- Gross written premiums exceeded $2.5 billion in 2019, increasing 3.4% in the fourth quarter and 2.2% for the full year versus the same periods in 2018
- Sonnet continued to increase its scale, with premiums surpassing $206 million in 2019
- Combined ratios of 103.6% for the fourth quarter and 105.0% for the full year represent significant year over year improvements of 5.3 points and 6.8 points, respectively
- Underwriting income improved $147 million in 2019, leading to net income of $17 million for the year
- Interest and dividend income was down in the quarter as growth in our investment portfolio was offset by lower fixed income yields
- Financial position remained solid at year end, as total equity increased $44 million in 2019 and MCT increased 12 points to 239%
WATERLOO, ON, February 14, 2020 — Economical Insurance today announced consolidated financial results for the three months and full year ended December 31, 2019.
“Our underwriting performance improved by more than $147 million on a full year basis compared to 2018, reflecting the corrective actions taken over the past couple of years,” said Rowan Saunders, President and CEO, Economical Insurance. “The adjusted combined ratio of 99.8% in the most recent quarter is a positive sign that our broker business has returned to profitability led by a substantial improvement in our commercial business, and ongoing pricing and underwriting discipline in broker personal lines. Our digital direct business, Sonnet, also continued to make progress in 2019, with significant growth in its top line and meaningful improvement in its underwriting performance. Net dividend and interest income was relatively flat in 2019, as market yields dropped materially, which poses an investment income headwind going into 2020. That said, I expect the presence of low interest rates and challenged industry auto results will also prolong the hard market pricing environment in which we currently operate. I am proud of what we accomplished in 2019 and look forward with confidence to where the business is headed. Successfully completing transformational initiatives is not easy. I thank our employees and broker partners for their perseverance and dedication, and believe the end results will prove that the efforts have been worthwhile.”
Economical Insurance Consolidated Highlights
($ in millions, except as otherwise noted)
|Gross written premiums1
|Net earned premiums
|Adjusted combined ratio1,2
|Net income (loss)
2019 Q4 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 (“GWP”) for the fourth quarter of 2019 increased by $22.0 million or 3.4% compared to the fourth quarter of 2018, as the current hard market was conducive to rate increases across our business. Personal lines premiums were up 4.8% from a year ago, driven by Sonnet and our broker personal property business. Commercial lines premiums declined 0.4% due to the ongoing impact of our targeted underwriting actions. For the year, personal lines premiums increased $115.7 million or 6.5% and commercial lines premiums declined $61.0 million or 9.0% as compared to the prior year due to the same factors noted above for the quarter.
Underwriting activity for the fourth quarter of 2019 improved substantially, producing an underwriting loss of $20.9 million and a combined ratio of 103.6%, compared to an underwriting loss of $52.0 million and a combined ratio of 108.9% in the same quarter a year ago. The underwriting improvement was due to favourable claims development and significant improvement in our commercial lines, which benefitted from our underwriting actions and rate increases. Further bolstering results were a decrease in both the commissions ratio and the impact of our strategic investments. The impact on the combined ratio of our strategic investments in the VyneTM platform and Sonnet, which continued to scale, was 3.8 points in the fourth quarter of 2019, compared to 4.5 points in the same period of 2018.
Our underwriting results improved $147.3 million for the year, representing an improvement in the combined ratio of 6.8 points, due to the same factors that affected the fourth quarter of 2019 as well as lower catastrophe losses in 2019 as compared to the prior year. The impact of our strategic investments on the combined ratio was 3.8 points in 2019, compared to 6.1 points in 2018.
Line of Business Results
|Adjusted combined ratio1,2
1 These items are non-GAAP measures which are defined below.
2 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 table above to show the combined ratios with and without these investments.
Overall, personal lines GWP increased by 4.8% in the quarter. Sonnet generated GWP of $58.7 million, an increase of 46.0% over the same quarter a year ago. Sonnet continued to grow and benefitted from significant targeted rate increases and improved efficiencies in customer acquisitions in 2019. For the year, Sonnet generated GWP of $206.5 million. On an adjusted basis, personal lines produced an underwriting profit of $0.1 million in the quarter compared to an underwriting loss of $8.3 million in the same quarter a year ago. For the year, on an adjusted basis, personal lines produced an underwriting loss of $16.7 million compared to an underwriting loss of $33.2 million in 2018.
