- Increased gross written premiums by 5.7% in the quarter and 5.5% for the year compared to 2012
- Absorbed weather-related pre-tax catastrophe costs of $11.0 million in the quarter and a record $103.4 million for the year, net of reinsurance, an increase of $81.5 million compared to 2012
- Recorded a combined ratio* of 101.0% for the fourth quarter and 100.1% for the full year 2013, reflecting 2.4 and 5.8 percentage points, respectively, for weather-related catastrophe costs
- Generated net income of $31.3 million for the quarter and $87.7 million for the year
- Increased total mutual policyholders’ equity by $108.9 million during 2013 to a record $1,573 million
WATERLOO, ON, February 21, 2014 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three months and full year ended December 31, 2013.
Economical reported consolidated net income of $31.3 million for the fourth quarter of 2013, down $11.5 million from the same quarter of the prior year. Full year net income for 2013 was $87.7 million, compared to $151.0 million in 2012, and was significantly impacted by weather-related catastrophe costs. The 2013 full year results incorporate $76.1 million of weather-related catastrophe costs net of reinsurance and tax, a record level in the company’s history. This compares to $16.1 million of weather-related catastrophe costs net of reinsurance and tax in 2012. Economical recorded a combined ratio of 101.0% for the fourth quarter, a 4.5 percentage point deterioration from the same quarter a year ago. The full year combined ratio for 2013 is 100.1% compared to 96.5% in 2012. When considering that weather-related catastrophe losses adversely impacted the 2013 full year combined ratio by 5.8 percentage points (1.3 percentage points in the prior year), the company generated an underlying improvement of 0.9 percentage points in underwriting performance in 2013. This improvement reflects the strong underlying quality of the company’s insurance business.
“The resilience of our insurance operations and the strong underlying performance of our insurance business allowed us to emerge from the worst catastrophe year in our 142-year history, and the worst on record for the property and casualty insurance industry in Canada, with only a small underwriting loss. Our mission is to be there when our customers need us most, and we are proud of how well we worked with our broker partners and served our policyholders during these difficult circumstances,” said Karen Gavan, president and CEO. “We are equally proud of the significant improvements in productivity and efficiency we have achieved throughout the company in the past year, as well as continuing to build the value of the company, with $1.573 billion of mutual policyholders’ equity at the end of 2013.”
Economical Insurance Consolidated Highlights*
($ in millions, except as otherwise noted)
2013 Q4 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 as defined below.
Gross written premiums for the fourth quarter showed growth of $26.2 million, or 5.7%, over the same quarter a year ago. Economical continues to grow consistently in both personal and commercial lines. Economical increased gross written premiums by $99.5 million, or 5.5% in 2013. In the automobile lines, growth has been driven by an increase in policy volumes combined with a shift in the mix of business toward regions and lines with higher average premiums. Commercial property and liability premiums have grown due to the combined impact of targeted rate and modest volume increases. Personal property premiums have declined marginally as rate increases have resulted in decreases in volume.
Underwriting results for the fourth quarter produced a $4.7 million loss after absorbing $11.0 million of pre-tax weather-related catastrophe losses, primarily from the Ontario ice storm in December. The combined ratio for the fourth quarter was 101.0% compared to 96.5% in the same quarter a year ago. Excluding the impact of weather-related catastrophe losses, the combined ratio was 98.6%, a 3.4 percentage point decline from the fourth quarter of 2012.
The combined ratio for the full year ended December 31, 2013 was 100.1%, a 3.6 percentage point deterioration from the prior year. Weather-related catastrophe losses contributed 5.8 percentage points to the 2013 combined ratio, compared to 1.3 percentage points in 2012.
The fourth quarter expense ratio improved by 1.8 percentage points compared to the same quarter in 2012 and 1.9 percentage points for the full year, despite absorbing significant one time costs related to the business transformation program. These savings were realized through improved productivity and efficiencies, lower base commissions due to a shift in business mix and lower profit commissions resulting from weaker underwriting results, all combined with the growth in earned premiums.
Economical’s personal auto business produced a fourth quarter combined ratio of 100.5%, a 5.3 percentage point deterioration from the fourth quarter of 2012, as a result of higher frequencies of claims resulting from more severe winter driving conditions. On a full year basis, personal auto generated a combined ratio of 93.3% for 2013, a 2.4 percentage point deterioration from the prior year period driven by an increase in the frequency of claims.
