- Gross written premiums grew 8.4% over first quarter 2018, driven by continued growth from Sonnet and our personal lines platform, Vyne
- Improved combined ratio of 107.3% for the quarter despite severe winter weather conditions and 3.3 percentage points of catastrophe losses
- Strategic investments impacted the combined ratio by 3.5 percentage points
- Substantial rate actions and cost reduction initiatives continue to work through our lines of business
- Eligible mutual policyholders voted overwhelmingly to continue with our demutualization process
WATERLOO, ON, May 2, 2019 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three months ended March 31, 2019.
“Our first quarter results were negatively impacted by unusually severe winter weather and a significant increase in catastrophe losses compared to historical industry norms. Despite these headwinds, we delivered an improved combined ratio for the quarter compared to last year. Our focus remains on the continued execution of our aggressive profit improvement plans as we prepare for demutualization and our expected initial public offering,” said Rowan Saunders, President and CEO. “Our significant actions on rate, risk selection, exiting unprofitable lines of business and other underwriting actions have laid the foundation for the future. We are pleased that our rate actions and strategic investments are continuing to drive growth, while the impact of our extensive underwriting actions and focus on portfolio quality is becoming evident in our results. There is more work to be done, as our turnaround actions will continue to run throughout 2019.”
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
2019 Q1 Consolidated Highlights
|Gross written premiums1
|Net earned premiums
|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.
2The expense ratio and the combined ratio are presented in the press release net of other underwriting revenues.
Gross written premiums for the first quarter of 2019 increased by $39.3 million or 8.4% over the same quarter a year ago. Personal lines premiums grew by $49.6 million or 15.0%, driven primarily by rate increases as well as volume growth from our VyneTM platform and Sonnet. Commercial lines premiums declined by $10.3 million or 7.4% due to the impact of our continued underwriting remediation plan which is necessary to improve profitability.
Underwriting activity for the first quarter of 2019 improved, producing an underwriting loss of $43.4 million and a combined ratio of 107.3%, compared to an underwriting loss of $54.6 million and a combined ratio of 109.9% in the same quarter a year ago. Our underwriting results improved despite unusually severe winter weather conditions and a significant increase in catastrophe losses during the quarter as compared to historical industry norms. In particular, our commercial lines of business substantially improved over the same quarter a year ago. The increase in our claims ratio, resulting from poor winter weather, was more than offset by a decrease in the expense ratio. The expense ratio decreased due to proactive expense management, Sonnet continuing to scale, and the completion of the Vyne deployment in 2018. The impact on the combined ratio of our significant investments in Sonnet and the Vyne platform was 3.5 percentage points in the first quarter of 2019 compared to 7.0 percentage points in the same quarter a year ago. These investments are expected to provide efficient and scalable platforms to support future growth and long-term profitability. In addition, new tools and process improvements are also being implemented in claims surrounding our claims recovery and claims procurement processes.
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.
2019 Q1 Personal Insurance
1 This item is a non-GAAP measure which is defined below.
Personal auto premiums increased in the quarter by 14.6%, driven by the ongoing ramp up of Sonnet, the successful deployment of Vyne, and significant rate increases implemented during the quarter and in 2018. Increases in rate and new business volumes more than offset extensive broker management actions and the tightening of our underwriting practices, particularly in Alberta and Ontario. The adjusted combined ratio in the quarter increased from 103.5% to 105.6% due to poor winter weather conditions in certain regions which led to challenging road conditions and increased claims frequency. We also saw a shift from favourable to adverse claims development.
Personal property premiums increased in the quarter by 16.1%, due primarily to significant rate increases, and the growth from Sonnet and Vyne. The adjusted combined ratio in the quarter increased from 86.4% to 99.7%. Personal property was heavily impacted by five separate catastrophe losses compared to one in the same quarter a year ago, impacting the adjusted combined ratio by $15.0 million or 11.6 percentage points, compared to only $2.7 million or 2.3 percentage points in the same quarter a year ago. Non-catastrophe weather-related claims also increased significantly in this line of business compared to the prior year, with the cold and wet winter in Ontario and volatile weather in Quebec causing elevated claims frequency.
