The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Press release from CNW Group

EGI Financial Reports Third Quarter Results

Thursday, November 08, 2012

EGI Financial Reports Third Quarter Results16:00 EST Thursday, November 08, 2012TORONTO, Nov. 8, 2012 /CNW/ - EGI Financial Holdings Inc. ("EGI" or "the Company") (TSX: EFH), which operates in the property and casualty insurance industry in Canada, the United States and Europe, today reported a net income of $13.9 million, or $1.17 per basic and diluted share, for the third quarter ended September 30, 2012, compared to a net loss of $0.2 million, or $0.01 per basic and diluted share, for the same quarter in 2011.The Company's earnings before taxes of $19.1 million in the third quarter were attributable primarily to investment income of $20.8 million, as compared to $0.9 million for the same quarter in 2011.  The increase was mainly due to $17.4 million in realized gains resulting from the transition to a more capital efficient investment portfolio.  Net operating income was $2.6 million, or $0.23 per share, compared to $2.3 million, or $0.18 per share, for same period in 2011.Third Quarter HighlightsA combined operating ratio of 91% in Personal Lines, resulting in an underwriting profit in this division of $2.8 million, a 68% increase over Q3 2011A 23% increase in written premiums and a 10% year-over-year increase in net earned premiums over Q3 2011A 10% increase in net operating income over Q3 2011$9.2 million in premiums written in the Company's newly formed International divisionBook value per share of $13.58 as at September 30, 2012, compared to $12.41 as at September 30, 2011$6.5 million in unrealized investment gains, due to strong equity and bond market performance, contributed to the strong growth in book value"Our core Personal Lines business, which accounts for the majority of our earned premiums, continues to perform well and has increased its underwriting profits by 86% so far this year," stated Steve Dobronyi, Chief Executive Officer of EGI. "The division has now recorded eight straight quarters of underwriting profitability.""We're particularly pleased with the increase in EGI's book value to $13.58 per share," he continued. "This is a 9.4% increase over the past 12 months.""In the third quarter, underwriting results in our Niche Products division improved dramatically over the second quarter. However, the runoff of cancelled programs again had a negative impact on results. We continue to work on improving the division's performance by focusing on fewer, more profitable programs and exiting volatile product lines with long claims tails. To further facilitate profitability, we have recently reorganized our Canadian division to combine the underwriting and operations of the Niche Products and Personal Lines businesses. We believe that this will provide us with a more integrated team approach and a more focused strategic direction.""Outside of Canada, our start-up businesses in the U.S. and Europe both performed well in the quarter. Our current focus in the U.S. is on claims and expenses and improvements were realized in the quarter in both categories," said Mr. Dobronyi. "We believe that the profitability of this division is best served by instilling a more focused approach and we have therefore discontinued writing new business in the overly competitive Texas market. In Florida, we believe that claims results will improve from recent underwriting and pricing changes, as well as the benefits of regulatory reforms that will become effective January 1, 2013.""Finally, we're pleased that our International division has already become a significant contributor to our overall expansion," concluded Mr. Dobronyi. "Written premiums were strong again in the third quarter and claims and expenses continue to be in line with our expectations."Financial Summary$000s (except per share amounts)3 months ended September 30, 20123 months ended September 30, 2011% Change9 months ended September 30, 20129 months ended September 30, 2011% ChangeDirect writtenpremiums57,77846,96623.0%167,823130,56828.5%       Net earnedpremiums45,73541,6729.7%131,862123,0727.1%       Underwriting income(loss)181470(61.4%)(5,104)(865)(490.1%)       Investment income20,7919392114.2%29,2528,622239.3%       Net income (loss)13,879(173)8,122.5%14,8534,263248.4%       Comprehensiveincome5,7985610,253%7,3993,154134.6%       Net operatingincome (1)2,5702,33010.3%3,3236,149(45.9%)       Net income (loss) perdiluted share$1.17($0.01)N/A$1.30$0.35271.4%       Net operatingincome per dilutedshare$0.23$0.1827.8%$0.34$0.48(29.2%)       Book value per share$13.58$12.419.4%$13.58$12.419.4%(1) Net operating income is defined as net income plus or minus after-tax impact of change in discount rate on unpaid claims, realized losses or gains on the sale of investments and unrealized fair value changes on held-for-trading investments.Third Quarter CommentaryDirect written premiums increased by 23% to $57.8 million, mainly due to growth in the International division, which is in its second full quarter of operations, as well as contributions from the U.S. and CUISA MGA, which was acquired in the second quarter of 2012. Net earned premiums were $45.7 million, an increase of 9.7% over the third quarter of 2011.Underwriting income came in at $0.2 million versus $0.5 million for the same period last year. Strong underwriting results were recorded in Personal Lines, with Ontario, Quebec and Nova Scotia all recording a profit. These gains were partially offset by claims losses in Niche Products and start-up costs in the U.S. and International divisions. The Niche Products results were affected by a $1.0 million impact from the runoff of previously cancelled programs. The U.S. recorded its best quarter to date with a small underwriting loss of $0.1 million.Investment income was $20.8 million, as compared to $0.9 million in the third quarter of 2011.  