Economical Insurance reports Second Quarter 2020 financial results

HIGHLIGHTS
In order to support our customers in this unprecedented time, we have taken actions expected to deliver in excess…

HIGHLIGHTS

  • In order to support our customers in this unprecedented time, we have taken actions expected to deliver in excess of $70 million of relief as well as providing flexibility in payment options and underwriting
  • Gross written premiums increased 10.5% versus the second quarter of 2019, as robust growth in Sonnet and our personal property and commercial businesses was partly offset by the significant impact of customer relief efforts
  • The impact of our corrective underwriting actions and a reduction in auto claims frequency outweighed $36.2 million of catastrophe losses in the quarter, leading to a combined ratio of 93.9%, an improvement of 9.1 points year over year
  • For the first half of 2020, underwriting income has improved $85.2 million from the same period a year ago, continuing a trend which saw substantial improvement in 2019
  • Interest and dividend income declined $2.5 million in the quarter, a headwind to performance that is expected to persist given low fixed income yields
  • The financial position benefitted from solid underwriting results which more than offset volatility in capital markets, with an MCT of 242% as at June 30, 2020, while total equity increased $31.6 million since December 31, 2019

WATERLOO, ON, July 30, 2020 /CNW/ – Economical Insurance today announced consolidated financial results for the three and six-month periods ended June 30, 2020.

“I’d like to take this opportunity to thank our employees and broker partners for their excellent support and response during this challenging time, which is evident in our strong operational performance. Our underwriting results in the quarter reflected a continuation of the momentum we’ve established in recent years, together with a reduction in auto claims frequency that was partially attributable to COVID-19, as our customers complied with public health restrictions,” said Rowan Saunders, President & CEO. “On an adjusted basis, our combined ratio of 90.0% was 8.7 points better than a year ago. I am particularly proud of the resilience in our personal and commercial property businesses, which each reported an underwriting profit despite incurring more than 10 points of catastrophe losses. At the same time, our scalable platforms and operational readiness gained traction in several target segments and resulted in a 10.5% increase in premiums compared to the second quarter of 2019.”

“The strong underwriting performance delivered in the second quarter is even more important in the context of the low interest rate environment, which is expected to remain a meaningful headwind to investment returns for the foreseeable future,” stated Philip Mather, EVP & CFO. “Our capital strength and improved operating results position the Company well as we continue to support our customers, brokers, and employees during this difficult time. We ended the quarter with an MCT of 242% and total equity exceeding $1.6 billion, evidencing our financial strength and resilience in the face of significant uncertainty.”

“Our results in the first half of the year were strong, but we are still in the early stages of an unprecedented global pandemic. We do not yet know how COVID-19 will play out, or its ultimate impact on the economy or on our operating and investment performance, and we therefore remain cautious in our outlook,” noted Saunders. “We have already provided significant premium relief across the business to customers in need and will continue to do so into the second half of the year. We maintain our focus on actively managing the evolving human and financial impact this pandemic continues to cause, prioritizing the health and safety of our employees, and meeting the needs of our customers and broker partners.”

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


Three months ended June 30

Six months ended June 30


2020

2019

Change

2020

2019

Change

Gross written premiums1

728.7

659.2

10.5%

1,304.9

1,169.3

11.6%

Net earned premiums

607.7

569.3

6.7%

1,198.2

1,163.6

3.0%

Claims ratio1,2

61.4%

70.6%

(9.2) pts

64.8%

73.2%

 (8.4) pts

Expense ratio1,2,3

32.5%

32.4%

0.1 pts

33.1%

32.0%

1.1 pts

Combined ratio1,2,3

93.9%

103.0%

(9.1) pts

97.9%

105.2%

(7.3) pts

Adjusted combined ratio1,2,3

90.0%

98.7%

(8.7) pts

94.0%

101.3%

(7.3) pts

Underwriting income (loss)2

36.9

(17.2)

54.1

24.6

(60.6)

85.2

Investment income

81.2

61.2

20.0

121.8

127.2

(5.4)

Net income

44.8

21.9

22.9

41.6

18.1

23.5


 


As at





Jun 30,

2020

Dec 31,

2019

Change




Total equity

1,642.6

1,611.0

31.6




Minimum Capital Test1

242%

239%

3 pts




1 These items are non-GAAP measures which are defined below.

2 The claims ratio, expense ratio, combined ratio, adjusted combined ratio, and underwriting income (loss) exclude the impact of discounting.

3 The expense ratio, combined ratio, and adjusted combined ratio are presented in the news release net of other underwriting revenues.

