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EGI Financial Reports Strong First Quarter Results 2006-05-15
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Three-months Three-months
ended ended
March 31, 2006 March 31, 2005 $000 % Change
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Net written premiums $23,493 $18,453 27.3%
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Investment income $2,633 $1,898 38.7%
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Net Income before extraordinary $2,434 $1,495 62.8%
gain -------------------------------------------------------------------------
Diluted earnings per share before
extraordinary gain $0.24 $0.17 41.2%
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TORONTO, May 15 /CNW/ - EGI Financial Holdings Inc. (TSX:EFH) today
announced strong results for the first quarter ended March 31, 2006, including
solid increases in net written premiums, investment income and income before
extraordinary gains, as the Company continues to build its specialty general
insurance business.
For the 2006 period, EGI Financial generated direct written premiums
totaling $26.1 million, compared with $25.9 million in the corresponding
period last year. Net written premiums (after reinsurance) rose 27% in 2006
from $18.4 million to $23.5 million.
Underwriting profit in the quarter increased strongly to $0.9 million,
compared with $0.4 million last year. The increase was attributable to a
combination of reduced loss ratio and increase in net earned premiums in the
automobile division during the first quarter of this year.
The combined ratio, being the addition of the ratio of net losses
incurred to net earned premiums, and the ratio of underwriting expenses to net
earned premiums, for the first quarter of 2006 was 96.3% compared with 97.6%
for the same period last year. EGI Financial believes that the combined ratio
is the best measure of the profitability of its underwriting business.
The loss ratio in the 2006 period, being net losses incurred expressed as
a percentage of net earned premiums was 66.1%, while the expense ratio, being
expenses incurred expressed as a percentage of net earned premiums, was 30.2%.
This compares with 69.3% and 28.3% respectively in the same period of 2005.
Investment income in the first quarter of 2006 was $2.6 million compared
to $1.9 million last year, an increase of 37%. At March 31, 2006, net
unrealized gains of $7.8 million included net unrealized gains on the common
share portfolio of $8.4 million ($0.87 per common share outstanding), with an
unrealized loss on the bond portfolio totaling $0.6 million.
Net income in the 2006 first quarter was $2.4 million compared with
$1.5 million last year, before extraordinary gains, an increase of 60%. Net
income per share, on a fully-diluted basis, was $0.24 in the 2006 period,
compared to $0.17 in the same period last year. This represents an annualized
return on equity, on a last-twelve-months basis, of 20.4%.
EGI Financial also announced that its Board of Directors has declared a
dividend of $0.04 per share, payable on June 30, 2006 to shareholders of
record on June 15, 2006.
"We are very pleased with our financial results in the first quarter,"
said Douglas McIntyre, Chief Executive Officer of EGI Financial. "The
performance reflects continued strong underwriting results in our Automobile
division and solid top-line growth in our Niche Products division. Greater
retention of business, which had previously been passed to reinsurers, was
also an important factor."
Direct written premiums in the Automobile Division for the first quarter
of 2006 were $22.3 million, down 7% from $24.0 million in 2005, however net
written premiums for the 2006 period were up 21%, to $20.6 million from
$17.0 million in 2005. In the Niche Products Division, direct written premiums
for the first quarter of 2006 were $3.8 million, up 100% from $1.9 million in
the same period last year, and net written premiums for the 2006 quarter were
$2.9 million, up 93% from $1.5 million in 2005.
Geographically, EGI Financial's business in the first quarter of 2006 was
derived from Ontario (89%), Quebec (7%), Alberta (1%) and other jurisdictions
in Canada (3%).
Total assets at March 31, 2006 were $259.3 million. The investment
portfolio at book value, including cash and premium finance receipts,
increased to $184.1 million (market value was $191.8 million or $20.02 per
share), compared to $145.2 million (market value $147.9 million or $19.14 per
share) a year earlier. The fair value increment over book value of the
investment portfolio increased to $0.81 per share from $0.34 at March 31,
2005.
Book value per share was $7.54 at March 31, 2006 compared with $5.63 a
year earlier.
The annualized ratio of net written premiums in the first quarter of 2006
to shareholders' equity was 1.3 times. Echelon's Minimum Capital Test (MCT)
margin at March 31, 2006 was 357%, providing EGI Financial with the financial
strength to grow its business utilizing its current resources.
"Looking forward, we continue to be optimistic about the prospects for
the Company," added Mr. McIntyre. "In our Automobile segment, we see
opportunities for growth through the appointment of new producers, the
addition of other vehicle types and geographic expansion, which is helping to
counter some encroachment into the non-standard auto segment by standard line
insurers. In the Niche products segment, we plan to expand the scope of our
product offerings, both organically and through acquisitions."
EGI Financial uses both Canadian generally accepted accounting principles
(GAAP) and certain non-GAAP measures to assess performance. Readers are
cautioned that non-GAAP measures do not have a standardized meaning under GAAP
and are unlikely to be comparable to similar measures used by other companies.
EGI Financial analyzes performance based on underwriting ratios such as
combined, expense and loss ratios as defined in regulations established under
the Insurance Companies Act (Canada). Return on equity (ROE) is a non-GAAP
measure which represents EGI Financial's net income for the twelve months
ended on the date indicated divided by the average shareholders' equity over
the same twelve-month period.
About EGI Financial
-------------------
Founded in 1997, EGI Financial operates in the property and casualty
insurance industry in Canada, primarily focusing on non-standard automobile
insurance and other niche and specialty general insurance products. EGI
Financial's common shares are traded on the Toronto Stock Exchange under the
symbol EFH.
Forward-looking Information
---------------------------
This 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 Financial for 2006 and
subsequent periods. Forward-looking information is typically identified by the
words "looking forward", "opportunities", "see", "believe", "expect",
"anticipate", "intend", "estimate" and other similar expressions.
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 Financial's control, affect
the operations, performance and results of EGI Financial and its business, and
could cause actual results to differ materially from the expectations
expressed in any of this forward-looking information. These factors include:
EGI Financial's success in developing and introducing new products and
services, expanding existing distribution channels, developing new
distribution channels and realizing increased revenue from these channels;
legislative or regulatory developments in the jurisdictions where EGI
Financial operates, including developments in provincial laws regulating
insurance rates and rating methodologies; claims developments and the
resolution of legal proceedings and related matters; the effect of applying
future accounting changes; changes in tax laws; weather and other acts of God,
in particular those affecting potential insurance claims; competition from
established competitors and new entrants in the insurance industry;
technological change; global capital market activity; interest rate
fluctuations; currency value fluctuations; political conditions and
developments; general economic conditions in Canada; and EGI Financial's
ability to anticipate and manage the risks associated with these factors. This
list is not exhaustive of the factors that may affect any of EGI Financial's
forward-looking information. These and other factors should be considered
carefully and readers are cautioned not to place undue reliance on
forward-looking information. EGI Financial does not undertake to update any
forward-looking information.
Additional information about the risks and uncertainties about EGI
Financial's business is provided in its disclosure materials, including its
annual information form, filed with the securities regulatory authorities in
Canada, available at www.sedar.com.
