economical insurance | 2019 annual report...with strong, committed leaders and employees, economical...

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At the end of 2019, the independent rating agency AM Best reaffirmed the financial

strength of Economical with an A- (Excellent) rating for the seventh consecutive year.

This recognition provides additional confidence for our valued broker partners and customers as we drive our strategy forward.

OUR VISIONTo be one of Canada’s top

property and casualty insurers, recognized for our business

innovation and how well we take care of our customers.

OUR MISSION To be the insurance partner

Canadians choose to protect what they value most.

OUR VALUES

We focus on customers first

We bring our best

We’re stronger together

INSURANCE CAN BE BETTERThe world has become a drastically different place since the closing of 2019. The COVID-19 crisis has made supporting each other with a shared sense of community more critical than ever. Teams across Economical® have rallied together with urgency and focus to support customers, brokers, communities, and each other.

The unwavering confidence and empathy of the people at Economical demonstrates the shared values necessary to manage our business with compassion and integrity. While this new chapter is unexpected, Economical remains focused on the goal of becoming a high performing, publicly-traded company.

With strong, committed leaders and employees, Economical will continue to support customers, brokers, employees, and communities when they need it most.

* The claims satisfaction percentage is based on 10,793 claimant survey responses measuring customer satisfaction with claims services from January 2019 to December 2019.

89%CUSTOMER

CLAIMS SATISFACTION

2019 PERFORMANCE AT A GLANCE

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2019 PERFORMANCE AT A GLANCE

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EXPENSE RATIO

Our expense ratio significantly decreased in 2019 from prior years. We continued to make investments in our strategic initiatives, which we expect to drive profitable growth and improve our operational efficiency in the longer term.

MINIMUM CAPITAL TEST (MCT)

Our MCT ratio of 239.1% remained well in excess of both minimum internal capital and external regulatory requirements as of December 31, 2019.

GROSS WRITTEN PREMIUMS (GWP)

Gross written premiums exceeded $2.5 billion in 2019, increasing 2.2% compared to 2018, as personal lines growth outpaced reduced commercial business, which underwent corrective underwriting actions.

COMBINED RATIO (COR)

Our combined ratio of 105.0% in 2019 represented a year over year improvement of 6.8 points, driven by a significant improvement in our commercial lines business, lower catastrophe losses, and a decrease in the expense ratio.

TOTAL EQUITY

Total equity at year-end increased by $43.7 million from the prior year-end, to a total exceeding $1.6 billion.

NET INCOME (LOSS)

Net income of $17.4 million in 2019 represented a significant improvement of $90.4 million from the net loss in 2018 of $73.0 million, driven by lower underwriting losses.

2015 2016 2017 2018 2019

2.01B

$2.51B

2.08B

2.29B

2.46B

2015 2016 2017 2018 2019

2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

2015 2016 2017 2018 2019

2015 2016 2017 2018 2019

97.4%

109.1%113.7% 111.8%

105.0%

176.0M

(20.3M) (92.7M) (73.0M)$17.4M

33.3%

37.2% 37.1% 36.3%

32.4%

1.78B 1.80B1.73B

1.57B$1.61B

285.2%276.1%

242.1%227.0%

239.1%

As I pen this letter in April 2020, we are experiencing the profound impact of COVID-19 here in Canada and in communities around the world. This global pandemic is an unprecedented humanitarian crisis with far-reaching health, financial and economic implications and, as a result, it is incredibly dynamic and difficult to predict.

At Economical, we are committed to moving forward with our business, actively managing the impact of COVID-19, supporting the health and safety of our employees, and meeting the needs of our customers and broker partners. Fortunately, we started this year with momentum, brought about by major initiatives executed over the past three years across our business. These actions have deepened the resilience of our organization, at a time when we and our customers need it most.

BUILDING A STRONG FOUNDATION

Under a strong and skilled leadership team, Economical closed 2019 in a position of emerging strength. We expanded and transformed our business to become more innovative, efficient, scalable, and profitable. The impact of these initiatives can be seen in key results from 2019:

• A substantial improvement in our commercial business, which benefitted from several years of disciplined portfolio realignment, underwriting actions, and rate increases

• The full implementation of VyneTM, which is driving growth and efficiency for our broker business

• Increasing the scale of Sonnet, which surpassed $200 million in annual gross written premiums in 2019 alongside ongoing improvements in underwriting performance

• Our continued pursuit of optimizing the claims experience to drive business efficiency and customer satisfaction

In 2019, we were also pleased to add additional bench strength to the diverse skill set of our Board of Directors, with the appointment of Robert McFarlane in October. Bob’s extensive experience in public company leadership as one of Canada’s top former CFOs is a welcome addition to what was already a strong and capable Board.

Our 2019 annual results demonstrate the positive impact from years of investment in our business fundamentals and innovation, and show we are building toward sustainable profitability, strengthening the track record we need to meet future investor expectations, complete our planned IPO, and succeed as a public company for the long term. Those investments have also made a tremendous impact on our ability to adapt our operations to continue supporting our broker partners and our customers in the face of the challenges presented by the COVID-19 pandemic.

THE DEMUTUALIZATION JOURNEY

As the first P&C insurance company in Canada to pursue demutualization under modern regulations, Economical is breaking new ground. In fact, the regulatory framework that governs our demutualization itself did not exist when we first started down this path and it took years to develop. Our journey has been longer and more complex than anyone could have predicted at the time, but we have made great progress so far.

MESSAGE FROM JOHN BOWEY, BOARD CHAIR

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KEY ACCOMPLISHMENTS FROM 2019 INCLUDE:

• Announced that a new charitable foundation is being established as part of our demutualization – The Economical Insurance Heritage Foundation – which will receive a $100 million donation from the proceeds of our successful demutualization. The Foundation’s mission will be to honour Economical policyholders and employees, past and present, by working to have the greatest impact in our communities.

• Published a comprehensive conversion plan that outlines how Economical intends to convert from a mutual company to a widely-held company with common shares. The plan includes the method of allocating the financial benefits that will result from a successful demutualization, which was the end result of extensive negotiations by court-appointed committees representing eligible policyholders.

• Secured overwhelming approval from eligible mutual policyholders to proceed with the demutualization process. At a special meeting held in the first half of the year, 99% of eligible mutual policyholders that voted were in favour of proceeding with the demutualization process.

Taken together, these gains are positioning us to succeed as a public company. They are the product of a sustained focus on working through the complexities of a unique regulatory process, while at the same time transforming Economical’s strategy, talent, market position, and operating capabilities.

OUR PATH AHEAD

As we continue to pursue the path to becoming a public company, we know that COVID-19 is having a profound impact on the economic outlook and capital market conditions in Canada and around the world. Most industries are affected and ours is no exception. Economical can’t control that, but we can respond by doing our part to help our customers navigate the crisis, delivering on our promise to be there when they need us most.

We don’t yet know the full extent of the pandemic’s impact on our business performance or the timing of our planned IPO. We do know the success of our IPO depends on:

• Our ability to build the kind of performance that investors will reward

• The emergence of favourable capital market conditions

• The completion of the remaining steps to secure necessary regulatory and governmental approvals

Our Board continues to actively monitor all of these factors, while our management, employees, and broker partners continue to work tirelessly to navigate through the ongoing impact of COVID-19 for our customers and the communities we serve.

The good news is, the strength in the business we demonstrated in 2019 provides valuable resiliency to navigate through a truly unprecedented time in our history. I am proud of what our team has accomplished, and the dedication they have shown to our customers and broker partners through this crisis.

JOHN BOWEY Board Chair

AT ECONOMICAL, WE ARE COMMITTED TO MOVING FORWARD WITH OUR BUSINESS, ACTIVELY MANAGING THE IMPACT OF COVID-19,

SUPPORTING THE HEALTH AND SAFETY OF OUR EMPLOYEES, AND MEETING THE NEEDS OF OUR CUSTOMERS AND BROKER PARTNERS.

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The global pandemic that now surrounds us is influencing all facets of our life, from our health and well-being to our economic and political outlook. This event is having a significant impact on individuals, families, and businesses, and we have worked diligently to ensure the well-being of our employees and broker partners throughout this challenging time.

