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Economical Insurance posts net income of $5.3 million in 2017 Q1, down from $28.5 million in prior-year quarter


May 8, 2017   by Canadian Underwriter


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Auto lines, catastrophe and weather-related losses served as a drag on underwriting results which, in turn, contributed to Economical Insurance posting net income of $5.3 million in 2017 Q1 compared to $28.5 million in 2016 Q1.

“Higher investment income was more than offset by higher underwriting losses, driven largely by increased spend on our strategic initiatives, as well as continued challenges in auto performance, relatively worse winter weather conditions and increased catastrophe losses,” notes a statement Friday from the insurer.

“A number of measures, including improvements in pricing, underwriting and claims actions are being implemented, but will take time to be reflected in our results,” report Rowan Saunders, president and CEO of Economical Insurance.

Related: Economical Insurance gross written premiums up 4.8% in Q4 2016 to $521.8 million

The insurer’s consolidated financial results for the three months ended March 31, 2017 show underwriting loss for the first quarter of 2017 amounted to $37.8 million compared to a loss of $5.4 million in the prior-year quarter.

The combined ratio also worsened, climbing to 107.2% in 2017 Q1 compared to 101.1% in 2016 Q1. (Claims ratio and underwriting loss exclude the impact of discounting.)

“Underwriting results were impacted by continued challenging auto performance, mainly in Ontario, British Columbia and Alberta,” notes the company statement.

“Despite reforms to Ontario auto insurance, many insurers have recently filed or implemented rate increases to address rate deficiencies in this line of business,” the insurer points out.

“To address these challenges, we are implementing a number of measures, including improvements in pricing, underwriting and claims actions. However, these measures will take time to be reflected in our results,” it adds.

As well, the first quarter of 2017 – which saw relatively worse winter weather conditions compared to a benign first quarter of 2016 – was “impacted by $7.7 million of net catastrophe losses, compared to none in the same quarter a year ago,” Economical Insurance reports.

“Overall, on an adjusted basis, personal lines produced underwriting income of $6.9 million compared to underwriting income of $7.9 million in the same quarter a year ago,” the statement notes.

For commercial lines, these “produced an underwriting loss of $10.8 million compared to an underwriting loss of $1.8 million in the same quarter a year ago, primarily due to the deterioration in commercial auto underwriting performance,” the insurer adds.

“We continue to make significant investments in Sonnet and the replacement of our personal lines policy administration system, which impacted the combined ratio by 6.5 percentage points compared to 2.5 percentage points in the same quarter a year ago,” it states.

Related: Broker ‘still a valuable partnership’ for Economical Insurance despite Sonnet launch: CIO

“We expect that these strategic investments will continue to increase operating expenses during the implementation and start-up phases, but are expected to improve our operational efficiency and profitable growth in the longer term,” it predicts.

Results were more positive on the premium front. With regard to net earned premium (NEP), it measured $521.3 million compared to $481.4 million.

For gross written premiums (GWP), a combination of organic and inorganic growth resulted in GWP of $488.6 million in 2017 Q1, up 14.5% over $426.7 million in 2016 Q1. The result was “driven by strong personal lines growth, including contributions from Sonnet and Petline,” which serves the Canadian pet insurance industry.

“Personal lines premiums grew by $53.3 million or 20.5% primarily due to increased auto policy volumes in our broker channel, our digital direct distribution channel, Sonnet, and the acquisition of Petline,” Economical Insurance notes.

Related: Economical Insurance completes acquisition of Canada’s largest pet insurer

Commercial lines premiums, for their part, “grew by $8.6 million or 5.2%, driven by targeted rate increases for commercial property and liability, and increased fleet business,” the company points out.

“Decreases in favourable claims development and increased catastrophe losses were largely offset by a decrease in large losses, a decrease in the expense ratio and the beneficial impact of increased rate resulting from our underwriting and pricing actions,” notes the company statement.

Also up was investment income, which was $57.8 million in the first quarter of 2017 compared to $42.6 million in the prior-year quarter.

Rowan Saunders, President and CEO of Economical Insurance

Rowan Saunders, President and CEO of Economical Insurance

“We generated significant growth in gross written premiums stemming from broker channel personal lines, Sonnet and our newly acquired Petline business,” Saunders points out.

Other results for the first quarter of 2017 include the following:

  • total equity exceeded $1.8 billion at March 31, 2017, an increase of $35.1 million or 1.9% since December 31, 2016, primarily due to market value increases within the investment portfolio; and
  • a minimum capital test ratio of 279%, which remains significantly in excess of both internal capital management and external regulatory requirements as of March 31, 2017.