Conference call
---------------
A conference call for analysts and interested listeners will be held
Tuesday, May 16, 2006 at 11:00 a.m. (ET). The call-in numbers for participants
are 416-644-3423 or 866-249-2157. A live audio feed of the call will also be
available on the Internet at:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=1459480br> A replay of the call will be available from 1:00 p.m. (ET) on May 16,
2006 until 11:59 p.m. on May 23, 2006. To access the replay, call 416-640-1917
or 877-289-8525, enter pass code number 21186405, and then press the pound
(No.) key. The replay can also be accessed over the Internet at the above
address.
EGI FINANCIAL HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the period ending March 31, 2006 and 2005
References to "EGI" in this Management's Discussion and Analysis of
Financial Condition and Results of Operations refer to EGI Financial Holdings
Inc. on a consolidated basis, both now and in its predecessor forms
The following discussion should be read in conjunction with EGI's
unaudited interim consolidated financial statements for the first quarter of
fiscal 2006 and 2005; with the management discussion and analysis (MD&A) set
out on pages 8 to 35 in the Company's 2005 Annual Report; and with the notes
to the interim unaudited consolidated financial statements for the first
quarter of fiscal 2006 and the notes to the audited consolidated financial
statements for fiscal 2005 set out on pages 42 to 51 of the Company's 2005
Annual Report. The following commentary is current as of April 18, 2006.
Additional information relating to EGI is available on SEDAR at www.sedar.com.
Certain totals, subtotals and percentages may not reconcile due to rounding.
EGI uses both Canadian generally accepted accounting principles (GAAP)
and certain non-GAAP measures to assess performance. Securities regulators
require that companies caution readers about non-GAAP measures that do not
have a standardized meaning under GAAP and are unlikely to be comparable to
similar measures used by other companies. EGI analyzes performance based on
underwriting ratios such as combined, expense and loss ratios.
The following discussion contains forward-looking statements that involve
risk and uncertainties. EGI's actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those discussed in this Management's Discussion and
Analysis and the Company's 2005 Annual Report.
Overall Performance
Net income of $2.4 million for the quarter ended March 31, 2006,
represents an increase of $0.9 million, or 60% compared to net income of
$1.5 million, excluding extraordinary gain for the first quarter of 2005.
These results were better due to improved underwriting results which is
evidenced by a lower combined loss ratio when compared to last year and higher
investment income which is driven by the additional capital from the closing
of the IPO in December last year. Despite the dilutive effect of the
additional shares issued through the IPO, basic earnings per share for the 1st
quarter of 2006 of $0.25 is significantly higher than the $0.18 for the same
period last year.
Part of the proceeds from the IPO was used for the redemption of the
Series F special shares for a value of $2.4 million on January 31, 2006. In
addition, EGI declared a quarterly dividend resulting in $0.4 million being
paid to common shareholders of record on March 15, 2006. These reductions to
shareholders' equity were for the most part offset by net income in the
quarter of $2.4 million and therefore shareholders' equity only decreased by
$0.3 million or 0.4% to $72.3 million at March 31, 2006.
The summary financial data set forth in the following tables has been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") and has been derived from our unaudited interim consolidated
financial statements for the three months ended March 31, 2006 and 2005.
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Three months ended
March 31
------------------------
(in $ thousands) 2006 2005
----------- -----------
Direct premiums written 26,092 25,931
Total revenue 27,708 18,554
Underwriting income 930 404
Net Income before extraordinary gain 2,434 1,495
Extraordinary gain - 5,669
Net income 2,434 7,164
Earnings per share before extraordinary gain
(in dollars)
Basic $ 0.25 $ 0.18
Diluted $ 0.24 $ 0.17
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As at As at
March 31 Dec 31
(in $ thousands) 2006 2005
----------- -----------
Investments
(excludes premium finance receivables) 153,681 152,736
Total assets 259,255 260,731
Total shareholders' equity 72,296 72,585
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The following table shows our selected financial ratios and Return on
Equity (ROE) data:
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Three months ended
March 31
---------------------
2006 2005
-------- --------
Claims ratio 66.1% 69.3%
Expense ratio 30.2% 28.3%
Combined ratio 96.3% 97.6%
ROE(1) 20.4% 19.7%
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(1) Represents EGI's net income for the twelve months ended on the date
indicated, divided by the average shareholders' equity over the same
twelve-month period.
Current Outlook
The above-average results which the Canadian P&C Insurance Industry has
experienced over the past three years is leading into a more competitive
market phase. The positive result is encouraging Auto insurers to implement
rate reductions and loosen underwriting guidelines, thus creating competition
for market share. As a result, we expect standard auto insurers to continue to
pursue market share opportunities in traditionally non-standard auto areas,
thereby reducing the near term opportunity for growth for non-standard auto
insurers. The Company expects this to be a temporary situation for the
non-standard market and the pendulum will swing back, as standard insurers'
margins erode on this higher risk business.
This competitive auto insurance market will create some challenges for
EGI to grow its premium income in the non-standard auto line of business.
However, the Company continues to pursue its diversification strategy to
reduce its reliance on Ontario non-standard auto by growing its Niche Products
Division and pursuing other opportunities in new geographic markets and new
vehicle types, such as motorcycles.
Through this market phase EGI will preserve its capital and is committed
to focus on profitable lines of business even though this may, in the short
term, limit growth in direct written premiums. Despite the pressure on growth,
EGI expects to manage its reinsurance arrangements to increase its net
retained business and thereby utilize its capital more effectively. EGI has
eliminated its quota share reinsurance coverage in 2006 on automobile
business, which resulted in significant growth in net written premiums in the
quarter compared to last year.
Revenue
Revenue reflected in the consolidated financial statements includes net
earned premiums, investment income, realized gains and losses on the sale of
investments and other revenue.
Three months ended
March 31
----------------------
(in $ thousands) 2006 2005
-------- --------
Gross premiums written 26,092 25,931
Net premiums written 23,493 18,453
Net premiums earned 25,074 16,650
Interest and dividends 1,774 1,349
Net realized gains on investments 859 549
Other revenue 1 6
-------- --------
Total revenue 27,708 18,554
-------- --------
Expenses
EGI's expenses consist of incurred claims, acquisition costs and
operating expenses.
Three months ended
March 31
----------------------
(in $ thousands) 2006 2005
-------- --------
Incurred claims 16,579 11,533
Acquisition expense 4,980 2,764
Operating expense 2,586 1,955
-------- --------
24,145 16,252
Three months ended
March 31
----------------------
Selected Underwriting Ratios 2006 2005
-------- --------
Incurred claims ratio 66.1% 69.3%
Acquisition expense ratio 19.9% 16.6%
Operating expense ratio 10.3% 11.7%
-------- --------
Combined ratio 96.3% 97.6%
-------- --------
The combined ratio for the Company improved in the first quarter of 2006
to 96.3% from 97.6% in the first quarter of 2005.
Incurred claims, also referred to as losses, are the amounts payable
under insurance policies relating to insured events. Loss adjustment expenses,
also referred to as claim expenses, are the expenses of settling claims,
including allocated (i.e. external) loss adjustment expenses and unallocated
(i.e. internal) loss adjustment expenses (together, "LAE"). Achieving
profitable results depends on EGI's ability to manage future claims and other
costs through innovative product design, strict underwriting criteria and
efficient claims management.