We can’t look past the human cost of the pandemic and the very real impact it continues to have on the economy, our industry, and our business. However, it is also important not to lose sight of the progress Economical has made in our major multi-year transformation. We have been working on multiple fronts over the past three years to concurrently reshape our insurance fundamentals across all business lines and distribution channels. We continue to deliver on our innovation agenda.

I am extremely proud of what our team has accomplished and the momentum we’ve created in a very short period of time, particularly given the scale and complexity of the changes we’ve undertaken and the dynamic market conditions in which we operate. The positive 2019 financial results for Economical show that we are making sound investments in our business in order to achieve the results we need to become a strong and stable public company for the long term. In the midst of the COVID-19 pandemic, we remain committed to that goal, and are working diligently to support our employees, brokers, customers, and the communities we serve through this unprecedented crisis. The health and safety of our people and our broker partners are of utmost importance to us.

STRENGTHENING THE CORE BUSINESS

Our transformation initiatives relating to our core business are becoming evident in our financial results. The profit improvement plans we carried out during the last three years are now showing through our improved combined ratio, which was 105.0% for the full year 2019, a significant improvement of 6.8 points from the prior year. We were also pleased to see a return to profitability with a net income of $17.4 million for the year, a $90.4 million improvement from the prior year.

This outcome reflects how our teams have worked forcefully to re-price, re-segment, and re-engineer aspects of our business with a focus on driving future success. These significant shifts have improved our competitive position, representing an important start to the track record of success we need to demonstrate to potential future investors.

One area that truly demonstrates the impact of our actions is our commercial insurance business. Our leadership team evaluated high-performing and under-performing areas of our portfolio and undertook a focused restructuring. We updated our service offering with market-appropriate pricing and targeted underwriting actions, which have now positioned this line of business for growth. For the year, commercial lines underwriting performance improved by more than $80 million, producing an underwriting loss of $9.9 million compared to a loss of $92.3 million in the prior year. There is still work to do, but the actions are having the desired impact on performance.

Investment income was relatively flat in 2019, as market yields dropped materially, and they will likely pose an earnings headwind going into 2020. That said, the presence of low interest rates will likely also prolong the firm market pricing environment throughout 2020.

We continued to strengthen our leadership team with the addition of Liam McFarlane as Chief Risk and Actuarial Officer. As a recognized and respected actuarial expert, Liam represents an excellent addition of experience and influence to our strong executive leadership team. This continues our track record of attracting and retaining impressive leadership to our company and reinforces our confidence in our future.

INVESTING IN INNOVATION

While we have been enhancing our business to operate both efficiently and profitably, we have also been committed to being future-forward, through the launch of innovative offerings such as Sonnet and Vyne. It’s quite unusual for a business to pursue such innovative, large-scale initiatives simultaneously. This reflects the rigour and drive which our employees bring to work every day. Our hard work is starting to pay off.

MESSAGE FROM ROWAN SAUNDERS, PRESIDENT AND CEO

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The Sonnet business made great progress in 2019:

• Refined its segmentation to better target profitable customers

• Initiated enhanced underwriting fraud detection and deflection capabilities

• In December 2019, launched a group insurance offering to pursue profitable scale

More refinements are needed to scale Sonnet profitably, but we believe the efforts made throughout 2019 have shown the potential within Sonnet and the opportunity that lies ahead with this innovative, leading digital direct business.

On the broker side of our business, the Vyne offering has continued to improve:

• Our broker partners have shared positive sentiment regarding its ease of use

• 99% of policy renewals are being done in minutes, while they previously often took days

• Improving diversification as our broker business grew 17% in Quebec in 2019, thanks to strengthened regional leadership and the capabilities that Vyne provides

We will continue to refine and enhance our offering with a view to simple workflows that integrate easily for our broker partners, in addition to providing a seamless experience for our customers.

RESPONDING TO COVID-19

Amidst the COVID-19 pandemic, Economical is doing everything it can to address the impact of the current environment, prioritizing the health and well-being of our people, while maintaining our important focus on service levels and business operations. Economical has initiated a comprehensive and highly-responsive business continuity plan to meet the needs of our policyholders, broker partners, and employees. We continue to be thoughtful, measured, and adaptable through these new realities.

Our teams are adapting to new ways of working. Our technology enables most of our employees to work remotely, helping us to maintain safety and physical distancing measures for anybody that needs to be in our offices. To further protect everyone, we are now handling our broker and policyholder interactions by phone, email, and other available remote channels.

We also continue to give back to the communities where we live and work. Building on this commitment, Economical has

expanded donations to our longstanding partner, Canadian Red Cross, to support preparedness initiatives for COVID-19, and invested $200,000 to support front-line health workers in response to the virus. We are also working with brokers across the country to offer localized support.

We remain well capitalized, having entered the onset of the pandemic with a conservative investment portfolio and an A- (Excellent) rating from AM Best affirmed on November 15, 2019, which recognized our strong capitalization and commitment to organizational and operational transformations.

We are able to manage many of these changes because of the platforms we invested in building as part of preparing to become a publicly-traded company. Sonnet, our digital direct offering, enables policyholders to manage their insurance needs in real-time directly through the online platform. Vyne, our broker service platform, similarly allows brokers to directly source policy and quote information and submit policy changes for their customers in minutes. These functionalities are significant advantages for Economical, our brokers, and our policyholders at a time when physical distancing has become a necessary part of everyday life.

LOOKING AHEAD TO 2020

Every day, I am inspired by the dedication and commitment I see across the company. There is challenging work being done in our journey to build a high-performing, highly valued, dynamic, publicly-traded Canadian insurance company.

We still have some road to travel before we completely understand the full impact that the COVID-19 pandemic will have on our business performance and the timing of our planned IPO, but I am extremely proud of how Economical has supported employees, brokers, and communities to get through this together. This has only deepened our resiliency, proven our integrity, and focused our commitment to achieve future goals as our industry continues to adjust to external pressures. The needs and expectations of our customers, brokers, and employees will always evolve, as will the capabilities of our company.

Thank you for your ongoing support of our business. During 2020, I wish you good health and safety.

ROWAN SAUNDERS President & CEO

ECONOMICAL IS DOING EVERYTHING IT CAN TO ADDRESS THE IMPACT OF THE CURRENT ENVIRONMENT, PRIORITIZING THE HEALTH AND

WELL-BEING OF OUR PEOPLE, WHILE MAINTAINING OUR IMPORTANT FOCUS ON SERVICE LEVELS AND BUSINESS OPERATIONS.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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TABLE OF CONTENTSINTRODUCTION 10

1 — CORPORATE OVERVIEW 12

2 — FINANCIAL PERFORMANCE 14

3 — RESULTS BY LINE OF BUSINESS 18

4 — OPERATING ENVIRONMENT AND OUTLOOK 22

5 — FINANCIAL POSITION 24

6 — LIQUIDITY AND CAPITAL RESOURCES 28

7 — COMMITMENTS AND CONTINGENCIES 30

8 — RELATED PARTY TRANSACTIONS 31

9 — ACCOUNTING AND INTERNAL CONTROLS 32

10 — RISK MANAGEMENT AND CORPORATE GOVERNANCE 33

11 — NON-GAAP FINANCIAL MEASURES 44

12 — DEFINITIONS 45

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INTRODUCTIONFebruary 14, 2020

The following Management’s Discussion and Analysis (“MD&A”) is the responsibility of management and has been approvedby the Board of Directors. This MD&A is intended to enable the reader to assess our financial position and results ofoperations as at and for the year ended December 31, 2019, compared to our year ended December 31, 2018. This MD&Ashould be read in conjunction with our audited consolidated financial statements and accompanying notes for the year endedDecember 31, 2019. Unless otherwise noted in this MD&A, all information was prepared as at February 14, 2020.

As used in this MD&A, references to “Economical”, “the Company”, “we”, “us”, and “our” refer to Economical Mutual InsuranceCompany, and, unless the context otherwise requires or is otherwise expressly stated, its consolidated subsidiaries.

