Tough catastrophe year contributes to lower 2013 net income for Economical Insurance

Economical Insurance saw its full-year net income fall from $151 million in 2012 to $87.7 million in 2013 in the wake of the worst catastrophe year in the insurer’s history.

The net income for 2013 was significantly impacted by weather-related catastrophe costs, notes Economical, which last Friday released its consolidated financial results for the three months and full year ended Dec. 31, 2013.

In 2013, Economical absorbed weather-related, pre-tax catastrophe costs of $103.4 million, net of reinsurance, representing an increase of $81.5 million over 2012, notes a statement from the company.

“The 2013 full-year results incorporate $76.1 million of weather-related catastrophe costs net of reinsurance and tax, a record level in the company’s history. This compares to $16.1 million of weather-related catastrophe costs net of reinsurance and tax in 2012,” the statement adds.

“The resilience of our insurance operations and the strong underlying performance of our insurance business allowed us to emerge from the worst catastrophe year in our 142-year history, and the worst on record for the property and casualty insurance industry in Canada, with only a small underwriting loss,” says Karen Gavan, president and CEO of Economical Insurance.

There was a $2.3 million underwriting loss in 2013 compared to $58.3 million in underwriting income in 2012.

Among Economical’s other financial results for 2013 are the following: a combined ratio of 100.1% (weather-related catastrophe losses contributed 5.8 percentage points) compared to 96.5% in 2012; a 5.5% increase in gross written premiums (or $99.5 million) to 1,919.2 million compared to 1,819.7 million 2012; and a $108.9 million, or 7.4%, increase in total mutual policyholders’ equity to a record $1,573 million. The insurer’s Minimum Capital Test ratio remains very strong at 295% as of December 31, 2013, the statement notes.

Gavan says that Economical achieved significant improvements in productivity and efficiency in 2013, as well as continued to “build the value of the company, with $1.573 billion of mutual policyholders’ equity at the end of 2013.”

Economical reports that it continues to grow consistently in both personal and commercial lines. “In the automobile lines, growth has been driven by an increase in policy volumes combined with a shift in the mix of business toward regions and lines with higher average premiums.

“Commercial property and liability premiums have grown due to the combined impact of targeted rate and modest volume increases. Personal property premiums have declined marginally as rate increases have resulted in decreases in volume.”

Overall, Economical reports, its personal lines business produced a combined ratio of 95.7% for 2013 compared to 90.7% in 2012. “The deterioration in results in 2013 reflects the substantial impact of the 2013 catastrophe losses, which contributed 5.1 percentage points to the combined ratio in 2013 compared to only 1.4 percentage points in 2012,” the statement notes.

For the commercial lines business, it posted a combined ratio of 107.2%, representing a 1.4 percentage point deterioration year over year. “Excluding the impact of weather-related catastrophe losses, the 2013 combined ratio was 100.1% compared to 104.7% for the prior year, a 4.6 percentage point improvement,” the statement adds.

Looking specifically at results for 2013 Q4, Economical increased gross written premiums by 5.7% (or $26.2 million) to 488.6 million over the same quarter in 2012; recorded a combined ratio of 101.0% (reflecting 2.4 percentage points for weather-related catastrophe costs), a 4.5 percentage point deterioration from 96.5% in 2012 Q4; and generated consolidated net income of $31.3 million, down $11.5 million from the same quarter of the prior year.

Underwriting results for 2013 Q4 produced a $4.7 million loss after absorbing $11.0 million of pre-tax, weather-related catastrophe losses, primarily from the Ontario ice storm in December. In the fourth quarter of 2012, the underwriting income was $15.2 million, the statement adds.

In 2013, Economical began to realize benefits from actions started in 2012 related to its business transformation program, which helped to offset the program-related costs incurred in operating expenses. The total costs of the program in 2013, including restructuring expenses, are $37.7 million, $14.3 million of which is included in underwriting results, the insurer reports.

“Improved productivity and efficiencies, lower base commissions due to a shift in business mix and lower profit commissions resulting from weaker underwriting results, all combined with the growth in earned premiums,” the statement adds.