Acquisition costs consist mainly of commissions and premium taxes which
are directly related to the acquisition of premiums. Commissions are the
amounts paid to producers for selling insurance policies. The amount of
commission is generally a percentage of the premium of the insurance policy
sold. Contingent commissions are paid to brokers and MGAs on an annual basis
if they meet certain targets. In general, these producers have to meet or
exceed certain criteria, including written premium targets and profitability
on average over three years to qualify for this compensation. Premium taxes
are taxes paid by EGI to provincial governments calculated as a percentage of
direct written premiums.
Operating expenses are the non-commission selling, underwriting and
administrative expenses incurred to support EGI's business. A significant
portion of these expenses are related to employee compensation and benefits.
The effective control and management of these expenses can enhance the
underwriting results from the operation.
Segmented Financial Information
The segmented information for the first quarter of 2006 shows the Auto
line of business contributed $1.3 million of underwriting income while Niche
products experienced an underwriting loss of $0.2 million in the quarter. The
loss in Niche resulted mainly from one "at limits" liability claim, and
because this book of business is small, with only one quarter of the year's
premium earned, this claim had a significant impact on the results. If this
single claim is excluded, the Niche results for the first quarter 2006 would
exceed 2005.
Three months ended
March 31
---------------------------------------
(in $ thousands) 2006 2005
------------------ ------------------
Auto Niche Auto Niche
---- ----- ---- -----
Underwriting revenue 22,661 2,414 15,578 1,078
Underwriting income (loss) 1,302 (189) 440 79
(not including corporate
expenses of $183)
Loss ratio 66.7% 60.5% 70.6% 50.0%
Expense ratio 27.5% 47.3% 26.6% 43.3%
Combined ratio 94.3% 107.9% 97.2% 93.2%
The chart above illustrates the significant improvement in the loss ratio
for the Auto line of business compared to the first quarter of 2005. This is
evidence of our commitment to strong underwriting and claims adjudication.
The Niche loss ratio increased to 60.5% in the first quarter 2006,
compared to 50.0% in the first quarter of 2005 due to the claim occurrence
noted above.
The expense ratio increased slightly for both lines of business. This
ratio is the combination of the acquisition expense ratio and the operating
expense ratio. While the operating expense ratio decreased due to the increase
in net earned premiums, the acquisition expense ratio increased. This was
caused by a reduction in reinsurance commission revenue received (due to the
elimination of the quota share arrangements) and an increase in Niche warranty
business which carries a higher commission expense rate than Auto.
Critical Accounting Estimates and Assumptions
For a description of EGI's accounting policies refer to Note 3 in the
2005 audited financial statements as set out on pages 36 to 51 of the
Company's 2005 Annual Report. A further description of EGI's critical
accounting estimates and assumptions are also detailed on pages 17 and 18 of
the 2005 Annual Report.
There have been no changes to the Company's accounting policies or
assumptions made in critical accounting estimates in the first quarter of
2006.
For the three months ended March 31, 2006 and 2005
Insurance Operation
Written Premiums
Direct written premiums increased $0.2 million or 0.8% to $26.1 million
for the quarter ended March 31, 2006, compared to $25.9 million for the first
quarter of 2005. EGI has realized an increase despite current market
conditions which resulted in a reduction of Ontario non-standard auto
business. Despite the deficit in the Ontario non-standard auto, there was a
slight growth overall and this was achieved due to the growth in Niche
Products and Quebec automobile business, and the addition of motorcycle
business in Ontario. Direct written premiums for Niche Products increased 100%
to $3.8 million in the first quarter of 2006 compared to $1.9 million in the
same period in 2005. The Niche Products Division was formed in 2003, had
modest growth in 2004, and due to the continued marketing efforts to grow this
division, it has experienced significant growth in 2005 and to date in 2006.
Quebec automobile insurance premiums grew 33% to $1.2 million for the quarter
ended March 31, 2006, compared to $0.9 million for the first quarter of 2005.
Quebec is viewed as a strategic growth area for geographic diversification and
the focus there is on contracting new brokers and introducing new products
such as the motorcycle program. With an exclusive arrangement with a
specialist broker, EGI began to write motorcycle business in Ontario, during
the first quarter of 2006.
Net written premiums increased $5.0 million or 27% to $23.5 million for
the quarter ended March 31, 2006, compared to $18.5 million in the first
quarter of 2005. EGI has achieved a significant growth in net written premiums
in spite of a modest increase in direct written premium, because of its
ability to more effectively utilize its capital through managing its
reinsurance arrangement. Net written premiums increased over 2005 because the
Company terminated its quota share reinsurance arrangement effective
December 31, 2005. Therefore, no quota share reinsurance arrangement was put
in place for auto policies written in 2006.
Earned Premiums
Net earned premiums for the quarter ended March 31, 2006, were
$25.1 million, an increase of $8.4 million or 50% from the first quarter of
2005. The reduction in the amount of reinsurance purchased by EGI in 2006
compared to 2005 is the primary reason for the growth in net earned premiums.
The revenue for the first quarter of 2006 was also positively impacted by the
termination of the quota share reinsurance arrangement effective December 31,
2005.
Incurred Claims Expense
Net incurred claims expense increased $5.1 million or 44% to
$16.6 million for the quarter ended March 31, 2006, compared to $11.5 million
for the first quarter of 2005. This compares favourably to the 50% increase in
net earned premiums which indicates that the expense did not increase at the
same rate as the revenue.
This was the result of a significant improvement in the loss ratio to
66.1% in the first quarter of 2006 compared to 69.3% in the same period in
2005.
Acquisition Costs
Net acquisition costs, which consist mainly of commissions and premium
taxes, increased $2.2 million or 79% to $5.0 million for the quarter ended
March 31, 2006, compared to $2.8 million in the first quarter of 2005. This is
primarily due to the withdrawal of quota share reinsurance effective
December 31, 2005. In 2005, gross commissions paid to EGI's producers were
offset by the commissions received from reinsurers on the portion of business
that was ceded to them, on a quota share basis, to develop the net commission.
No reinsurance commission has been received in 2006 on the auto line of
business related to the 2005 or 2006 policy years.
The resulting impact of the quota share withdrawal is an increase to
acquisition costs; however, this is offset by a corresponding improvement in
the operating expense ratio. This occurs because the reduction in ceded
premiums leads to an increase in net earned premiums resulting in an improved
operating expense ratio.
Operating Expenses
Operating expenses increased $0.6 million or 30% to $2.6 million for the
quarter ended March 31, 2006, compared to $2.0 million for the first quarter
of 2005. This compared favourably to the 50% increase in net earned premiums.
As noted above, this is due to the quota share reinsurance reduction and the
resulting increase in net earned premiums.
Underwriting Income (Loss)
Underwriting results reflect the revenues from net earned premiums less
claims, acquisition and operating expenses. Industry underwriting
profitability reached record levels in 2005, reflecting strong market
conditions and a favourable claims environment. The overall underwriting
income increased $0.5 million to $0.9 million for the quarter ended March 31,
2006, compared to a gain of $0.4 million for the comparative period in 2005.
The underwriting income for the first quarter of 2006 and 2005 is net of
$0.2 million and $0.1 million of corporate and other expenses, respectively.
Underwriting income from non-standard automobile insurance for the
quarter ended March 31, 2006, was $1.3 million, an improvement of $0.9 million
compared to an income of $0.4 million for the first quarter of 2005. This
improvement was attributable to a decrease in the loss ratio to 66.7% in 2006
and the increase in net earned premiums resulting from the elimination of the
quota share arrangements.
