Economical Insurance Reports Financial Results for Second Quarter 2017

HIGHLIGHTS

• Increased gross written premiums by 12.8% over second quarter 2016, driven by strong personal lines growth, including contributions from Sonnet and Petline
• Reported a combined ratio of 112.8% for the quarter, including an impact of 6.5 percentage points related to Sonnet and the replacement of our personal lines policy administration system
• Generated a net loss of $18.5 million for the quarter

WATERLOO, ON, August 4, 2017 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three and six month periods ended June 30, 2017.

“Our second quarter results continue to reflect the trends experienced in the first quarter performance. While we generated significant growth in gross written premiums stemming from broker channel personal lines, Sonnet, and Petline, the underwriting performance of our auto lines remains challenged,” said Rowan Saunders, President and CEO. “To address this, we have implemented a number of targeted rate increases, underwriting and broker management actions, and will continue to strengthen our executive leadership. Further actions are planned through the balance of the year, although they will take time to earn through our results. We were also impacted by challenging weather conditions including four separate catastrophe losses from wind and rain events. The ongoing investments in Sonnet and the replacement of our personal lines policy administration system further contributed to the increase in the combined ratio.”

Economical Insurance Consolidated Highlights
_{($ in millions, except as otherwise noted)}

¹These items are non-GAAP measures which are defined below. Claims ratio, expense ratio, combined ratio, and underwriting loss exclude the impact of discounting.

Gross written premiums for the second quarter of 2017 grew by $75.2 million or 12.8% over the same quarter a year ago from a combination of organic and inorganic growth. Personal lines premiums grew by $69.3 million or 18.8% primarily due to increased auto and property policy volumes in our broker channel, new business growth from our digital direct distribution channel, Sonnet, and the acquisition of Petline. Commercial lines premiums grew by $5.9 million or 2.7% driven primarily by increased fleet business. Year-to-date, personal lines premiums grew by $122.6 million or 19.5% and commercial lines premiums grew by $14.5 million or 3.8% over the same period a year ago.

Underwriting activity for the second quarter of 2017 produced a loss of $68.4 million, resulting in a combined ratio of 112.8%, compared to an underwriting loss of $21.6 million and a combined ratio of 104.5% in the same quarter a year ago. Underwriting results were impacted by continued deterioration in auto performance, primarily in Ontario and British Columbia, which also resulted in adverse prior year claims development in the quarter. The quarter was also impacted by a number of wind and rain storms primarily impacting our property lines of business, which contributed 2.7 percentage points to the combined ratio. The second quarter of 2016 included the Fort McMurray wildfire, which contributed 7.6 percentage points to the combined ratio. We continue to make significant investments in Sonnet and the replacement of our personal lines policy administration system, which impacted the combined ratio by 6.5 percentage points, compared to 5.2 percentage points in the same quarter a year ago. We expect that these strategic investments will continue to increase operating expenses during the implementation and start-up phases, but are expected to improve our operational efficiency and profitable growth in the longer term. Year-to-date, underwriting activity produced a loss of $106.1 million, resulting in a combined ratio of 110.0%, compared to an underwriting loss of $27.0 million and a combined ratio of 102.8% in the same quarter a year ago. Year-to-date, our underwriting results were impacted by the same factors as the quarter.

Line of Business Combined Ratios

In 2017, the results of the underwriting activity of Sonnet have been included in the line of business performance, resulting in increased combined ratios, which will continue during the start-up phase. In addition, our investment in a new personal lines policy administration system has further increased the combined ratios. The collective impact of these strategic investments on the 2017 combined ratios has been noted in the table below to depict the adjusted combined ratios excluding these investments for comparative purposes.

Personal insurance

Three months ended June 30

Six months ended June 30

¹ In 2016, the personal lines of business results excluded certain expenses associated with the development and launch of Sonnet as it was in the pre-launch phase for the majority of the year.

² This item is a non-GAAP measure which is defined below.

The adjusted personal auto combined ratio for the second quarter increased primarily due to continued deterioration in Ontario bodily injury, and British Columbia excess auto liability claims. This resulted in overall adverse prior year claims development for our personal auto line of business. Targeted rate increases and a number of underwriting actions have been recently implemented. Further actions to remediate this line of business are planned during the second half of 2017. These actions will take time to earn through our results.

The adjusted personal property combined ratio for the second quarter improved compared to the same quarter a year ago, primarily due to lower levels of weather-related catastrophe losses. Total catastrophe losses decreased, as the same quarter a year ago was heavily impacted by the devastating Fort McMurray wildfire (19.3 percentage points impact), while the current quarter was impacted by 8.0 percentage points of catastrophe losses stemming from four separate wind and rain events.

