- Increased gross written premiums by 2.2% over third quarter 2013
- Incurred weather-related catastrophe losses of $25.7 million, net of reinsurance, contributing to an underwriting loss* of $38.3 million in the quarter
- Recorded a combined ratio* of 108.2% for the quarter, reflecting 5.5 percentage points for weather-related catastrophe losses
- Increased total equity by $87.3 million since December 31, 2013
WATERLOO, ON, November 5, 2014 — Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three and nine months ended September 30, 2014.
Economical reported a combined ratio of 108.2% for the third quarter, reflecting a 4.5 percentage point deterioration from the same quarter a year ago, due primarily to disappointing commercial property and liability results and lower favourable prior year loss development performance for Ontario auto. The Company's consolidated net income was $0.9 million for the third quarter of 2014 compared to $13.8 million during the same period a year ago.
Year-to-date net income was $45.5 million compared to $56.5 million for the same period in 2013, with a combined ratio of 103.0% compared to 99.8% in 2013, or 100.2% versus 92.8% when excluding weather-related catastrophe losses. While weather-related catastrophe losses are down from record levels set in 2013, this has been offset by a reduction in favourable prior years' loss reserve development during 2014.
When including unrealized gains on the entire investment portfolio, Economical increased total equity by $87.3 million, or 5.5%, from December 31, 2013.
"Our disappointing third quarter and year-to-date underwriting results reflect difficult weather-related conditions, as well as increases in underlying claims frequency," said Karen Gavan, president and CEO. "The third quarter saw a significant hail event in Airdrie, Alberta combined with a number of other storms throughout the country. Commercial property and liability performance in particular continues to be of concern, and we are continuing to implement both targeted rate increases and underwriting strategies to address profitability. While we are not satisfied with our underwriting results in 2014, we remain confident in the long-term potential of the profitable growth strategies and rating actions we continue to implement."
Economical Insurance Consolidated Highlights (unaudited)
($ in millions, except as otherwise noted)
2013 Q3 Consolidated Financial Highlights
|Gross written premiums
|Underwriting income (loss)
|Minimum Capital Test
Note: *Claims ratio, combined ratio and underwriting income exclude the impact of discounting and are non-GAAP measures which are defined below.
Gross written premiums for the third quarter 2014 grew by $10.8 million, or 2.2%, over the same quarter a year ago. The personal lines premium grew by $13.1 million, or 4.1% in the third quarter of 2014, driven by auto growth in both Ontario and Western Canada. The impact of the mandated rate decreases on longer-term profitability for Ontario auto will continue to develop as policies are issued and renewed at lower rates. Commercial lines premium was relatively flat in the quarter as targeted rate increases resulted in anticipated lower retention levels.
For the nine months ended September 30, 2014, gross written premiums grew by $39.9 million or 2.8% compared to the prior year. Personal lines grew by $30.6 million or 3.5% driven primarily by strong volume growth in Ontario auto and commercial lines grew by $9.3 million or 1.7% driven by higher average policy premiums primarily as a result of targeted rate increases.
Underwriting activity for the third quarter produced a $38.3 million underwriting loss after incurring $25.7 million of net weather-related catastrophe losses, more than half of which stemmed from hail, wind and rain storms in Alberta. An increase in claims frequency and reduced levels of favourable loss reserve development produced additional downward pressure on underwriting results. The combined ratio for the third quarter 2014 was 108.2% compared to 103.7% in the same quarter a year ago. The third quarter of 2013 saw higher net weather-related catastrophe losses of $53.0 million, mainly due to the July rainstorm in the GTA. For the nine months ended September 30, 2014, the combined ratio of 103.0% represented a 3.2 percentage point deterioration from the prior year period, due primarily to the impact of severe winter weather experienced in the first quarter of 2014, an increase in underlying claims frequency and lower levels of favourable loss reserve development.
Economical's personal auto business produced a third quarter 2014 combined ratio of 101.5%, a 10.2 percentage point deterioration from the third quarter of 2013. For the nine months ended September 30, 2014, personal auto produced a profitable combined ratio of 97.2% for 2014, a 6.4 percentage point deterioration from the prior year period. The deterioration compared to the same quarter last year and the prior year-to-date is due primarily to increases in both the frequency and severity of claims, combined with lower levels of favourable reserve development in Ontario.
Personal property produced a combined ratio of 107.3% in the third quarter of 2014, a 17.0 percentage point improvement over the third quarter a year ago. Net weather-related catastrophe losses contributed 15.9 percentage points to the third quarter combined ratio, compared to 37.2 percentage points in 2013, which was heavily impacted by the July rainstorm in the GTA. For the nine months ended September 30, 2014, personal property produced a combined ratio of 101.6%, a 1.9 percentage point improvement from the prior year period.
