Economical Insurance reports financial results for Fourth Quarter and Full Year 2015
Increased total equity by $97.9 million since December 31, 2014 to a record $1.78 billion
Waterloo Economical Insurance, one of Canada’s leading property and casualty insurance companies, today announced consolidated financial results for the three months and full year ended December 31, 2015.
“As we prepare for our future as a public company, we are delighted by our quarterly and record full-year performance,” said Karen Gavan, president and CEO. “Economical achieved a significant milestone in 2015 with gross written premiums for the year exceeding $2 billion for the first time in our history. This substantial achievement comes despite taking corrective underwriting and pricing actions and after the impact of mandated Ontario auto rate decreases. Record full-year net income more than doubled on the back of our strong underwriting performance, which benefited from an encouraging improvement in the profitability of our commercial property and liability line of business. As part of our strategy to drive profitable growth, we are investing heavily in the development of a multi-channel distribution platform. The investment in the replacement of our policy administration system will support both a separately branded direct-to-consumer distribution channel and our existing core broker channel.”
Gross written premiums for the fourth quarter 2015 grew by $5.5 million, or 1.1%, over the same quarter a year ago. Personal lines premiums grew by $18.7 million, or 6.7% over the same quarter a year ago. This growth was primarily driven by increased auto policy volumes in Ontario, Alberta and BC, as well as continued growth in personal property primarily driven by targeted rate increases and increased policy volumes. Commercial lines premiums declined by $13.2 million, or 6.2%, over the same quarter a year ago. The overhaul of our commercial pricing strategy has continued to result in decreased policy volumes which more than offset targeted rate increases. Year-to-date, personal lines premiums grew by $65.1 million or 5.5% while commercial lines premiums declined by $19.7 million or 2.5% over the same period a year ago.
Underwriting activity for the fourth quarter 2015 produced a $7.2 million underwriting profit, resulting in a combined ratio of 98.5%, compared to an underwriting profit of $2.5 million and a combined ratio of 99.5% in the same quarter a year ago. The strong operating performance was driven by the improved performance of our commercial lines and a reduction in catastrophe and large losses. This was somewhat offset by a strengthening of reserves for Ontario auto accident benefits and to reflect our current views on Ontario auto reforms implemented in 2015, in light of recent court decisions.
Infrastructure and operational investments, including costs associated with the replacement of our policy administration system and costs to support our multi-channel distribution platform, impacted the fourth quarter 2015 expense ratio by 3.0 percentage points and 2.1 percentage points year-to-date. This compares to 0.6 percentage points and 0.3 percentage points for the comparable prior year periods. We believe these investments will drive profitable growth and further improve our operational efficiency in the longer term. Economical’s business transformation program was completed during the fourth quarter of 2014. The impact of the restructuring costs on the combined ratio was an increase of 0.2 percentage points for the fourth quarter 2014 and 0.7 percentage points for the year ended December 31, 2014.
The personal auto combined ratio improved over the same quarter a year ago due to a decrease in large losses and improved loss development, somewhat offset by an increase in claim frequency. The personal property combined ratio improved over the same quarter a year ago driven by targeted rate increases. We continued to benefit from benign weather conditions in the fourth quarter. Overall, personal lines produced an underwriting profit of $24.0 million compared to $20.2 million in the same quarter a year ago. Year-to-date, personal lines produced an underwriting profit of $86.5 million compared to $32.8 million in 2014. This significant improvement was driven by both auto and property lines, with property in particular recording a strong operating performance due to targeted rate increases and favourable weather conditions throughout the year.
The commercial auto combined ratio improved over the same quarter a year ago primarily due to decreased claim severity, particularly in Ontario, and decreased claim frequency, particularly in Alberta. The commercial property and liability combined ratio significantly improved over the same quarter a year ago as underwriting and pricing actions began to take hold. Benign weather conditions also contributed to the improved performance. Overall, commercial lines produced an underwriting loss of $2.4 million compared to $17.7 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting profit of $1.5 million compared to an underwriting loss of $71.2 million in 2014. Our commercial auto book of business sustained strong year over year performance. We also saw a substantial improvement in commercial property and liability, which benefited from the underwriting and pricing actions taken in 2014 and 2015, as well as favourable weather conditions throughout the year.
Investment income decreased from $52.3 million in the fourth quarter a year ago to $47.7 million. A decrease in interest income was offset by an increase in dividend income as we continue to increase our investments in high quality common and preferred stocks to optimize our portfolio performance. The decline in bond yields in the fourth quarter was less than in the same quarter a year ago, resulting in lower recognized gains on the bond portfolio. Investment quality remains strong with more than 73% of total investments held in government and investment-grade corporate bonds as at December 31, 2015. The balance of investments is primarily held in common and preferred shares of large, well-established companies.
Net income increased by $3.2 million over the same quarter a year ago. Net income for the full year 2015 more than doubled from $84.2 million to a record $176.0 million driven by stronger underwriting performance and increased investment income.
Economical’s capital position remains strong. Total equity was a record $1.78 billion at December 31, 2015, an increase of $97.9 million, or 5.8% since December 31, 2014. This increase is despite an other comprehensive loss of $78.1 million (net of tax) for the year ended December 31, 2015, primarily related to a reduction in unrealized investment gains due to investment market conditions. Economical’s minimum capital test ratio is at 285%, which remains significantly in excess of both internal capital management and external regulatory requirements as of December 31, 2015.