HIGHLIGHTS

  • Gross written premiums declined by 3.7% over first quarter 2017, driven by corrective underwriting actions in commercial lines
  • Reported a combined ratio of 109.9% for the quarter, including an impact of 7.0 percentage points related to strategic investments
  • Generated a net loss of $1.2 million for the quarter

WATERLOO, ON, May 3, 2018 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three months ended March 31, 2018.

“Poor winter weather conditions impacted our first quarter underwriting performance as unseasonably cold and frequent fluctuations in temperatures were experienced, particularly in January,” said Rowan Saunders, President and CEO. “In order to address our underwriting performance issues, we have continued to implement a range of previously announced corrective pricing, enhanced underwriting and broker management actions, with further actions planned this year. Our actions in commercial lines have caused a necessary decline in gross written premiums as we seek to achieve sustained profitability. As Vyne, our new personal lines underwriting platform, progresses towards its launch later this year, our investments in its development will continue to impact financial performance. We expect Vyne to improve operating efficiency, pricing, underwriting and ease of doing business with our broker partners, but these benefits will take time to be fully realized. Consistent with our focus on profitability, we announced a related restructuring program in February to optimize our efficiency, effectiveness, and organizational structure.”

Economical Insurance Consolidated Highlights

($ in millions, except as otherwise noted)

2018 Q1 Consolidated Highlights
Three months ended March 31
  2018 2017 Change
Gross written premiums1 470.8 488.6 (17.8)
Net earned premiums 549.7 521.3 28.4
Claims ratio1 73.4% 70.4% 3.0 pts
Expense ratio1 36.5% 36.8% (0.3) pts
Combined ratio1 109.9% 107.2% 2.7 pts
Underwriting loss1 (54.6) (37.8) (16.8)
Investment income 44.1 57.8 (13.7)
Net (loss) income (1.2) 5.3 (6.5)
 
As at
  Mar 31, 2018 Dec 31, 2017 Change
Total equity 1,687.9 1,730.4 (42.5)
Minimum Capital Test1 240% 242% (2) pts

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 first quarter of 2018 declined by $17.8 million or 3.7% over the same quarter a year ago. Commercial lines premiums declined by $34.5 million or 19.7%, as we continue to implement underwriting actions designed to improve profitability. We expect downward pressure on the commercial lines premiums to continue throughout the rest of the year as our performance improvement actions continue to be implemented. Personal lines premiums grew by $16.7 million or 5.3%, driven primarily by new business growth from our digital direct distribution channel, Sonnet, and increased personal property policy volumes in our broker channel.

Underwriting activity for the first quarter of 2018 produced an underwriting loss of $54.6 million, resulting in a combined ratio of 109.9%, compared to an underwriting loss of $37.8 million and a combined ratio of 107.2% in the same quarter a year ago. The quarter was impacted by unseasonably cold and frequent fluctuations in temperatures, which contributed to increased levels of property and auto losses. In addition, auto lines remain challenged in all major regions. We continue to make significant investments in Sonnet and the development of the Vyne™ platform, which impacted the combined ratio by 7.0 percentage points in the first quarter of 2018, compared to 6.5 percentage points in the same quarter a year ago. We expect that the costs of these strategic investments will continue to negatively impact our underwriting results during the ongoing implementation and start-up phases, but are expected to provide platforms for growth and to improve our long-term profitability.

Line of Business Combined Ratios

The underwriting activity of Sonnet and our investment in the development of the personal lines Vyne platform are included in the line of business performance, increasing our combined ratios. The collective impact of these strategic investments on the combined ratios has been noted in the tables below to depict the adjusted combined ratios excluding these investments.

Personal insurance

2018 Q1 Personal Insurance Results
Three months ended March 31
  Combined ratio Impact of strategic investments Adjusted combined ratio1
2018
Auto 115.5% 12.0 pts 103.5%
Property 92.5% 6.1 pts 86.4%
Total 108.2% 10.3 pts 97.9%
2017 Q1 Personal Insurance Results
Three months ended March 31
  Combined ratio Impact of strategic investments Adjusted combined ratio1
2017
Auto 115.8% 11.7 pts 104.1%
Property 91.5% 6.3 pts 85.2%
Total 108.0% 10.1 pts 97.9%

