Economical Insurance reports financial results for Second Quarter and Year-to-date 2016

HIGHLIGHTS

  • Increased gross written premiums by 2.3% over second quarter 2015
  • Incurred pre-tax losses of $36.6 million pertaining to the Fort McMurray wildfire, inclusive of reinstatement premiums and net of reinsurance recoveries
  • Combined ratio increased 8.6 percentage points over second quarter 2015, heavily impacted by the Fort McMurray wildfire
  • Generated net income of $17.1 million for the quarter
  • Increased total equity by $58.6 million since December 31, 2015 to $1.84 billion

WATERLOO, ON, Aug. 5, 2016 /CNW/ - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three and six month periods ended June 30, 2016.

"Our second quarter results were heavily impacted by the Fort McMurray wildfire, the costliest insured disaster in Canadian history. We quickly mobilized our catastrophe response team and provided emergency funding," said Karen Gavan, President and CEO. "Insurance is a promise and we have been honouring that promise by helping our policyholders in their time of need to move forward and rebuild their lives. In addition, during the quarter, we introduced our digital direct channel, announced our intention to acquire Western Financial Insurance Company, and continued to see traction from the implementation of our commercial property and liability pricing strategy." 

Economical Insurance Consolidated Highlights

($ in millions, except as otherwise noted)







Three months ended
June 30


Six months ended
June 30



2016

2015

Change

2016

2015

Change








Gross written premiums1

585.4

572.3

13.1

1,012.1

994.4

17.7

Net earned premiums

480.7

473.6

7.1

962.1

943.0

19.1

Claims ratio1

67.2%

63.1%

4.1 pts

66.6%

67.5%

(0.9)pts

Expense ratio1

37.3%

32.8%

4.5 pts

36.2%

33.3%

2.9 pts

Combined ratio1

104.5%

95.9%

8.6 pts

102.8%

100.8%

2.0 pts

Underwriting (loss) income1

 

(21.6)

 

19.6

 

(41.2)

 

(27.0)

 

(7.2)

 

(19.8)

Investment income

50.5

21.4

29.1

93.1

111.8

(18.7)

Net income

17.1

33.8

(16.7)

45.6

67.9

(22.3)








As at






June 30,
2016

December
31, 2015











Total equity

1,837.6

1,779.0

58.6




Minimum Capital Test

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 second quarter 2016 grew by $13.1 million or 2.3% over the same quarter a year ago. Personal lines premiums grew by $14.7 million or 4.2% driven primarily by increased auto policy volumes. Commercial lines premiums declined by $1.6 million or 0.7% over the same quarter a year ago. The overhaul of our commercial property and liability pricing strategy has continued to result in decreased policy volumes which more than offset targeted rate increases. Overall, we expect our commercial gross written premium levels to begin to stabilize as the execution of this phase of our pricing strategy is substantially complete. Year-to-date, personal lines premiums grew by $27.2 million or 4.5% and commercial lines premiums declined by $9.5 million or 2.4% over the same period a year ago.  

Underwriting activity for the second quarter 2016 produced a $21.6 million underwriting loss, resulting in a combined ratio of 104.5%, compared to an underwriting profit of $19.6 million and a combined ratio of 95.9% in the same quarter a year ago. The Fort McMurray wildfire impacted the combined ratio by 7.6 percentage points, compared to 0.6 percentage points of catastrophe losses in the same quarter a year ago. We also continue to invest heavily in the development and launch of our digital direct channel and the replacement of our policy administration system. These infrastructure and operational investments impacted the second quarter 2016 expense ratio by 5.2 percentage points and 3.9 percentage points year-to-date, compared to 1.1 percentage points and 1.6 percentage points respectively for the comparable prior year periods. We expect these strategic investments will continue to increase operating expenses during the implementation and start-up phases, but are expected to drive profitable growth and further improve our operational efficiency in the longer term.  

The performance of the underlying book of business was strong, improving the combined ratio over the same quarter a year ago by 2.6 percentage points and 3.4 percentage points year-to-date when excluding catastrophe losses and our infrastructure and operational investments from both periods.