Personal property produced a combined ratio of 93.7% in the fourth quarter of 2013 compared to an exceptionally strong 76.9% in the fourth quarter a year ago. Weather-related catastrophe losses contributed 12.6 percentage points to the fourth quarter combined ratio, compared to 3.7 percentage points in 2012. Excluding the impact of these losses, the combined ratio for personal property remained strong at 81.1% for the quarter. On a full year basis, personal property produced a combined ratio of 101.0% compared to 90.5% in the prior year period. Excluding the impact of weather-related catastrophe losses, the combined ratio for personal property was 86.4% for 2013, a 1.5 percentage point improvement compared to 2012.
Overall the personal lines business produced a combined ratio of 98.4% during the fourth quarter of 2013 compared to 89.3% for the prior year quarter. For the full year 2013, the combined ratio was 95.7% compared to 90.7% in 2012. The deterioration in results in 2013 reflects the substantial impact of the 2013 catastrophe losses, which contributed 5.1 percentage points to the combined ratio in 2013 compared to only 1.4 percentage points in 2012.
Commercial auto continued to perform strongly, producing an excellent fourth quarter combined ratio of 91.9%, compared to 103.6% in the same quarter of 2012, primarily due to a decrease in both the severity and frequency of claims in the quarter. On a full year basis, the combined ratio for commercial auto was 85.0% compared to 103.0% for the prior year. The commercial property and liability business recorded a combined ratio of 112.2% in the fourth quarter of 2013 compared to 110.2% in the prior year quarter. On a full year basis, the commercial property and liability business produced a disappointing combined ratio of 118.6% compared to 107.1% for the prior year. In addition to an increase in the frequency and severity of large losses, the full year 2013 results were also heavily impacted by catastrophe losses. Excluding the impact of weather-related catastrophe losses, the 2013 combined ratio was 108.1% compared to 105.7% for the prior year.
Overall the commercial lines business posted a combined ratio of 105.1% during the fourth quarter of 2013, compared to 108.0% for the prior year quarter. On a full year basis, the combined ratio of 107.2% represents a 1.4 percentage point deterioration year over year. Excluding the impact of weather-related catastrophe losses, the 2013 combined ratio was 100.1% compared to 104.7% for the prior year, a 4.6 percentage point improvement.
In 2013, Economical began to realize benefits from actions commenced in 2012 related to its business transformation program, which helped to offset the program-related costs incurred in operating expenses. The total costs of the program in 2013, including restructuring expenses, are $37.7 million, $14.3 million of which is included in underwriting results. The fourth quarter results alone include $15.0 million in costs related to the program in total, $4.1 million of which are included in underwriting results. This significant investment represents a 0.9 percentage point increase to the fourth quarter combined ratio and 0.8 percentage points on a full year basis. The 2012 results included $13.7 million of expenses related to the business transformation program, $13.0 million of which were incurred in the fourth quarter.
Market yields fell during the fourth quarter of 2013, resulting in a 2.2 percentage point increase to the discounted combined ratio during the quarter. On a full year basis, market yields have increased, favourably impacting the discounted combined ratio by 0.5 percentage points, or $8.4 million. The effect of the full year discounting recovery on claim liabilities was offset by recognized investment losses of $5.2 million on the matched bond portfolio.
Investment income of $40.4 million was generated in the fourth quarter of 2013, an $11.2 million increase from the same quarter a year ago. This was primarily the result of higher unrealized gains on the matched bond portfolio due to the decline in market yields during the quarter.
On a full year basis, overall investment income fell by $21.9 million due largely to a reduction in realized gains as a result of a one-time gain in 2012 from the sale of foreign index funds. Interest income declined by $5.9 million year over year as a result of the continued low interest rate environment, although this was largely offset by a $3.7 million increase in dividend income.
Overall investment quality remains very strong with 72% 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 exceeded $1.57 billion at December 31, 2013, representing an increase of $108.9 million, or 7.4%, in 2013. Economical’s Minimum Capital Test ratio remains very strong at 295% as of December 31, 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.
|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 $1.9 billion in annual premium volume and $5.1 billion in assets as at December 31, 2013. 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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