The Company’s audited consolidated financial statements have been prepared in accordance with International FinancialReporting Standards (“IFRS” or “GAAP”). Management uses certain non-GAAP measures to assess performance and explainresults for the year. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore may notbe comparable to similar measures presented by other companies. These measures are outlined and defined in this MD&A.See Section 11 — “Non-GAAP financial measures”.

This MD&A may include product and brand names, trade names, and trademarks of Economical, our subsidiaries and othercompanies, each of which is the property of their respective owners.

All dollar amounts are in Canadian dollars. Certain totals, subtotals, and percentages may not reconcile due to rounding. Achange column has been provided showing the variation between the current year and the prior year for certain financialanalyses.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements that involve risks and uncertainties. Certain of the statements made in thisMD&A, including, but not limited to, statements in Section 4 — “Operating environment and outlook”, and statementsregarding our current and future plans, expectations and intentions, results, levels of activity, performance, goals orachievements, or any other future events or developments may constitute forward-looking statements. When used in thisMD&A, the words “may”, “will”, “would”, “should”, “could”, “expects”, “plans”, “intends”, “trends”, “indications”, “anticipates”,“believes”, “estimates”, “predicts”, “likely”, “looking to”, “potential”, or negative or other variations of these words, or othersimilar or comparable words or phrases suggesting future events or outcomes, are typically intended to identify forward-looking statements.

Forward-looking statements are based on estimates and assumptions made by management based on management’sknowledge, experience, and perception of historical trends, current conditions, and expected future developments, as well asother factors that management believes are appropriate in the circumstances. Many factors could cause Economical’s actualresults, performance or achievements, or future events or developments to differ materially from those expressed or impliedby the forward-looking statements, including, without limitation, the following factors:

‰ Economical’s ability to appropriately price its insurance products to produce an acceptable return;‰ Economical’s ability to accurately assess the risks associated with the insurance policies that it writes;‰ Economical’s ability to assess and pay claims in accordance with our insurance policies;‰ litigation and regulatory actions;‰ Economical’s ability to obtain adequate reinsurance coverage to transfer risk;‰ Economical’s ability to accurately predict future claims frequency or severity, including the frequency and severity of

weather-related events and the impact of climate change;‰ the occurrence of unpredictable catastrophe events;‰ unfavourable capital market developments, interest rate movements, or other factors which may affect our investments;‰ Economical’s ability to successfully manage credit risk from its counterparties;‰ foreign currency fluctuations;‰ Economical’s ability to meet payment obligations as they become due;‰ Economical’s dependence on key employees;‰ Economical’s ability to attract, develop, motivate, and retain an appropriate number of employees with the necessary skills,

capabilities, and knowledge;‰ Economical’s ability to appropriately manage and protect the collection and storage of information;‰ Economical’s reliance on information technology and telephony systems and the potential disruption or failure of those

systems, including as a result of cyber security risk;‰ failure of key service providers or vendors to comply with contractual or business terms;‰ changes in legislation or its interpretation or application, or supervisory expectations or requirements, including risk-based

capital guidelines;‰ deceptive or illegal acts undertaken by an employee or a third party, including fraud in the course of underwriting insurance

or settling insurance claims;‰ Economical’s ability to respond to events impacting its ability to conduct business as normal;‰ Economical’s ability to implement its strategy or operate its business as management currently expects;‰ general economic, financial, and political conditions, particularly those in Canada;

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‰ the competitive market environment;‰ the introduction of disruptive innovation;‰ distribution channel risk, including Economical’s reliance on independent brokers to sell its products;‰ Economical’s ability to manage capital effectively; and‰ periodic negative publicity regarding the insurance industry or Economical.

All of the forward-looking statements included in this MD&A are qualified by these cautionary statements and those made inSection 10 — “Risk management and corporate governance”. These factors are not intended to represent a complete list ofthe factors that could impact Economical, and other factors and risks could impact our actual results, performance andachievements; however, these factors should be considered carefully, and readers should not place undue reliance on theforward-looking statements we make. We do not undertake and have no intention to update or revise any forward-lookingstatements, whether as a result of new information, future events, or otherwise, except as required by law.

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1 — CORPORATE OVERVIEWABOUT ECONOMICAL

Economical is one of the leading property and casualty (“P&C”) insurers in Canada. We are the eighth largest P&C insurer inCanada, with 4.4% market share1, and $2.5 billion in gross written premiums (“GWP”) in 2019. Our P&C insurance business issupported by our investment management activities with approximately $4.2 billion in invested assets as at December 31,2019.

We rank among the top ten P&C insurance companies in Canada in both personal and commercial lines2. Our personal linesinsurance operations, representing 75.4% of our GWP in 2019, include property, auto, liability, and pet insurance products. Ourcommercial lines insurance operations, representing 24.6% of our GWP in 2019, include auto, property, liability, and specialtyinsurance products sold to businesses of all sizes.

As a multi-channel insurer, we distribute our insurance products both directly and indirectly through brokers and otherpartners. We have a network of more than 700 independent brokers, who work with individuals and businesses to assesstheir insurance needs. Our personal insurance products are sold primarily through brokers, but increasingly direct tocustomers through our direct channels. This includes Sonnet which was launched in 2016, our pet insurer Petline, which wasacquired in 2017, and portions of our group insurance offering. Our commercial insurance products are only sold throughbrokers. Broker and direct distribution represented 89.6% and 10.4%, respectively, of our total GWP in 2019.

We are currently pursuing demutualization to convert from a mutual company to a public share company. Through asuccessful demutualization process and initial public offering (“IPO”), we will have greater access to capital, enhancedfinancial flexibility, and the ability to pursue larger growth opportunities. As a publicly-traded company we believe we will bebetter positioned to compete more effectively with other leaders in our industry.

DEMUTUALIZATION

Demutualization is the process whereby a mutual company converts into a share company. On November 3, 2015, our Boardof Directors announced its decision to proceed with demutualization within the federal demutualization regulatory framework.At the first special meeting on demutualization held on December 14, 2015, our eligible mutual policyholders passed a specialresolution to authorize the start of negotiations of the allocation of demutualization benefits with eligible non-mutualpolicyholders. Following the completion of those negotiations, a second special meeting was held on March 20, 2019 whereeligible mutual policyholders passed a special resolution that amended company by-laws in a targeted manner to permiteligible non-mutual policyholders to participate in a third, and final, special meeting on demutualization.

If there is a successful outcome at that third special meeting, we will be in a position to apply to the federal Minister of Financefor approval to demutualize. We will continually evaluate market conditions, company performance, and other relevant factorsthat may impact the timing and success of an IPO and, by extension, the demutualization process.

CORPORATE STRATEGY

Our strategy guides how we strive to achieve our vision — to be one of Canada’s top P&C insurers, recognized for ourbusiness innovation and how well we take care of our customers. At the heart of our strategy is our mission — to be theinsurance partner Canadians choose to protect what they value most.

Over the past five years, we have been pursuing a multi-year strategy to transform Economical from a broker-based mutualcompany, into a high-performing multi-line, multi-channel national insurer.

‰ Our strategy started with a foundational pivot to expand our distribution reach to access a substantial portion of theCanadian market that chooses not to use an insurance broker.

‰ Next, we focused on reinforcing our broker-based business by streamlining the broker workflows and enhancing how theydo business with us, while concurrently repositioning our commercial lines business for more sustainable profitability.

‰ Throughout, we have been transforming our operating capabilities, modernizing our core systems, and reinvestingefficiencies in preparation for our planned demutualization.

‰ More recently, we have been actively renewing and realigning our talent, investing in innovation, and re-energizing ourculture to position us for our next phase of growth.

1 As of September 30, 2019, based on direct written premiums (“DWP”), company filings and overall industry data published by MSA Research Inc. All industryranking and market share comparisons exclude Genworth Financial Mortgage Insurance Company, Insurance Corporation of British Columbia, Lloyd’sUnderwriters Canada, and Saskatchewan Auto Fund from industry data. Our DWP and GWP are substantially the same.

2 As of September 30, 2019, based on volume of DWP, from overall industry data published by MSA Research Inc.

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Across Economical, we drive this multi-pronged strategy through four core objectives:

Combining sound fundamentals and exceptional experiences to exceed customer and broker expectations.

