Economical Insurance reports financial results for Second Quarter and Year-to-date 2018

FINANCIAL HIGHLIGHTS

  • Gross written premiums returned to growth overall, increasing by 1.4% over second quarter 2017
  • Reported a combined ratio of 114.5% for the quarter, including an impact of 7.4 percentage points related to strategic investments
  • Incurred $48.2 million of catastrophe losses in the second quarter, a significant impact of 8.8 percentage points on the combined ratio
  • Began the roll out of our Vyne™ platform for personal lines and individually rated commercial auto
  • Generated a net loss of $25.1 million for the quarter

WATERLOO, ON, Aug. 2, 2018 /CNW/ - Economical Insurance, one of Canada's leading property and casualty insurance companies, today announced consolidated financial results for the three and six month periods ended June 30, 2018.

Economical Insurance (CNW Group/Economical Insurance)

"While we are encouraged to see signs of improvement in our top line growth and underlying claims performance compared to recent periods, we are continuing to implement a number of corrective actions to address our underlying underwriting performance. These corrective actions significantly impacted gross written premiums, particularly in commercial lines, but are necessary as we seek sustained profitability and improved business mix. We achieved a number of key milestones in respect of our strategic initiatives during the quarter, including the successful launch of Vyne in New Brunswick and Prince Edward Island, and filed our demutualization conversion proposal with OSFI," said Rowan Saunders, President and CEO. "Unfortunately, like many in the industry, we were heavily impacted by severe weather events in Ontario and Quebec, relating to wind, ice, and rain during the second quarter. We incurred catastrophe losses of $48.2 million, which were substantially higher than historic levels, for this time of year, and the $14.3 million incurred in the same quarter a year ago."

Economical Insurance Consolidated Highlights ($ in millions, except as otherwise noted)


Three months ended June 30

Six months ended June 30


2018

2017

Change

2018

2017

Change

Gross written premiums1

669.5

660.6

8.9

1,140.3

1,149.2

(8.9)

Net earned premiums

549.0

535.8

13.2

1,098.7

1,057.1

41.6

Claims ratio1

77.7%

74.6%

3.1 pts

75.5%

72.6%

2.9 pts

Expense ratio1

36.8%

38.2%

(1.4) pts

36.7%

37.4%

(0.7) pts

Combined ratio1

114.5%

112.8%

 1.7 pts

112.2%

110.0%

2.2 pts

Underwriting loss1

(79.7)

(68.4)

(11.3)

(134.2)

(106.1)

(28.1)

Investment income

38.5

26.1

12.4

82.5

83.8

(1.3)

Net loss

(25.1)

(18.5)

(6.6)

(26.3)

(13.2)

(13.1)









As at






Jun 30,
2018

Dec 31,
2017

Change




Total equity

1,676.1

1,730.4

(54.3)




Minimum Capital Test1

237%

242%

(5) pts




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 second quarter of 2018 increased by $8.9 million or 1.4% over the same quarter a year ago. Personal lines premiums grew by $38.1 million or 8.7%, 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. Commercial lines premiums declined by $29.2 million or 13.1%, as we continue to implement underwriting actions designed to improve profitability. Throughout the rest of the year, as our performance improvement actions continue to be implemented, we expect continued downward pressure on the commercial lines premiums. Year-to-date, personal lines premiums grew by $54.7 million or 7.3% and commercial lines premiums declined by $63.6 million or 16.0% as compared to the same period a year ago.

Underwriting activity for the second quarter of 2018 produced an underwriting loss of $79.7 million, resulting in a combined ratio of 114.5%, compared to an underwriting loss of $68.4 million and a combined ratio of 112.8% in the same quarter a year ago. The quarter was heavily impacted by catastrophe losses of $48.2 million, primarily as a result of wind, ice, and rain storms in Ontario and Quebec, which contributed to increased levels of property losses. These losses contributed 8.8 percentage points for the second quarter of 2018, as compared to 2.7 percentage points in the same quarter a year ago. Overall, there was an underlying reduction in the non-weather related claims ratio. Year-to-date, our underwriting results were impacted by increased catastrophe losses of 2.6 percentage points, and unseasonably cold and frequent fluctuations in temperatures during the first quarter.

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 7.4 percentage points in the second quarter of 2018, compared to 6.5 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. It is also expected to increase the speed at which we can bring new products and pricing changes to market. 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 investments are expected to provide platforms for growth and to improve our 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, increasing our combined ratios. The collective impact of these strategic investments on the combined ratios has been noted in the tables below to show the combined ratios with and without these investments.

