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

HIGHLIGHTS

  • Fully launched our direct offering Sonnet in the quarter, now offering both personal property and auto insurance
  • Increased gross written premiums by 6.7% over third quarter 2015
  • Reported a combined ratio of 116.1% for the quarter
  • Generated a net loss of $27.6 million for the quarter
  • Increased total equity by $62.6 million since December 31, 2015 to $1.84 billion

WATERLOO, ON, Nov. 4, 2016 /CNW/ - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three and nine month periods ended September 30, 2016.

"Our third quarter results were significantly impacted by a number of different factors. Heightened storm activity resulted in Economical incurring catastrophe losses in six separate events during the quarter. We also saw a sizeable increase in large losses, primarily in our commercial property and liability line of business, and increases in claims frequency and severity," said John Bowey, Board Chair. "In addition, we also continued to make significant investments in our digital direct brand, Sonnet, supporting infrastructure, and the replacement of our policy administration system. We are proud to announce the full launch of Sonnet in the quarter, now offering personal property and auto insurance. We would like to welcome Rowan Saunders as our new President and CEO effective November 1, 2016, and to thank Karen Gavan for the significant progress made under her leadership."

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


Three months ended September 30

Nine months ended September 30


2016

2015

Change

2016

2015

Change

Gross written premiums1

550.3

515.9

34.4

1,562.4

1,510.4

52.0

Net earned premiums

493.9

481.3

12.6

1,456.0

1,424.3

31.7

Claims ratio1

77.4%

55.9%

21.5 pts

70.3%

63.5%

6.8 pts

Expense ratio1

38.7%

33.9%

4.8 pts

37.0%

33.6%

3.4 pts

Combined ratio1

116.1%

89.8%

26.3 pts

107.3%

97.1%

10.2 pts

Underwriting (loss) income1

(79.3)

48.9

(128.2)

(106.3)

41.7

(148.0)

Investment income

41.3

20.0

21.3

134.4

131.8

2.6

Net (loss) income

(27.6)

66.1

(93.7)

18.0

134.1

(116.1)








As at






Sept 30,
2016

Dec 31,
2015

Change




Total equity

1,841.6

1,779.0

62.6




Minimum Capital Test1

275%

285%

(10) 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 third quarter 2016 grew by $34.4 million or 6.7% over the same quarter a year ago. Personal lines premiums grew by $13.5 million or 3.9% driven primarily by increased auto policy volumes. Commercial lines premiums grew by $20.9 million or 12.6% over the same quarter a year ago driven by targeted rate increases for commercial property, increased fleet business and the earlier renewal date of certain large accounts. Year-to-date, personal lines premiums grew by $40.6 million or 4.3% and commercial lines premiums grew by $11.4 million or 2.0% over the same period a year ago. 

Underwriting activity for the third quarter 2016 produced a $79.3 million underwriting loss, resulting in a combined ratio of 116.1% compared to underwriting income of $48.9 million and a combined ratio of 89.8% in the same quarter a year ago. Catastrophe and large losses impacted the combined ratio by 12.9 percentage points in the quarter compared to 5.0 percentage points in the same quarter a year ago. There was also an increase in claims frequency and severity, which we are monitoring closely. Comparatively, the third quarter of 2015 benefited from relatively benign weather conditions and increased levels of favourable claims development that arose from one-time regulatory reforms which reduced reserves for certain open claims. We also continue to make significant investments in Sonnet, supporting infrastructure, and the replacement of our policy administration system which impacted the third quarter 2016 expense ratio by 7.6 percentage points compared to 2.1 percentage points in the same quarter a year ago. 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. Year-to-date, underwriting activity produced a $106.3 million underwriting loss, resulting in a combined ratio of 107.3% compared to underwriting income of $41.7 million and a combined ratio of 97.1% in the same quarter a year ago. Year-to-date, our underwriting results were significantly impacted by increased catastrophe and large losses, including the Fort McMurray wildfire, an increase in claims frequency and severity and increased spend on our strategic investments.       

Line of Business Combined Ratios1


Three months ended September 30

Nine months ended September 30


2016

2015

Change

2016

2015

Change

Personal auto

104.1%

86.5%

17.6 pts

97.9%

93.7%

4.2 pts

Personal property

112.9%

89.5%

23.4 pts

103.9%

90.9%

13.0 pts

Total personal lines

106.7%

87.4%

19.3 pts

99.6%

92.9%

6.7 pts















Commercial auto

99.3%

79.0%

20.3 pts

97.8%

90.0%

7.8 pts

Commercial property and liability

120.0%

93.3%

26.7 pts

112.2%

104.4%

7.8 pts

Total commercial lines

112.2%

88.2%

24.0 pts

106.9%

99.4%

7.5 pts

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

The personal auto combined ratio was impacted by higher catastrophe and large losses and an increase in claims frequency. The third quarter of 2015 benefited from increased levels of favourable claims development that arose from one-time regulatory reforms which reduced reserves for certain open claims, resulting in a 10.1 percentage point reduction on the combined ratio. The personal property combined ratio increased due to higher catastrophe losses, resulting in a 18.0 percentage point increase on the combined ratio, and an increase in claims severity, which was partially offset by higher average premiums. Overall, personal lines produced an underwriting loss of $21.1 million compared to underwriting income of $37.4 million in the same quarter a year ago. Year-to-date, personal lines produced underwriting income of $3.3 million compared to $62.6 million in 2015.

The commercial auto combined ratio was impacted by higher claims severity and an increase in claims frequency whereas the third quarter of 2015 benefited from the same one-time regulatory reforms which impacted personal auto, resulting in an 11.9 percentage point reduction on the combined ratio. The commercial property and liability combined ratio increased due to significantly higher large losses, resulting in a 17.6 percentage point increase on the combined ratio, partially offset by an increase in average premiums due to our underwriting and pricing actions. Overall, commercial lines produced an underwriting loss of $21.8 million compared to underwriting income of $21.5 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $36.4 million, compared to underwriting income of $3.9 million in 2015.  

Investment income


Three months ended September 30

Nine months ended September 30


2016

2015

Change

2016

2015

Change

Interest income

15.1

17.1

(2.0)

45.6

51.8

(6.2)

Dividend income

11.3

7.8

3.5

29.4

22.5

6.9

Total recognized gains
(losses) on investments

14.9

(4.9)

19.8

59.4

57.5

1.9

Total investment income

41.3

20.0

21.3

134.4

131.8

2.6

 

Trading activity within stronger equity markets and a lower increase in bond yields in the current quarter compared to the same quarter a year ago resulted in higher recognized gains. Lower interest income was more than offset by an increase in dividend income as we continue to see benefits from the optimization of our investment portfolio. 

Net income decreased from $66.1 million in the same quarter a year ago to a loss of $27.6 million and from $134.1 million year-to-date in 2015 to $18.0 million as weaker underwriting performance and continued spend on our strategic initiatives more than offset the increase in investment income.

Economical's capital position remains strong. Total equity exceeded $1.8 billion at September 30, 2016, an increase of $62.6 million, or 3.5% since December 31, 2015. Economical's minimum capital test ratio is at 275%, which remains significantly in excess of both internal capital management and external regulatory requirements as of September 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. 

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 single claim with 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 (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 more than $2.1 billion in annualized premium volume and $5.5 billion in assets as at September 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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