Posted on June 30, 2020

A Virtual Annual Meeting and the Path Ahead

In this update, I want to share a perspective from our recently completed Annual Meeting on our journey toward becoming a high-performing publicly traded company and provide additional clarity on the impact of the COVID-19 pandemic on our demutualization process.

2020 Annual Meeting — Making History

Last month Economical made history by holding a virtual Annual Meeting for the first time in its 148-year history. Respecting the limitations we are all facing during the current pandemic, we were pleased to see many of our mutual policyholders were able to attend online on May 21st. The meeting was highlighted by the election of directors, the appointment of auditors and a review of our business results by our CEO, Rowan Saunders. The results of our Annual Meeting can be found online here.

At the meeting, Rowan reviewed the simultaneous efforts we have been making to turn around our financial performance while transforming our business through innovative strategic investments. Although it takes time for the actions we take to earn through our financial results, the impact of our efforts are now becoming evident in the improved results across the business. The time we’ve taken to get this right has been worthwhile -- in fact, our 2019 results show that we have been improving at a faster pace relative to the industry.

While we have yet to understand the full impact of COVID-19 on our business, the momentum of our full year results was encouraging. Specific highlights from our Q1 2020 report include:

  • Gross written premiums increased 13% versus the first quarter of 2019 on broad-based growth, reflecting the hard market conditions in place prior to COVID-19
  • Our ongoing corrective actions and favourable weather conditions more than offset COVID-19 related catastrophe losses in Commercial Insurance, leading to a combined ratio of 102.1%, an improvement of 5.2 points year over year
  • Our financial position proved resilient despite turbulent capital market conditions, with a Minimum Capital Test of 223% at quarter-end and a relatively modest decline in total equity of 5.3% in the quarter

The work we have been doing for the past number of years to ready ourselves to become a public company has made us more efficient, agile and innovative, and better able to withstand the impacts of COVID-19. The newly realized digital abilities of Sonnet, Vyne, and our online pet insurance offerings helped to create a big advantage for our staff at Economical, our brokers and our customers who are faced with new and unexpected challenges during the current pandemic.

Since the pandemic has become a day-to-day reality for Economical, we have taken action to build upon that advantage. This has included:

  • Acting swiftly to make our employees feel safe and mobilizing the vast majority of our business to work remotely, while ensuring that those who did come into the office were entering a space that was clean and followed physical distancing guidelines.
  • Helping our personal insurance customers who have been financially impacted by offering the ability to defer payments or change payment plans and introducing enhanced discounts for those customers driving less or not at all. For all of our customers, we have capped rate increases until the end of the pandemic.
  • For our commercial customers we are providing flexible underwriting options for those who have had to pivot their business operations and for businesses that had to close, we provided options to lower their premium, and maintained coverage on temporarily closed locations. For all businesses, we have capped rate increases until the end of the pandemic.
  • These programs, launched across our personal and commercial insurance business, are material and are expected to provide more than $50 million in total relief for our customers.

The Impact of COVID-19 on Our Demutualization Process

Some eligible policyholders have raised questions about how the current pandemic will impact our plans for becoming a public company.

The simple answer is we don’t yet know. For some time now, you’ve heard me say that there are three key areas that need to come together before we can finalize the timing of our IPO. First we need to improve our performance, second we need to complete the necessary regulatory and governmental approval steps, and lastly we need to ensure capital market conditions are favourable.

We have consistently focused on these key areas not just to increase the likelihood of a successful IPO, but also to ensure that Economical emerges from that IPO as strong as it possibly can be. We will not vary from that principled approach to timing our IPO.

It is clear that before the COVID-19 outbreak, we were building great momentum in each area:

Improving our performance. We have worked hard to build the kind of performance that investors will reward. Our 2019 financial results reflect the momentum we have built in our operations through our transformation initiatives and strategic investments. That momentum has continued into 2020. We now have a more predictable and stable business that is ready to excel.

Completing regulatory steps. In 2019, 99% of eligible mutual policyholders who voted at our second special meeting were in favour of proceeding with demutualization, an important milestone for us. Since then, we have continued to advance the regulatory steps necessary to call the third vote and establish our footing as a public company.

Capital markets conditions. Capital market conditions have to be favourable and open to an Economical IPO. This is a necessary condition to ensure we begin life as a public company on a strong footing, and while we can’t make a determination that conditions are favourable and open until closer to a potential IPO date, we do know advisors have said our trajectory is on the right track.

It was momentum in all these key areas that prompted a prediction from me earlier this year about moving forward with our third special meeting in 2020. Unfortunately, since then, it has become clear that the onset of COVID-19 could slow our performance improvement, particularly in relation to the returns we can earn on our investment portfolio and the impact the pandemic is having on capital markets and public offerings.

In this environment, it is impossible to deliver a responsible prediction about the timing of our future IPO, and therefore our third vote. While we don’t yet know when the final special meeting will happen, we can confirm that it will not be held in 2020, as we expected before the pandemic. For now, there are too many unknown factors affecting our business. Almost all of those unknown factors are related to the impact that COVID-19 will have not just on us, but on the Canadian economy as a whole and on capital markets. And, for the most part, they are not within our control and so a final decision on the timing of our IPO must wait for now. Several of you have reached out to us to share exactly that sentiment.

Moving Forward

Our business has navigated many challenges over the last 148 years that have given us the strength and insight to not only endure but succeed as well. Not many of those challenges have been as far reaching as COVID-19, but the good news is, the strength in the business we demonstrated in 2019 and continued to build prior to the outbreak, has provided us with valuable resiliency through a truly unprecedented time in our history. Despite the current uncertainty, I am confident in our business and in our readiness for the “new normal”. While we don’t yet know exactly when that will take hold, I do know that, along with the Board and executive team, we will continue to work with dedication toward building a high-performing publicly traded company. And we will continue to provide you with periodic updates to keep you informed of our progress.

As always, we welcome your feedback on the demutualization process. You can share that with us directly on our website.

Thank you again for your continued support, and please accept my sincere wishes for your continued safety and health in these difficult times.

John Bowey
Chair of the Board of Directors of Economical Mutual Insurance Company
June 30, 2020

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