- Grew gross written premiums by 5.1% in the quarter
- Generated underwriting income* of $5.5 million in the quarter
- Maintained a profitable combined ratio* of 98.7% for the quarter, despite incurring weather-related catastrophe losses of $33.1 million, net of reinsurance
- Increased total mutual policyholders’ equity by $35.5 million since December 31, 2012
WATERLOO, ON — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three and six months ended June 30, 2013.
Economical reported consolidated net income of $15.8 million for the second quarter of 2013, down $23.5 million from the prior year quarter. The second quarter results incorporate $27.4 million of weather-related catastrophe costs net of reinsurance and tax, primarily in Alberta, and reflect the strong underlying quality of the company’s insurance business. Despite this, Economical maintained a profitable combined ratio of 98.7% for the second quarter, a 4.9 percentage point deterioration from the same quarter a year ago. When considering that the weather-related catastrophe losses adversely impacted the combined ratio by 8.4 percentage points (nil in the prior year), the company generated an underlying improvement in underwriting performance in the period.
Year-to-date net income for the first half of 2013 was $42.7 million compared to $79.7 million for the first half of 2012, with a combined ratio of 97.8% compared to 95.2% in 2012, or 93.6% versus 95.2% when excluding weather-related catastrophe losses.
"Our second quarter results demonstrate the resilience of our insurance operations," said Karen Gavan, president and CEO. "We were able to maintain an underwriting profit while delivering on our promise to be there when our policyholders in Alberta needed us most during the worst flooding in the province’s history. Since June 30, we have responded to torrential rain and flooding in the Greater Toronto Area as well as storm activity in other parts of the country. Our policyholders can count on Economical to help them restore their lives and businesses in the aftermath of such catastrophic challenges."
"We also continued to invest in transforming our business during the second quarter. On May 29, we announced the completion of the organizational restructuring of our Information Technology department and the progress we continue to make in identifying opportunities for efficiency and productivity gains," added Gavan.
Economical Insurance Consolidated Highlights*
($ in millions, except as otherwise noted)
2013 Q2 Consolidated Financial Results
|Gross written premiums
|Investment income (loss)
|Total mutual policyholders' equity
*Note: Claims ratio, combined ratio and underwriting income exclude the impact of discounting and are non-GAAP measures as defined below.
Gross written premiums for the second quarter grew by $26.0 million, or 5.1%, over the same quarter a year ago. This is the seventh consecutive quarter of top line growth for Economical and continues to build on the significant growth achieved throughout 2012. This growth has been driven by both higher average premiums and modest volume increases across most lines of business. Gross written premiums have grown by 5.1% in the first half of 2013 relative to the first half of 2012.
Underwriting results for the second quarter showed resilience, producing a $5.5 million profit while absorbing $33.1 million of weather-related catastrophe losses net of reinsurance, $30.0 million of which relates to the flooding in Alberta. The combined ratio remained strong at 98.7% compared to 93.8% in the same quarter a year ago. Excluding the impact of weather-related catastrophe losses, the combined ratio was 90.3%, a 3.5 percentage point improvement from the excellent second quarter of 2012. The second quarter expense ratio declined by 2.3 percentage points compared to the same quarter in 2012. This was driven by a combination of lower overall commissions and reduced ongoing operating expenses as a result of the business transformation program, as well as growth in net earned premiums.
The combined ratio for the six months ended June 30, 2013 was 97.8%, a 2.6 percentage point deterioration from the prior year period. Weather-related catastrophe losses contributed 4.2 percentage points to the 2013 year-to-date combined ratio, compared to nil in 2012.
Economical’s personal auto business produced a second quarter combined ratio of 90.4%, a 7.3 percentage point deterioration from the exceptionally strong second quarter of 2012. On a year-to-date basis, personal auto generated a combined ratio of 90.6% for 2013, a 2.9 percentage point deterioration from the prior year period driven by an increase in frequency of losses.
Personal property produced a combined ratio of 96.2% in the second quarter of 2013 compared to 94.1% in the second quarter a year ago. Weather-related catastrophe losses contributed 9.5 percentage points to the second quarter combined ratio, compared to nil in 2012. Excluding these losses, the combined ratio actually improved by 7.4 percentage points due to a decline in large loss activity and severity in the quarter. Overall the personal lines business produced a robust combined ratio of 92.2% during the second quarter of 2013 compared to 86.7% for the prior year quarter, and 91.5% for the first half of 2013 compared to 88.4% for the first half of 2012. The deterioration in results reflects the substantial impact of the catastrophe losses in 2013 compared to 2012, partially offset by an underlying improvement in the personal property results.
