Economical Insurance reports First Quarter 2020 financial results

HIGHLIGHTS

• Gross written premiums increased 13% versus the first quarter of 2019 on broad-based growth, reflecting our strategic investments and firm market conditions in place prior to COVID-19
• Ongoing corrective actions and benign weather more than offset COVID-19 related losses, leading to a combined ratio of 102.1%, an improvement of 5.2 points year over year
• Growth in interest and dividend income was muted in the quarter, while the recent larger than expected decline in market yields remains a headwind to performance
• Financial position proved resilient despite turbulent capital market conditions, with an MCT of 223% and a relatively modest decline in total equity of 5.3% in the quarter

WATERLOO, ON, May 14, 2020 /CNW/ - Economical Insurance today announced consolidated financial results for the three months ended March 31, 2020.

"Our underwriting results in the quarter clearly reflect the continued momentum we've established in recent years, in addition to overall benign weather to begin the year," said Rowan Saunders, President & CEO, Economical Insurance. "On an adjusted basis, our combined ratio of 98.3% was 5.5 points better than a year ago. The success of our operational turnaround provided the foundation to accelerate our growth, which, combined with prevailing firm market conditions, resulted in premiums increasing 13% compared to the first quarter of 2019. Without question, the environment has evolved since the onset of the COVID-19 pandemic, which introduces significant uncertainty in the months ahead. While the underwriting results in mid-March began to benefit from a reduction in auto claims frequency, this was outweighed by our prudent provisioning for potential COVID-19 exposures where specific endorsements were in place. Our focus in the period ahead will be on actively managing the impact of the pandemic, while supporting the health and safety of our employees and meeting the needs of our customers and broker partners." 

"The resiliency of our business was evident during an unprecedented period of capital markets volatility," added Philip Mather, EVP & CFO, Economical Insurance. "Notwithstanding the negative impacts of COVID-19, our strong capital position, defensively-positioned investment portfolio, and improving insurance results served us well. We ended the quarter with an MCT of 223% and total equity exceeding $1.5 billion, despite reporting elevated unrealized investment losses. Our capital management capabilities and strong liquidity position us well as this unprecedented situation continues to unfold."

"It will take time to fully determine the longer term economic impact that COVID-19 will have on the economy and therefore our business performance," noted Saunders. "I am extremely proud of how Economical has supported employees, brokers, and communities to get through this together". 

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

Gross written premiums ("GWP") for the first quarter of 2020 increased by $66.1 million or 13.0% compared to the first quarter of 2019, driven by rate increases across our business in the firm market environment. Personal lines premiums were up 13.9%, with increases in both Sonnet and our broker business. Commercial lines premiums increased 10.2% as we return to growth in this line of business after several years of corrective underwriting actions.

Underwriting activity for the first quarter of 2020 improved substantially, producing an underwriting loss of $12.3 million and a combined ratio of 102.1%, compared to an underwriting loss of $43.4 million and a combined ratio of 107.3% in the same quarter a year ago. The underwriting improvement was the result of a decrease in the core accident year claims ratio across our lines of business. This improvement was driven primarily by benign weather conditions in 2020 compared to particularly challenging weather in the first quarter of 2019. The claims ratio also benefitted from our underwriting actions, rate increases, and improved claims development in our personal lines. The expense ratio increased due primarily to continued capability build to support our growth and strategic objectives. The impact on the combined ratio of our strategic investments in Sonnet, which continued to scale, was 3.8 points in the first quarter of 2020, compared to 3.5 points in the same period of 2019 in the Vyne^TM and Sonnet platforms.

Line of Business Results

Personal insurance

Overall, personal lines premiums increased by 13.9% in the quarter. Sonnet generated GWP of $40.8 million, an increase of 20.0% over the same quarter a year ago. Sonnet continued to grow and benefitted from significant targeted rate increases and improved efficiencies in customer acquisitions. Excluding the impact of the strategic investments, personal lines produced an underwriting profit of $19.7 million in the quarter compared to an underwriting loss of $15.0 million in the same quarter a year ago, an improvement of $34.7 million.

Personal auto premiums increased by 11.4% in the quarter, driven by rate increases in 2019 and the growth in Sonnet. The adjusted combined ratio in the quarter of 100.3% improved due to a shift to favourable claims development and an improved core accident year claims ratio. The improvement reflects our underwriting and broker management actions to improve profitability, in addition to lower auto claims frequency, which benefitted from benign weather and COVID-19 related physical distancing.

Personal property premiums increased 19.3% in the quarter, bolstered by strong growth in both Vyne and Sonnet, and rate increases put in place over the course of 2019. The adjusted combined ratio in the quarter of 85.1% was strong, improving 14.6 points from the same quarter in the prior year. The improvement was driven by reductions in catastrophe losses, and in the core accident year claims ratio, due in part to rate increases and benign weather conditions. The same quarter a year ago was impacted by unusually severe winter weather.

Commercial insurance

Overall, commercial lines premiums increased 10.2% in the quarter, as we transition to a return to growth in this line of business after several years of portfolio rehabilitation, underwriting actions, and rate increases. Commercial lines produced an underwriting loss of $10.3 million in the quarter, reflecting a $10.5 million estimate for potential exposures pertaining to COVID-19. This compared to a $6.6 million underwriting loss in the same quarter a year ago. 

Commercial auto premiums increased 19.9% in the quarter, driven by rate increases in our mid-market and fleet businesses. The combined ratio of 103.9% increased, due primarily to a shift from favourable to adverse claims development.

Commercial property and liability premiums increased 4.6% in the quarter, due to rate increases in our mid-market and small business portfolios. The combined ratio decreased by 1.1 points in the quarter owing to the benefits of our corrective underwriting actions and benign weather conditions, which were largely offset by a 9.3 point increase in catastrophe losses including potential exposures pertaining to COVID-19.

Investment income

Total interest and dividend income remained relatively consistent compared to the first quarter of 2019. Recognized gains on investments in the quarter decreased due to lower gains on bonds and an increase in impairment losses. Global equity markets experienced significant volatility in the quarter due to the COVID-19 pandemic, resulting in an impairment charge of $13.6 million on domestic common stocks. Entering the onset of the pandemic with a conservative investment portfolio better positioned us for this volatile market environment.

Net loss decreased slightly from $3.8 million in the first quarter of 2019 to $3.2 million in the first quarter of 2020 due primarily to our improved underwriting performance, partially offset by lower investment income.

Economical's capital position remained well in excess of both minimum internal capital and external regulatory requirements as of March 31, 2020, despite the volatile investment environment, with total equity exceeding $1.5 billion and a Minimum Capital Test ratio of 223%. The decrease in total equity of $85.9 million from December 31, 2019 was due primarily to unrealized losses in our available for sale investment portfolio. Subsequent to the end of the quarter, we entered into a $100 million unsecured committed credit facility with a two-year term. The purpose of the credit facility is to enhance our financial flexibility during periods of significant uncertainty.

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 over $5.8 billion in assets as at March 31, 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;
• 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

SOURCE Economical Insurance