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

The adjusted personal auto combined ratio for the first quarter improved slightly compared to the same quarter a year ago. This line of business continues to produce unacceptably high claims ratios in all major regions and was further impacted in the quarter by poor winter weather impacting claims frequency. Targeted rate increases and a number of underwriting actions have been implemented, with further targeted rate increases and improvements to risk selection planned later this year. The adjusted personal property combined ratio for the first quarter increased slightly compared to the same quarter a year ago, although performance of this line of business continues to be strong, particularly given an increase in property losses driven by the volatile winter weather conditions experienced in the quarter. Overall, on an adjusted basis, personal lines produced underwriting income of $7.5 million compared to $6.9 million in the same quarter a year ago. During 2018, we will begin the roll out of our Vyne platform for personal lines, which we expect will improve operating efficiency, pricing, underwriting, and ease of doing business with our broker partners once fully implemented.

Commercial insurance

2018 Q1 Commercial Insurance Results
Three months ended March 31
  2018 2017 Change
Commercial auto 112.3% 113.9% (1.6) pts
Commercial property and liability 114.7% 100.9% 13.8 pts
Total commercial lines 113.8% 105.9% 7.9 pts

The commercial auto combined ratio for the first quarter improved slightly, although this line of business continues to produce unacceptably high claims ratios. The commercial property and liability combined ratio for the first quarter of 2018 was impacted by an increase in property losses driven by the poor winter weather conditions. We were impacted by seven large losses in this line of business, compared to four in the same quarter a year ago, which increased our combined ratio by 7.3 percentage points. Overall, commercial lines produced an underwriting loss of $23.9 million compared to $10.8 million in the same quarter a year ago. To address the performance challenges in the commercial lines of business, a number of actions have already been implemented, including enhanced broker management, targeted rate increases, exiting unprofitable books of business and certain product offerings, and increased underwriting discipline. These actions will take time to be reflected in our results. Further actions planned for the remainder of 2018 include enhancing segmentation and pricing capabilities, improving underwriting quality and risk assessment, and cost reduction.

Investment income

2018 Q1 Investment Income Results
Three months ended March 31
  2018 2017 Change
Interest income 16.0 15.0 1.0
Dividend income 8.7 8.9 (0.2)
Total interest and dividend income 24.7 23.9 0.8
Total recognized gains on investments 19.4 33.9 (14.5)
Total investment income 44.1 57.8 (13.7)

Total interest and dividend income was stable during the first quarter of 2018 compared to the same quarter a year ago. Total recognized gains on investments decreased due mostly to losses on bonds, arising from an increase in yields during the quarter, whereas the same quarter a year ago experienced a decrease in yields.

Net income declined by $6.5 million over the same quarter a year ago, due to higher underwriting losses, lower investment income, and reflective of restructuring expenses.

Economical’s capital position remains well in excess of both minimum internal capital and external regulatory requirements as of March 31, 2018, with total equity of approximately $1.7 billion, and a Minimum Capital Test ratio of 240%.

Forward looking statements

Certain of the statements made 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 may constitute forward-looking statements. When used in this press release, the words “may”, “will”, “would”, “should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”, “anticipates”, “believes”, “estimates”, “predicts”, “likely”, “looking to”, “potential”, or negative or other variations of these words or other similar or comparable words or phrases, are typically 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 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; Economical’s ability to obtain reinsurance coverage to alleviate risk; litigation and regulatory actions; 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; unfavourable capital market developments or other factors which may affect our investments; Economical’s ability to successfully manage credit risk from its counterparties; foreign currency fluctuations; Economical’s ability to meet payment obligations as they become due; Economical’s dependence on key employees; 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; Economical’s ability to respond to events impacting its ability to conduct business as normal; Economical’s ability to implement its strategy or operate its business as management currently expects; general economic, financial, and political conditions, particularly those in Canada; the competitive market environment; Economical’s reliance on independent brokers to sell its products; success and timing of the demutualization process; the outcome of a demutualization transaction; and periodic negative publicity regarding the insurance industry or Economical.

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, and other factors and risks could impact our actual results, performance and achievements; however, these factors should be considered carefully, and readers should not place undue reliance on the forward-looking statements we make. We do not undertake 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

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.
Core accident year claims ratio Claims ratio excluding catastrophe losses and claims development.
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 financial impact of our investment in the development of the Vyne platform 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 $5.4 billion in assets as at March 31, 2018. 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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(T) 877.859.4950, ext. 54042
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sarah.stevens@economical.com

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(C) 416-435-5568
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