Customer expectations are continuously evolving in an ever-connected world. Experiences with top-tier brands have becomethe standard by which all other interactions are measured, and our industry is no exception. Brokers are as critical to us asour end customers and they too expect exceptional experiences. Delivering against those expectations with a disciplinedfocus on sound fundamentals, such as analytics, underwriting, pricing, and service excellence is key to our long-termsuccess.

‰ In 2016, we launched Canada’s first digital direct-to-consumer P&C company, Sonnet, which remains the only fully digitalinsurance experience which is available nationally. In 2019, we continued to apply advanced analytics against a deepeningbase of customer insights to refine Sonnet’s customer targeting and acquisition, reduce fraud, improve underwriting, andenhance the end customer experience. We also launched our group insurance offering and extended our growing SonnetConnect referral network which links a broad range of digital financial wellness companies.

‰ To support our broker business, we launched our VyneTM platform in 2018. Vyne combines a new policy administration andbilling system with enhanced coverage, sophisticated pricing, simplified workflows and better service for our personal linesand individually rated commercial auto business. It provides our broker partners with an industry-leading end-to-endexperience and gives their customers better value, support, and transparency. In 2019, we completed the migration ofsubstantially all policies and exceeded our planned broker adoption targets.

‰ In our commercial lines business, we completed the first phase of our strategy which was focused on improving ourunderwriting, pricing, and risk selection capabilities, while strengthening broker relationships and our operationalcapabilities to drive performance improvements. We are now focusing our efforts on expanding our value proposition byadding new production solutions in specialty property and professional lines as well as an enhanced customer and brokerexperience in our small business segment.

Creating industry-leading speed and agility through productivity and efficiency.

Efficient and flexible processes and systems are essential to respond to rapidly changing industry conditions, and are key toeffectively managing expenses and positively impacting culture. The ability to adapt quickly to changing market needs is keyfor sustainable growth.

‰ In 2019, we completed the cost improvement programs we started in 2018 directed at our sourcing and procurementpractices, technology application rationalization, and claims recovery. We also launched a multi-year transformation for ourclaims operations aimed at driving superior customer experience, effectively managing indemnity costs, and buildingscalable and efficient operations. In parallel, we are keeping ourselves aligned with small business digitization trends andtracking their emerging needs and wants in order to exceed product and service expectations of our customers.

‰ To address the constant change in market dynamics, customer expectations, and evolving technology, we are continuing tobuild enterprise innovation capabilities, explore new partnerships, and integrate innovation into our transformation programsand existing platforms. Our strategic partnership with EOS Venture Partners, a globally-recognized venture capital firmfocused exclusively on insurance, gives us access to insurance-based innovation globally.

Empowering a culture that delivers on our brand.

Culture underpins high-performance. Building an engaging values-based culture where customer focus, operationalexcellence, innovation, and collaboration are championed by everyone helps us deliver on the essence of our brand.

‰ We made significant progress in 2019 on advancing a high-performance culture through: a revitalized broker channelorganization structure to support the Vyne platform, implementation of an agile operating structure for our direct channel,and establishment of cross-functional teams to drive innovation initiatives.

‰ We continue to focus on enhancing our employee experience proposition — “Let’s Rethink Insurance, Together” — to createan inspiring and engaging environment that enables our people to maximize their individual and collective contribution tobuilding value over the long term.

Growing and diversifying inorganically.

Size matters in our industry and our growth plans are ambitious. At the same time, competitors are growing in scale andreach with the largest companies aggressively consolidating smaller carriers and brokers. Executing on acquisitions requiresaccess to capital, and superior acquisition execution and integration capabilities.

‰ Our planned demutualization is expected to culminate with an IPO which will open access to capital markets and expandour ability to grow and diversify inorganically.

‰ As part of that process, we continue to deepen the maturity of key corporate capabilities to succeed as a public companythrough enhanced capital modeling, investment management, risk management, reporting, and disclosure practices.

‰ In terms of integration capabilities, our Petline acquisition and the significant operational transformations we have effectivelyconcluded over the past years have strengthened our ability to execute large scale initiatives with speed and discipline,while capturing planned financial benefits.

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2 — FINANCIAL PERFORMANCEHIGHLIGHTS FOR THE YEAR:

‰ Gross written premiums exceeded $2.5 billion in 2019, an increase of 2.2% versus the prior year‰ Sonnet continued to increase its scale, with premiums surpassing $206 million in 2019‰ Combined ratio of 105.0% for the year, representing a significant improvement of 6.8 points‰ Underwriting income improved $147.3 million in 2019, leading to net income of $17.4 million for the year‰ Interest and dividend income was relatively flat versus 2018, as growth in our investment portfolio was largely offset by

lower fixed income yields

RESULTS FROM OPERATIONS

The results from operations for the years ended December 31 are as follows:

Figure 1

(in millions of dollars, except as otherwise noted) 2019 2018 Change

Policies in force (thousands) 1,469.3 1,483.8 (1.0%)

Gross written premiums1 $ 2,511.0 $ 2,456.3 2.2%

Net written premiums1 $ 2,331.0 $ 2,380.7 (2.1%)

Net earned premiums $ 2,343.2 $ 2,244.6 98.6

Net claims and adjustment expenses, undiscounted 1,702.0 1,694.7 7.3

Other underwriting expenses2 759.5 815.5 (56.0)

Underwriting loss1 (118.3) (265.6) 147.3

Impact of discounting (29.0) 4.3 (33.3)

Underwriting loss including the impact of discounting (147.3) (261.3) 114.0

Total interest and dividend income 109.5 107.2 2.3

Recognized gains on investments 68.3 58.9 9.4

Other expense 10.1 5.0 5.1

Restructuring expenses (0.8) 17.3 (18.1)

Income (loss) before income taxes 21.2 (117.5) 138.7

Income tax expense (recovery) 3.8 (44.5) 48.3

Net income (loss) $ 17.4 $ (73.0) 90.4

Other comprehensive income (loss) 26.3 (90.1) 116.4

Comprehensive income (loss) $ 43.7 $ (163.1) 206.8

Claims ratio1 72.6% 75.5% (2.9) pts

Expense ratio1,2 32.4% 36.3% (3.9) pts

Combined ratio1,2 105.0% 111.8% (6.8) pts

Return on equity1 1.1% (4.5%) 5.6 pts

1 Refer to Section 11 — “Non-GAAP financial measures”. These non-GAAP measures are considered key performance indicators, and are measures that wemonitor regularly.

2 Other underwriting expenses, the expense ratio, and the combined ratio are presented in the MD&A net of other underwriting revenues.

GROSS WRITTEN PREMIUMS

GWP increased by 2.2% in 2019 compared to 2018, as personal lines growth outpaced our corrective underwriting actions inour commercial business. Personal lines GWP grew by 6.5% driven by Sonnet and our broker personal property business.Commercial lines GWP declined by 9.0% due to the ongoing impact of our underwriting actions.

Further details by line of business are provided in Section 3 — “Results by line of business”.

NET WRITTEN PREMIUMS

In May 2019, we entered into a quota share reinsurance arrangement retroactive to January 1, 2019, ceding a proportion ofcertain broker personal lines business to facilitate overall growth levels. This resulted in a $105.1 million decrease in netwritten premiums in 2019.

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UNDERWRITING RESULTS

The composition of the undiscounted combined ratio for the years ended December 31 is as follows:

Figure 2 2019 2018 Change

(in millions of dollars, except as otherwise noted) $ Ratio $ Ratio $ Ratio

Net earned premiums $ 2,343.2 $ 2,244.6 98.6 4.4%

Net claims and adjustment expenses $ 1,702.0 72.6% $ 1,694.7 75.5% 7.3 (2.9) pts

Other underwriting expenses 759.5 32.4% 815.5 36.3% (56.0) (3.9) pts

Combined ratio, undiscounted 2,461.5 105.0% 2,510.2 111.8% (48.7) (6.8) pts

The growth in net earned premiums in 2019 is due primarily to the significant GWP growth in the second half of 2018. Thegrowth in net earned premiums was partially offset by the quota share reinsurance arrangement entered into in May 2019.