Overall, on an adjusted basis, personal lines produced an underwriting loss of $15.8 million compared to an underwriting profit of $16.3 million in the same quarter a year ago. Year-to-date, on an adjusted basis, personal lines produced an underwriting loss of $8.9 million compared to an underwriting profit of $24.4 million in 2016.

Commercial insurance

The commercial auto combined ratio for the second quarter was impacted by a significant increase in claims severity in all regions. To address the deterioration in this line of business, certain targeted rate increases have been implemented in the second quarter. Further targeted rate increases and underwriting actions are planned for the second half of 2017.

The commercial property and liability combined ratio for the second quarter improved significantly. Catastrophe losses decreased, as the same quarter a year ago was heavily impacted by the devastating Fort McMurray wildfire (17.1 percentage points impact), while the current quarter was impacted by 4.1 percentage points of catastrophe losses. There was also an increase in favourable prior year claims development in the second quarter of 2017, which was partially offset by an increase in large losses.

Overall, commercial lines produced an underwriting loss of $17.9 million compared to $12.8 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $28.8 million compared to $14.6 million in 2016. In the second quarter of 2017, under new leadership, we initiated a comprehensive review of the commercial line of business portfolio by region and product type. This ongoing review has identified some early findings, including a range of pricing, underwriting, and broker management actions, some of which were swiftly implemented during the second quarter. While we expect our actions implemented to date and further actions arising from our ongoing review will impact our policy volumes and gross written premiums, we believe these actions will improve operating performance going forward.

Investment income

Recurring investment income was stable during the second quarter of 2017, compared to the same quarter a year ago. The decline in interest income was offset by an increase in dividend income. Recognized gains decreased as an increase in yields produced unrealized losses on the bond portfolio. These were partially offset by realized gains, mainly on domestic equities.

Net income decreased by $35.6 million over the same quarter a year ago due to lower investment income, and higher underwriting losses driven largely by continued challenges in auto performance and increased spend on our strategic initiatives. Year-to-date, net income decreased $58.8 million over the same period a year ago due to these same factors.

Economical’s capital position remains strong. Total equity approximated $1.8 billion as at June 30, 2017. Economical’s minimum capital test ratio is at 259%, which remains significantly in excess of both internal capital management and external regulatory requirements as of June 30, 2017.

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; its ability to pay claims in accordance with our insurance policies; 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 our 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 ability to manage the appropriate collection and storage of information; Economical’s reliance on information technology and telecommunications systems; changes in government regulations; supervisory expectations or requirements, including risk-based capital guidelines; litigation and regulatory actions; success and timing of the demutualization process; the outcome of a demutualization transaction; periodic negative publicity regarding the insurance industry or Economical; Economical’s ability to uphold its independent third party ratings; 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 the 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.

Definitions

2017 Q2 Definitions

Catastrophe loss	Generally, an event causing greater than 100 claims and gross losses in excess of $2 million.
Claims development	The difference between prior year end estimates of ultimate undiscounted claim costs and the current estimates for the same block of claims. A favourable development represents a reduction in the estimated ultimate claim costs during the period for that block of claims.
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.
Frequency	A measure of how often a claim is reported as a function of policies in force.
Large loss	A single claim with a gross loss in excess of $1 million.
Severity	A measure of the average dollar amount paid per claim.
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.
Gross written premiums	The total premiums from the sale of insurance during a specified period.
Claims ratio	Claims and adjustment expenses (excluding the impact of discounting) during a defined period expressed as a percentage of net earned premiums for the same period.
Expense ratio	Underwriting expenses including commissions, operating expenses (net of other underwriting revenues) and premium taxes during a defined period, expressed as a percentage of net earned premiums for the same period.
Combined ratio	Claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses (net of other underwriting revenues) and premium taxes during a defined period expressed as a percentage of net earned premiums for the same period.
Adjusted combined ratio	Combined ratio excluding the impact of our investment in a new personal lines policy administration system and the results of the underwriting activity of Sonnet.
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.
Underwriting loss	Net earned premiums for a defined period less the sum of claims and adjustment expenses (excluding the impact of discounting), net commissions, operating expenses (net of other underwriting revenues) and premium taxes during the same period.

About Economical Insurance

Founded in 1871, Economical Insurance is one of Canada’s leading property and casualty insurers, with more than $2.2 billion in annualized premium volume and over $5.5 billion in assets as at June 30, 2017. Based in Waterloo, this Canadian-owned and operated company services the insurance needs of more than one million customers across the country.

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