- Our disciplined underwriting approach curtailed growth in the quarter, as gross written premiums were 1.5% lower than the prior year
- Our corrective actions and lower catastrophe losses generated a combined ratio of 103.0%, 11.5 points improved from the second quarter of 2018
- Strategic investments impacted our reported combined ratio by 4.3 points, a reduction of 3.1 points year over year as Sonnet continues to scale and Vyne deployment was completed in 2018
- Income from interest and dividends was relatively stable, although fixed income yields have dropped significantly in 2019
- Our financial position remains solid, with an MCT of 241%
WATERLOO, ON, August 1, 2019 — Economical Insurance today announced consolidated financial results for the three and six month periods ended June 30, 2019.
“I am encouraged by the improved operating performance during the second quarter. Though we benefitted from lower levels of catastrophe losses, our improvement plan is clearly bearing fruit and earning into our underwriting results,” said Rowan Saunders, President and CEO. “Our rate increases and strategic investments in both Sonnet and Vyne are driving growth, while our corrective underwriting actions are reshaping our in-force book of business. Our disciplined approach to writing quality business is important in the context of both current dynamic market conditions and a persistently low interest rate environment.”
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
2019 Q2 Consolidated Highlights
|Gross written premiums1
|Net earned premiums
|Adjusted combined ratio1,2
|Net income (loss)
2019 Q2 Consolidated Highlights - As At
|Minimum Capital Test1
1These items are non-GAAP measures which are defined below. The claims ratio, expense ratio, combined ratio, and underwriting loss exclude the impact of discounting.
2The expense ratio, combined ratio, and adjusted combined ratio are presented in the press release net of other underwriting revenues.
Gross written premiums for the second quarter of 2019 decreased by $10.3 million or 1.5% compared to the second quarter of 2018. Personal lines premiums were up 3.0% from a year ago, as strong growth in Sonnet and our broker property business more than offset a decline in broker auto premiums that resulted from our ongoing actions relating to profitability of the portfolio. Commercial lines premiums declined 12.8% due to the impact of our continued turnaround plan which we believe is necessary to achieve profitability. Year-to-date, personal lines premiums increased $64.2 million or 8.0% and commercial lines premiums declined $35.2 million or 10.6% as compared to the first half of 2018.
Underwriting activity for the second quarter of 2019 improved significantly, producing an underwriting loss of $17.2 million and a combined ratio of 103.0%, compared to an underwriting loss of $79.7 million and a combined ratio of 114.5% in the same quarter a year ago. Our results benefitted from a $36.2 million reduction in catastrophe losses, which improved the combined ratio by 6.7 points, higher favourable prior year claims development, and the impact of our actions to achieve profitability. Our underwriting results also benefitted from a decrease in our expense ratio due to proactive expense management, Sonnet continuing to scale, and reduced costs as a result of the completion of the VyneTM deployment in 2018. The impact on the combined ratio of our strategic investments in Sonnet and the Vyne platform was 4.3 points in the second quarter of 2019 compared to 7.4 points in 2018. This resulted in an adjusted combined ratio of 98.7% in the current quarter. These investments are expected to provide efficient and scalable platforms to support future growth and long-term profitability. Year-to-date, our underwriting results improved due to our turnaround plan, lower catastrophe losses, and a decrease in the impact of our strategic investments, despite elevated weather losses experienced in the first quarter.
Line of Business Results
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 Q2 Consolidated Highlights - Personal Insurance
1These items are non-GAAP measures which are defined below.
Personal auto premiums decreased in the quarter by 2.1% due to extensive broker management actions and the tightening of our underwriting practices following the successful deployment of Vyne, particularly in Alberta and Ontario. These were partially offset by growth in Sonnet and rate increases. The adjusted combined ratio in the quarter of 98.1% benefitted from the impact of prior rate increases, expense management, and reduced losses from catastrophes.
Personal property premiums increased in the quarter by 14.7%, driven by strong growth from both Sonnet and Vyne. The adjusted combined ratio in the quarter improved significantly, as the second quarter of 2018 was heavily impacted by $32.6 million in catastrophe losses, compared to $7.1 million in the current quarter. This represented a reduction in the combined ratio of 22.1 points.