Our undiscounted underwriting results improved $147.3 million in 2019, representing an improvement in the combined ratio of6.8 points. The underwriting improvement was due primarily to a significant improvement in our commercial lines, whichbenefitted from our underwriting actions and rate increases, and lower catastrophe losses in 2019 as compared to the prioryear. Additional improvements were realized due to a decrease in the commissions ratio and a decrease in the impact of ourstrategic investments.

Our significant investments in Sonnet and the Vyne platform impacted our combined ratio by 3.8 points, compared to 6.1points in 2018. This resulted in an adjusted combined ratio of 101.2% in 2019 and 105.7% in 2018. The impact of these strategicinvestments should continue to reduce due to the completion of the Vyne deployment in 2018 and as Sonnet scales andmatures its business model.

A number of actions continued to be implemented across our entire book of business, including targeted rate increases,enhanced pricing segmentation, exiting unprofitable and volatile books of business, increased underwriting discipline, andfocus on underwriting quality. We continued to refine Sonnet’s customer targeting and acquisition approach using advancedanalytics to reduce fraud and improve profitability. In addition, Vyne, our new broker platform for personal lines andindividually rated commercial auto, was deployed in 2018 to improve operating efficiency, pricing, underwriting, and ease ofdoing business for our broker partners.

The impact of discounting shifted to an expense of $29.0 million in 2019 from a recovery of $4.3 million in 2018, driven by asignificant decrease in yields on investments supporting the claim liabilities in 2019, compared to an increase in the yields in2018. The impact of the discounting expense in 2019 was offset by recognized gains associated with the Fair Value ThroughProfit or Loss (“FVTPL”) investment portfolio. The composition of recognized gains on investments is detailed below inFigure 6.

NET CLAIMS AND ADJUSTMENT EXPENSES

The composition of the claims ratio for the years ended December 31, illustrating the impact of accident year claims incurred,catastrophe losses, and prior year claims development is as follows:



Core accident year claims $ 1,688.5 72.0% $ 1,620.4 72.2% 68.1 (0.2) pts

Catastrophe losses 51.4 2.2% 93.1 4.1% (41.7) (1.9) pts

Prior year favourable claims development (37.9) (1.6%) (18.8) (0.8%) (19.1) (0.8) pts

Total $ 1,702.0 72.6% $ 1,694.7 75.5% 7.3 (2.9) pts

The core accident year claims ratio, which excludes catastrophe losses and prior year claims development, improved slightlyin 2019. The improvement in the core accident year claims ratio was driven by stronger results in the commercial lines ofbusiness, supported by our targeted rate increases and corrective underwriting actions. This was partially offset by personalauto, where the loss ratios remain elevated, reinforcing the need for our underwriting and rate actions.

Catastrophe losses decreased as compared to 2018. In 2019, catastrophe losses were driven by a number of wind and rainstorms in Ontario, Quebec, and in the Atlantic region. Comparatively, in 2018 we were impacted primarily by Ontario andQuebec wind and ice storms of much higher severity than those in 2019, as well as an Ontario and Quebec tornado.

We experienced higher favourable claims development in 2019, primarily attributable to our commercial lines of business.

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OTHER UNDERWRITING EXPENSES

The key components of our reported expense ratio for the years ended December 31 are as follows:



Net commissions $ 361.3 15.4% $ 381.0 17.0% (19.7) (1.6) pts

Operating expenses (net of other underwriting revenues) 312.0 13.3% 353.8 15.7% (41.8) (2.4) pts

Premium taxes 86.2 3.7% 80.7 3.6% 5.5 0.1 pts

Total $ 759.5 32.4% $ 815.5 36.3% (56.0) (3.9) pts

The net commissions ratio decreased due to the impact of Sonnet, which pays no commissions, and whose impact on netearned premiums is increasing, and the beneficial impact of reinsurance commissions income on our quota sharearrangement.

The operating expenses ratio decreased due primarily to lower operating expenses and rapidly-growing net earned premiumsin Sonnet, and reduced costs as a result of the completion of the Vyne deployment in 2018.

INVESTMENT INCOME

The composition of interest and dividend income recorded in the consolidated statement of comprehensive income (loss) forthe years ended December 31 is as follows:

Figure 5


Interest income $ 82.5 $ 71.8 10.7

Dividend income 27.0 35.4 (8.4)

Total $ 109.5 $107.2 2.3

The shift in our investment portfolio toward higher bond holdings and lower stock holdings resulted in a correspondingincrease in interest income, which was somewhat offset by lower fixed income yields and a decline in dividend income in2019.

The composition of recognized gains on investments recorded in the consolidated statement of comprehensive income (loss)for the years ended December 31 is as follows:

Figure 6


Realized gains on Available for Sale (“AFS”) portfolio $ 39.5 $ 74.6 (35.1)

Realized gains (losses) on FVTPL bonds 12.6 (22.4) 35.0

Unrealized gains on FVTPL bonds 16.5 22.4 (5.9)

Net impairment losses on AFS portfolio (0.3) (15.7) 15.4

Total $ 68.3 $ 58.9 9.4

A subset of the bond portfolio is designated as FVTPL. Changes in the fair value of FVTPL instruments are included inrecognized gains on investments in the consolidated statement of comprehensive income (loss). The FVTPL portfolio isstructured so that the impact of changes in interest rates on claim liabilities and the FVTPL portfolio reasonably offset eachother. As at December 31, 2019, the FVTPL portfolio represented 70.6% (2018: 71.2%) of the underlying claim liabilities thatthese investments support, and the average duration of our FVTPL portfolio was 4.2 years (2018: 4.1 years). The balance of thebond portfolio, along with the short-term investments and equity portfolios, is designated as AFS. Changes in the fair value ofAFS instruments are included in other comprehensive income (loss) (“OCI”) unless the instrument is disposed of or consideredto be impaired, in which case they are included in net income (loss).

Realized gains on the AFS portfolio decreased due to lower gains triggered on common stocks and losses on preferredstocks, which were partially offset by gains on bonds due to a decrease in bond yields in 2019. The net realized andunrealized gains on the FVTPL bond portfolio arose due to the decrease in bond yields in 2019. Investment impairment lossesin 2019 were minimal.

Refer to Section 5 — “Financial position” for additional details of our investment portfolio mix.

OTHER EXPENSE

Other expense includes investment expenses, costs incurred to prepare for our potential demutualization, and the resultsfrom our investments in associates. Other expenses increased $5.1 million over the prior year due primarily to lower incomefrom our investments in associates, partially offset by lower demutualization costs. Demutualization costs in 2019 totalled$4.8 million as compared to $9.7 million in 2018. Other expense in 2018 also included a gain on sale of a brokerage inJanuary 2018.

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RESTRUCTURING EXPENSES

In the first quarter of 2018, we announced that we would be updating our operational structure to optimize efficiency andsimplicity for our broker partners and customers. The changes to the operational structure included the consolidation of ourbrands and headcount reductions, aimed at improving future operating results. We executed this plan in phases during 2018and 2019. In 2019, a recovery of $0.8 million was recorded pertaining to employee severance and outplacement services, asthe restructuring efforts for these costs were complete, and no further payments are required. The restructuring provision of$0.9 million as at December 31, 2019 includes decommissioning costs associated with our legacy policy administrationsystem.

INCOME TAX EXPENSE (RECOVERY)

The effective tax rate for 2019 was an expense of 18.0% compared to a recovery of 37.9% in 2018. The effective tax rate wasimpacted by a return to pre-tax profitability in 2019, Canadian dividends not subject to tax, the effect of changes in enactedtax rates, and other matters.

NET INCOME (LOSS)

Net income of $17.4 million represented a significant improvement of $90.4 million from the net loss in 2018 of $73.0 milliondue primarily to lower underwriting losses, higher investment income, and restructuring charges recorded in 2018, partiallyoffset by the negative impact of discounting driven by lower effective yields.

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) shifted from a loss of $90.1 million in 2018 to income of $26.3 million in 2019. Therebound in equity markets and the decrease in yields in 2019 resulted in an increase in unrealized gains in our common stockand AFS bond portfolios. Refer to Figure 18, which outlines the unrealized gains (losses) on AFS securities by type of security.

