Economical Insurance reports financial results for Second Quarter and Year-todate

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1 NEWS RELEASE Economical Insurance reports financial results for Second Quarter and Year-todate 2015 Increased gross written premiums by 3.0% over second quarter 2014 Recorded a combined ratio of 95.9% for the quarter Generated net income of $33.8 million for the quarter Increased total equity by $37.9 million since December 31, 2014 to $1.72 billion WATERLOO, ON, August 6, 2015 Economical Insurance, one of Canada s leading property and casualty insurance companies, today announced consolidated financial results for the three and six months ended, We delivered a strong performance in the quarter with solid contributions from each of our lines of business, said Karen Gavan, president and CEO. While the mandated rate reductions in Ontario continue to place pressure on our results as average premiums have declined, the overhaul of our commercial pricing strategy is well underway and we expect the benefits will be realized over time as policies renew and earn through. During the quarter, we continued our significant investment in information technology infrastructure upgrades, including our policy administration system. We believe these strong results, our ongoing pricing actions and the investments we continue to make in our business position us well for the future. 1

2 Economical Insurance Consolidated Highlights ($ in millions, except as otherwise noted) Three months ended Six months ended Change Change Gross written premiums Net premiums earned Claims ratio* Expense ratio* Combined ratio* Underwriting income (loss)* Investment income Net income % 62.2% 32.8% 32.9% 95.9% 95.1% pts (0.1)pts 0.8pts (2.9) (16.5) (9.8) % 67.6% 33.3% 32.7% 100.8% 100.3% (7.2) (2.5) (0.1)pts 0.6pts 0.5pts (4.7) , 2015 As at December 31, 2014 Total equity Minimum Capital Test 1, , % 295% 37.9 (3)pts Note: *Claims ratio, expense ratio, combined ratio and underwriting income exclude the impact of discounting and are non-gaap measures which are defined below. Gross written premiums for the second quarter 2015 grew by $16.8 million, or 3.0%, over the same quarter a year ago. The personal lines premiums grew by $15.5 million, or 4.6% over the same quarter a year ago. Increased auto policy volumes in Ontario more than offset declines in average premiums due to the mandated 2014 rate decreases. Personal property premiums exhibited strong growth due to increased policy volumes and targeted rate increases. Commercial lines premium grew by $1.3 million, or 0.6%, over the same quarter a year ago as decreased policy volumes were more than offset by targeted rate increases in commercial property. Year-to-date, personal lines premiums grew by $25.8 million or 4.5% while commercial lines premiums declined by $0.7 million or 0.2% over the same period a year ago. Underwriting activity for the second quarter 2015 produced a $19.6 million underwriting profit, resulting in a combined ratio of 95.9%, compared to an underwriting profit of $22.5 million, resulting in a combined ratio of 95.1%, in the same quarter a year ago. The slight decline is due to an increase in loss costs and the strengthening of reserves, primarily for Ontario auto accident benefit costs and the British Columbia auto liability line. Information technology infrastructure investments, including costs associated with the replacement of our policy administration system, impacted the second quarter 2015 expense ratio by 1.1 percentage points and 1.6 percentage points year-to-date compared to nil for the

3 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 Its impact on the combined ratio was an increase of 0.8 percentage points for the second quarter 2014 and 0.9 percentage points for year-to-date Combined Ratio* Three months ended Change Six months ended Change Personal auto Personal property Total personal lines 92.8% 92.4% 97.0% 98.6% 94.0% 94.2% 0.4pts (1.6)pts (0.2)pts 97.4% 95.0% 91.6% 98.7% 95.6% 96.1% 2.4pts (7.1)pts (0.5)pts Commercial auto Commercial property and liability Total commercial lines 88.7% 74.4% 100.1% 108.2% 96.0% 96.4% 14.3pts (8.1)pts (0.4)pts 95.6% 90.4% 109.9% 115.5% 104.9% 106.8% 5.2pts (5.6)pts (1.9)pts Note: *The above combined ratios exclude costs for certain infrastructure investments. The personal auto combined ratio increased slightly over the same quarter a year ago as lower frequency was more than offset by lower levels of favourable reserve development and the continued impact of the mandated rate reductions in Ontario. We continue to invest in predictive analytics and pricing sophistication to improve customer targeting, risk classification, product design and business mix optimization. The personal property combined ratio improved 1.6 percentage points compared to the same quarter a year ago, due to targeted rate increases and benign weather conditions. Overall, personal lines produced an underwriting profit of $17.3 million compared to $16.1 million in the same quarter a year ago. Year-to-date, personal lines produced an underwriting profit of $25.1 million compared to $21.7 million in The commercial auto combined ratio increased over the same quarter a year ago primarily due to higher claims severity and lower levels of favourable loss reserve development. Overall operating results of this book of business continue to be strong. The commercial property and liability combined ratio improved over the same quarter a year ago primarily due to the impact of underwriting actions, rate increases taken in 2014, and reduced claims severity. Overall, commercial lines produced an underwriting profit of $7.4 million compared to $6.4 million in the same quarter a year ago. Year-to-date, commercial lines produced an underwriting loss of $17.7 million compared to $24.2 million in 2014 as the first quarter was impacted by a number of large losses. Investment income decreased $16.5 million over the second quarter a year ago to $21.4 million. Dividend and interest income combined were relatively flat, however the increase in yields during the quarter resulted in higher recognized losses on the bond portfolio.