The underwriting loss from Niche Products for the quarter ended March 31,
2006, was $0.2 million, a decrease of $0.3 million compared to a gain of
$0.1 million in the first quarter of 2005. This decrease was primarily the
result of an increase in the loss ratio for the Niche Products Division to
60.5% in 2006 compared to 50% for the first quarter of 2005. Due to the
relatively small book of business in this area, the underwriting result can be
subject to significant variation. In the first quarter of 2006, one "at
limits" liability claim occurred with a net impact of $0.3 million, which was
the primary factor in the increased loss ratio. As the Niche book of business
grows and matures, we expect the variability in results to be progressively
reduced and our objective of controlled growth and effective selection of
risks is expected to produce positive results.
Investment Income
Investment income increased $0.7 million, or 38.7%, to $2.6 million for
the quarter ended March 31, 2006, compared to $1.9 million for the first
quarter of 2005.
EGI's investment portfolio reflected a $34.7 million or 29% increase in
size in the first quarter of 2006 compared to March 31, 2005, due to the
additional funds raised in our IPO which closed on December 8, 2005, and
positive cash flows from operations during the period.
Net realized investment and other gains increased $0.3 million to
$0.8 million in the first quarter of 2006 compared to $0.5 million in the
first quarter of 2005. The significant increase was primarily from the sale of
invested assets of $61.7 million (2005 - $14.3 million).
Net Income before Income Taxes
Net income before income taxes and extraordinary gain increased
$1.2 million, or 52%, to $3.5 million for the quarter ended March 31, 2006,
compared to $2.3 million for the first quarter of 2005 as a result of improved
underwriting results and higher investment income.
For the quarter ended March 31, 2006, underwriting income of $0.9 million
plus investment income of $2.6 million comprises net income before income
taxes of $3.5 million. This compares to an underwriting income of
$0.4 million, plus investment income of $1.9 million in the first quarter of
2005.
Income Taxes
The provision for income taxes for the quarter ended March 31, 2006, was
$1.1 million compared to $0.8 million for the first quarter of 2005. This
reflected higher pre-tax income as a result of increased underwriting profits
year over year.
Extraordinary Gain
In the first quarter of 2005 an extraordinary after-tax gain of
$5.7 million arose due to the share exchange which formed part of the January
2005 Echelon Transaction. The gain was the result of the write-off of negative
goodwill arising from the transaction.
Summary of Quarterly Results
A summary of the Company's last eight quarters is as follows:
(Pro Forma 2004 results give effect to the acquisition of the remaining
50% of EGI Financial (2003) as if it had occurred at January 1, 2004.)
2006 2005
($ thousands except -------- --------------------------------------
per share amounts) Q1 Q4 Q3 Q2 Q1
-------- -------- -------- -------- --------
Direct Written Premiums 26,092 28,081 28,466 34,528 25,931
Total Revenues 25,075 19,950 20,124 19,840 16,656
Underwriting Income
(loss) 930 2,452 347 6,214 405
Income (loss) before
income taxes 3,563 4,267 2,643 7,732 2,303
Net Income before
extraordinary gain 2,434 3,057 1,728 4,928 1,495
Extraordinary gain - - - - 5,669
Net income 2,434 3,057 1,728 4,928 7,164
Earnings per adjusted
Share
Basic 0.25 0.36 0.21 0.62 0.90
Diluted 0.24 0.35 0.20 0.58 0.85
Pro Forma 2004
($ thousands except ----------------------------
per share amounts) Q4 Q3 Q2
-------- -------- --------
Direct Written Premiums 26,864 27,380 34,106
Total Revenues 16,697 16,889 16,275
Underwriting Income
(loss) 3,585 172 (587)
Income (loss) before
income taxes 5,644 1,306 795
Net Income before
extraordinary gain 5,632 1,060 1,102
Extraordinary gain - - -
Net income 5,632 1,060 1,102
Earnings per adjusted
Share
Basic 0.71 0.13 0.14
Diluted 0.69 0.13 0.14
Balance Sheet Analysis
Investments The following table sets forth EGI's invested assets as at
March 31, 2006, and December 31, 2005.
March 31, 2006 December 31, 2005
------------------------------ -----------------------------
Unrealized Unrealized
($ in Carrying Fair gain Carrying Fair gain
thousands) amount value (loss) amount value (loss)
--------- --------- --------- --------- --------- ---------
Bonds 121,399 120,774 (625) 122,677 123,633 956
Preferred
shares 3,738 3,744 6 3,738 3,767 29
Common
shares 27,049 35,430 8,381 25,563 31,735 6,172
Investment
income due
and accrued 1,495 1,495 - 758 758 -
--------- --------- --------- --------- --------- ---------
153,681 161,443 7,762 152,736 159,893 7,157
--------- --------- --------- --------- --------- ---------
EGI's portfolio is constructed in a manner which seeks to ensure that its
objectives of producing a competitive rate of return while at the same time
protecting and enhancing statutory underwriting capital on a long term basis
are met. This is achieved through diversification principles to ensure each
asset class has limited exposure by region, by industry, by issuer and by type
of underlying security. Target ranges are set for each asset class and
economic sector and are monitored by the Investment Committee to ensure that
EGI's investment managers comply with these guidelines, and all regulatory
requirements and liquidity needs are adhered to by each manager.
Fixed Income Securities
EGI holds fixed income securities to provide a steady, predictable level
of income and reasonable liquidity with minimum risk of loss and a fixed sum
at maturity. EGI's portfolio is diversified by selecting various types of
government and corporate bonds. Constraints on types of issuers take
liquidity, diversification and risk into account by limiting the portfolio mix
by issuer.
EGI maintains a high overall credit quality level as measured by Dominion
Bond Rating Service ("DBRS"). Constraints are placed on the percentage of
bonds which can be held in the rating classes as follows: Class A or better -
no maximum, Class BBB or lower - maximum 10%. EGI's policy is to purchase only
corporate bond issues which are rated BBB or better at the time of purchase.
In the event of subsequent downgrades, the Investment Committee will consider
whether to continue to hold the bonds.
Common Shares
Common shares are a key component of EGI's portfolio to enhance the
capital appreciation opportunities of EGI's invested assets. EGI's investment
managers, using a conservative approach to equity selection, ensure that
equities of companies with a reputation for strong management and a proven
track record of success are selected for EGI's portfolio. Diversification by
country and industry sector also reduces the overall risk level inherent in
EGI's common share portfolio.
EGI generally limits its total exposure to common shares at any one time
to a maximum of 16% of the total of its invested assets and premium financing
receivables, which is slightly below the average exposure to equities for
Canadian-owned insurers.
Recoverable from Reinsurers
As at March 31, 2006, the recoverable from reinsurers remained unchanged
at $56.8 million compared to December 31, 2005.
Accounts Receivable
Premium financing receivables is the largest component of this asset as
at March 31, 2006, and represents approximately 83% or $17.1 million of total
receivables. Premium financing receivables decreased $1.7 million or 9% to
$17.1 million at March 31, 2006, from $18.8 million at December 31, 2005. The
majority of the automobile business is billed directly to policyholders and
only a very small percentage is billed through the broker. Increasingly, more
of the direct billed premium to policyholders is being financed.