Overall, personal lines premiums increased by 15.0%. This includes Sonnet, which generated premiums of $34.0 million in the quarter for an increase of 66.7% over the same quarter a year ago. Sonnet continues to benefit from the increasing maturity of its direct marketing activities, which is improving customer acquisition quality while significantly reducing operating expenses. Our Vyne platform has also generated significant growth, with our personal lines broker premiums increasing by 12.6% over the prior year. The deployment of Vyne significantly increases our operational flexibility through deployment of analytics, and implementation of targeted underwriting actions and price adjustments. On an adjusted basis, personal lines produced an underwriting loss of $15.0 million compared to underwriting income of $7.5 million in the same quarter a year ago. Our substantial profitability actions continue to work through our personal lines business, with additional rate actions and cost reductions planned in 2019.
2019 Q1 Commercial Insurance Results
|Commercial property and liability
|Total commercial lines
Underlying fundamentals of the commercial lines book have improved as rehabilitation actions earn through in 2019. For the remainder of 2019, we will continue to implement targeted pricing and underwriting actions to improve our profitability, especially in underperforming commercial property and liability segments in line with industry trends. These actions will continue to negatively impact volume in the near-term, but are expected to substantially improve our mix of business and drive profitable growth.
Commercial auto premiums decreased in the quarter by 2.1%, driven primarily by the impact of our targeted underwriting actions. These actions implemented in 2018 and into 2019 consist of sizeable rate increases, significant mix of business changes, including exiting unprofitable areas of our transportation business, and other underwriting actions taken to improve quality and decrease volatility. The combined ratio improved over the same quarter a year ago due primarily to our underwriting and pricing actions, a decrease in claims frequency, and a return to favourable claims development.
Commercial property and liability premiums decreased in the quarter by 10.1%, driven primarily by the impact of our targeted underwriting actions, which are necessary in order to remediate the performance of this book of business. These actions include rate increases in our mid-market and small business portfolios, exiting from unprofitable and volatile portfolios, and enhanced underwriting and risk selection. The combined ratio improved due to the aforementioned actions and a return to favourable claims development. This was partially offset by an increase in catastrophe losses, which impacted the combined ratio by 3.6 percentage points compared to 0.1 percentage points in the same quarter a year ago. Non-catastrophe weather related claims also increased in this line of business compared to the prior year
Commercial lines premiums decreased by 7.4%, impacted by a combination of broker cancellations, substantial pricing actions, and exiting unprofitable lines of business. Overall, commercial lines produced an underwriting loss of $6.6 million compared to $23.9 million in the same quarter a year ago. The overall profitability improvement in commercial lines was achieved despite more severe winter conditions.
2019 Q1 Investment Income Results
|Total interest and dividend income
|Total recognized gains on investments
|Total investment income
Interest income increased during the first quarter of 2019 compared to the same quarter a year ago due to the rising interest rate environment and increased bond holdings. Dividend income declined due to lower holdings of dividend-paying common stocks. Total recognized gains on investments increased due mainly to higher gains on bonds, which were partially offset by a corresponding claims discounting expense of $25.4 million.
Net loss increased by $2.6 million over the same quarter a year ago as lower realized gains on foreign common stocks were partially offset by lower underwriting losses.
Economical’s capital position remains well in excess of both minimum internal capital and external regulatory requirements as of March 31, 2019, with total equity of $1.6 billion, and a Minimum Capital Test ratio of 242%.
About Economical Insurance
Economical is a leading property and casualty insurer in Canada, with approximately $2.5 billion in annualized gross written premiums and approximately $5.7 billion in assets as at March 31, 2019. Economical is a Canadian-owned and operated company that services the insurance needs of more than one million customers across the country.
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 suggesting future events or outcomes, are typically intended to identify forward-looking statements.
Forward-looking statements are based on estimates and assumptions made by management based on management’s knowledge, 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 insurance products to produce an acceptable return; its ability to accurately assess the risks associated with the insurance policies that it writes; its ability to assess and pay claims in accordance with our insurance policies; litigation and regulatory actions; Economical’s ability to obtain adequate reinsurance coverage to alleviate risk; 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, interest rate movements, 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 and protect the appropriate collection and storage of information; Economical’s reliance on information technology and telecommunications systems; failure of key service providers or vendors to comply with contractual or business terms; changes in government regulations, interpretation or application, supervisory expectations or requirements, including risk-based capital guidelines; deceptive or illegal acts undertaken by an employee or a third party; 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; the introduction of disruptive innovation; distribution channel risk, including Economical’s reliance on independent brokers to sell its products; Economical’s ability to manage capital effectively; 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.
||An event causing gross losses in excess of $2 million, and generally greater than 100 claims.
||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 the 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 (loss).
|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.
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