- Gross written premiums grew 19.1% over fourth quarter 2017 and 7.4% over full year 2017
- Sonnet gross written premiums grew to over $127 million in 2018
- Combined ratio of 108.9% for the quarter and 111.8% for the year, reflecting strategic investments which impacted the combined ratio by 4.5 percentage points and 6.1 percentage points, respectively
- Successfully deployed our Vyne™ platform for personal lines and individually rated commercial auto
- Advancement of our demutualization process with the announcement of our second special meeting
WATERLOO, ON, February 21, 2019 — Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three months and full year ended December 31, 2018.
“We continue to work hard on transforming our business. While our combined ratios in 2018 remained at elevated levels, particularly after one of our worst weather years in recent experience, it was encouraging to finish the year with an improved fourth quarter and strong growth momentum driven by our strategic investments,” said Rowan Saunders, President and CEO. “Our improvements in risk selection and the level of rate that we are pushing through our portfolio have had meaningful impact. The repositioning of our commercial portfolio will continue into 2019. These are not quick fixes as it takes time to realize the benefits of rate increases, underwriting improvements, and exiting unprofitable lines of business. We also completed the deployment of Vyne, which enhances ease of use by our broker partners to generate growth and which we expect to improve underwriting results through improved speed to market, underwriting sophistication, and enhanced use of analytics. Our digital direct channel, Sonnet, has demonstrated its ability to drive growth with gross written premiums of over $127 million in 2018. While Sonnet requires additional scale to achieve profitability, we now have sufficient insights and experience to improve performance, and we have confidence in the numerous actions we have already taken. We believe the momentum our investments create will build long-term value as we progress through demutualization and prepare for our expected initial public offering.”
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
2018 Q4 and Full Year Consolidated Highlights
|Gross written premiums1
|Net earned premiums
2018 Q4 and Full Year 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.
2The expense ratio and the combined ratio are presented in the press release net of other underwriting revenues.
Gross written premiums for the fourth quarter of 2018 increased by $103.6 million or 19.1% over the same quarter a year ago. Personal lines premiums grew by $105.5 million or 29.0%, driven primarily by rate increases and new business across both our broker and digital direct channels. Commercial lines premiums declined by $1.9 million or 1.1% due to our continued underwriting actions which we expect to improve long-term profitability. For the year, personal lines premiums grew by $241.6 million or 15.7% and commercial lines premiums declined by $72.2 million or 9.6% as compared to 2017 due to the same factors noted above for the quarter.
Underwriting activity for the fourth quarter of 2018 improved, producing an underwriting loss of $52.0 million and a combined ratio of 108.9%, compared to an underwriting loss of $99.9 million and a combined ratio of 118.0% in the same quarter a year ago. The improvement was due to a decline in the core accident year claims ratio. The same quarter a year ago was impacted by an increase in claims severity and frequency which also resulted in reserve strengthening to reflect these trends.
Underwriting activity for the year produced a loss of $265.6 million, resulting in a combined ratio of 111.8%, compared to an underwriting loss of $295.7 million and a combined ratio of 113.7% in the prior year. For the year, our underwriting results improved despite elevated catastrophe losses which impacted the combined ratio by 4.1 percentage points compared to 2.7 percentage points in 2017. Excluding the impact of catastrophe losses, there was an underlying improvement of 3.3 percentage points in the combined ratio. Our results in 2018 benefited from our underwriting actions and rate increases, as well as 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 4.5 percentage points in the fourth quarter of 2018 compared to 8.3 percentage points in the same quarter a year ago. For the year, their impact on the combined ratio was 6.1 percentage points compared to 7.4 percentage points in 2017. 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 the impact should continue to decrease in 2019. These investments are expected to provide efficient and scalable platforms to support future growth and long-term profitability. Vyne provides a broader range of customer-centric products, an enhanced pricing model, and an improved service and workflow experience for our broker partners. It also increases the speed at which we can bring new products and pricing changes to market. The deployment of the Vyne platform is now complete with the launch of Quebec and Alberta in the quarter. Near-term results are encouraging, with significant growth generated since the platform implementation.