Provision for Unpaid Claims
EGI establishes loss reserves to provide for future amounts required to
pay claims related to insured events that have occurred and been reported but
have not yet been settled, and related to events that have occurred but have
not yet been reported to the insurer. Claims provisions (i.e. reserves for
claims liability) are established at the individual file level by the "case
method" as claims are reported. The provisions are subsequently adjusted as
additional information affecting the estimated amount of a claim becomes known
during the course of its settlement. With the assistance of EGI's consulting
actuary, a reserve provision is also made for management's calculation of
factors affecting the future development of claims including a provision for
claims incurred but not yet reported based on the volume of business currently
in force and the historical experience on claims. Reserves are also
established for the estimated internal and external loss adjustment expenses,
which will be incurred during the claims settlement process.
The provision for unpaid claims and adjustment expenses is discounted to
take into account the time value of money as required by EGI's primary
insurance regulator. It also includes a provision for adverse deviation as
required by accepted Canadian actuarial practice. EGI's consulting actuary
reports on the adequacy of EGI's claims reserves as at June 30 and December 31
of each year. As time passes, more information about the claims becomes known
and provisional estimates are appropriately adjusted upward or downward.
Adjustments to reserves are reflected in the results of operations in the
periods in which the estimates are changed.
The development of the provision for claims is shown by the difference
between estimates of reserves as of the initial year-end and the re-estimated
liability at each subsequent year-end. This is based on actual payments in
full or partial settlement of claims, plus re-estimates of the reserves
required for claims still open or claims still unreported. Favourable
development means that the original reserve estimates were higher than
subsequently indicated. Unfavourable development means that the original
reserve estimates were lower than subsequently indicated.
Provision for unpaid claims consists of the gross amount of individual
case reserves established and management's estimate of claims incurred but not
reported based on the volume of business currently in force and historical
claims experience. In order to ensure as far as possible that EGI's provision
for unpaid claims (often called "reserves") is adequate, management has
retained the services of an independent actuary. EGI strives to establish
adequate provisions at each quarter end.
EGI estimates its reserves on a quarterly basis and this is supported by
a mid-year and an annual assessment by the independent actuary. Every quarter,
for each line of business, EGI compares actual and expected claims
development. To the extent that actual results differ from expected
development, assumptions are re-evaluated and new estimates are derived.
Although EGI believes its overall provision levels to be adequate to satisfy
its obligations under existing policies, actual losses may deviate, perhaps
substantially, from the amounts reflected in EGI's financial statements. To
the extent provisions prove to be inadequate, EGI would have to increase such
provisions and incur a charge to earnings in the future.
The table below shows the development of the provision for claims
reserves including loss adjustment expenses as at December 31 in each year of
the four year period and for the quarter ended March 31, 2006.
Years ended December 31
---------------------------------------
(in $ thousands) 2005 2004 2003 2002
--------- --------- --------- ---------
Reserve Carried (actuarial
present value basis)(1) 129,041 107,196 79,191 66,545
Reserve at December 31, 2003 43,754
Cumulative paid to
December 31, 2003 24,122
Cumulative Redundancy
(Deficiency) (1,331)
Reserve at December 31, 2004 56,226 31,213
Cumulative paid to
December 31, 2004 24,184 39,619
Cumulative Redundancy
(Deficiency) (1,220) (4,286)
Reserve at December 31, 2005 70,620 37,802 21,682
Cumulative paid to
December 31, 2005 24,922 38,802 48,033
Cumulative Redundancy
(Deficiency) 11,654 2,587 (3,170)
Reserve at March 31, 2006 118,418 67,772 35,753 20,662
Cumulative paid to
March 31, 2006 8,781 28,384 41,324 49,554
Cumulative Redundancy
(Deficiency) 1,842 11,040 2,114 (3,631)
(1) Amounts include Provision for Adverse Deviation (PfAD) of $11,619 -
2005, $8,613 - 2004, $6,137 - 2003 and $5,226 - 2002.
The uncertainties regarding EGI's reserves could result in a liability
exceeding the reserves by an amount that would be material to EGI's financial
condition or results of operations in a future period. Future development
could be significantly different from the past, due to many unknown factors.
Reinsurance
EGI has reinsurance treaties with several unaffiliated reinsurers, all of
whom are selected on the basis of their credit worthiness. EGI purchases
reinsurance to reduce its exposure to the insurance risks that it assumes in
writing business. For 2006 the maximum net retention on a single risk is
$0.95 million.
In accordance with industry practice, EGI's reinsurance recoverables with
licensed Canadian reinsurers are generally unsecured, because Canadian
regulations require these reinsurers to maintain minimum asset and capital
balances in Canada to meet their Canadian obligations. However, policy
liabilities rank in priority to any subordinate creditors a reinsurer may
have. For reinsurance recoverables with non-licensed reinsurers, EGI maintains
security against reinsurance recoverables in the form of cash, letters of
credit and/or assets held in trust accounts. At March 31, 2006, EGI was the
assigned beneficiary of such trust accounts totalling $2.1 million
(December 31, 2005 - $2.3 million) in guarantees from unlicensed reinsurers.
Excess of loss and catastrophe reinsurance is used to limit an insurer's
exposure to a maximum dollar value per claim and per occurrence. Quota share
is a form of proportional reinsurance often used by an insurer to build a book
of business larger than can be supported by the insurer's own capital. When
used on established, profitable lines of business, quota share is an expensive
substitute for equity capital. The insurer is essentially "borrowing" capital
from the reinsurer by transferring unearned premium and claims liabilities
from its books to the books of the reinsurer. Within the range of expected
loss ratios, this transfer is done at a direct cost to the insurer, which
happens through the ceding commission (expense allowance) paid by the
reinsurer.
The ceding commission paid to the insurer by the reinsurer varies
depending on the gross loss ratio. As the gross loss ratio increases, the
amount of ceding commission decreases, subject to agreed limits. Above the
maximum loss ratio on the ceding commission scale, there is full risk transfer
(i.e., the potential to lose money) to the reinsurer. Below the minimum loss
ratio on the ceding commission scale, the reinsurer's profit increases. The
reinsurer also retains the investment income on the cash balances that develop
between the dates premiums are received and the dates claims are paid.
EGI purchases renewable excess of loss and catastrophe reinsurance from
third party reinsurers, covering its automobile and general liability
business. In 2006, such coverage is for a total of $19,500,000 and in 2005 is
for $14,425,000. EGI has also purchased renewable quota share reinsurance from
third party reinsurers in 2005. In 2005 EGI purchased 25% quota share
reinsurance coverage protecting its automobile and general liability
businesses. This coverage was withdrawn effective December 31, 2005. Other
than general liability, coverages for the programs of the Niche Products
Division are reinsured on a program-by-program basis.
For 2005, EGI's liability after all excess of loss and quota share
reinsurance recoveries is limited to a maximum of $450,000 and, in 2006,
$950,000 on any one claim. Using reinsurance, EGI's policy is to limit its
loss exposure in any one claim to not more than 2% of its shareholders'
equity.
EGI depends upon the financial stability of its reinsurers in the same
way that EGI's insureds rely upon EGI. Accordingly, EGI carefully selects its
reinsurers and only deals with credit-worthy reinsurers. Reinsurers are
selected based on their financial strength ratings, services, reputation and
prices offered on the required reinsurance. As reported to EGI by AON Re
Canada Inc., EGI's reinsurance broker, at December, 2005, all reinsurers
providing coverage under EGI's treaties were rated B++ or better by A.M. Best.
