the year was impacted by reduced recognized gains, mostly due to an increase in bond yields compared to a decrease in the prior year. Interest income decreased due to the reinvestment of bonds within the continued low interest rate environment and a lower weighting of bonds. As part of the continued optimization of our portfolio, we decreased our bond holdings and increased our investments in common stocks and higher yielding preferred stocks during the year.

Net (loss) income decreased from a profit of $41.9 million in the same quarter a year ago to a loss of $38.3 million. Net (loss) income for the year decreased from a profit of $176.0 million in the prior year to a loss of $20.3 million. These declines were due to weaker underwriting performance, higher levels of catastrophe losses, increased spend on our strategic initiatives and a decline in investment income, partially offset by a more favourable effective tax rate.

Economical's capital position remains strong. Total equity exceeded $1.8 billion at December 31, 2016, an increase of $24.1 million or 1.4% since December 31, 2015. Economical's minimum capital test ratio is at 276%, which remains significantly in excess of both internal capital management and external regulatory requirements as of December 31, 2016.

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: 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.

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.

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) income

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 over $2.0 billion in annualized premium volume and over $5.4 billion in assets as at December 31, 2016. 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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