Gross written premiums (“GWP”) for the second quarter of 2020 increased by $69.5 million or 10.5% compared to the second quarter of 2019, driven by new business and rate increases in 2019 across our business in the firm market environment. These were partially offset by significant customer relief actions in relation to COVID-19, which will continue to impact written and earned premiums in the second half of the year due to the ongoing impact of actions to date, as well as further planned relief actions. Personal lines premiums were up 8.8%, with increases in both Sonnet and our broker business. Commercial lines premiums increased 15.5% as we continue to focus on growth in this line of business after several years of corrective underwriting actions. Year to date, personal lines premiums increased $96.2 million or 11.0% and commercial lines premiums increased $39.4 million or 13.2% as compared to the prior year.

Underwriting activity for the second quarter of 2020 improved substantially, producing underwriting income of $36.9 million and a combined ratio of 93.9%, compared to an underwriting loss of $17.2 million and a combined ratio of 103.0% in the same quarter a year ago. The underwriting improvement of $54.1 million was the result of a decrease in the core accident year claims ratio across our lines of business. This improvement was driven primarily by our ongoing corrective underwriting actions and rate increases over the past several years, as well as lower auto claims frequency which benefitted from COVID-19 related reduced activity levels. These were partially offset by a significant increase in catastrophe losses, which impacted the quarter by $36.2 million compared to only $12.0 million in the same period of 2019, and our ongoing customer premium relief actions. The impact on the combined ratio of our strategic investments in Sonnet, which continued to scale, was 3.9 points in the second quarter of 2020, compared to 4.3 points in the same period of 2019 for the VyneTM and Sonnet platforms. Year to date, our improvement in underwriting results was also positively impacted by benign non-catastrophe weather conditions in 2020 compared to particularly challenging weather in the first quarter of 2019.

Line of Business Results

Personal insurance


Three months ended June 30

Six months ended June 30


2020

2019

Change

2020

2019

Change

GWP1







Auto

337.0

322.7

4.4%

626.9

583.0

7.5%

Property

197.2

168.1

17.3%

340.3

288.0

18.2%

Total

534.2

490.8

8.8%

967.2

871.0

11.0%

Combined ratio1,2







Auto

90.3%

105.7%

(15.4) pts

98.6%

108.7%

(10.1) pts

Property

99.7%

99.9%

(0.2) pts

93.5%

100.7%

(7.2) pts

Total

93.5%

103.9%

(10.4) pts

96.9%

106.2%

(9.3) pts

Adjusted combined ratio1,2







Auto

82.9%

98.1%

(15.2) pts

91.6%

102.0%

(10.4) pts

Property

97.1%

97.7%

(0.6) pts

91.3%

98.7%

(7.4) pts

Total

88.0%

98.0%

(10.0) pts

91.5%

100.9%

(9.4) pts

1 These items are non-GAAP measures which are defined below.

2 The underwriting activity of Sonnet in 2019 and 2020, and the expenses pertaining to our investment in the development as well as the implementation of the Vyne platform in 2019, 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 premiums increased 8.8% in the quarter. Sonnet generated GWP of $61.6 million, an increase of 21.7% over the same quarter a year ago, while the broker business grew by 9.7% driven by a focus on personal property. Excluding the impact of the strategic investments, personal lines produced underwriting income of $48.8 million in the quarter compared to $7.8 million in the same quarter a year ago, an improvement of $41.0 million. Year to date, excluding the impact of the strategic investments, personal lines produced underwriting income of $68.6 million compared to an underwriting loss of $7.2 million in the same period of 2019.

Personal auto premiums increased 4.4% in the quarter, driven by rate increases approved in 2019 and the growth in Sonnet, partially offset by the significant impact of customer relief actions. The adjusted combined ratio in the quarter of 82.9% improved due to our underwriting and broker management actions to improve profitability, in addition to lower auto claims frequency which benefitted from COVID-19 related reduced activity levels. These were partially offset by an increase in catastrophe losses and a decrease in favourable claims development.

Personal property premiums increased 17.3% in the quarter, bolstered by strong growth in our broker and direct channels, and rate increases put in place over the course of 2019. The adjusted combined ratio in the quarter of 97.1% improved slightly from the same quarter a year ago. This was driven by rate increases from 2019 earning through, which was partially offset by an increase in catastrophe losses associated with the Alberta hailstorm and flooding in Fort McMurray. Catastrophe losses impacted the personal property adjusted combined ratio by 10.1 points in the quarter, compared to 5.7 points in the same quarter a year ago.

