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Economical Insurance cites wildfire’s impact, net income drops to $17.1 million in 2016 Q2


August 8, 2016   by Canadian Underwriter


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Canada’s worst-ever insured natural disaster – the Fort McMurray wildfire – delivered a hard hit to the underwriting activity of Economical Insurance, contributing to a net income in the second quarter of 2016 of about half the prior-year quarter.

Economical Insurance reports that net income for the quarter ending June 30, 2016 amounted to $17.1 million compared to $33.8 million in the second quarter of 2015.

“Higher investment income and a lower effective tax rate were more than offset by weaker underwriting performance due to the Fort McMurray wildfire and continued infrastructure and operational investments,” notes a company statement issued Friday.

The incurred pre-tax losses related to the wildfire were $36.6 million, inclusive of reinstatement premiums and net of reinsurance recoveries, the statement adds.

Karen Gavan, president and CEO of Economical Insurance

Karen Gavan, president and CEO of Economical Insurance

“Our second quarter results were heavily impacted by the Fort McMurray wildfire, the costliest insured disaster in Canadian history,” says Karen Gavan, president and CEO of Economical Insurance.

“We quickly mobilized our catastrophe response team and provided emergency funding,” Gavan continues.

For the first half of 2016, net income was again down, although not as dramatically. Net income for 2016 H1 was $45.6 million compared to $67.9 million for the first half of 2015.

With regard to premiums, both gross written premium (GWP) and net earned premium (NEP) were up somewhat in 2016 Q2 compared to 2015 Q2.

Specifically, GWP was up 2.3% to $585.4 million compared to $572.3 million. “Personal lines premiums grew by $14.7 million or 4.2%, driven primarily by increased auto policy volumes. Commercial lines premiums declined by $1.6 million or 0.7% over the same quarter a year ago,” the insurer reports.

“The overhaul of our commercial property and liability pricing strategy has continued to result in decreased policy volumes, which more than offset targeted rate increases,” the statement explains.

“Overall, we expect our commercial gross written premium levels to begin to stabilize as the execution of this phase of our pricing strategy is substantially complete,” the company adds.

NEP for the second quarter of 2016 was $480.7 million compared to $473.6 million in the same quarter of 2015.

Looking at results for the first half of 2016 and 2015, these show that GWP was $1,102.1 million and $994.4 million, respectively. “Year-to-date, personal lines premiums grew by $27.2 million or 4.5%, and commercial lines premiums declined by $9.5 million or 2.4% over the same period a year ago.”

NEP, for its part, amounted to $962.1 million in 2016 H1 compared to $943.0 million in 2015 H1.

Economical Insurance Consolidated HighlightsDespite the increase in premiums, however, Economical Insurance posted an underwriting loss of $21.6 million in the second quarter of 2016 compared to underwriting income of $19.6 million for the prior-year quarter.

“Overall, personal lines produced an underwriting profit of $16.3 million compared to $17.3 million in the same quarter a year ago,” the statement notes.

For commercial lines, these produced an underwriting loss of $12.8 million, compared to an underwriting profit of $7.4 million in the same quarter a year ago.

Year-to-date in 2016, personal lines produced an underwriting profit of $24.4 million, down from $25.1 million in 2015.

For commercial lines in the first half of 2016, the underwriting loss was $14.6 million compared to $17.7 million in 2015. “This improvement is primarily due to commercial property and liability whose performance, excluding the impact of catastrophes, is considerably better than year-to-date 2015.”

Overall, the insurer’s underwriting loss resulted in a combined ratio of 104.5% in the second quarter of 2016 compared to 95.9% in the same quarter of 2015.

“The Fort McMurray wildfire impacted the combined ratio by 7.6 percentage points compared to 0.6 percentage points of catastrophe losses in the same quarter a year ago,” the statement notes.

For the first half of 2016, the underwriting loss was $27.0 million compared to a $7.2 million loss for the first six months of 2015.

Related: Economical Insurance combined ratio down 4.6 points in first quarter of 2016

Economical Insurance also points to the impact from investments made in the development and launch of its digital channel and new policy administration system.

“These infrastructure and operational investments impacted the second quarter 2016 expense ratio by 5.2 percentage points and 3.9 percentage points year-to-date, compared to 1.1 percentage points and 1.6 percentage points, respectively, for the comparable prior-year periods,” the statement notes.

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

Other results include the following:

  • total equity increased by $58.6 million to $1.84 billion since Dec. 31, 2015;
  • investment income increased to $50.5 million in 2016 Q2 compared to $21.4 million in 2015 Q2;
  • the minimum capital test ratio as of June 30, 2016 is 276%, significantly in excess of both internal capital management and external regulatory requirements; and
  • Economical Insurance has announced its intention to acquire Western Financial Insurance Company and its flagship brand, Petsecure, subject to customary closing conditions and regulatory approvals.

Related: Economical Insurance to acquire largest pet insurer in Canada