Personal auto premiums decreased in the quarter by 0.5% due to underwriting and broker management actions to improve profitability. For the year, premiums increased by 3.1% as the growth in Sonnet and rate increases were partially offset by the impact of our underwriting actions. The adjusted combined ratio in the quarter of 108.1% improved slightly due to a shift from adverse to favourable claims development and a decrease in commissions, partially offset by an increase in the core accident year claims ratio. The adjusted combined ratio for the year of 105.1% increased slightly over 2018, reinforcing the need for our underwriting and rate actions.
Personal property premiums increased in the quarter by 16.7% and 14.1% for the year, driven by strong growth from both Sonnet and Vyne, and rate increases in 2019. The adjusted combined ratio in the quarter of 84.4% improved due primarily to a decrease in commissions, partially offset by an increase in the core accident year claims ratio. For the year, the adjusted combined ratio was solid, at 92.7%, and improved mainly due to a reduction in catastrophe losses.
|Property and liability
|Property and liability
1 These items are non-GAAP measures which are defined below.
Overall, commercial lines premiums decreased slightly by 0.4% in the quarter. The downward pressure on premiums associated with the ongoing impact of our targeted underwriting actions has slowed. While further underwriting improvement from past actions is expected, the bulk of the required actions have been taken and we are now transitioning to a return to growth.
Commercial lines produced an underwriting profit of $0.7 million compared to a $16.4 million underwriting loss in the same quarter a year ago; a significant improvement as our actions continued to work through this book of business. For the year, commercial lines produced an underwriting loss of $9.9 million compared to a loss of $92.3 million in 2018.
Commercial auto premiums increased slightly in the quarter by 1.5% and decreased 5.1% for the year, driven by the impact of our targeted underwriting actions. These actions, along with the shift from adverse to favourable claims development, resulted in a significant improvement in the combined ratio, which decreased 20.5 points in the quarter and 14.6 points for the year.
Commercial property and liability premiums decreased in the quarter by 1.6% and 11.3% for the year, driven primarily by the impact of our targeted underwriting actions which included 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 decreased by 4.9 points in the quarter and 11.1 points for the year due to the benefits of these corrective underwriting actions and improved claims development. A reduction in catastrophe losses further decreased the full year combined ratio versus 2018.
|Total interest and dividend income
|Total recognized (losses) gains on investments
|Total investment income
The shift in our investment portfolio toward higher bond holdings and lower stock holdings resulted in a corresponding decline in dividend income, while interest income remained flat compared to the same quarter a year ago due to lower yields. Recognized losses on investments in the quarter were due to losses on bonds and a decrease in gains on foreign stocks compared to the prior year, which was partially offset by an increase in gains on domestic common stocks. For the year, interest and dividend income was impacted by these same factors. Recognized gains on investments for the year increased due to gains on bonds, which were partially offset by lower gains on common stocks and losses on preferred stocks.
Net income shifted from a loss of $13.4 million in the fourth quarter of 2018 to income of $6.8 million in the fourth quarter of 2019 due to lower underwriting losses and restructuring charges recorded in 2018, partially offset by lower investment income. For the year, net income of $17.4 million represented a significant improvement of $90.4 million from the net loss in 2018 of $73.0 million, due to lower underwriting losses, higher investment income, and restructuring charges recorded in 2018.
Economical’s capital position remained well in excess of both minimum internal capital and external regulatory requirements as of December 31, 2019, with total equity of $1.6 billion, an increase of $43.7 million since December 31, 2018, and a Minimum Capital Test ratio of 239%.
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 transfer risk;
- Economical’s ability to accurately predict future claims frequency or severity, including the frequency and severity of weather-related events and the impact of climate change;
- 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 attract, develop, motivate, and retain an appropriate number of employees with the necessary skills, capabilities, and knowledge;
- Economical’s ability to appropriately manage and protect the collection and storage of information;
- Economical’s reliance on information technology and telephony systems and the potential disruption or failure of those systems, including as a result of cyber security risk;
- 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, including fraud in the course of underwriting insurance or settling insurance claims;
- 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.
|Underwriting income (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
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 $2.5 billion in gross written premiums and approximately $6.0 billion in assets as at December 31, 2019. Economical is a Canadian-owned and operated company that services the insurance needs of more than one million customers.
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