How Economical returned to profitability

Editor’s Note: In an earlier version of this story, Canadian Underwriter incorrectly reported Economical Insurance’s net loss in 2017. Canadian Underwriter regrets the error.

Commercial premiums for Economical Insurance are down more than 10%, but that does not mean prices are dropping.

“We have limited our exposure to highly volatile lines of business – those that were habitually under-performing – and there were several segments over the last couple of years that we actually exited the business,” said Rowan Saunders, CEO of Waterloo, Ont.-based Economical, in a recent interview with Canadian Underwriter.

During the last two years, Economical has reduced revenue in volatile or unprofitable lines of business. Some examples include dairy farms, forestry, residential realty construction and some classes of trucking, Saunders said.

“If you don’t have a broad enough portfolio that is properly constructed, the volatility of big losses has a disproportionate impact on your commercial portfolio.”

Economical released Aug. 1 its financial results for the three months ending June 30, reporting its commercial insurance premiums were 12.8% lower in the latest quarter than in Q2 2018.

The combined ratio in commercial improved 10.3 points from 110.4% in Q2 2018 to 100.7% in the latest quarter.

“We took a very bold rebuild of Economical’s commercial business,” Saunders told Canadian Underwriter.

The company has been replacing unprofitable or volatile lines of business with more profitable lines at better rates.

“We are benefiting from better market conditions and I think it would be fair to say that the commercial marketplace as a whole is operating in a more disciplined fashion than it was a few years ago,” said Saunders.

The improvement in commercial is one of the reasons Economical has returned to profitability.

Its net income was $21.9 million in the latest quarter, compared to net losses of $3.8 million in the first quarter of 2019, $13.4 million in Q4 2018 and $33.3 million in Q3 2018.

Economical last reported an annual profit of $176 million in 2015. It lost $20.3 million in 2016, $92.7 million in 2017 and $73 million last year.

Its underwriting loss was $17.2 million in the latest quarter compared to an underwriting loss of $79.7 million in Q2 2018.

Economical was profitable despite the underwriting loss because the insurer had $61.2 million in investment income in the latest quarter.

The combined ratio was 103% in the latest quarter, down 11.5 points from 114.5% in the same period in 2018.

Gross written premiums dropped 1.5% from $669.5 million in Q2 2018 to $659.2 million in the latest quarter.

“That’s really the underwriting discipline and the planned re-shaping of the portfolio coming through,” said Saunders.

Economical has also been increasing personal auto rates for some clients and tightening its risk appetite.

The combined ratio in personal auto improved from 111.9% in Q2 2018 to 105.7% in the latest quarter. Personal auto premiums dropped 2.1%.