Overall, the personal lines business produced a combined ratio of 103.2% in the third quarter of 2014, a 1.9 percentage point deterioration from the third quarter of 2013. For the nine months ended September 30, 2014, personal lines produced a profitable combined ratio of 98.5%, a 3.7 percentage point deterioration from the prior year period.
Commercial auto results remain strong, producing a combined ratio of 92.8% in the third quarter of 2014, a 10.2 percentage point deterioration from the excellent ratio in the third quarter of 2013. On a year-to-date basis, commercial auto produced a robust combined ratio of 91.2%, a 8.6 percentage point deterioration over the same period in 2013. The deterioration compared to the very strong same quarter last year and the prior year-to-date is due primarily to increases in both frequency and severity of claims, particularly in Ontario.
The commercial property and liability business produced a disappointing third quarter 2014 combined ratio of 128.9%, a 8.5 percentage point deterioration from the third quarter of 2013. Net weather-related catastrophe losses contributed 6.1 percentage points to the third quarter 2014 combined ratio, compared to 18.2 percentage points in the same period in 2013 which was heavily impacted by the July rainstorm in the GTA. Lower net weather-related catastrophe losses were offset by adverse development on prior years' reserves as well as increased claims frequency, particularly in Ontario and Atlantic Canada. For the nine months ended September 30, 2014, commercial property and liability produced a combined ratio of 119.9%, a 1.0 percentage point improvement over the same period in 2013.
Overall, the commercial lines business posted a combined ratio of 116.2% in the third quarter of 2014, which represents a 8.7 percentage point deterioration from the third quarter of 2013. For the nine months ended September 30, 2014, the combined ratio of 110.0% represents a 2.1 percentage point deterioration from the prior year period.
Economical continues to realize benefits from actions taken over the past two years related to its business transformation program, which is nearing completion. The total cost of the program, including restructuring expenses, was $3.8 million for the third quarter 2014 and $18.5 million on a year-to-date basis, compared to $5.7 million for the third quarter and $22.7 million on a year-to-date basis for the prior year. Costs solely in respect of underwriting results were $3.7 million for the third quarter 2014 and $12.2 million on a year-to-date basis, compared to $2.8 million for the third quarter and $10.2 million on a year-to-date basis for the prior year. The resulting impact of these costs on the combined ratio was a 0.8 percentage point increase for the third quarter 2014 and a 0.9 percentage point increase on a year-to-date basis, compared to a 0.6 percentage point increase for the third quarter and a 0.8 percentage point increase on a year-to-date basis for the prior year.
Market yields increased during the third quarter of 2014, favourably impacting the discounted combined ratio by 1.1 percentage points, or $4.9 million. The effect of the discounting on claims liabilities was offset by recognized investment losses of $1.8 million on the matched bond portfolio. During the same quarter a year ago, market yields were flat. For the nine months ended September 30, 2014, market yields have decreased, negatively impacting the discounted combined ratio by 0.3 percentage points or $4.6 million compared with the same period in 2013. The effect of the discounting expense for the nine month period ended September 30, 2014 on claims liabilities was offset by recognized investment gains of $14.7 million on the matched bond portfolio over the same time period.
Investment income for the quarter increased $5.1 million over the third quarter of 2013, to a total of $36.0 million. This increase was due primarily to higher recognized gains on the non-matched portfolio.
For the nine months ended September 30, 2014, overall investment income increased by $47.3 million. This is due to year-to-date recognized gains of $14.7 million on the matched bond portfolio, compared with a year-to-date loss of $15.2 million in 2013. In addition there was an increase in year-to-date recognized gains on the non-matched portfolio of $18.6 million, slightly offset by a marginal decline in combined year-to-date interest and dividend income.
Investment quality remains strong with more than 75% of total investments, at September 30, 2014, held in government and investment-grade corporate bonds with the balance primarily held in common and preferred shares.
Economical's capital position remains strong. Total equity was $1.66 billion at September 30, 2014, representing an increase of $87.3 million, or 5.5%, during the first nine months of 2014. Economical's minimum capital test ratio remains strong at 290% as of September 30, 2014.
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.
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.
Claims ratio - 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.
Combined ratio - 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.
Underwriting income - 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.
Discounting - To reflect the time value of money, clim 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.
Matched bond portfolio - 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 approximately $2.0 billion in annualized premium volume and $5.2 billion in assets as at September 30, 2014. In 2010, Economical announced its decision to become the first federally-regulated mutual property and casualty insurance company to pursue demutualization. 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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