EGI's Reinsurance Committee is responsible for evaluating and approving
companies to which EGI cedes reinsurance. The committee consults with AON Re
Canada Inc. regarding the financial ratings of EGI's reinsurers.
As EGI's insurance and reinsurance company subsidiaries increase their
equity (and therefore regulatory capital), they can retain more insurance
business for their own account and therefore purchase less quota share
reinsurance. The marginal return on this new capital can be very substantial.
Each dollar of new equity allows EGI to retain up to two and one-half dollars
of additional premium (and the potential downside risk thereon) each year for
its own account.
EGI believes that there is currently adequate reinsurance capacity in the
marketplace for those classes of business which EGI underwrites and management
is not aware of any developments that might cause a serious shortage of
capacity in the future. EGI believes that, through its reinsurance program, it
is adequately protected against major underwriting losses arising from a large
claim under a single policy or claims under a group of policies arising from a
single event.
Share Capital
As of April 18, 2006, there were 9,587,152 common shares issued and
outstanding. See Note 9 to our audited 2005 consolidated financial statements.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure there is sufficient cash
to meet all of EGI's financial commitments and obligations as they come due.
EGI believes that it has the flexibility to obtain, from internal sources, the
funds needed to fulfill its cash requirements during the following financial
year and to satisfy regulatory capital requirements. EGI's principal sources
of funds are premiums collected, investment income and proceeds from
investments that have been sold or have matured. However, such funds may not
provide sufficient capital to enable EGI to pursue additional market
opportunities.
At December 31, 2004, EGI had a $1.25 million principal debt obligation
to Co-operators General Insurance Company that was due in June 2006 with
accrued interest. This obligation was paid in full on December 21, 2005, with
a portion of the proceeds of the IPO. EGI also issued Series F special shares
with a cumulative dividend feature in June 2004 and redeemed these shares with
a portion of the proceeds of the IPO on January 31, 2006.
The only contractual obligation that EGI has relates to operating leases
for which $0.5 million is due in less than a year and $1.0 million is due in
the next two years.
EGI is a holding company and, as such, has limited direct operations of
its own. EGI's principal assets are the shares of its insurance, reinsurance
and insurance management subsidiaries. Accordingly, its future cash flows
depend in part upon the availability of dividends and other statutorily
permissible distributions from the insurance subsidiaries. The ability to pay
such dividends and to make such other distributions is limited by applicable
laws and regulations of the jurisdictions in which the insurance subsidiaries
are domiciled, which subject the insurance subsidiaries to significant
regulatory restrictions. These laws and regulations require, among other
things, that the insurance subsidiaries maintain minimum solvency requirements
and also limit the amount of dividends that the insurance subsidiaries can pay
to EGI.
Transactions with Related Parties
EGI has entered into transactions with two related parties, Co-operators
General Insurance Company and Purves Redmond & Associates Limited ("Purves
Redmond"). These transactions are carried out in the normal course of
operation and are measured at cost which approximates fair value. The
transactions involving Co-operators, which is a significant shareholder of
EGI, consist principally of the agent channel of distribution, support
services and investment management. Purves Redmond is involved in arranging
insurance coverage for the companies within the EGI group. Robert Purves, a
shareholder and director of EGI, is also a shareholder and chairman of Purves
Redmond.
Risk Management
The Company's 2005 Annual Report includes description and analysis of the
key risk factors which could have a material adverse effect on EGI's results
of operations, business prospects or financial condition. These factors have
remained substantially unchanged.
Corporate Governance
Please refer to the Company's 2005 Annual Report for a description of the
corporate governance structure and processes in place at EGI.
Disclosure Controls and Procedures
As of March 31, 2006, an evaluation was carried out, under the
supervision of and with the participation of management including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures as defined under Multilateral
Instrument 52-109. Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No changes were made in our
internal control over financial reporting during the quarter ended March 31,
2006, that have materially affected, or are reasonably likely to affect, our
internal control over financial reporting.
Capital Resources
The total capitalization of EGI at March 31, 2006, is $72.3 million
compared to $72.6 million at December 31, 2005. The decrease was caused by the
redemption of the Series F special shares in the amount of $2.3 million and
the payment of common share dividends of $0.4 million on March 31, 2006.
Offsetting these reductions is net income of $2.4 million in the first quarter
of 2006.
Future Adoption of New Accounting Policies
Please refer to page 34 of the Company's 2005 Annual Report.
Consolidated Financial Statements of
EGI FINANCIAL HOLDINGS INC.
March 31, 2006
EGI FINANCIAL HOLDINGS INC.
Consolidated Balance Sheets
(in $ thousands)
March 31 December 31
Assets 2006 2005
(unaudited)
Cash and short-term deposits................... $ 13,352 $ 15,899
Investments (note 3)........................... 153,681 152,736
Reinsurers' share - unearned premiums.......... 2,993 2,761
- unpaid claims.............. 53,838 54,043
Accounts receivable............................ 20,659 22,271
Income taxes recoverable....................... 349 273
Due from insurance companies................... 3,102 2,504
Deferred policy acquisition costs.............. 6,187 6,289
Capital assets................................. 516 560
Future income taxes............................ 4,246 3,133
Prepaid expenses and other assets.............. 332 262
---------- ----------
$ 259,255 $ 260,731
---------- ----------
---------- ----------
Liabilities
Provision for unpaid claims (note 4)........... 136,370 129,173
Unearned premiums.............................. 38,630 39,973
Unearned commission............................ 987 1,261
Accounts payable and accrued liabilities....... 3,623 4,503
Payable to insurance companies................. 5,349 7,340
Income taxes payable........................... 2,000 5,708
Other liabilities.............................. - 188
---------- ----------
186,959 188,146
---------- ----------
Shareholders' Equity
Share capital (note 6)......................... 45,522 47,660
Contributed surplus............................ 107 80
Retained earnings.............................. 26,667 24,845
---------- ----------
72,296 72,585
---------- ----------
$ 259,255 $ 260,731
---------- ----------
---------- ----------
EGI FINANCIAL HOLDINGS INC.
Consolidated Statements of Income
for the Quarters Ended March 31
(in $ thousands, except per share amounts)
2006 2005
(unaudited) (unaudited)
Revenue:
Direct written premiums...................... $ 26,092 $ 25,931
---------- ----------
Net written premiums......................... 23,493 18,453
---------- ----------
Net earned premiums.......................... 25,074 16,650
Investment income............................ 2,633 1,898
Other revenue................................ 1 6
---------- ----------
$ 27,708 $ 18,554
---------- ----------
Expenses
Incurred claims.............................. 16,579 11,533
Acquisition costs............................ 4,980 2,764
Operating expenses........................... 2,586 1,955
---------- ----------
24,145 16,252
---------- ----------
Income before income taxes and
extraordinary gain............................ 3,563 2,302
Income tax expense............................. 1,129 807
---------- ----------
Income before extraordinary gain............... 2,434 1,495
Extraordinary gain, net of taxes............... - 5,669
---------- ----------
Net income..................................... $ 2,434 $ 7,164
---------- ----------
---------- ----------
Earnings per share :
Net income per share before extraordinary gain $ 0.25 $ 0.18
Net income per share from extraordinary gain $ 0.00 $ 0.72
Net income per share $ 0.25 $ 0.90
Net income per diluted share before
extraordinary gain $ 0.24 $ 0.17
Net income per diluted share from
extraordinary gain $ 0.00 $ 0.66
Net income per diluted share $ 0.24 $ 0.83
EGI FINANCIAL HOLDINGS INC.