Line of Business Combined Ratios1





Three months ended
June 30


Six months ended
June 30



2016

2015

Change

2016

2015

Change








Personal auto

88.1%

92.8%

(4.7)pts

94.7%

97.4%

(2.7)pts

Personal property

110.7%

97.0%

13.7 pts

99.3%

91.6%

7.7 pts

Total personal lines

94.7%

94.0%

0.7 pts

96.0%

95.6%

0.4 pts








Commercial auto

91.7%

88.7%

3.0 pts

97.1%

95.6%

1.5 pts

Commercial property and liability

117.1%

100.1%

17.0 pts

108.3%

109.9%

(1.6)pts

Total commercial lines

107.5%

96.0%

11.5 pts

104.2%

104.9%

(0.7)pts

1The above combined ratios exclude costs for certain infrastructure and operational investments.

The personal auto combined ratio improved over the same quarter a year ago primarily due to increased favourable claims development. The increase in the personal property combined ratio was driven primarily by the Fort McMurray wildfire which contributed 19.3 percentage points to the combined ratio. This was partially offset by improved claims development and increases in average premiums. Overall, personal lines produced an underwriting profit of $16.3 million, compared to $17.3 million in the same quarter a year ago. Year-to-date, personal lines produced an underwriting profit of $24.4 million, compared to $25.1 million in 2015.

The commercial auto combined ratio increased compared to the same quarter a year ago primarily due to higher claims severity. Despite this increase, this book of business continues to perform well. The commercial property and liability combined ratio increased due to the impact of the Fort McMurray wildfire which contributed 17.1 percentage points to the combined ratio, and an increase in large losses, more than offsetting our underwriting and pricing actions. Overall, commercial lines produced an underwriting loss of $12.8 million, compared to an underwriting profit of $7.4 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $14.6 million, compared to $17.7 million in 2015. This improvement is primarily due to commercial property and liability whose performance excluding the impact of catastrophes is considerably better than year-to-date 2015.

Investment income increased from $21.4 million in the second quarter a year ago to $50.5 million in the current quarter. A decline in bond yields during the quarter compared to an increase in the same quarter a year ago, which, along with trading activity within strong equity and bond markets, produced higher recognized gains. Lower interest income was more than offset by higher dividend income as we continue to optimize our portfolio performance by shifting investments into higher yielding assets that remain of high quality. Investment quality remains strong with more than 70% of total investments held in government and investment-grade corporate bonds as at June 30, 2016. The balance of investments is primarily held in common and preferred shares of large, well-established companies.

Net income decreased from $33.8 million in the same quarter a year ago to $17.1 million. Higher investment income and a lower effective tax rate were more than offset by weaker underwriting performance due to the Fort McMurray wildfire and continued infrastructure and operational investments. The quarter benefited from a lower effective tax rate due to a higher proportion of Canadian dividend income as well as favourable adjustments on tax filings. Year-to-date, net income decreased $22.3 million over the same period a year ago due to a higher underwriting loss and lower investment income, somewhat offset by the lower effective tax rate.   

Economical's capital position remains strong. Total equity exceeded $1.84 billion at June 30, 2016, an increase of $58.6 million or 3.3% 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 June 30, 2016.

Western Financial Insurance Company Transaction
On May 17, 2016, we announced our intention to acquire Western Financial Insurance Company and its flagship brand Petsecure. The transaction is subject to customary closing conditions, including receipt of required regulatory approvals, and is expected to close in the second half of 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: 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; its ability to pay claims in accordance with our insurance policies; 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 our 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 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; litigation and regulatory actions; success and timing of the demutualization process; the outcome of a demutualization transaction; periodic negative publicity regarding the insurance industry or Economical; Economical's ability to uphold its independent third party ratings; and Economical's ability to respond to events impacting its ability to conduct business as normal.

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.


Catastrophe loss

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



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.



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.



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.



Large loss

A gross loss in excess of $1 million.



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 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 more than $2.0 billion in annualized premium volume and $5.4 billion in assets as at June 30, 2016. Based in Waterloo, 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, Economical Insurance, (T) 519.570.8249, (C) 519.404.0989, doug.maybee@economical.com; Stakeholder 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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