- Gross written premiums grew 12.5% over the third quarter 2017
- Combined ratio of 114.1% for the quarter, reflecting strategic investments, elevated catastrophe losses, and continued poor industry-wide conditions
- Implementation of the Vyne™ platform progressing well with the launch of Ontario and Nova Scotia in the quarter
WATERLOO, ON, November 2, 2018 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three and nine month periods ended September 30, 2018.
“Our personal lines business generated growth in gross written premiums for both our broker and digital direct businesses with Sonnet premiums more than doubling over the same quarter a year ago. Growth in the broker business was driven by widespread rate increases as well as volume growth driven by our Vyne platform. As expected, commercial lines premiums continued to be negatively impacted by our corrective actions, although the pace of decline has slowed compared to the first half of the year,” said Rowan Saunders, President and CEO. “Our combined ratio for the quarter was heavily impacted by continued strategic investments and heightened catastrophe events. Poor weather conditions and high catastrophe losses incurred throughout the year are resulting in one of the worst weather years we have experienced. We are continuing to implement corrective actions to address our underwriting performance, and to assess further necessary actions given the continued elevated combined ratios in our auto lines across the country.”
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
2018 Q3 Consolidated Highlights
|Gross written premiums1
|Net earned premiums
2018 Q3 Consolidated Highlights - As At
|Minimum Capital Test1
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 third quarter of 2018 increased by $74.7 million or 12.5% over the same quarter a year ago. Personal lines premiums grew by $81.4 million or 19.4%, driven primarily by new business growth from our digital direct brand, Sonnet, increased personal property policy volumes in our broker channel, and rate increases in personal auto across both our distribution channels. Commercial lines premiums declined by $6.7 million or 3.8%, as we continue to implement underwriting actions designed to improve profitability. As our performance improvement actions continue to be implemented, we expect continued downward pressure on the commercial lines premiums, although this downward pressure has slowed. Year-to-date, personal lines premiums grew by $136.1 million or 11.6% and commercial lines premiums declined by $70.3 million or 12.3% as compared to 2017.
Underwriting activity for the third quarter of 2018 produced an underwriting loss of $79.4 million, resulting in a combined ratio of 114.1%, compared to an underwriting loss of $89.7 million and a combined ratio of 116.2% in the same quarter a year ago. The quarter was heavily impacted by catastrophe losses of $37.5 million, primarily as a result of a tornado in Ontario and Quebec, development on highway acid spills in British Columbia, and an Ontario flood. These losses contributed 6.7 percentage points to the combined ratio in the third quarter of 2018, as compared to 4.9 percentage points in the same quarter a year ago. Offsetting these catastrophe losses was a reduction of 3.1 percentage points in the claims ratio excluding catastrophe losses, arising from improvements in our personal lines and commercial auto lines of business. Our commercial property and liability line of business results continue to be challenged. Year-to-date, our underwriting results were impacted by increased catastrophe losses of 2.3 percentage points, and unseasonably cold and frequent fluctuations in temperatures during the first quarter of 2018, partially offset by a return to favourable claims development.
We continue to make significant investments in Sonnet, and the development and implementation of the Vyne platform for personal lines and individually rated commercial auto, which together impacted the combined ratio by 5.7 percentage points in the third quarter of 2018, compared to 8.1 percentage points in the same quarter a year ago. Vyne is expected to provide a broader range of customer-centric products, an enhanced pricing model and an improved service and workflow experience for our broker partners once fully implemented. It is also expected to increase the speed at which we can bring new products and pricing changes to market. During the quarter we launched Vyne in Ontario and Nova Scotia, and subsequently launched Vyne in Alberta and Quebec in October. 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 these costs are expected to decrease in 2019. These investments are expected to provide efficient and scalable platforms to support future growth and long-term profitability.
Line of Business Combined Ratios
The underwriting activity of Sonnet and the expenses pertaining to our investment in the development and implementation of the Vyne platform are included in the personal insurance line of business performance. The collective impact of these strategic investments on our combined ratios has been noted in the tables below to show the combined ratios with and without these investments.
