• Increased gross written premiums by 2.9% over third quarter 2014
• Recorded a combined ratio of 89.8% for the quarter
• Generated net income of $66.1 million for the quarter
• Increased total equity by $42.3 million since December 31, 2014 to $1.72 billion
WATERLOO, ON, November 3, 2015 — Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three and nine months ended September 30, 2015.
"Economical delivered excellent performance during the quarter with each line of business providing a strong contribution to our underwriting profit," said Karen Gavan, president and CEO. "The rate decreases mandated in 2014 for Ontario auto have now fully earned through, and we are encouraged by the recently enacted budget measures which will provide some offsetting cost reductions. We continue to closely monitor rate adequacy in the context of a dynamic regulatory environment. Our significant investment in information technology infrastructure upgrades continued during the quarter along with our ongoing commercial pricing actions. We remain confident that these measures will deliver profitable growth over time."
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
2015 Q3 Consolidated Financial Results
|Gross written premiums
|Net premiums earned
|Underwriting income (loss)*
|Minimum Capital Test
Note: *Claims ratio, expense 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 2015 grew by $14.6 million, or 2.9%, over the same quarter a year ago. Personal lines premiums grew by $20.4 million, or 6.2% over the same quarter a year ago. This growth was primarily driven by increased auto policy volumes in Ontario and British Columbia as well as growth in personal property primarily driven by increased policy volumes and targeted rate increases. Commercial lines premiums declined by $5.8 million, or 3.4%, over the same quarter a year ago. The overhaul of our commercial pricing strategy has resulted in decreased policy volumes which more than offset targeted rate increases. Year-to-date, personal lines premiums grew by $46.4 million or 5.1% while commercial lines premiums declined by $6.5 million or 1.2% over the same period a year ago.
Underwriting activity for the third quarter 2015 produced a $48.9 million underwriting profit, resulting in a combined ratio of 89.8%, compared to an underwriting loss of $38.3 million, resulting in a combined ratio of 108.2%, in the same quarter a year ago. This considerable improvement was due to the strong underlying performance in all lines of business and reduced catastrophe losses. There was also a significant benefit from the regulatory reforms enacted in Ontario during the quarter, resulting in a reduction in reserves for certain open claims. These reforms partially offset rate reductions mandated in 2014.
Information technology infrastructure investments, including costs associated with the replacement of our policy administration system, impacted the third quarter 2015 expense ratio by 2.1 percentage points and 1.8 percentage points year-to-date compared to 0.6 percentage points and 0.3 percentage points for the comparable prior year periods. We believe these investments will drive profitable growth and further improve our operational efficiency in the longer term. Economical's business transformation program was completed during the fourth quarter of 2014. Its impact on the combined ratio was an increase of 0.8 percentage points for the third quarter 2014 and 0.9 percentage points for the nine months ended September 30, 2014.
2016 Q3 Combined Ratio
|Total personal lines
|Commercial property and liability
|Total commercial lines
Note: *The above combined ratios exclude costs for certain infrastructure investments.
The personal auto combined ratio improved over the same quarter a year ago due to our continued improvements in predictive analytics and pricing sophistication, the benefit from the regulatory reforms in Ontario (10 percentage point reduction in the combined ratio for the third quarter) and improved loss development. The personal property combined ratio improved compared to the same quarter a year ago due to targeted rate increases, and benign weather conditions which resulted in lower catastrophe losses and claims frequency. Overall, personal lines produced an underwriting profit of $37.4 million compared to an underwriting loss of $9.1 million in the same quarter a year ago. Year-to-date, personal lines produced an underwriting profit of $62.6 million compared to $12.6 million in 2014.
The commercial auto combined ratio improved over the same quarter a year ago primarily due to the benefit from the regulatory reforms in Ontario (12 percentage point reduction in the combined ratio for the third quarter). The underlying book of business continues to perform well. The commercial property and liability combined ratio significantly improved over the same quarter a year ago primarily due to underwriting and pricing actions implemented over the past twelve months, improved loss development and a large decrease in both frequency and net claims severity resulting from benign weather conditions. Overall, commercial lines produced an underwriting profit of $21.5 million compared to an underwriting loss of $29.2 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting profit of $3.9 million compared to an underwriting loss of $53.4 million in 2014.
Investment income decreased $16.0 million from the third quarter a year ago to $20.0 million. Dividend and interest income combined were relatively flat quarter over quarter. However, increased bond yields and softening equity markets resulted in unrealized losses during the quarter. Investment quality remains strong with more than 76% of total investments held in government and investment-grade corporate bonds as at September 30, 2015. The balance of investments is primarily held in common and preferred shares of large, well-established companies.
Net income increased by $65.2 million over the same quarter a year ago primarily due to the strong underwriting performance partially offset by a decrease in investment income. Annual net income increased by $88.6 million, driven by strong underwriting performance and increased investment income.
Economical's capital position remains strong. Total equity was $1.72 billion at September 30, 2015, an increase of $42.3 million, or 2.5% since December 31, 2014. This is despite a loss of $71.1 million (net of tax) recorded in other comprehensive income for the nine months ended September 30, 2015 related to a reduction in unrealized investment gains. Economical's minimum capital test ratio is at 287%, which remains significantly in excess of regulatory requirements as of September 30, 2015.
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", "looking to", 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: the competitive market environment; Economical's ability to appropriately price its products to produce an acceptable return; its ability to accurately assess the risks associated with the insurance policies that it writes; management's ability to accurately predict future claims frequency or severity including the frequency and severity of weather related events; the occurrence of unpredictable catastrophic events; Economical's ability to obtain reinsurance coverage to alleviate risk; Economical's ability to successfully manage credit risk from its counterparties; unfavourable capital market developments or other factors which may affect the Company's investments; general economic, financial and political conditions; foreign currency fluctuations; Economical's ability to implement its strategy or operate its business as management currently expects; Economical’s dependence on key employees; Economical's reliance on independent brokers to sell its products; Economical's ability to meet payment obligations as they become due; the risk of financial loss from an inadequate enterprise risk management framework; Economical's reliance on information technology and telecommunications systems; changes in government regulations; success and timing of the demutualization process; the outcome of a demutualization transaction; litigation and regulatory actions; periodic negative publicity regarding the insurance industry, and Economical's ability to respond to events impacting its ability to conduct business as normal.
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.
Expense ratio - Underwriting expenses including commissions, operating expenses and premium taxes during a defined period, expressed as a percentage of net premiums earned for the same period.
Large loss - A loss in excess of $1 million
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, the expected future payments of claim liabilities are discounted back to present value using the market yield rate of investments used to support those liabilities. 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.
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 $5.3 billion in assets as at September 30, 2015. Based in Waterloo, this Canadian-owned and operated company services the insurance needs of more than one million customers across the country. 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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