Consolidated Statements of Changes in Shareholders' Equity
for the Quarters ended March 31
(in $ thousands)
2006 2005
(unaudited) (unaudited)
Share capital
Balance, beginning of period................. $ 47,660 $ 17,341
Common shares issued......................... 17 14,222
Redemption of Series F special shares........ (2,155) -
---------- ----------
Balance, end of period....................... $ 45,522 $ 31,563
---------- ----------
Contributed surplus
Balance, beginning of period................. $ 80 $ -
Stock options granted........................ 27 -
---------- ----------
Balance, end of period....................... $ 107 $ -
---------- ----------
Retained earnings
Balance, beginning of period................. $ 24,845 $ 7,968
Net income................................... 2,434 7,164
Dividends - Series F special shares.......... (229) -
- Common shares.................... (383) -
---------- ----------
Balance, end of period....................... $ 26,667 $ 15,132
---------- ----------
Total, end of period........................... $ 72,296 $ 46,695
---------- ----------
---------- ----------
EGI FINANCIAL HOLDINGS INC.
Consolidated Statements of Cash Flows
for the Quarters Ended March 31
(in $ thousands)
2006 2005
(unaudited) (unaudited)
Cash provided by (used in):
Operating activities:
Net income................................... $ 2,434 $ 7,164
Items not involving cash:
Amortization of capital assets............. 119 94
Amortization of premium on bonds........... 68 51
Realized gains on investments.............. (869) (549)
Extraordinary gain......................... - (6,819)
---------- ----------
1,752 (59)
Net change in other non-cash balances.......... (1,357) 25
---------- ----------
$ 395 $ (34)
---------- ----------
Financing activities
Issue of common shares....................... 17 -
Redemption of Series F special shares........ (2,384) -
Common share dividends....................... (383) -
---------- ----------
$ (2,750) $ -
---------- ----------
Investing activities:
Acquisition of subsidiary,
net of cash acquired........................ - 5,646
Purchase of capital assets................... (75) (169)
Purchase of investments...................... (61,825) (17,042)
Sale/maturity of investments................. 61,708 14,301
---------- ----------
$ (192) $ 2,736
---------- ----------
Increase (decrease) in cash and
short-term deposits........................... (2,547) 2,702
Cash and short-term deposits,
beginning of quarter.......................... 15,899 7,327
---------- ----------
Cash and short-term deposits, end of quarter... $ 13,352 $ 10,029
---------- ----------
Supplementary information
Income taxes paid............................ $ 6,026 $ 2,188
---------- ----------
EGI FINANCIAL HOLDINGS INC.
Notes to Consolidated Financial Statements
(unaudited, in $ thousands except per share amounts)
1. Organization and Basis of Presentation.
These interim consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the
year ended December 31, 2005, as set out on pages 36 to 51 of the
Company's 2005 Annual Report. These interim consolidated financial
statements have been prepared in accordance with Canadian generally
accepted accounting principles using the same accounting policies as were
used for the Company's consolidated financial statements for the year
ended December 31, 2005.
The preparation of financial statements in accordance with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities as at the date of the financial statements and the reported
amounts of revenue and expenses during the periods covered by the
financial statements. The principal financial statement components
subject to measurement uncertainty include the provision for claims,
other than temporary declines in the value of investments and the
carrying value of future tax assets. Actual results could differ from
those estimates.
The Company is principally engaged, through its subsidiaries, in property
and casualty insurance.
2. Extraordinary Gain
During January 2005, the Company issued shares to acquire an additional
50% ownership interest in the holding company that owned 100% of Echelon.
The acquisition cost of $14,222 was paid with the issuance of 1,682,768
common shares and 1,682,768 Series B special shares of the Company. The
price of the common shares was determined and agreed using the fair value
of the net assets acquired as at December 31, 2003.
The resulting negative goodwill was recorded as an extraordinary gain in
2005, net of income tax of $1,150.
3. Investments
The Company utilizes the prudent person approach to asset management as
required by the Insurance Companies Act (the "Act"). An investment policy
is in place and its application is monitored by the Board of Directors.
Diversification techniques are employed to minimize risk. Policies limit
investments in any entity or group of related entities to a maximum of 5%
of the Company's assets. Limitations are also placed on the quality of
investments, particularly relating to investment grade bonds.
March 31, 2006 December 31, 2005
----------------------------- -----------------------------
Net Un- Net Un-
realized realized
Carrying Fair gain Carrying Fair gain
amount value (loss) amount value (loss)
--------- --------- --------- --------- --------- ---------
Bonds
Canadian
Federal $ 59,405 $ 58,780 $ (625) $ 61,405 $ 61,267 $ (138)
Provincial 23,434 23,549 115 21,366 22,307 941
Municipal 1,923 1,975 52 1,529 1,617 88
Corporate 36,637 36,470 (167) 38,377 38,442 65
--------- --------- --------- --------- --------- ---------
$121,399 $120,774 $ (625) $122,677 $123,633 $ 956
--------- --------- --------- --------- --------- ---------
Preferred
shares $ 3,738 $ 3,744 $ 6 $ 3,738 $ 3,767 $ 29
--------- --------- --------- --------- --------- ---------
Common shares
Canadian 24,445 32,494 8,049 22,802 28,934 6,132
United States 2,604 2,936 332 2,761 2,801 40
--------- --------- --------- --------- --------- ---------
$ 27,049 $ 35,430 $ 8,381 $ 25,563 $ 31,735 $ 6,172
--------- --------- --------- --------- --------- ---------
Investment
income
due and
accrued 1,495 1,495 - 758 758 -
--------- --------- --------- --------- --------- ---------
$153,681 $161,443 $ 7,762 $152,736 $159,893 $ 7,157
--------- --------- --------- --------- --------- ---------
Fair values of bonds and stocks are determined based on quoted market
prices. Bonds comprise Canadian government, provincial, municipal and
corporate bonds.
Impaired assets and provisions for losses
The Board of Directors has established a policy to write down or make a
provision for any investment with "other than temporary" impairment.
There was no investment provision recorded in the interim consolidated
financial statements for 2006 and 2005.
Management has reviewed currently available information regarding those
investments whose estimated fair value is less than carrying value. Debt
securities whose carrying value exceeds market value can be held until
maturity. All investments have been reviewed to ensure that corporate
performance expectations have not changed significantly to adversely
affect the market value of these investments other than on a temporary
basis.
Interest rate and liquidity risk
Historical data and current information are used to profile the ultimate
claims settlement pattern by class of insurance, which is then used in a
broad sense to develop an investment policy and strategy. Fluctuations in
interest rates could have a significant impact on the market value of the
bond portfolio. Stock market values can be volatile. This could result in
realized gains or losses if actual claims payment patterns require
liquidation of investments.
Liquidity risk is the risk that an entity will encounter difficulty in
raising funds to meet cash flow commitments associated with financial
instruments. To manage its cash flow requirements, the Company maintains
a portion of its invested assets in liquid securities.
