• Increased gross written premiums by 2.0% over first quarter 2014
  • Recorded a combined ratio of 105.7% for the quarter
  • Generated net income of $34.2 million for the quarter
  • Increased total equity by $41.0 million since December 31, 2014 to a record $1.72 billion

WATERLOO, ON, May 5, 2015 - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three months ended March 31, 2015.

"Our first quarter 2015 financial results were challenged by several headwinds," said Karen Gavan, president and CEO. "We continued to see the impact of the mandated rate reductions in Ontario auto causing average premiums to decline, and also experienced an increase in the number of large commercial property losses. We continue to execute on our plan to return our commercial property and liability business to profitability through a combination of corrective underwriting and rate actions, the benefits of which will be realized over time as they earn through the book of business. The first quarter of 2015 also saw significant investment in information technology infrastructure upgrades, including our policy administration system, which we expect will drive profitable growth and further improve our operational efficiency in the longer term."

Economical reported a combined ratio of 105.7% for the first quarter 2015, similar to the 105.5% reported in the same quarter a year ago. Lower levels of weather-related catastrophe losses were more than offset by an increase in large commercial property losses.

The Company's consolidated net income was $34.2 million for the first quarter of 2015 compared to $1.0 million during the same period a year ago. The improvement was driven by higher investment income stemming from increased capital gains and a one-time after-tax discounting recovery of $12.0 million from the reduction of the interest rate margin within claim liabilities. The margin was reduced due to the significant reduction in bond yields during the quarter and is expected to reverse if interest rates were to increase.

Economical Insurance Consolidated Highlights

($ in millions, except as otherwise noted)

2015 Q1 Consolidated Financial Results
  Three months ended March 31
  2015 2014 Change
Gross written premiums 422.1 413.7 8.4
Net premiums earned 469.4 453.6 15.8
Claims ratio* 71.9% 73.0% (1.1)
Expense ratio* 33.8% 32.5% 1.3
Combined ratio* 105.7% 105.5% 0.2
Underwriting loss* (26.8) (25.1) (1.7)
Investment income* 90.3 37.9 52.4
Net income 34.2 1.0 33.2
  As at
  March 31, 2015 December 31, 2014 Change
Total equity 1,722.1 1,681.1 41.0
Minimum Capital Test 297.5% 295.4% 2.1

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 first quarter 2015 grew by $8.4 million, or 2.0%, over the same quarter a year ago. The personal lines premiums grew by $10.3 million, or 4.3% over the same quarter a year ago. Increased auto policy volumes in Ontario more than offset declines in average premiums as the mandated 2014 rate decreases continue to be implemented. Commercial lines premium declined by $1.9 million, or 1.1%, over the same quarter a year ago primarily due to the non-renewal of certain non-core fronting arrangements in the fourth quarter of 2014. Excluding the impact of fronting, commercial lines premiums increased by $3.9 million or 2.3% over the same quarter a year ago driven primarily by rate increases.

Underwriting activity for the first quarter 2015 produced a $26.8 million underwriting loss compared to an underwriting loss of $25.1 million in the same quarter a year ago, and was impacted by mandated rate reductions in Ontario auto and an increase in large losses.

Information technology infrastructure investments, including work on our policy administration system, impacted the first quarter 2015 expense ratio by 2.0 percentage points compared to nil in the first quarter of 2014. Economical’s business transformation program was completed during the fourth quarter of 2014 and its impact on the first quarter 2014 combined ratio was an increase of 1.1 percentage points.

Combined Ratio*

2015 Q1 Combined Ratio*
  Three months ended March 31
  2015 2014 Changed
Personal auto 102.1% 97.7% 4.4
Personal property 86.4% 98.8% (12.4)
Total personal lines 97.2% 98.0% (0.8)
Commercial auto 102.7% 106.7% (4.0)
Commercial property and liability 119.7% 122.6% (2.9)
Total commercial lines 113.8% 117.2% (3.4)

Note: *The above combined ratios exclude costs for certain core infrastructure investments.

Personal auto results were impacted by the mandated rate reductions in Ontario and an increase in claims severity and large losses. The impact of the mandated rate decreases is expected to continue to develop in 2015 as policies are issued and renewed at lower rates. The personal property combined ratio improved due to a decrease in large losses and net weather-related catastrophe losses. Overall, personal lines produced an underwriting profit of $7.9 million compared to $5.4 million in the same quarter a year ago.

The commercial auto combined ratio improved over the same quarter a year ago as higher claims severity was more than offset by improved claims development. The commercial property and liability performance remains challenged. An increase in the number of large losses more than offset improved claims development. Overall, commercial lines produced an underwriting loss of $25.2 million compared to a $30.5 million loss in the same quarter a year ago.

Investment income increased $52.4 million over the first quarter of 2014 to $90.3 million. Dividend and interest income were relatively flat, however the dramatic decline in yields during the quarter produced significant recognized gains on the bond portfolios. Increased trading activity also produced additional capital gains. Investment quality remains strong with more than 75% of total investments held in government and investment-grade corporate bonds. The balance of investments is primarily held in common and preferred shares of large, well-established companies.

Economical's capital position remains strong. Total equity was $1.72 billion at March 31, 2015, an increase of $41.0 million, or 2.4% since December 31, 2014. Economical's minimum capital test ratio at 297.5% remains significantly in excess of regulatory requirements as of March 31, 2015. The January 1, 2015 implementation of the new rules for the minimum capital test is favourable to Economical.

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; 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.

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 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 identified as 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 March 31, 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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