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3 — RESULTS BY LINE OF BUSINESSWe provide a wide range of P&C insurance products throughout Canada in two broad lines of business: personal insuranceand commercial insurance. Each line is further subdivided between auto and property, or in the case of commercial, propertyand liability lines of business. Included in personal property are pet insurance products.

The following charts illustrate our GWP mix on this basis for the fiscal years 2019 and 2018:

2019 GWP BY LINE OF BUSINESS

50%

25%

10%

15%

2018 GWP BY LINE OF BUSINESS

Personal auto

Personal property

Commercial auto

Commercial propertyand liability

50%

23%

10%

17%

The shift in business mix is due to the growth in Sonnet and our broker personal property business along with our correctiveunderwriting actions in our commercial business.

2019 GWP BY REGION

61%

8%7%

10%

14%

2018 GWP BY REGION

Ontario

Quebec

British Columbia

Alberta & Prairies

Atlantic

61%

8%6%

14%

11%

There was a slight shift in the regional mix from the Ontario and British Columbia regions to Quebec.

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UNDERWRITING — PERSONAL LINES

Figure 7 presents selected results of operations of the personal lines of business for the years ended December 31.

Figure 7


Policies in force (thousands)

Auto 718.8 751.8 (4.4%)

Property 623.0 582.2 7.0%

Total 1,341.8 1,334.0 0.6%

Gross written premiums

Auto $ 1,261.9 $ 1,224.4 3.1%

Property 632.3 554.1 14.1%

Total $ 1,894.2 $ 1,778.5 6.5%

Net earned premiums

Auto $ 1,195.6 $ 1,099.2 8.8%

Property 551.8 494.6 11.6%

Total $ 1,747.4 $ 1,593.8 9.6%

Underwriting (loss) income (undiscounted)

Auto $ (139.4) $ (155.2) 15.8

Property 31.0 (18.1) 49.1

Total $ (108.4) $ (173.3) 64.9

The underwriting activity of Sonnet and the expenses pertaining to our investment in the development and implementation ofthe Vyne platform are included in the personal insurance line of business performance. The collective impact of thesestrategic investments on our combined ratios are noted as follows to show the combined ratios with and without theseinvestments:

Figure 8Combined

ratio1

2019Impact ofstrategic

investments

Adjustedcombined

ratio1

Combinedratio1

2018Impact ofstrategic

investments

Adjustedcombined

ratio1

Auto 111.7% 6.6 pts 105.1% 114.1% 10.2 pts 103.9%

Property 94.4% 1.7 pts 92.7% 103.7% 5.1 pts 98.6%

Total 106.2% 5.1 pts 101.1% 110.9% 8.7 pts 102.2%

1 These items are non-GAAP measures which are defined below.

The impact of strategic investments on our personal lines combined ratio decreased in 2019 as compared to 2018, due to thebeneficial impact of Sonnet’s significant growth in net earned premiums as well as reducing claims and expense ratios, andthe completion of the Vyne development in 2018.

PERSONAL AUTO RATIOS1 PERSONAL PROPERTY RATIOS1 TOTAL PERSONAL LINES RATIOS1

claims expense combined

103.9105.1

28.026.8

75.978.3


98.692.7

36.134.0

62.558.7

2019 2018


102.2101.1

30.629.2

71.671.9

1 These adjusted ratios exclude the impact of our strategic investments

Overall, personal lines GWP increased by 6.5% in 2019. Sonnet generated GWP of $206.5 million in 2019, an increase of61.8% over 2018. Sonnet continued to scale and benefitted from significant rate increases, sophisticated new tools andanalytics to more effectively advertise and acquire target customers, and lower operating expenses. Our Vyne platform hasalso generated growth and substantially all of our $1.6 billion broker personal line premiums are now on this platform. Thedeployment of Vyne significantly increased our operational flexibility through deployment of analytics, and implementation oftargeted underwriting actions and price adjustments. On an adjusted basis, personal lines produced an underwriting loss of$16.7 million in 2019 compared to an underwriting loss of $33.2 million in 2018 as our profitability actions continued to workthrough the portfolio and losses from catastrophes declined versus 2018.

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The composition of the adjusted claims ratio for the years ended December 31 for our personal lines of business is as follows:

Figure 9 Auto Property

20191 20181 Change 20191 20181 Change

Core accident year claims 80.5% 78.6% 1.9 pts 53.2% 52.9% 0.3 pts

Catastrophe losses 0.3% 1.2% (0.9) pts 6.6% 10.9% (4.3) pts

Prior year favourable claims development (2.5%) (3.9%) 1.4 pts (1.1%) (1.3%) 0.2 pts

Total 78.3% 75.9% 2.4 pts 58.7% 62.5% (3.8) pts

1 These adjusted ratios exclude the impact of our strategic investments

Personal auto GWP increased by 3.1% in 2019 compared to 2018, due primarily to policy growth in Sonnet and rate increases,partially offset by underwriting and broker management actions to improve profitability. The adjusted personal auto combinedratio of 105.1% increased over 2018 due to an increase in the core accident year claims ratio and a decrease in favourableclaims development. These were partially offset by a reduction in catastrophe losses and rate increases in 2019.

Personal property GWP increased by 14.1% compared to 2018, driven by strong growth from both Sonnet and Vyne, and rateincreases in 2019. The adjusted personal property combined ratio in 2019 was solid, at 92.7%, and improved mainly due to areduction in catastrophe losses compared to 2018.

UNDERWRITING — COMMERCIAL LINES

Figure 10 presents selected results of operations of the commercial lines of business for the years ended December 31.

Figure 10


Policies in force (thousands)

Auto 42.1 50.1 (16.0%)

Property and liability 85.4 99.7 (14.3%)

Total 127.5 149.8 (14.9%)

Gross written premiums

Auto $ 239.0 $ 251.9 (5.1%)


Total $ 616.8 $ 677.8 (9.0%)

Net earned premiums

Auto $ 238.3 $ 254.2 (6.3%)


Total $ 595.8 $ 650.8 (8.5%)

Underwriting income (loss) (undiscounted)

Auto $ 0.8 $ (36.4) 37.2

Property and liability (10.7) (55.9) 45.2

Total $ (9.9) $ (92.3) 82.4

COMMERCIAL AUTO RATIOS COMMERCIAL PROPERTY ANDLIABILITY RATIOS

TOTAL COMMERCIAL LINES RATIOS


114.399.7

30.429.2

83.970.5


114.1103.0

40.240.6

73.962.4

2019 2018


114.2101.7

36.436.1

77.865.6

Commercial lines GWP decreased by 9.0%, impacted by substantial pricing actions and the targeted exit from unprofitablebusiness. While further underwriting improvement from past actions is expected, the bulk of the required actions have beentaken and we are now transitioning to a return to growth. Commercial lines produced an underwriting loss of $9.9 millioncompared to a $92.3 million underwriting loss in 2018; a significant improvement as our actions continued to work throughthis book of business. These actions continued to negatively impact premiums, but were necessary to improve our mix ofbusiness and return to profitability.

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The composition of the claims ratio for the years ended December 31 for our commercial lines of business is as follows:

Figure 11 Auto Property and liability

2019 2018 Change 2019 2018 Change

Core accident year claims 73.1% 77.6% (4.5) pts 59.1% 63.0% (3.9) pts

Catastrophe losses 0.2% 0.1% 0.1 pts 2.9% 6.4% (3.5) pts

Prior year (favourable) adverse claims development (2.8%) 6.2% (9.0) pts 0.4% 4.5% (4.1) pts

Total 70.5% 83.9% (13.4) pts 62.4% 73.9% (11.5) pts

Commercial auto GWP decreased by 5.1% in 2019 compared to 2018, driven primarily by the impact of our targetedunderwriting actions. These actions, which were implemented in 2018 and continued throughout 2019, consisted of sizeablerate increases, significant mix of business changes including exiting unprofitable areas of our business, and otherunderwriting actions taken to improve quality and decrease volatility. The commercial auto combined ratio significantlyimproved by 14.6 points, reflecting the impact of our corrective underwriting actions and a shift from adverse to favourableclaims development.

