- Generated net income of $43.6 million for the quarter
- Grew gross written premiums by 2.9% over second quarter 2013
- Recorded a combined ratio* of 95.1% for the quarter
- Increased total mutual policyholders’ equity by $88.1 million since December 31, 2013
WATERLOO, ON, August 6, 2014 — 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, 2014.
Economical reported a combined ratio of 95.1%, a 3.6 percentage points improvement from the same quarter a year ago, due primarily to reduced levels of weather-related catastrophe claims combined with strong underlying performance from its insurance operations. The company's consolidated net income was $43.6 million for the second quarter of 2014 compared to $15.8 million from a year ago. When including unrealized gains on the entire investment portfolio, Economical increased mutual policyholders' equity by $88.1 million, or 5.6%, from December 31, 2013.
Year-to-date net income for the first half of 2014 was $44.6 million compared to $42.7 million for the first half of 2013, with a combined ratio of 100.3% compared to 97.8% in 2013, or 98.8% versus 94.0% when excluding weather-related catastrophe losses.
"Our second quarter results reflect the strong performance of our insurance operations and represent a significant improvement from the severely weather-impacted first quarter of 2014," said Karen Gavan, president and CEO. "As we reach the first anniversary of the catastrophic Alberta flooding of June 2013, it serves as a potent reminder of the vital importance of our role and the protection we provide to our policyholders and the communities we serve. We continue to invest significantly in transforming our business, as illustrated by our recently announced agreement with Guidewire to replace our policy administration system, and in respect of our business transformation program which is nearing completion. These significant investments will provide the platform to support our future profitable growth goals."
Economical Insurance Consolidated Highlights*
($ in millions, except as otherwise noted)
2014 Q2 Consolidated Financial Results
|Gross written premiums
|Underwriting income (loss)
|Investment 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 second quarter grew by $15.7 million, or 2.9%, over the same quarter a year ago. The personal lines premium grew by $15.5 million, or 4.8% in the second quarter, driven by Ontario auto. The first phase of the mandated rate decreases for Ontario auto have now been implemented by the company. The impact on longer-term profitability will continue to develop as policies are issued and renewed at the lower rates. Commercial lines growth was flat overall in the quarter as increasing rates were offset by lower retention levels in targeted products.
On a year-to-date basis, gross written premiums grew by $29.2 million or 3.1%. Personal lines grew by $17.5 million or 3.1% driven by strong volume growth in Ontario auto. Commercial lines grew by $11.6 million or 3.1% driven by rate increases in targeted markets in Ontario and western Canada.
Underwriting activity for the second quarter produced $22.5 million of underwriting income, primarily due to strong personal lines and commercial auto performance combined with the absence of weather-related catastrophe losses. The combined ratio for the second quarter was 95.1% compared to 98.7% in the same quarter a year ago. The higher ratio in the second quarter of 2013 was mainly due to the significant Alberta flooding experienced in June 2013. The second quarter expense ratio fell by 0.7 percentage points compared to the same quarter in 2013 as growth in earned premiums more than offset a marginal increase in expenses. On a year-to-date basis the combined ratio of 100.3% represented a 2.5 percentage point deterioration from the prior year period, due primarily to the impact of severe winter weather experienced in the first quarter of 2014.
Economical's personal auto business produced a second quarter combined ratio of 92.4%, a 2.0 percentage point deterioration from the second quarter of 2013. On a year-to-date basis, personal auto generated a combined ratio of 95.0% for 2014, a 4.4 percentage point deterioration from the prior year period due primarily to higher volumes of claims in the first quarter arising from challenging winter driving conditions.
Personal property produced a combined ratio of 98.6% in the second quarter of 2014, a 2.4 percentage point deterioration over the second quarter a year ago. Although there were no weather-related catastrophe losses in the second quarter, compared to the prior year period where the Calgary flooding and other weather losses negatively affected the combined ratio by 8.2%, this was offset by higher volumes of claims in Atlantic and western Canada. On a year-to-date basis, personal property produced a combined ratio of 98.7% compared to 93.4% for the prior year period. This deterioration in performance was driven by the severe winter weather of the first quarter, which more than offset the overall reduction in weather-related catastrophe losses.