The increase is attributable primarily to the realization of $17.4 million of gains through the sale of equities and a realignment of the bond portfolio to better match maturities with liabilities, and in order to make the portfolio more capital efficient.Income from interest and dividends net of investment expenses was $3.1 million, compared to $3.2 million in the same period last year. In addition, unrealized gains of $6.5 million were generated through strong performance in the equity and bond portfolios. The fair value of EGI's investment portfolio, including finance receivables and short-term deposits, increased 12.2% to $432 million, compared to total fair values of $385 million as at September 30, 2011.Overall net income was $13.9 million, compared to a net loss of $0.2 million in the third quarter of 2011. Net operating income of $2.6 million was recorded in the quarter, compared to income of $2.3 million in the third quarter of 2011.EGI reorganized its Canadian division's operations in the third quarter, integrating the Personal Lines and Niche Products businesses into one unit. The expected benefits of the reorganization are:A more integrated team approach and focused strategic directionMore effective sharing of best practicesGreater consistency in underwriting practices and disciplineStandardized approaches to product pricingUniformity in the number and types of products that we provideA coordinated national marketing approachSynergies in operational efficienciesFor the foreseeable future, the results of Personal Lines and Niche Products will continue to be reported separately.Operating ResultsUnderwriting Income (Loss)*$000sDivision3 months endedSeptember 30, 20123 months endedSeptember 30, 20119 months endedSeptember 30, 20129 months endedSeptember 30, 2011Personal Lines2,7771,6527,0713,802Niche Products(1,525)(139)(5,444)(1,424)U.S.(134)(696)(3,628)(2,025)International(544)—(1,908)—* Excluding head office overhead costs and impact of change in discount rate on unpaid claimsThe significant improvement in underwriting income in the Company's Personal Lines division was primarily due to the performance of non-standard auto, which recorded a combined ratio of 85.2% in the third quarter, compared to 88.1% in Q3 2011, as well as an improvement in motorcycle. The division exceeded its target profitability with an overall combined ratio of 91.1%, compared to 92.5% in the same quarter of 2011.The significant increase in underwriting losses in the Niche Products division was primarily due to the increase in the loss ratio, which was impacted by the runoff development on previously cancelled programs. The additional bulk reserve of $2.0 million that was added to these programs in Q2 of 2012 has not been released. Further actions taken to improve profitability include exiting a number of unprofitable product lines.The U.S. division recorded net earned premiums of $3.7 million in the quarter compared to $0.8 million in the comparative period in 2011, leading to a substantial improvement in the division's combined ratio to 103.7%. The claims ratio was also well in line with expectations. While this overall result may not be sustainable in the short term, the division should continue to benefit from a more profitable and growing renewal book of business as well as regulatory reforms in Florida.  In addition, EGI is expected to benefit from its exit from the Texas market and greater focus on Florida.The International division recorded gross written premiums of $9.2 million and an underwriting loss of $0.5 million as a result of the ongoing start-up costs associated with the development of its operations. We believe that we remain on track to break even on underwriting results for both the U.S. and International divisions before the end of 2013.Loss Ratio*Division3 months ended September 30, 20123 months ended September 30, 20119 months ended September 30, 20129 months ended September 30, 2011Personal Lines57.5%65.7%60.8%67.1%Niche Products69.1%51.5%71.9%58.2%U.S.74.7%68.6%105.8%69.2%International63.9%—64.6%—* Loss ratio excludes impact of change in discount rate on unpaid claims.Company ResultsKey Operating Ratios3 months ended September 30, 20123 months ended September 30, 20119 months ended September 30, 20129 months ended September 30, 2011Loss ratio *61.4%63.0%66.1%65.3%Expense ratio38.3%35.9%37.8%35.4%Combined ratio99.7%98.9%103.9%100.7%* Loss ratio excludes impact of change in discount rate on unpaid claimsThe year-over-year increase in the overall combined ratio for EGI is due to the runoff of cancelled programs in the Niche Products division and expenses related to the start-up of the International division, partially offset by an improvement in Personal Lines.  