4 Investment quality remains strong with more than 76% of total investments held in government and investment-grade corporate bonds as at, The balance of investments is primarily held in common and preferred shares of large, well-established companies. Economical s capital position remains strong. Total equity was $1.72 billion at, 2015, an increase of $37.9 million, or 2.3% since December 31, Economical s minimum capital test ratio at 292% remains significantly in excess of regulatory requirements as of June 30, Forward looking statements Certain of the statements in this press release regarding our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements, or any other future events or developments constitute forward-looking statements. The words may, will, would, should, could, expects, plans, intends, trends, indications, anticipates, believes, estimates, predicts, likely, looking to, or potential or the negative or other variations of these words or other similar or comparable words or phrases, are intended to identify forward-looking statements. Forward-looking statements are based on estimates and assumptions made by management based on management s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Many factors could cause Economical s actual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forwardlooking statements, including, without limitation, the following factors: the competitive market environment; Economical s ability to appropriately price its products to produce an acceptable return; its ability to accurately assess the risks associated with the insurance policies that it writes; management s ability to accurately predict future claims frequency or severity including the frequency and severity of weather related events; the occurrence of unpredictable catastrophic events; Economical s ability to obtain reinsurance coverage to alleviate risk; Economical s ability to successfully manage credit risk from its counterparties; unfavourable capital market developments or other factors which may affect the Company s investments; general economic, financial and political conditions; foreign currency fluctuations; Economical s ability to implement its strategy or operate its business as management currently expects; Economical s dependence on key employees; Economical s reliance on independent brokers to sell its products; Economical s ability to meet payment obligations as they become due; the risk of financial loss from an inadequate enterprise risk management framework; Economical s reliance on information technology and telecommunications systems; changes in government regulations; success and timing of the demutualization process; the outcome of a demutualization transaction; litigation and regulatory actions; periodic negative publicity regarding the insurance industry, and Economical s ability to respond to events impacting its ability to conduct business as normal. All of the forward-looking statements included in this press release are qualified by these cautionary statements. These factors are not intended to represent a complete list of the factors that could impact Economical, however, these factors should be considered carefully, and readers should not place undue reliance on forward-looking statements we make. We are under no obligation and have no intention to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 4

5 Definitions Total equity Retained earnings plus accumulated other comprehensive income. Also included in this press release are a number of measures which do not have any standardized meaning prescribed by generally accepted accounting principles ( GAAP ). These non-gaap measures may not be comparable to any similar measures presented by other companies. Claims ratio Combined ratio Expense ratio Large loss Underwriting income Discounting Minimum Capital Test Claims and adjustment expenses (excluding the impact of discounting) during a defined period expressed as a percentage of net premiums earned for the same period. Claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses and premium taxes during a defined period expressed as a percentage of net premiums earned for the same period. Underwriting expenses including commissions, operating expenses and premium taxes during a defined period, expressed as a percentage of net premiums earned for the same period. A loss in excess of $1 million Net premiums earned for a defined period less the sum of claims and adjustment expenses (excluding the impact of discounting), commissions, operating expenses and premium taxes during the same period. To reflect the time value of money, the expected future payments of claim liabilities are discounted back to present value using the market yield rate of investments used to support those liabilities. Provisions for adverse deviation are also included when determining the discounted value. A regulatory formula, defined by The Office of the Superintendent of Financial Institutions, that is a risk-based test of capital available relative to capital required. About Economical Insurance Founded in 1871, Economical Insurance is one of Canada s leading property and casualty insurers, with approximately $2.0 billion in annualized premium volume and $5.3 billion in assets as at, Based in Waterloo, this Canadian-owned and operated company services the insurance needs of more than one million customers across the country. Economical Insurance conducts business under the following brands: Economical Insurance, Economical, Western General, Economical Select, Perth Insurance, Family Insurance Solutions, Federation Insurance and Economical Financial. 5

6 For further information, contact: Media Inquiries: Doug Maybee, manager, public and media relations Economical Insurance (T) (C) Stakeholder Relations Inquiries: Max Weis, vice president, corporate development Economical Insurance (T) (Waterloo) (T) (Toronto) 6