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GET READY FOR THE FUTURE, WITH US

We’re progressing towards our vision of becoming one of Canada’s top property and casualty insurers. We’re building a best-in-class, national insurance company that will raise the bar in the Canadian marketplace.

Since 1871, we’ve been protecting Canadians with innovative home, automobile, and commercial insurance products, and a market-leading claims service designed with our policyholders in mind.

Proudly headquartered in Waterloo, Ontario, we serve more than one million policyholders across the country through a multi-channel distribution network that requires fresh approaches to meet evolving consumer and business needs.

Our vision

To be one of Canada’s top property and casualty insurers, recognized for our business innovation and how well we take care of our customers.

Our mission

To be the insurance partner Canadians choose to protect what they value most.

Our values

We focus on customers first.

We bring our best.

We’re stronger together.

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On October 21, 2016, A.M. Best affirmed a financial strength rating of A- (Excellent) and an issuer credit rating of A- for Economical Mutual Insurance Company and Waterloo Insurance Company, a wholly-owned subsidiary. The outlook for all ratings is stable. This is the fourth consecutive year that A.M. Best has recognized our excellent financial strength. It also reinforces confidence in our customers and broker partners that we’ll be there when they need us most.

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Percentage based on 91,254 Economical claimant survey responses measuring customer satisfaction with claims services from January 2007 to December 2016.

2016 Performance at a glance

Gross written premiums (GWP)

Combined ratio (COR)

Total equity

Net income

Expense ratio

Minimum capital test (MCT)

Message from John Bowey,
chairman of the board

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"We made strategic advances in 2016 that demonstrate how we're progressing towards our vision to be one of Canada's top P&C insurers, recognized for our business innovation and how well we take care of our customers."

We are at a pivotal moment in the history of Economical with strong plans in place to accelerate our growth and drive our competitiveness in the market. We marked the company’s 145th anniversary in 2016, a milestone few Canadian companies have the privilege of celebrating. This is a testament to the longevity and strength we have in the industry, and we believe our robust plans for the future will secure our place as a leader in the market for many years to come.

There are a number of significant accomplishments from 2016 that we’re proud to share:

  • We helped customers in Fort McMurray restore their lives through immediate and caring response, which they valued highly
  • We became a multi-channel company with the launch of Sonnet, our innovative digital-direct business
  • We acquired the largest pet insurance company in Canada, a move that has expanded our product portfolio
  • We’re well on our way to becoming the first property and casualty (P&C) insurer in Canada to demutualize
  • We welcomed Rowan Saunders as our new President and CEO

An unprecedented year

From the wildfires in Fort McMurray and the hail storms in Alberta, to the severe weather floods in Eastern Canada, catastrophes in 2016 heavily buffeted the P&C industry.

The wildfire in Fort McMurray — the costliest insured natural disaster in Canadian history — caused insured losses of nearly $3.6 billion for the industry, according to Catastrophe Indices and Quantification Inc. Our response was second to none. Immediately following the evacuation order that forced 88,000 people to flee their homes and businesses, Economical was on the ground offering help and delivering cheques into the hands of our customers. Our performance in Fort McMurray highlighted the strength of our claims handling expertise and our ability to respond to catastrophes.

2016 provided lessons for the entire Canadian P&C industry. With a trend of higher than normal catastrophe losses right across the country, individual insurers must be able to provide the best protection and service we can to our customers, while also protecting our businesses.

While it was an unprecedented year with natural disasters, we were disappointed in our underlying performance. It was not what we expected it to be and we are focused on a number of corrective actions to improve our core business going forward. We also invested significantly in our strategic initiatives, which we believe will drive profitable growth and improve operating performance for the long term.

Activating our corporate strategy

We made strategic advances in 2016 that demonstrate how we’re progressing towards our vision to be one of Canada’s top P&C insurers, recognized for our business innovation and how well we take care of our customers.

In 2016, we showed our strength in collaboration and innovation by launching our digital-direct brand, Sonnet. Sonnet gives us access to a significant segment of consumers that we couldn’t reach through our broker channel alone. The successful launch of this business is the result of extensive research, analysis, and collaboration across our company. It demonstrates what Economical is capable of and that we’re in it for the long term. As we aspire to become one of the largest P&C insurance companies in Canada, we’re establishing ourselves as a leader in both customer service and innovation.

Sonnet received an international innovation award for its sophisticated implementation of the Guidewire platform. This technology integrates big data and analytics with a seamless user experience, resulting in a best-in-class insurance offering. We’ve already started reinventing our systems capabilities to bring the same speed, convenience, and competitive edge to our broker partners.

We acquired the market leader in the growing Canadian pet insurance industry, now renamed Petline, and its flagship brand Petsecure. This strategic transaction closed on January 1, 2017 and increases the scale and diversification of our portfolio, and illustrates our acquisition capability.

Progress along the path to demutualization

In 2016, we continued to make progress in our journey towards demutualization, one we intend to culminate with our conversion from a mutual to a public company. We believe this transformation is critical to our company’s long-term future. It will level the playing field with our competitors and give us access to capital we need to grow through acquisition, so we can become a top player in a consolidating marketplace.

There have been a number of recent milestones along our path to demutualization:

  • In May 2016 — we provided more than 630,000 eligible policyholders with information on our demutualization and how it may affect them
  • In July 2016 — the Ontario Superior Court of Justice issued an initial court order, setting out the procedural framework for establishing committees of mutual and non-mutual policyholders
  • In September 2016 — the Court appointed counsel to represent eligible policyholders and assist the policyholder committees
  • In February 2017 — the Court appointed members to both policyholder committees, paving the way for the committees to negotiate the allocation of benefits from our demutualization

The Board is confident that with pragmatism and compromise, the policyholder committees will successfully negotiate an agreement on the allocation of benefits.

In the coming months, we will prepare the conversion proposal that outlines how Economical will demutualize into a share company, including the allocation of financial benefits to be negotiated by the policyholder committees. We are required to submit the conversion proposal to the Office of the Superintendent of Financial Institutions (OSFI) by February 22, 2018, the one-year anniversary of the appointment of policyholder committees.

With OSFI approval, eligible mutual policyholders will then be able to vote to amend the company’s bylaws to allow eligible non-mutual policyholders to vote on the conversion proposal itself. If that vote is successful, both eligible mutual and eligible non-mutual policyholders will vote together as a single class to approve the conversion proposal and to proceed with the demutualization. If the vote succeeds, we will send the conversion proposal to the Minister of Finance and, once the Minister approves it, we will be able to initiate an initial public offering.

Our new president and CEO

In November, we welcomed Rowan Saunders as our President and CEO, succeeding Karen Gavan who stepped down after five years at the helm. Karen stepped in at a critical time in our history and significantly progressed the company’s demutualization efforts and our overall strategy. On behalf of the Board, I’d like to thank Karen again for her leadership and contributions to the company.

The Board is confident in Rowan’s ability to lead Economical as we transition to a strong, public company. Rowan brings robust P&C industry expertise, and a track record of successfully driving growth and profitability. Rowan will build on our vision, values, and innovative strategy to unlock our long-term potential for future growth and continued success.

Our partners and our people

Thank you to our broker partners for the trust and loyalty you continue to show in Economical.

I also want to recognize the talent, commitment, and motivation of our leaders and employees. Rowan, his leadership team, and our dedicated employees have our full confidence. Thank you all for your hard work.

Sincerely,

John Bowey
Board Chair

Message from Rowan Saunders,
President and CEO

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"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."

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.

Sincerely,

Rowan Saunders
President and Chief Executive Officer