In a year with great change and unique challenges, I am proud to see how Economical’s leaders, employees, and partners have worked together to pursue our goal of becoming a leading P&C insurer in Canada. Economical has disrupted the industry, using technology, innovation, and a focus on the customer to drive our vision. The foundation and future success of our strategic execution would not be possible without the counsel and support of our Board, the commitment of our broker partners, or the dedication of our teams bringing their best every day.
2017 was a challenging year financially for Economical, but also an impressive year given the progress we made in building new capabilities. We continue to pursue strategic initiatives to improve operational efficiency and return to profitable growth, with significant transformation across our business. In 2017, we developed and implemented strategies that we expect will fix the core of our business, and we will continue to pursue those in 2018 while maintaining our focus on strategic initiatives and investments that will lay the foundation for being a public company with a profitable and long future.
Our financial performance in 2017
We ended 2017 with disappointing results as the deteriorating trends that emerged in late 2016 continued, resulting in a combined ratio of 113.7% and a net loss of $92.7 million. We have been working intensely to correct these results and succeed through a smart, disciplined approach with a view to the long-term to ensure sustainable profitable growth.
The profitability challenge related primarily to our personal auto and commercial fleet business, consistent with trends we’ve seen in the industry generally. The heavy weighting of our portfolio to regulated auto meant we were disproportionately impacted by adverse industry trends and exposure to challenge in the auto business cycle. In response, we have implemented a number of corrective pricing actions, enhanced our underwriting capabilities, and instigated broker management actions that will intensify during 2018 but will take time to earn through our results. Some of these actions include our updated commercial strategy and new broker offering Vyne, which will be instrumental in shaping our future profitable portfolio.
We continue to see growth in gross written premiums, which increased by 9.7% compared to the prior year, driven by new business growth in our digital-direct brand, Sonnet, the acquisition of Petline, and personal lines growth within our broker channel. These were partially offset by an intended decline in gross written premiums in our commercial lines, as a result of targeted underwriting actions in this line of business.
Our capital position remains well in excess of both minimum internal capital targets and external regulatory requirements, with total equity of approximately $1.7 billion and a Minimum Capital Test ratio of 242.1%, as of the end of 2017.
At the end of 2017, the independent rating agency A.M. Best reaffirmed Economical’s financial strength rating of A- (Excellent) for the fifth consecutive year. A.M. Best acknowledged Economical’s strong risk-adjusted capitalization, favourable underwriting leverage and liquidity, historically positive operating performance, diversified product offerings, operational improvement initiatives, and established market presence across Canada. This recognition provides additional confidence as we drive our strategy forward.
Foundation for the future
As I mentioned in last year’s annual report letter, our focus over the next few years will be on improving our operational performance and effectively executing on our strategic initiatives. After a thorough review of our value drivers, we implemented a robust profit improvement plan to accelerate profitability focused on underwriting excellence, operational effectiveness and targeted growth.
We have bold actions well underway: re-pricing all product lines, reconstructing our commercial insurance portfolio, tighter underwriting standards, enhanced productivity and proactively managing external provider costs. These activities are transforming our company into an agile, innovative, and competitive industry leader, all directly in support of our vision to be one of Canada’s leading P&C insurers.
As we continue to execute on our strategic initiatives, we have implemented a new management organization structure to provide greater clarity, alignment and accountability.
- In April 2017, Fabian Richenberger joined Economical as Executive Vice-President of Commercial Insurance. Previously President at Northbridge Insurance, Fabian has been leading the execution of Economical’s new commercial lines strategy and structure to strengthen the broker experience, improve profitability, capture more market share in small business, and expand our capabilities in middle market and specialty lines.
- Also in April 2017, Kelley Irwin joined Economical as Senior Vice-President and Chief Information Officer. Most recently CIO of Corporate Technology at TD Bank Group, Kelley has been driving improvement through optimization of our technical solutions as the leader of IT strategy and operations, while Economical continues to transform its business platforms.
- In August 2017, Economical welcomed Roger Dunbar as Senior Vice-President of Sonnet Insurance. Previously at Trader Corporation, Roger is in place to build on the strong foundation of our digital-direct brand’s first year of operation.
- In January 2018, Paul MacDonald joined Economical as Executive Vice-President of Personal Insurance. As the previous Chief Claims Officer for RSA Canada and with deep personal lines executive experience, Paul is committed to deepening our capabilities to deliver the most relevant products and experiences to our customers and brokers.
We materially bolstered our management bench strength, both at the executive level and at the operational and regional levels. It’s encouraging to see the high-quality talent Economical is able to attract and retain to provide the right leadership for the business challenges we face and to execute our ambitious strategy in the years ahead.
Advancing our strategy for success
Significant progress was achieved on our strategic initiatives in 2017, including refinement of our multi-channel strategy through the successful launch of Sonnet, building the foundation for our new broker offering, and supporting the newly acquired Petline.
Our digital-direct brand Sonnet celebrated its first anniversary in 2017, closing out the year with more than 50,000 customers. Sonnet was also recognized for its technological innovation, winning the Insurance Canada Technology Award and Insurance Canada People’s Choice Award, and recognized for its commitment to the customer, winning international Stevie Awards for Customer Service.
Over the last year, the Economical team has been working to evolve our broker-facing policy administration system to simplify workflows, streamline administration and billing, and provide our valued broker partners more options, efficiencies, and control. In early 2018, we were able to share the work being done by introducing Vyne, which is expected to increase speed and efficiency, reduce manual intervention, enable future innovation, and allow us to build scale. Our approach is driven by broker feedback and our platform is built for serving consumers who value the advice and support of a broker when determining their insurance needs.
Our acquisition of Petline has been successfully integrated by all measures and has built experience for future acquisitions. The brand contributed to the growth in our premiums for personal lines in 2017 and continues to experience a strong combined ratio. Our broker partners are now able to integrate Petline products into their coverage offerings, and we continue to see strong opportunities for growth in this market in years to come.
I am pleased to share that this is the third year Economical has been named one of the Waterloo Area’s Top Employers. Over the course of 2017, in response to employee feedback, we improved our community giving program to feature corporate matching of employee donations and opportunities for employees to nominate and vote for deserving local charities to receive donations. We also unveiled a new employment brand that reflects the fun, ambitious, and rewarding work experience at Economical.
Our employees continue to bring their best as we evolve along our journey to becoming a public company. Across Economical, I see our values come to life every day through our employees, both at work and in the community — we focus on customers first, we bring our best, and we’re stronger together. Those values are what makes Economical a truly great place to work.
Executing for success
In 2017 we truly shifted our strategy into high gear. We continue to look for opportunities to maximize our operational efficiency and build capabilities for the future. We have the right strategy and the right leadership to drive exceptional execution. There have been, and will continue to be, difficult decisions to make that are necessary to position Economical for a successful initial public offering and establish ourselves as a leader in the industry.
We have laid the foundation for our future, which we will continue to build on to make Economical a strong, independent Canadian insurance leader.
President and Chief Executive Officer