Commercial property and liability GWP decreased by 11.3% in 2019 compared to 2018, driven primarily by the impact of ourtargeted underwriting actions which included rate increases in our mid-market and small business portfolios, exiting fromunprofitable and volatile portfolios, and enhanced underwriting and risk selection. The commercial property and liabilitycombined ratio improved significantly, by 11.1 points over 2018, driven by the benefits of our corrective underwriting actions, areduction in catastrophe losses, and improved claims development.

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4 — OPERATING ENVIRONMENT ANDOUTLOOKOPERATING ENVIRONMENT

Personal autoenvironment

Over the past few years, the industry has been impacted by deteriorating results in the personal autosector across several provinces. Automobile physical damage expenses continue to increase across thecountry due to rising costs of repair and increased frequency of claims attributable to distracted driving.We expect pressure will continue in the near-term. In response, insurers have implemented rateincreases to partially mitigate escalating fraud and claim costs in the system. Some of the key marketchanges impacting us are as follows:‰ Canada legalized recreational cannabis use in October 2018, which could amplify the impact of

impaired driving on road safety and the insurance industry.‰ Claims and underwriting fraud continues to impact the industry, becoming more complex and

sophisticated.

Ontario ‰ In April 2019, the Ontario government announced proposed changes to automobile insurance with thepotential to reduce costs for consumers, reduce regulatory burdens on insurers, and enhance digitalease of doing business. Details on these reforms have not yet been disclosed. The financial impactand timing of implementation remains uncertain.

‰ In October 2019, the Financial Services Regulatory Authority of Ontario (“FSRA”) implemented a newstandard rate filing process for private passenger automobile insurance which reduces the time andregulatory burden associated with these filings and should promote more competition in the market.

Alberta ‰ Recent court decisions have changed the scope of the minor injury definition and have contributed toincreasing claims costs.

‰ In August 2019, the government did not renew the 5% limit on automobile rate increases, whichgenerally was negatively impacting insurer financial performance. Insurers have subsequently filed formaterial rate increases to improve financial performance.

BritishColumbia

‰ Claim costs in the province have been escalating due to a higher frequency of liability claims andincreasing court awards.

‰ The British Columbia government passed legislation to implement a $5,500 cap on damage awardsfor minor injuries that result from auto accidents effective in April 2019.

‰ In September 2019, ICBC implemented fundamental product reform by moving from a vehicle-basedrating model to an operator-based rating model.

‰ In February 2020, the British Columbia government announced plans to move from a tort system to an“enhanced care” model by May 2021. This new system, if approved, will eliminate the right to sue forpersonal injuries and is therefore widely considered a no-fault system.

Climatechange

‰ The impact of climate change is increasing the size and frequency of weather events across thecountry, creating a challenging environment for the entire P&C insurance industry.

‰ Weather events are expected to continue to affect the industry and result in higher and more volatileclaim costs, particularly in the property lines of business.

‰ This will necessitate changes to property products to provide appropriate insurance coverage toconsumers.

‰ We address our catastrophe loss exposure by managing the geographic concentration of policyexposures, purchasing reinsurance, the use of our policy deductibles and product design, pricing inexpected long-term costs, and monitoring the impact on our capital position and overall risktolerances.

Technologicalinnovation

‰ Customers are increasingly demanding simplicity, personalization, and transparency when they buyinsurance products and services, and when they change and/or renew their policies.

‰ Insurers are investing heavily in the modernization of their legacy technologies to allow for digitalproduct offerings, enhanced analytic capabilities, and improved customer service. This includesenhancements to mobile capabilities to support a range of customer-facing functions in conjunctionwith traditional channels, as well as areas such as claims assessments and fraud prevention anddetection.

‰ Carriers are also investing in cloud-based platforms for digital products to drive product innovation andreduce costs. Artificial Intelligence, Blockchain, and the Internet of Things are also areas of focus.

‰ Technological innovation in the automotive industry includes a broad array of automated safetyfeatures that are increasing vehicle safety but also increasing claims costs for vehicles. A longer-termtrend towards autonomous vehicles may result in a transition of liability away from drivers and towardequipment manufacturers and software providers.

‰ Insurtech companies have become more prevalent, primarily with niche products. Most of thesecompanies are focused on customer-facing aspects and require partnerships with incumbents tocomplete their products and services.

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Investmentenvironment

‰ Domestic and global equity markets rebounded from the sharp declines in late 2018 to close 2019 upmaterially, despite investor concerns over slowing global growth, international trade tensions, andpolitical uncertainty.

‰ Further heightening investor concerns was the inversion of the yield curve in the middle of 2019 which,in the past, has been an indicator of future economic slowdown.

‰ The current low yield environment shows no signs of abating, as the Federal Reserve cut interest ratesin the second half of 2019, while the Bank of Canada held interest rates steady, posing a headwind forfuture interest income.

Industryconsolidation

‰ Premium levels are becoming concentrated within the industry’s largest companies.‰ Scale and diversification are required for P&C insurers to make the large and recurring investments

necessary to achieve sustainable profitability through use of big data, enhanced price segmentation,and operational efficiencies.

‰ Consolidation of the broker network continues as brokers execute succession plans but also expandaccess to capital and formalize partnerships that improve acquisition capacity.

OUTLOOK

The Canadian P&C insurance industry has historically exhibited cyclical profitability patterns, with overall return on equityranging from low single-digits to mid-teens. Recently, the performance of the industry has been much closer to the lower endof this range.

To improve profitability, investment returns or combined ratios must improve. The current low yield environment is placingpressure on investment returns and increasing the importance of underwriting profits.

In response to overall profitability challenges and segment-specific dynamics, markets have firmed across the country. Thisfirming has come in the form of both reduced capacity and higher rates. We are not immune to these industry dynamics andhave been proactive in recent years to ensure we enhance our financial returns on a sustainable basis.

Personal auto ‰ We expect pressure will continue in the near-term due to increasing costs of claims and ongoingregulatory and competitive market dynamics.

‰ In response insurers, including Economical, have implemented underwriting restrictions and significantrate increases to partially mitigate escalating fraud and claim costs.

Personalproperty

‰ The frequency and severity of weather events have increased in recent years, leading to increasedclaims costs.

‰ We expect this trend in relation to the frequency and severity of weather events to continue, withcommensurate rate increases, product changes, and an enhanced focus on loss prevention andmitigation.

Commercialauto

‰ The industry has been impacted by deterioration in performance in the auto sector, particularly in theOntario and Quebec transportation industry, which we expect will continue to impact results in thenear-term.

‰ The market has hardened, and insurers, including Economical, have implemented underwritingrestrictions and significant rate increases to improve profitability.

Commercialproperty &liability

‰ As expected, market firming in auto extended to property & liability, with the pace acceleratingthroughout 2019.

‰ The withdrawal of global industry participants (both primary insurers and reinsurers) has added furtherpressure in the form of reduced capacity.

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5 — FINANCIAL POSITIONFINANCIAL HIGHLIGHTS AS AT DECEMBER 31, 2019:

‰ Total assets increased by $246.1 million (4.3%) compared to December 31, 2018‰ Gross claim liabilities increased by $137.6 million (5.2%) compared to December 31, 2018‰ Financial position remained solid at year end, as total equity increased $43.7 million in 2019 and MCT increased 12 points to

239%

The significant consolidated balance sheet line items as at December 31 are as follows:

Figure 12


Cash and cash equivalents $ 94.7 $ 135.3 (40.6)

Investments 4,191.0 3,940.7 250.3

Accrued investment income 18.8 15.5 3.3

Premiums receivable 850.7 837.0 13.7

Income taxes receivable 3.0 13.0 (10.0)

Reinsurance receivable and recoverable 95.1 64.7 30.4

Deferred policy acquisition expenses 235.6 230.1 5.5

Property and equipment 61.1 38.9 22.2

Deferred income tax assets 89.8 105.0 (15.2)

Goodwill and intangible assets 210.9 225.6 (14.7)