2018 Q3 Personal Insurance
1 This item is a non-GAAP measure which is defined below.
The adjusted personal auto combined ratio for the third quarter of 2018 increased compared to the same quarter a year ago. Catastrophe losses, mainly due to highway acid spills in British Columbia, contributed 4.1 percentage points compared to just 0.2 percentage points in the same quarter a year ago. The increase in catastrophe losses was more than offset by a decrease in claims frequency. Despite this improvement, the core accident year claims ratios across our auto business remain elevated and unsustainable, as particularly demonstrated in Alberta, whose ongoing poor performance led us to strengthen claims reserves during the quarter. The ongoing regulatory pricing limits in Alberta have led us to implement broker management actions in this province. We continue to implement targeted rate increases and a number of underwriting actions in personal auto across the country, with further targeted rate increases and improvements to risk selection planned.
The adjusted personal property combined ratio for the third quarter improved compared to the same quarter a year ago, due to an absence of large losses and a decrease in catastrophe losses, although catastrophe losses remain elevated.
Overall, on an adjusted basis, personal lines produced an underwriting loss of $10.7 million compared to $8.0 million in the same quarter a year ago. During the quarter we continued the roll out of our Vyne platform, launching Vyne in Ontario and Nova Scotia. We are encouraged by early results and expect Vyne will improve operating efficiency, pricing, underwriting, and ease of doing business with our broker partners. Year-to-date, on an adjusted basis, personal lines produced an underwriting loss of $24.3 million compared to $16.9 million in 2017.
2018 Q3 Commercial Insurance
|Commercial property and liability
|Total commercial lines
The commercial auto combined ratio for the third quarter of 2018 improved driven primarily by an improvement in claims development compared to the third quarter of 2017, although this line of business continues to be challenged. The commercial property and liability combined ratio for the third quarter of 2018 was impacted by an increase in catastrophe and large losses, and a shift from favourable to adverse claims development. During the quarter, catastrophe losses impacted the combined ratio by 13.1 percentage points (2017: 9.6 percentage points), while large losses impacted the combined ratio by 11.2 percentage points (2017: 7.2 percentage points). Overall, commercial lines produced an underwriting loss of $35.0 million compared to $36.5 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $75.8 million compared to $65.2 million in 2017.
To address the performance challenges in the commercial lines of business, a number of actions have already been implemented, including targeted rate increases, exiting unprofitable books of business and certain product offerings, increased underwriting discipline, and enhanced broker management, which are expected to improve our mix of business. Continued actions planned for the remainder of 2018 include enhancing segmentation and pricing capabilities, improving underwriting quality and risk assessment, and expense management. Given the continued underperformance, we will likely implement further cancellations of business in commercial property and liability in particular.
2018 Q3 Investment Income
|Total interest and dividend income
|Total recognized (losses) gains on investments
|Total investment income
Interest income increased during the third quarter of 2018 due to the rising interest rate environment. Dividend income declined due to lower holdings of dividend-paying common stocks. Total recognized losses on investments decreased due mostly to higher gains on domestic common and preferred stocks, and lower losses on bonds as the increase in yields during the quarter was lower than the increase in the same quarter a year ago. Year-to-date, recognized gains on investments were higher, due primarily to a decrease in impairment losses on our available for sale common stock portfolio.
Net loss decreased by $18.2 million over the same quarter a year ago, due primarily to lower underwriting losses and higher investment income. Year-to-date, net loss decreased by $5.1 million over 2017, due primarily to an increase in investment income, partially offset by higher underwriting losses.
Economical’s capital position remains well in excess of both minimum internal capital and external regulatory requirements as of September 30, 2018, with total equity of approximately $1.6 billion, and a Minimum Capital Test ratio of 226%.
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.
||Generally, an event causing greater than 100 claims and gross losses in excess of $2 million.
||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.
||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.
||A measure of how often a claim is reported as a function of policies in force.
||A single claim with a gross loss in excess of $1 million.
||A measure of the average dollar amount paid per claim.
||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 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.
||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.
||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 and implementation 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.
||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 $2.3 billion in annualized premium volume and approximately $5.7 billion in assets as at September 30, 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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