Overall, personal lines premiums increased by 3.0%. This includes Sonnet, which generated gross written premiums of $50.6 million in the quarter, an increase of 96.3% over the same quarter a year ago. Sonnet continues to scale and is benefitting from significant rate increases, new tools and analytics to more effectively advertise and acquire target customers, and lower operating expenses. On an adjusted basis, personal lines produced underwriting income of $7.8 million compared to an underwriting loss of $21.6 million in the same quarter a year ago. Our profitability actions continue to work through our personal lines business, with additional rates and cost reductions planned for the remainder of the year. Year-to-date, on an adjusted basis, personal lines produced an underwriting loss of $7.2 million compared to a loss of $14.1 million in the first half of 2018.
2019 Q2 Consolidated Highlights - Commercial Insurance
|Property and liability
1 This item is a non-GAAP measure which is defined below.
Our commercial lines book of business is improving as the results of our turnaround actions continue to earn through in 2019. Across our commercial portfolio, we have implemented targeted rate increases and other underwriting actions, especially in underperforming commercial property and liability segments. These actions continue to negatively impact premiums, but we believe that they are necessary to improve our mix of business and return to profitability.
Commercial auto premiums decreased in the quarter by 12.8%, 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 business, and other underwriting actions taken to improve quality and decrease volatility. The combined ratio improved to 97.4% in the second quarter, reflecting a meaningful shift from adverse to favourable claims development.
Commercial property and liability premiums decreased in the quarter by 12.9%, driven primarily by the impact of our targeted underwriting actions which 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 significantly, by 10.5 points over the same quarter a year ago, driven by a $7.9 million or 7.6 point reduction in catastrophe losses and the benefits of our corrective underwriting actions.
Overall, commercial lines premiums decreased by 12.8%, impacted by substantial pricing actions and the exit from unprofitable lines of business. Commercial lines produced an underwriting loss of $1.0 million compared to a $17.0 million loss in the same quarter a year ago, a significant improvement as our turnaround plan begins to take hold. Year-to-date, commercial lines produced an underwriting loss of $7.6 million compared to $40.8 million in the first half of 2018.
2019 Q2 Consolidated Highlights - Investment Income
|Total interest and dividend income
|Total recognized gains on investments
|Total investment income
A shift in our portfolio from dividend-producing equities towards bond holdings led to an increase in interest income and a corresponding decline in dividend income from the same quarter a year ago. Total recognized gains on investments increased due mainly to higher gains on bonds, which more than offset lower gains on domestic and foreign equities. A significant portion of the gains on bonds resulted from the repositioning of the bond portfolio to enhance interest income while maintaining the overall risk profile of our bond portfolio. Year-to-date, recognized gains on investments were higher due to these same factors and due to a decrease in bond yields compared to an increase in 2018.
Net income increased by $47.0 million over the same quarter a year ago due to lower underwriting losses and higher investment income, partially offset by a discounting expense. Year-to-date, net income increased by $44.4 million due to these same factors.
Economical’s capital position remains well in excess of both minimum internal capital and external regulatory requirements as of June 30, 2019, with total equity of $1.6 billion, and a Minimum Capital Test ratio of 241%.
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;
- Economical’s ability to accurately assess the risks associated with the insurance policies that it writes;
- Economical’s 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;
- Economical’s ability to accurately predict future claims frequency or severity, including the frequency and severity of weather-related events;
- the occurrence of unpredictable catastrophe 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 legislation or its interpretation or application, or 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.
|Minimum capital test (MCT)
||A regulatory formula defined by the Office of the Superintendent of Financial Institutions Canada, that is a risk-based test of capital available relative to capital required.
||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.
|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.
||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.
||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.
|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.
|Gross written premiums
||The total premiums from the sale of insurance during a specified period.
||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
Economical Mutual Insurance Company (“Economical” or “Economical Insurance”, which includes its subsidiaries where the context so requires) is a leading property and casualty insurer in Canada, with approximately $2.5 billion in annualized gross written premiums and approximately $5.8 billion in assets as at June 30, 2019. Economical is a Canadian-owned and operated company that services the insurance needs of more than one million customers across the country.
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