The maturity profile of bonds as at March 31, 2006, is as follows:
1 - 3 3 - 5 Over 5
1 year years years years Total
--------- --------- --------- --------- ---------
Bonds $6,592 $19,181 $38,560 $57,066 $121,399
Percentage of total 5.4% 15.8% 31.8% 47.0% 100.0%
4. Provision for unpaid claims
The determination of the provision for unpaid claims and adjustment
expenses and the related reinsurers' share requires the estimation of
three major variables or quanta, being development of claims, reinsurance
recoveries and the effects of discounting, to establish a best estimate
of the value of the respective liability or asset.
The provision for unpaid claims and adjustment expenses is an estimate
subject to variability and the variability could be material in the near
term. The variability arises because all events affecting the ultimate
settlement of claims have not taken place and may not take place for some
time. Variability can be caused by receipt of additional claim
information, changes in judicial interpretation of contracts, significant
changes in the severity or frequency of claims for historical trends, the
timing of claim payments, the recoverability of reinsurance and future
rates of investment return. The estimates are principally based on the
Company's historical experience. Methods of estimation have been used,
which the Company believes produce reasonable results given current
information.
All provisions are periodically reviewed and evaluated considering
emerging claims experience and changing circumstances. The process of
determining the provisions necessarily involves risks that actual results
may differ, perhaps materially, from the best estimates made. The
resulting changes in estimates of the ultimate liability are recorded as
incurred claims in the current year.
The provision for unpaid claims includes a provision for adverse
deviation, as required by Canadian accepted actuarial practices. The
aggregate impact of the provision for adverse deviation is to increase
the provision for unpaid claims on a gross basis by $13,381 as at March
31, 2006 (December 31, 2005 - $12,485).
March 31, 2006 December 31, 2005
------------------- -------------------
Gross Ceded Gross Ceded
Automobile:
- accident benefits $ 49,480 $ 20,816 $ 47,571 $ 21,668
- liability 80,573 30,965 75,631 30,647
- other 2,160 666 3,063 1,237
--------- --------- --------- ---------
Total Automobile $132,213 $ 52,447 $126,265 $ 53,552
--------- --------- --------- ---------
Niche:
Property
- commercial 1,617 372 1,590 411
- personal 107 26 74 28
Liability 1,427 853 114 28
Accident and sickness 732 122 961 9
Other 274 18 169 15
--------- --------- --------- ---------
Total Niche $ 4,157 $ 1,391 $ 2,908 $ 491
--------- --------- --------- ---------
$136,370 $ 53,838 $129,173 $ 54,043
--------- --------- --------- ---------
The Company discounts its best estimate of claim provisions at a rate of
interest of 2.8% for 2006 (2005 - 2.8%) for all lines of business. The
Company determines the discount rate based upon the expected return on
its investment portfolio of assets with appropriate assumptions for
interest rates relating to reinvestment of maturing investments.
5. Underwriting policy and reinsurance ceded
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavourable
underwriting results by purchasing reinsurance to share all or part of
the insurance risks originally accepted by the Company in writing
premiums. This reinsurance does not relieve the Company of its primary
obligation to policyholders.
The Company has entered into quota share reinsurance contracts with third
party reinsurers ceding 25% of all auto risks written in 2005. There were
other specific reinsurance placements for the specialty property and
casualty program business. At the end of 2005 the Company arranged for a
portfolio withdrawal of the unearned premiums from the 2005 quota share
reinsurers. No quota share reinsurance has been purchased for auto
policies written in 2006.
During the first quarter of 2006, the Company followed the policy of
underwriting and reinsuring contracts of insurance, which limits the net
exposure of the Company to a maximum amount on any one loss to $950
(2005 - $450). In addition, the Company obtained catastrophe reinsurance
which limits the loss from a series of claims arising from a single
occurrence to $950 (2005 - $750) to a maximum coverage of $19,050
(2005 - 75% of $15,000).
The Company places all its automobile reinsurance with Canadian
registered reinsurers. There are non-registered reinsurers participating
on the specialty property and casualty program business. The Company has
access to trust funds that, in the Company's judgement, are adequate to
secure the liabilities that the Company has ceded to non-registered
reinsurers.
Failure of reinsurers to honour their obligations could result in losses
to the Company. Consequently, the Company continually evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk to minimize its exposure to significant losses. There have
been no defaults and no provision made in the accounts for defaults based
on management's review of the creditworthiness of its reinsurers.
6. Share capital
March 31, December 31,
2006 2005
------------- ------------
Authorized:
Unlimited common shares
Unlimited special shares issuable in Series
Issued:
9,587,152 common shares
(2005 - 9,583,152 post split) 45,522 45,505
Nil Series F special shares(2005-2,268,279) - 2,155
------------- ------------
45,522 47,660
------------- ------------
On January 31, 2006, the Series F special shares were redeemed for
consideration of $2,384 including dividends of $229.
On March 31, 2006, common share dividends of $383 or $.04 per share were
paid to common shareholders of record March 15, 2006.
During the first quarter of 2006, 4,000 common shares were issued
pursuant to the exercise of options under the employee stock option plan.
7. Earnings per share
First First
Quarter Quarter
2006 2005
--------- ---------
Basic earnings per share:
Income before extraordinary gain $ 2,434 $ 1,495
Dividends to Series F shareholders 12 36
--------- ---------
Income before extraordinary gain available
to common shareholders $ 2,422 $ 1,459
--------- ---------
Diluted earnings per share:
Average number of common shares (in thousands) 9,585 7,913
Common shares obligation under employee
stock option plan 606 470
--------- ---------
Average number of diluted common shares 10,132 8,383
--------- ---------
Earnings per share amounts for the first quarter of 2005 reflect the
two-for-one common stock split completed on June 7, 2005. On December 8,
2005, 1,670,000 common shares were issued pursuant to the Company's
Initial Public Offering.
8. Segmented information
The Company operates through two divisions. Through its Automobile
Division, the Company is engaged in the underwriting of high premium,
non-standard automobile insurance. Through its recently established Niche
Products Division, the Company designs and underwrites specialized
non-auto insurance programs, such as higher premium property, primary and
excess liability, legal expense, accident and health insurance and
warranty coverage.
The effect of reinsurance is reflected in the revenue and results of the
two divisions. The investment activities consist of managing the
investment portfolio for the Company as a whole. Investment income is
shown net of investment expenses. The corporate and other activities
include sources of income and non-recurring items such as acquisitions,
divestitures and discontinued operations.
First First
Quarter Quarter
2006 2005
--------- ---------
Revenue
Earned premiums
Property and casualty insurance
Automobile $ 22,661 $ 15,578
Niche 2,414 1,078
--------- ---------
$ 25,075 $ 16,656
Interest and dividends 1,774 1,349
Realized gains 859 549
--------- ---------
Total revenue $ 27,708 $ 18,554
--------- ---------
Income (loss) before income taxes
Property and casualty insurance
Automobile $ 1,302 $ 440
Niche (189) 79
Corporate and other (183) (115)
--------- ---------
Underwriting Income $ 930 $ 404
Interest and dividends 1,774 1,349
Realized investment and other gains 859 549
--------- ---------
Total income before income taxes and
extraordinary gain $ 3,563 $ 2,302
--------- ---------
For further information:
Douglas E. McIntyre,
Chief Executive Officer,
EGI Financial Holdings Inc.,
Telephone: (905) 564-9215
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