I am proud to lead Economical at this exciting yet challenging period in the Canadian property and casualty (P&C) insurance industry. Although 2016 was a mixed year for us with both major strategic gains and operational setbacks, our future is bright and there’s tremendous opportunity to build on our 145-year legacy. We’ve made significant investments in strategic initiatives that are unlocking enormous potential in cutting edge technology, new markets, and competitive products. Our focus going forward is on profitable growth and operational effectiveness as we deepen our capabilities, diversify our business, and strengthen our partnerships with brokers and customers.
Our financial performance in 2016
We continued to see growth in gross written premiums, which increased by $75.7 million (or 3.8%) compared to the prior year, driven by strong advancements within the broker channel.
However, our underlying financial performance missed our target. We ended the year with a combined operating ratio of 109.1%, impacted by deterioration in personal and commercial auto and historically high catastrophe losses. As a result, while we experienced an increase of $24.1 million in total equity since December 31, 2015, we incurred a net loss of $20.3 million for the year.
The deterioration in Ontario personal auto is particularly acute where mandated rate reductions were imposed. We significantly reduced our rates while the underlying root causes of high costs continue to persist. We also experienced deterioration in Alberta and British Columbia personal auto. To address these challenges, we’re implementing a number of deliberate measures, including improvements in pricing, underwriting, and claims. These measures are being implemented within a regulated environment, in which policymakers play a key role to help ensure long-term soundness of the markets.
Our commercial book didn’t perform as expected. While the underwriting and pricing actions we have taken significantly improved our underlying loss ratio compared to previous years, there was a disproportionate increase in large commercial property losses in 2016 that impacted results. There is still much more to do. We are continuing to strengthen our commercial lines offerings and capabilities, further enhancing our pricing sophistication, and continuously improving ease of doing business for our brokers, with a tight focus on delivering exceptional service.
The P&C insurance industry was battered by more than $4.9 billion in insured losses in 2016 — the worst in Canadian history, according to Catastrophe Indices and Quantification Inc. The severe weather that’s causing so much destruction is on an upward trend. Nine catastrophes in 2016, including the wildfires in Fort McMurray, cost us nearly $80 million in insured losses, net of reinsurance.
We received wonderful feedback about our claims service, achieving a 96% customer satisfaction rating from those customers who were affected by the Fort McMurray disaster. Our empathy and speed in looking after our customers clearly reinforces our mission to be the insurance partner Canadians choose to protect what they value most. We’re committed to providing this exceptional protection and service to all our customers.
Despite financial performance challenges, we continued with a number of planned strategic initiatives that are expected to drive profitable growth and improve our operating performance over the longer term. Given the significance of these investments, they have had an impact on financial returns and will again in the year ahead. These initiatives include investing in the replacement of our personal lines policy administration system to support our broker channel, as well as the launch of our digital-direct brand, Sonnet, including building the supporting infrastructure.
Our capital position remains strong with total equity exceeding $1.8 billion at December 31, 2016, an increase of $24.1 million or 1.4% since December 31, 2015. Our minimum capital test ratio as of December 31, 2016 was 276.1%, well above the regulatory minimum of 150%, further demonstrating the strength of our financial position.
In October 2016, the independent rating agency A.M. Best reaffirmed our financial strength and operating performance with an “A- (Excellent)” rating for Economical and Economical Select for the fourth consecutive year. This bolsters the confidence of our broker partners to recommend us to their customers.
Broker partners are the heart of our success
Our strong relationship with brokers is the core of our business. Traditional business models are shifting in this era of evolving consumer needs and technological innovation, resulting in new ways of working together. Our ability to respectfully partner with brokers to navigate these changes is essential to our continued mutual success.
In consultation with our brokers, we’re investing significantly in a new sophisticated and streamlined policy administration and billing system that uses the same Guidewire technology as Sonnet, our digital-direct brand. This initiative will revolutionize the way our brokers do business with us by enhancing our speed to market and operating efficiency, as well as improving our product line. Greater pricing sophistication and advanced analytics will make us even more competitive. Our brokers will see product enhancements and increased coverage within our product lines as we move to individualized, risk-based pricing. The technology will improve broker connectivity, enabling them to serve customers quickly and efficiently. Brokers will be able to focus more on their customers and spend less time on administration.
We’re also enhancing how we support our broker partners with their sales and service efforts. Through investment plans, strategic partnerships, and funding to help them grow profitably, we’re reaffirming our commitment to the broker channel. We’re also one of the few carriers in Canada that proactively trains brokers to win business and boost customer retention.
Sonnet: our digital-direct brand for personal insurance
The launch of Sonnet in 2016 was an industry game changer. Our digital-direct offering to customers combines sophisticated data and analytics with best-in-class technology to provide an online purchasing experience unlike any other in the insurance industry. We built and launched this new insurance company from the ground up in less than two years, creating a digital-direct platform that’s leading-edge in the Canadian market.
Sonnet is a separately-branded business, designed to engage the segment of the market that prefers to make their insurance purchases online. It’s completely independent from our broker channel, using a different pricing model that leverages multiple data inputs and advanced analytics to provide personalized quotes for each customer.
Petline: a source of growth and diversification
We acquired Western Financial Insurance Company (which we rebranded to Petline Insurance Company) in a transaction that closed January 1, 2017. As a market leader in the Canadian pet insurance industry for more than 25 years, it’s provided Canadian pet owners with innovative and comprehensive, veterinarian-recommended coverage for dogs and cats under the flagship brand, Petsecure. This deal reflects our appetite and capability to grow and diversify our product portfolio through acquisition.
Our people — our strength
At Economical, we live our values every day: we focus on customers first, we bring our best, and we’re stronger together. These values guide us in both our work and in the community, and it’s why Economical is a great place to work.
For the second year in a row, we’ve been recognized by Canada’s Top 100 Employers as one of Waterloo Area’s Top Employers for 2017. Our company promotes an inclusive environment, where diverse experiences and opinions are valued as a source of strength and innovation.
We were also honoured as P&C Insurer of the Year at the 2016 Insurance Business Awards for our growth strategy, our people, and for providing top-tier P&C insurance products to consumers and businesses in Canada.
Economical continues to attract and retain top talent across the country as we move along our journey to build a high performance organization and culture. Thank you to our employees for their commitment and dedication, which helps us stand out as a leader in the P&C insurance industry.
Energized by the future
The future is bright; we have an ambitious strategy and a dedicated leadership team. Over the next few years, our focus is to improve operational performance and effectively execute on our strategic initiatives. We will implement plans to resolve performance weaknesses, while also addressing the internal and external challenges to realize our full potential. We plan to improve sophistication in our personal lines pricing, and enhance our capabilities and our appetite in commercial lines, particularly mid-market. We’ll also continue to optimize Sonnet, our innovative digital-direct channel, and inspire a best-in-class broker distribution channel.
Following a successful demutualization, we will introduce new stakeholders to a strong, independent Canadian insurance leader, while continuing to be one of Canada’s most trusted P&C insurance companies.
President and Chief Executive Officer