Personal insurance


Three months ended June 30  

Six months ended June 30


Combined
ratio

Impact of
strategic
investments

Adjusted
combined
ratio1

Combined
ratio

Impact of
strategic
investments

Adjusted
combined
ratio1








2018








Auto

111.9%

12.1 pts

99.8%

113.7%

12.1 pts

101.6%


Property

125.7%

6.8 pts

118.9%

109.1%

6.4 pts

102.7 %

Total

116.2%

10.3 pts

105.9%

112.2 %

10.3 pts

101.9 %








2017








Auto

117.8%

11.3 pts

106.5%

116.9%

11.6 pts

105.3%


Property

106.8%

6.2 pts

100.6%

99.2%

6.3 pts

92.9%

Total

114.4%

9.8 pts

104.6%

111.2%

9.9 pts

101.3%

1 This item is a non-GAAP measure which is defined below.

 

The adjusted personal auto combined ratio for the second quarter improved compared to the same quarter a year ago, driven primarily by a shift from adverse to favourable claims development. Despite this improvement, the underlying claims ratios across our auto business remain elevated. As such, targeted rate increases and a number of underwriting actions continue to be implemented, with further targeted rate increases and improvements to risk selection planned later this year. The adjusted personal property combined ratio for the second quarter increased compared to the same quarter a year ago, due to a significant increase in catastrophe losses of $23.8 million, which contributed 19.6 percentage points to the combined ratio. Our catastrophe losses related primarily to wind, ice, and rain storms in Ontario and Quebec. Overall, on an adjusted basis, personal lines produced an underwriting loss of $21.6 million compared to $15.8 million in the same quarter a year ago. During the quarter, we began the roll out of our Vyne platform for personal lines in New Brunswick and Prince Edward Island, and subsequently launched Vyne in Ontario and Nova Scotia in July. The roll out of Vyne for Quebec and Alberta is currently planned for later this year. This is a significant milestone achievement for our personal lines business, which we expect 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 $14.1 million compared to $8.9 million in 2017.

Commercial insurance


Three months ended June 30

Six months ended June 30


2018

2017

Change

2018

2017

Change

Commercial auto

105.9%

115.5%

(9.6 pts)

109.2%

114.8%

(5.6 pts)

Commercial property and liability

113.4%

105.9%

7.5 pts

114.1%

103.3%

10.8 pts

Total commercial lines

110.4%

109.7%

0.7 pts

112.2%

107.9%

4.3 pts

 

The commercial auto combined ratio for the second quarter improved due primarily to a decrease in net claims severity. The commercial property and liability combined ratio for the second quarter of 2018 was impacted by an increase in catastrophe losses of $7.2 million, which contributed 7.8 percentage points to the combined ratio, and a shift from favourable to adverse claims development. These were partially offset by a decrease in large losses. Overall, commercial lines produced an underwriting loss of $17.0 million compared to $17.9 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $40.8 million compared to $28.8 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. These actions will take time to be fully reflected in our results. Further actions planned for the remainder of 2018 include enhancing segmentation and pricing capabilities, improving underwriting quality and risk assessment, and cost reduction.

Investment income


Three months ended June 30

Six months ended June 30


2018

2017

Change

2018

2017

Change

Interest income

17.2

14.7

2.5

33.2

29.7

3.5

Dividend income

10.3

10.3

-

19.0

19.2

(0.2)

Total interest and dividend income

27.5

25.0

2.5

52.2

48.9

3.3

Total recognized gains on investments

11.0

1.1

9.9

30.3

34.9

(4.6)

Total investment income

38.5

26.1

12.4

82.5

83.8

(1.3)

 

Interest income increased during the second quarter of 2018 due to the rising interest rate environment being reflected in higher levels of interest income generated on our fixed income portfolio. Total recognized gains on investments increased due mostly to relatively 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 lower, due to a higher increase in yields in 2018 as compared to 2017, partially offset by increased realized gains on foreign stocks.

Net loss increased by $6.6 million over the same quarter a year ago, due primarily to higher underwriting losses which were more heavily impacted by severe weather-related losses. Year-to-date, net loss increased by $13.1 million over the same period a year ago, again due primarily to the higher level of weather-related underwriting losses. We continue to be focused on proactive expense management in order to mitigate to some extent the higher weather losses, despite the ongoing levels of significant strategic investments.

Economical's capital position remains well in excess of both minimum internal capital and external regulatory requirements as of June 30, 2018, with total equity of approximately $1.7 billion, and a Minimum Capital Test ratio of 237%.

Forward-looking statements

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.

Definitions

Catastrophe loss

Generally, an event causing greater than 100 claims and gross losses in excess of $2 million.

Claims development

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.

Discounting

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.

Frequency

A measure of how often a claim is reported as a function of policies in force.

Large loss

A single claim with a gross loss in excess of $1 million.

Severity

A measure of the average dollar amount paid per claim.

Total equity

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 ratio

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.

Expense ratio

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.

Combined ratio

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.

Underwriting 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

Founded in 1871, Economical Insurance is one of Canada's leading property and casualty insurers, with more than $2.2 billion in annualized premium volume and approximately $5.6 billion in assets as at June 30, 2018. Based in Waterloo, this Canadian-owned and operated company services the insurance needs of more than one million customers across the country.

SOURCE Economical Insurance

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