Commercial auto produced an outstanding second quarter combined ratio of 76.2%, compared to 108.8% in the same quarter of 2012. For the second consecutive quarter, the company experienced a significant decline in the severity of losses for this line of business. The commercial property and liability business recorded a combined ratio of 126.8%, having been heavily impacted by weather-related catastrophe losses. These losses contributed 24.8 percentage points to the increase. Excluding these losses the combined ratio was 102.0% compared to 103.4% in the same quarter of 2012. Overall the commercial lines business posted a combined ratio of 109.3% during the second quarter of 2013, compared to 105.2% for the prior year quarter and a 108.0% combined ratio on a year-to-date basis, representing a 1.7 percentage point deterioration year over year.
During the first half of 2013, Economical began to realize benefits from actions commenced in 2012 related to the business transformation program, which helped to offset the program related costs incurred in operating expenses. During the second quarter the company announced the reduction of 143 positions. On a year-to-date basis the total costs of the program, including restructuring expenses, are $17.0 million, $7.4 million of which are included in underwriting results. The second quarter results alone include $12.1 million in costs related to the program in total, $4.1 million of which were included in underwriting results. This investment represents a 0.9 percentage point increase to the second quarter combined ratio and 0.8 percentage points on a year-to-date basis.
Market yields rose during the second quarter of 2013, positively impacting the discounted combined ratio by 6.3 percentage points, or $27.7 million. The effect of the second quarter discounting recovery on claim liabilities was offset by recognized investment losses of $27.5 million on the matched bond portfolio over the same time period. On a year-to-date basis, the rise in market yields positively impacted the discounted combined ratio by 2.0 percentage points, or $17.2 million. The effect of the year-to-date discounting recovery on claim liabilities was offset by recognized investment losses of $17.9 million on the matched bond portfolio over the same time period.
Investment income fell $37.3 million in comparison to the same quarter a year ago, producing an overall investment loss of $1.2 million in the quarter. This was primarily the result of the recognized losses, of $27.5 million, on the matched bond portfolio discussed above, which compares with a gain of $12.2 million in the second quarter of 2012. While the low interest rate environment continued to depress interest income in the second quarter of 2013, higher levels of dividend income and realized gains on the remainder of the investment portfolio more than offset this impact compared to a year ago.
On a year-to-date basis, overall investment income fell by $28.7 million due largely to the year-to-date recognized losses on the matched bond portfolio, of $17.9 million, discussed above. Interest income declined by $3.5 million year over year and realized gains on the remainder of the investment portfolio fell by $10.2 million.
Overall investment quality remains very strong with over 74% of total investments held in high-quality government and corporate bonds, with the balance primarily held in common and preferred shares.
Economical’s capital position continues to strengthen and total mutual policyholders’ equity amounted to $1.5 billion at June 30, 2013. This represents an increase of $35.5 million, or 2.4%, during the first half of 2013. Economical’s minimum capital test ratio remains very strong at 289% as of June 30, 2013.
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" 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: Economical’s ability to implement its strategy or operate its business as management currently expects; its ability to accurately assess the risks associated with the insurance policies that it writes; unfavourable capital market developments or other factors which may affect Economical’s investments and funding obligations under its pension plans; the cyclical nature of the P&C industry; management’s ability to accurately predict future claims frequency or severity; government regulations; litigation and regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; Economical’s reliance on information technology and telecommunications systems; Economical’s dependence on key employees; and general economic, financial and political conditions.
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.
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.
Claims and adjustment expenses (excluding the impact of discounting) during a defined period expressed as a percentage of net premiums earned for the same period.
Claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses and premium taxes during a defined period expressed as a percentage of net premiums earned for the same period.
Net premiums earned for a defined period less the sum of claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses and premium taxes during the same period.
To reflect the time value of money, claim liabilities are discounted using the market yield rate of the investments used to support those liabilities (matched investments). Provisions for adverse deviation are also included when determining the discounted value.
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.
A subset of the company’s bond portfolio that is backing claim liabilities is matched in quantum and duration to those claim liabilities. The aim of this matching is to reduce the accounting mismatch in net income that would otherwise be generated by the fluctuations in the fair value of the claim liabilities due to changes in interest rates.
About Economical Insurance
Founded in 1871, Economical Insurance is one of Canada’s leading property and casualty insurers, with more than $1.8 billion in annual premium volume and $4.8 billion in assets as at June 30, 2013. In 2010, Economical announced its decision to become the first federally-regulated mutual property and casualty insurance company to demutualize. Economical Insurance conducts business under the following brands: Economical Insurance, Economical, Western General, Economical Select, Perth Insurance, Family Insurance Solutions, Federation Insurance and Economical Financial.
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