Overall, the personal lines business produced a combined ratio of 94.2%, a 2.0 percentage point deterioration from the second quarter of 2013. On a year-to-date basis, personal lines produced a combined ratio of 96.1%, a 4.6 percentage point deterioration from the prior year period.
Commercial auto produced a second quarter combined ratio of 74.4% compared to 76.2% in the same quarter of 2013. This is a significant improvement over the first quarter 2014 results which were impacted by severe winter weather and challenging driving conditions. On a year-to-date basis, commercial auto produced a combined ratio of 90.4%, a 7.8 percentage point deterioration over 2013 as a result of the challenging first quarter weather conditions.
The commercial property and liability business recorded a second quarter combined ratio of 108.2%, 18.6 percentage points better than the same quarter in 2013. 2013 was heavily affected by weather-related catastrophe losses which increased the commercial property combined ratio by 22.1 percentage points. On a year-to-date basis, commercial property and liability produced a combined ratio of 115.5%, a 5.6 percentage point improvement from the prior year period, reflective of reduced large loss activity and a reduction in catastrophe claims.
Overall, the commercial lines business posted a combined ratio of 96.4%, which represents a 12.9 percentage point improvement from the second quarter of 2013. On a year-to-date basis, the combined ratio of 106.8% represents a 1.2 percentage point improvement from the prior year period.
Economical continues to realize benefits from actions taken in prior years related to its business transformation program, which in the second quarter helped offset the program-related costs incurred. The total cost of the program, including restructuring expenses, was $4.5 million for the second quarter and $14.7 million on a year-to-date basis, compared to $12.1 million for the second quarter and $17.0 million on a year-to-date basis for the prior year. The impact solely in respect of underwriting results was $3.8 million for the second quarter and $8.5 million on a year-to-date basis, compared to $4.1 million for the second quarter and $7.4 million on a year-to-date basis for the prior year. The resulting impact on the combined ratio was 0.8 percentage point increase for the second quarter and 0.9 percentage point increase on a year-to-date basis, compared to a 0.9 percentage point increase for the second quarter and 0.8 percentage point increase on a year-to-date basis for the prior year.
Market yields fell during the second quarter of 2014, negatively impacting the discounted combined ratio by 0.6 percentage points, or $2.8 million. The effect of the discounting on claim liabilities was offset by recognized investment gains of $5.5 million on the matched bond portfolio. During the same quarter a year ago, market yields increased significantly, positively impacting the discounted combined ratio by 6.3 percentage points, or $27.7 million, which was offset by recognized losses of $27.5 million on the matched bond portfolio. On a year-to-date basis market yields have decreased, negatively impacting the discounted combined ratio by 1.0 percentage points or $9.5 million. The effect of the year-to-date discounting expense on claims liabilities was offset by recognized investment gains of $16.5 million on the matched bond portfolio over the same time period.
Investment income overall increased $39.1 million over the second quarter of 2013, to a total of $37.9 million. This increase was due primarily to recognized gains in 2014 of $5.5 million on the matched bond portfolio, discussed above, compared with recognized losses of $27.5 million in the second quarter of 2013.
On a year-to-date basis, overall investment income increased by $42.2 million due largely to the year-to-date recognized gains of $16.5 million on the matched bond portfolio, compared with a year-to-date loss of $17.9 million in 2013.
Investment quality remains very strong with more than 75% of total investments, at June 30, 2014, held in high quality government and investment-grade corporate bonds with the balance primarily held in common and preferred shares.
The second quarter effective tax rate at 22.8% is lower than the statutory rate primarily due to the favourable treatment of Canadian dividends generated by the company’s investment portfolio.
Economical’s capital position remains strong. Total mutual policyholders' equity was $1.66 billion at June 30, 2014, representing an increase of $88.1 million, or 5.6%, during the first six months of 2014. Economical’s minimum capital test ratio remains strong at 301% as of June 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.
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 portfolio 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 annualized premium volume and $5.1 billion in assets as at June 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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