Posted on Sept 10, 2020

Staying Focused — An Update from John Bowey, Chair of the Board of Directors

In this update, I want to share highlights from our most recent quarterly earnings, connect how they contribute to progress on our demutualization journey, and update our perspective on the path ahead as we move toward our planned IPO. As you know from my previous updates, we are at a frustrating phase of our journey. Our fundamentals are increasingly strong and generating momentum for our IPO story. But despite these positives, we simply can’t ignore the unprecedented global pandemic and the risk of reemergence heading into the next few months as schools and businesses re-open.

It was that risk that led us to the decision to not hold the third Special Meeting in 2020. But that does not mean our plans have been put on hold long-term. To the contrary, we remain optimistic regarding our IPO timeline. Our current best estimate is that our timeline has slipped by quarters and not years. It is just that right now, I am unable to give you specific timing because the COVID-19 virus is unpredictable, there is currently no vaccine, and a resurgence could be a significant setback for the economy and for our IPO. As I discuss below, the regulatory process for our demutualization has also been slowed by the national COVID-19 crisis. In the meantime, we continue to make progress and will be in a better position to frame our timeline in more concrete terms later this year. We hope to share that information with you then.

Q2 2020 Financial Results — Stronger Operational Performance Continues

During the first half of 2020, our business performance has continued to improve as the benefits of the strategic investments and corrective underwriting actions we have been taking become increasingly evident. Our recently announced Q2 2020 financial results show strong operational performance, overall growth, and a second consecutive profitable quarter.

Overall, we made significant improvement in several areas:

  • A 10.5 percent increase in gross written premiums in Q2 year-over-year, as robust growth in Sonnet and our personal property and commercial businesses was partly offset by the significant impact of COVID-19 relief we extended to our customers
  • For the second quarter of 2020, an improvement in underwriting income from the same period a year ago, transitioning from an underwriting loss of $17.2M in 2019 to an underwriting income of $36.9M in 2020. This continues a trend that saw substantial improvement in 2019
  • A financial position that benefitted from solid underwriting results, which more than offset volatility in capital markets, with an improved Minimum Capital Test (MCT) of 242 percent

Our underwriting results in the second quarter reflected a continuation of the momentum we’ve established in recent years, together with a reduction in auto claims frequency that was partially attributable to COVID-19 as our customers complied with public health restrictions. Our personal and commercial property businesses each reported an underwriting profit despite experiencing an increased level of catastrophe losses. At the same time, our scalable platforms such as Sonnet and Vyne gained traction in several target segments contributing to the premium growth we posted in the quarter.

To help support Canadians impacted by COVID-19, we have provided significant premium relief across the business to customers in need and will continue to do so into the second half of the year. We maintain our focus on actively managing the evolving human and financial impact this pandemic continues to cause, prioritizing the health and safety of our employees, and meeting the needs of our customers and broker partners.

Where We Are in Our Demutualization Journey

The good news on our operational performance and financial results are encouraging and demonstrate that we are making very real progress delivering against our plans. Our results in the first half of the year were strong, but we are still in the early stages of an unprecedented global pandemic. We do not yet know how COVID-19 will play out, or its ultimate impact on the economy or on our operating and investment performance. We remain cautious of the fact that without a vaccine, a resurgence could occur and be a significant setback for the economy and our business.

In that context, I would like to update you on the three key areas that impact the timing of our IPO and that the Company is focused on:

  1. Sustained profitability

    Our results in the first half of this year contribute positively to the track record of profitable performance that we need to attract the confidence of IPO investors. We are encouraged by our progress but recognize that one or two quarters of success are not enough to earn the confidence of future investors. Accordingly, we plan to continue building on that performance to show a sustained pattern of profitability and set the stage for a successful IPO and continued growth in the years to come.

  2. Regulatory and governmental engagement

    Engagement with our regulators and the government remains an important part of our demutualization process, as it has since the beginning. We continue to work constructively on the approvals required to support completion of our planned IPO and our long-term success, including those relating to our conversion and corporate structure, taxation and other post-demutualization matters.

    While we continue to make good progress, regulators and government officials have concurrently been focusing on important work to protect the health and welfare of Canadians, and the stability of our economy during the pandemic. As a result, governmental engagements have been taking longer than normal.

    In light of the fact that our demutualization must ultimately be approved by the federal Minister of Finance, we are also working with the Department of Finance and our advisors to more fully understand the potential impact of the recently appointed Minister of Finance, as well as the government’s decision to prorogue Parliament. We do not currently expect these changes to adversely impact our prospects of securing the required approvals, but it may impact our pace and timing.

  3. Capital markets conditions at IPO

    Our main focus right now is to build a track record of profitable results and secure regulatory and governmental approvals. Once those factors are sufficiently advanced, capital markets conditions will need to be favourable and open for an IPO to proceed at that time. The Board continues to monitor market conditions and volatility as we move closer to a potential IPO date.

Staying Focused

COVID-19 has slowed the Canadian and global economies this year and created a measure of uncertainty for the timing of our demutualization process. Despite these challenges, we are encouraged by what we have achieved thus far and remain committed to staying the course on demutualization. In the meantime, the Board and management continue to transform Economical into a high-performing company worthy of investor confidence while continuing to work toward securing relevant approvals. We believe we will be in a better position to share a more concrete perspective on our timing later this year.

As always, we welcome your questions. You can share them with us directly on our website.

Thank you again for your continued support, and best wishes for your continued safety and health in these difficult times.


Sincerely,
John Bowey
Chair of the Board of Directors
Economical Mutual Insurance Company
September 10, 2020

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