The combined ratio for the U.S. division improved significantly, due mainly to the reduction in its expense ratio.Nine Month ReviewFor the nine months ended September 30, 2012, the Company recorded a net operating income of $3.3 million, compared to $6.1 million for the same period in 2011.  The decrease is due to the underwriting results in the Niche Products division as a result of cancelled programs and start-up costs in the International division.Direct written premiums increased 28.5% to $167.8 million from $130.6 million in the same period in 2011, mainly due to growth in the U.S. and International divisions. Net earned premiums increased 7.1% to $131.9 million from $123.1 million over the first nine months of 2011.Combined, the company experienced $3.7 million in positive claims development, compared to $4.5 million in the first three quarters of 2011.Investment income increased to $29.3 million from $8.6 million in the same period last year, primarily due to realized gains of $17.4 million in Q3 2012.Financial PositionFor the three months ended September 30, 2012, total equity of the Company was $161.6 million, up from $154.8 million at December 31, 2011, due to net income of $14.9 million, an increase in contributed surplus of $0.2 million, repurchase of common shares of $0.9 million and a decrease of comprehensive income of $7.5 million.As at September 30, 2012, Echelon's Minimum Capital Test (MCT) ratio was 270%, which significantly exceeds the minimum regulatory capital level required by the Office of the Superintendent of Financial Institutions. The increase in the MCT ratio was primarily due to the sale of capital intensive equities in the quarter and a shortening of the bond duration to better match liabilities. Echelon is currently realigning its investment portfolio in order to better manage risk, regulatory capital and the current economic environment. We expect to complete the realignment by December 31, 2012.As of September 30, 2012, EGI was debt-free, well capitalized, and its Net Written Premiums-to-Capital ratio was a conservative 1.2:1.The discount rate used for September 30, 2012, in relation to the provision for unpaid claims was 1.25%, changed from 1.9% at the end of 2011, equivalent to a $3.7 million impact.Full Financial Statements and Management's Discussion and Analysis (MD&A) will be available at a later time today on SEDAR at: www.sedar.com and on the Company's web site at: www.egi.ca.About EGIFounded in 1997, EGI operates in the property and casualty insurance industry in Canada, the United States and Europe, primarily focusing on non-standard automobile insurance and other niche and specialty general insurance products.  EGI's common shares are traded on the Toronto Stock Exchange under the symbol EFH.Non-IFRS Financial MeasuresEGI uses International Financial Reporting Standards (IFRS) and certain non-IFRS measures to assess performance.  Readers are cautioned that non-IFRS measures do not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.  EGI analyzes performance based on operating income and underwriting ratios such as combined, expense and loss ratios.Forward-looking InformationThis news release contains forward-looking information based on current expectations.  This information includes, but is not limited to, statements about the operations, business, financial condition, priorities, targets, ongoing objectives, strategies and outlook of EGI for 2012 and subsequent periods.This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a projection as reflected in the forward-looking information.  By its nature, this information is subject to inherent risks and uncertainties that may be general or specific.  A variety of material factors, many of which are beyond EGI's control, affect the operations, performance and results of and its business and could cause actual results to differ materially from the expectations expressed in any of this forward-looking information.EGI does not undertake to update any forward-looking information.  Additional information about the risks and uncertainties about EGI's business is provided in its disclosure materials, including its Annual Information Form and Management Discussion & Analysis, filed with the securities regulatory authorities in Canada, available at www.sedar.com.Conference CallA conference call for analysts and interested listeners will be held on Friday, November 9, 2012, at 11:00 a.m. (ET). The call-in numbers for participants are 647-427-7450 or toll free 888-231-8191, Conference ID 37792828. A live audio feed of the call will be available online through the Company's website at www.egi.ca, or directly at http://www.newswire.ca/en/webcast/detail/1046713/1137375A replay of the call will be available until November 16, 2012. To access the replay, call 416-849-0833, or toll free 1-855-859-2056, enter password 37792828.SOURCE: EGI Financial Holdings Inc.For further information: Kathy Shulman Investor Relations Manager EGI Financial Holdings Inc. Telephone: 905-214-7880 Email: ir@egi.ca