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 Q4 and Full Year Consolidated Highlights - Personal Insurance
1 This item is a non-GAAP measure which is defined below.
The adjusted personal auto combined ratio for the fourth quarter of 2018 improved compared to the same quarter a year ago due to rate increases, underwriting actions, decreased claims frequency, and improved claims development. Specifically, there was significant improvement in Ontario, Alberta, and British Columbia as these regions were particularly challenged in 2017, with regard to bodily injury costs in Ontario and Alberta and excess auto liability in British Columbia. Although progress has been made, and our actions in 2018 are still earning through, our loss ratios in personal auto remained elevated. Further rate increases and underwriting actions are planned for 2019.
The adjusted personal property combined ratio for the fourth quarter of 2018 increased marginally as compared to a very strong equivalent quarter in 2017.
On an adjusted basis, personal lines produced an underwriting loss of $8.3 million compared to $31.9 million in the same quarter a year ago. For the year, on an adjusted basis, personal lines produced an underwriting loss of $33.2 million compared to an underwriting loss of $48.8 million in 2017. Personal auto improved due to a decrease in claims frequency, and a shift from adverse to favourable claims development as 2017 was impacted by deterioration in Ontario and Alberta bodily injury and British Columbia excess auto liability. Personal property was heavily impacted by elevated catastrophe losses which contributed 10.9 percentage points to the combined ratio in 2018 compared to 6.9 percentage points in 2017. We have taken additional rate actions across the personal lines of business to support overall profitability.
2018 Q4 and Full Year Consolidated Highlights - Commercial Insurance
|Commercial property and liability
|Total commercial lines
The commercial auto combined ratio for the fourth quarter of 2018 was impacted by a shift from favourable to adverse claims development, due primarily to deterioration in Ontario and Quebec, partially offset by a decrease in claims frequency. The commercial property and liability combined ratio for the fourth quarter of 2018 improved due primarily to a decrease in adverse claims development. Overall, commercial lines produced an underwriting loss of $16.4 million compared to $21.5 million in the same quarter a year ago.
For the year, commercial lines produced an underwriting loss of $92.3 million compared to $86.8 million in 2017. Commercial auto improved for the year due to improved claims development, mostly in Ontario for fleet exposure, and decreased claims frequency. Commercial property and liability was impacted mainly by adverse development, increased catastrophe losses, and an increase in claims severity.
To address the profitability challenges in the commercial lines of business, a number of actions have already been implemented and continue to work through our book of business, with additional actions planned in 2019. These actions include targeted rate increases, exiting unprofitable books of business, increased underwriting discipline and quality, as well as enhanced broker management. We will continue to implement targeted pricing and underwriting actions and are focused on strengthening underwriting rigour, risk assessment and selection, market segmentation, pricing, and expense management to deliver improved operating performance in commercial insurance. We expect these actions to negatively impact volume in the near-term, but substantially improve our mix of business and long-term underwriting profitability.
2018 Q4 and Full Year Consolidated Highlights - Investment Income
|Total interest and dividend income
|Total recognized gains on investments
|Total investment income
Interest income increased during the fourth quarter of 2018 compared to the same quarter a year ago due to the rising interest rate environment. 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 and foreign stocks. This was partially offset by recognized losses on domestic common stocks as the capital markets experienced significant volatility during the quarter, particularly in December. For the year, these same factors impacted interest and dividend income. Total recognized gains on investments increased due to higher gains on foreign stocks and lower losses on bonds. These were partially offset by lower gains on domestic common stocks.
Net loss decreased by $14.6 million over the same quarter a year ago and $19.7 million for the full year, due primarily to lower underwriting losses and higher investment income. These were partially offset by restructuring charges of $14.5 million during the quarter and $17.3 million for the full year.
Economical’s capital position remains well in excess of both minimum internal capital and external regulatory requirements as of December 31, 2018, with total equity of approximately $1.6 billion, and a Minimum Capital Test ratio of 227%.
About Economical Insurance
Economical is a leading property and casualty insurer in Canada, with approximately $2.5 billion in gross written premiums in 2018 and approximately $5.7 billion in assets as at December 31, 2018. Based in Waterloo and founded in 1871, 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 (loss) 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.
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