- Grew gross written premiums by 3.3% over first quarter 2013
- Generated net income of $1.0 million for the quarter
- Recorded a combined ratio* of 105.5% for the quarter reflecting severe winter weather conditions including 2.9 percentage points for weather-related catastrophe costs
- Increased total mutual policyholders' equity by $30.2 million since December 31, 2013
WATERLOO, ON, May 7, 2014 — Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three months ended March 31, 2014.
Economical reported a combined ratio of 105.5% which is 8.6 percentage points higher than the same quarter a year ago, due primarily to the impact of very severe winter weather conditions. The company's consolidated net income was $1.0 million for the first quarter of 2014 compared to $26.9 million from a year ago. Despite this, when including unrealized gains on the entire investment portfolio, Economical increased mutual policyholders' equity by $30.2 million, or 1.9%, from December 31, 2013.
"Our first quarter results reflect the impact of the very severe winter weather conditions experienced across the country which produced a higher than normal volume of claims as well as higher catastrophe costs. We take pride in our claims service to our policyholders and are committed to being there when our customers and broker partners need us the most," said Karen Gavan, president and CEO. "We continue to invest significantly in transforming our business, most recently in our newly announced national processing centre that will enhance the broker and customer experience, and provide a platform to support our future profitable growth goals. We are also pleased that A.M. Best recently reaffirmed the company's financial strength rating of "A-(Excellent)" and issuer credit rating of "a-"."
Economical Insurance Consolidated Highlights*
($ in millions, except as otherwise noted)
2014 Q1 Consolidated Financial Results
|Gross written premiums
|Underwriting income (loss)
|Total mutual policyholders' equity
|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 first quarter grew by $13.3 million, or 3.3%, over the same quarter a year ago. This growth was driven by commercial lines which grew by $11.4 million, or 6.9% primarily due to increased average premium levels. The personal lines premium growth slowed in the first quarter mainly due to actions taken in personal property to increase rates and improve profitability. The impact of the recently announced mandated rate decreases for Ontario auto will begin to be felt in the second quarter.
Underwriting activity for the first quarter produced a $25.1 million loss after absorbing $13.0 million of pre-tax weather-related catastrophe losses, primarily from the very severe winter weather conditions in Ontario. Underwriting losses were compounded by higher than normal volumes of weather-related claims that were not included in the catastrophe losses. The combined ratio for the first quarter was 105.5% compared to 96.9% in the same quarter a year ago. Excluding the impact of weather-related catastrophe losses, the combined ratio was 102.6%, a 5.7 percentage point increase from the first quarter of 2013. The first quarter expense ratio fell by 0.6 percentage points compared to the same quarter in 2013, as growth in earned premiums more than offset a marginal increase in expenses.
Economical's personal auto business produced a first quarter combined ratio of 97.7%, a 6.9 percentage point deterioration from the first quarter of 2013, due primarily to higher volumes of claims resulting from challenging winter driving conditions. Personal property produced a combined ratio of 98.8% in the first quarter of 2014, an 8.2 percentage point increase over the first quarter a year ago. Weather-related catastrophe losses contributed 4.1 percentage points to the first quarter combined ratio, compared to nil in the prior year period. Overall, the personal lines business produced a combined ratio of 98.0%, a 7.2 percentage point deterioration from the first quarter of 2013.
Commercial auto produced a first quarter combined ratio of 106.7% compared to 89.3% in the same quarter of 2013. An increase in claims volumes and severity of losses contributed significantly to the deterioration in results during the quarter in this line of business. The commercial property and liability business recorded a combined ratio of 122.6%, 7.1 percentage points higher than the same quarter in 2013. Weather-related catastrophe losses contributed 7.8 percentage points, compared to nil in the prior year period. Overall the commercial lines business posted a combined ratio of 117.2%, which represents a 10.4 percentage point deterioration from the first quarter of 2013.
Economical continues to realize benefits from actions taken in prior years related to its business transformation program, which in the first quarter helped offset the program-related costs incurred in operating expenses. The total costs of the program in the first quarter results, including restructuring expenses, are $10.2 million, compared to $4.9 million a year ago. The 2014 first quarter underwriting results included $4.8 million of expenses related to the business transformation program, compared to $3.3 million a year ago representing a 1.1 percentage point increase in the first quarter combined ratio.
Market yields fell during the first quarter of 2014, negatively impacting the discounted combined ratio by 1.5 percentage points, or $6.7 million. The effect of the discounting on claim liabilities was offset by recognized investment gains of $11.1 million on the matched bond portfolio. During the same quarter a year ago, market yields also fell, negatively impacting the discounted combined ratio by 2.4 percentage points, or $10.5 million, which was offset by recognized gains of $9.7 million on the matched bond portfolio.
Investment income overall increased $3.0 million over the first quarter of 2013 to $37.9 million, due primarily to the increase in recognized gains on the matched bond portfolio discussed above. Investment quality remains very strong with more than 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 remains strong. Total mutual policyholders' equity now exceeds $1.6 billion at March 31, 2014, representing an increase of $30.2 million, or 1.9%, during the first three months of 2014. Economical’s minimum capital test ratio remains strong at 299% as of March 31, 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.
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.
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 $1.9 billion in annual premium volume and $5.0 billion in assets as at March 31, 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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