Commercial insurance


Three months ended June 30

Six months ended June 30


2020

2019

Change

2020

2019

Change

GWP1







Auto

76.9

68.2

12.8%

133.6

115.4

15.8%

Property and liability

117.6

100.2

17.4%

204.1

182.9

11.6%

Total

194.5

168.4

15.5%

337.7

298.3

13.2%

Combined ratio1







Auto

92.5%

97.4%

(4.9) pts

97.9%

95.7%

2.2 pts

Property and liability

97.4%

102.9%

(5.5) pts

103.4%

106.8%

(3.4) pts

Total

95.3%

100.7%

(5.4) pts

101.1%

102.5%

(1.4) pts

1 These items are non-GAAP measures which are defined below.

Overall, commercial lines premiums increased 15.5% in the quarter, as we continue to focus on growth in this line of business after a period of portfolio rehabilitation, underwriting actions, and rate increases. Commercial lines produced underwriting income of $7.1 million in the quarter compared to a $1.0 million underwriting loss in the same quarter a year ago. Year to date, commercial lines produced an underwriting loss of $3.2 million, including a $12.5 million estimate for potential exposures pertaining to COVID-19, compared to a loss of $7.6 million in the same period of 2019.

Commercial auto premiums increased 12.8% in the quarter, driven by new business, strong renewals, and rate increases. The combined ratio of 92.5% decreased, due primarily to our underwriting and portfolio management actions to improve profitability, in addition to lower auto claims frequency which benefitted from COVID-19 related reduced activity levels. These were partially offset by an increase in catastrophe losses and a shift from favourable to adverse claims development.

Commercial property and liability premiums increased 17.4% in the quarter, driven by new business and rate increases. The combined ratio of 97.4% decreased due to a shift from adverse to favourable claims development and the benefits of our corrective underwriting actions. These were partially offset by an increase in catastrophe losses, associated primarily with the Alberta hailstorm and flooding in Fort McMurray, which impacted the quarter by 11.1 points compared to 4.3 points in the same quarter a year ago.

Investment income


Three months ended June 30

Six months ended June 30


2020

2019

Change

2020

2019

Change

Interest income

19.0

21.0

(2.0)

39.3

42.0

(2.7)

Dividend income

7.2

7.7

(0.5)

14.4

13.9

0.5

Total interest and dividend income

26.2

28.7

(2.5)

53.7

55.9

(2.2)

Total recognized gains on investments

55.0

32.5

22.5

68.1

71.3

(3.2)

Total investment income

81.2

61.2

20.0

121.8

127.2

(5.4)

Total interest and dividend income decreased slightly in the quarter and year to date compared to the same periods in 2019, due primarily to lower yields on our fixed income portfolio. Recognized gains on investments in the quarter increased due primarily to higher gains on bonds. For the year, recognized gains on investments decreased due to the significant volatility in global equity markets in 2020 as a result of the COVID-19 pandemic, which resulted in lower gains on common stocks, and an impairment charge of $13.6 million in the first quarter of 2020. These were partially offset by an increase in gains on bonds.

Net income increased to $44.8 million compared to $21.9 million in the second quarter of 2019 due primarily to our improved underwriting performance and higher investment income, partially offset by an increase in the discounting expense. Year to date, net income increased by $23.5 million due primarily to improved underwriting performance.

Economical’s capital position remained well in excess of both minimum internal capital and external regulatory requirements as of June 30, 2020, despite the volatile investment environment, with total equity exceeding $1.6 billion and a Minimum Capital Test ratio of 242%.

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 $2.6 billion in annualized gross written premiums and approximately $6.2 billion in assets as at June 30, 2020. Economical is a Canadian-owned and operated company that services the insurance needs of more than one million customers.

Forward-looking statements

Certain of the statements made in this news 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 news 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, including COVID-19 related class action lawsuits that have arisen and which may arise, together with associated legal costs;
  • 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;
  • the impact of public health crises and their associated economic, legislative and regulatory impacts, including pandemics or other health risk events, and Economical’s ability to maintain operations and provide services to customers in the event of pandemics or other health risk events, including the COVID-19 pandemic;
  • 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 and liquidity effectively; and
  • periodic negative publicity regarding the insurance industry or Economical.

All of the forward-looking statements included in this news 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

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

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 the 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.

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.

Severity

A measure of the average dollar amount paid per claim.

Total equity

Retained earnings plus accumulated other comprehensive (loss) income.

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.

Also included in this news 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 the underwriting activity of Sonnet and, for portions of 2019, our investment in the development and implementation of the Vyne platform.

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.

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.

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.

Gross written premiums

The total premiums from the sale of insurance during a specified period.

 

SOURCE Economical Insurance