Other assets 105.8 104.6 1.2

Total assets $ 5,956.5 $ 5,710.4 246.1

Unearned premiums $ 1,294.5 $ 1,268.5 26.0

Claim liabilities 2,808.2 2,670.6 137.6

Accounts payable and other liabilities 240.6 204.0 36.6

Income taxes payable 2.2 — 2.2

Total liabilities 4,345.5 4,143.1 202.4

Retained earnings 1,608.6 1,588.3 20.3

Accumulated other comprehensive income (loss) 2.4 (21.0) 23.4

Total equity 1,611.0 1,567.3 43.7

Total liabilities and equity $ 5,956.5 $ 5,710.4 246.1

CASH AND INVESTMENTS

The composition of our cash and cash equivalents, and investments recorded in the consolidated balance sheet as atDecember 31 is as follows:

Figure 13 2019 2018

(in millions of dollars, except as otherwise noted)Carrying

valuePercent of

carrying valueCarrying

valuePercent of

carrying value

Cash and cash equivalents $ 94.7 2.2% $ 135.3 3.3%

Short-term investments 228.1 5.3% 329.7 8.1%

Bonds 3,223.8 75.3% 2,792.4 68.5%

Preferred stocks 345.1 8.1% 334.0 8.2%

Common stocks 296.8 6.9% 329.9 8.1%

Pooled funds 44.4 1.0% 53.2 1.3%

4,232.9 98.8% 3,974.5 97.5%

Commercial loans 52.8 1.2% 101.5 2.5%

Total cash and investments $4,285.7 100.0% $4,076.0 100.0%

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Our investment strategy seeks to generate appropriate levels of income while preserving capital. The strategy focuses onmaximizing our long-term capital strength, while seeking to optimize risk-adjusted returns. We have an established investmentpolicy and strategy that is based on our risk appetite, the prudent person approach, regulatory guidelines, and reflects theexpected settlement pattern of claim liabilities.

Our proportionate share of investments in fixed income securities, including cash and cash equivalents, increased to 82.8% ofthe total portfolio as at December 31, 2019 compared with 79.9% as at December 31, 2018. Investments increased dueprimarily to net investments purchased, and increased market values of both bonds and common stocks. These gains weredue to a significant decrease in yields and a rebound in equity markets in 2019. These increases were partially offset by adecrease in the market value of preferred stocks, and a decrease in commercial loans due primarily to a sizeable loanrepayment in 2019. Refer to Note 2 — “Summary of significant accounting policies” of our audited consolidated financialstatements which provides further details pertaining to the classification and measurement of our financial instruments.

Investment sector mix

Our investments by sector demonstrates the secure and highly liquid nature of our overall investment portfolio with asignificant concentration in the government and financials sectors. As at December 31 the breakdown of these investments isas follows:

Figure 14 2019 2018

(in millions of dollars, except as otherwise noted)

Short-terminvestments

and bondsPreferred

stocksCommon

stocksPooled

funds Total Total

Government 56% – – – 46% 45%

Financials 29% 77% 28% 16% 32% 34%

Energy 2% 15% 18% 7% 5% 6%

Communication services 2% 2% 7% 6% 3% 2%

Industrials 4% – 10% 9% 4% 2%

Utilities 3% 6% 3% 15% 4% 3%

Consumer discretionary 1% – 6% 6% 1% 1%

Materials – – 11% 4% 1% 1%

Consumer staples 1% – 5% 12% 1% 3%

Information technology – – 7% 8% 1% 1%

Health care 1% – 5% 13% 1% 1%

Real estate 1% – – 4% 1% 1%

Total 100% 100% 100% 100% 100% 100%

Total $ 3,451.9 $ 345.1 $ 296.8 $ 44.4 $ 4,138.2 $ 3,839.2

Investment credit quality

Figure 15 and Figure 16 illustrate the strong credit quality of our fixed income securities and preferred stocks, respectively, asat December 31.

Credit rating1 — bonds

Figure 15 2019 2018

(in millions of dollars, except as otherwise noted) Carrying valuePercent of

carrying value Carrying valuePercent of

carrying value

AAA $1,189.3 36.9% $1,642.5 58.9%

AA 980.5 30.4% 358.7 12.8%

A 767.8 23.8% 589.3 21.1%

BBB 286.2 8.9% 201.9 7.2%

Total bonds $3,223.8 100.0% $2,792.4 100.0%

1 Using the lowest of Standard & Poor’s and DBRS ratings.

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Credit rating1 — preferred stocks

Figure 16 2019 2018



carrying value

P1 $ – – $ 3.2 1.0%

P2 288.5 83.6% 278.3 83.3%

P3 or not rated 56.6 16.4% 52.5 15.7%

Total preferred stocks $ 345.1 100.0% $ 334.0 100.0%

1 Using the lowest of Standard & Poor’s and DBRS ratings.

We continuously monitor the credit ratings of investments within the portfolio and take the necessary actions to ensure that ahigh level of quality is maintained. As at December 31, 2019, this resulted in 91.1% (2018: 92.8%) of our bonds being rated “A-”or better and 83.6% (2018: 84.3%) of the preferred stocks being rated “P2” or better. “A-” and “P2” represent the ratingsprovided by two recognized rating services for high-grade bonds and preferred stocks, respectively, where both asset andearnings protection are well-assured.

Investment portfolio region of issuer

The region of issuer of our investment portfolio as at December 31 is as follows:

Figure 17 2019 2018



carrying value

Canada $ 4,034.2 97.5% $ 3,636.5 94.7%

United States 69.0 1.7% 142.2 3.7%

Europe 25.6 0.6% 35.1 0.9%

Other 9.4 0.2% 25.4 0.7%

Total $ 4,138.2 100.0% $ 3,839.2 100.0%

Our investment portfolio is concentrated mainly in Canada. Our estimated exposure to foreign exchange is outlined inSection 10 — “Risk management and corporate governance”.

Unrealized gains (losses) on AFS securities

The unrealized gains (losses) on AFS securities by type of security as at December 31 are as follows:

Figure 18

(in millions of dollars, except as otherwise noted) 2019 2018

Short-term investments $ 1.9 $ 0.8

Bonds (0.2) (5.6)

Preferred stocks (58.6) (56.1)

Common stocks 53.7 27.0

Pooled funds 1.2 (2.6)

Unrealized losses $ (2.0) $ (36.5)

The rebound in equity markets in 2019 resulted in higher unrealized gains in our common stocks and drove a decrease in thetotal net unrealized losses in the portfolio.

REINSURANCE RECEIVABLE AND RECOVERABLE

Reinsurance receivable and recoverable increased due to the impact of the quota share arrangement entered into during thesecond quarter of 2019.

Consistent with industry practice, our reinsurance receivables and amounts recoverable from licensed Canadian reinsurers($83.0 million as at December 31, 2019, $56.3 million as at December 31, 2018) are usually unsecured. Canadian regulatoryrequirements, as set out by the Office of the Superintendent of Financial Institutions Canada (“OSFI”), require these reinsurersto maintain adequate assets to meet their Canadian obligations. Claim liabilities take precedence over the reinsurers’subordinated creditors. Amounts receivable and recoverable from unregistered reinsurers are secured by cash deposits andmarketable securities.

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PROPERTY AND EQUIPMENT

Property and equipment increased due to the adoption of IFRS 16 – Leases (“IFRS 16”) on January 1, 2019 which led to therecognition of our building leases in the consolidated balance sheet. Right-of-use assets of $28.6 million were recorded in“Property and equipment” in the consolidated balance sheet on the date of initial application of IFRS 16. Refer to Note 3 —“Adoption of new standard” of our audited consolidated financial statements, which provides further details pertaining to theadoption of IFRS 16.

DEFERRED INCOME TAX ASSETS

Deferred income tax assets have decreased. A large portion of the deferred tax asset relates to income tax loss carryforwardswhich declined as we generated taxable income in 2019 and therefore began utilizing our loss carryforwards. In addition,there was a decrease in the future tax rates at which our temporary differences will be recognized. We expect to generatesufficient taxable income from ordinary operations to fully utilize the deferred income tax assets in the future.

CLAIM LIABILITIES AND ADJUSTMENT EXPENSES

The change in our net unpaid claim liabilities as at December 31 is as follows:

Figure 19


Net unpaid claim liabilities, beginning of year $ 2,615.2 $ 2,473.2

Current year claims incurred 1,739.9 1,713.5

Prior year favourable claims development (37.9) (18.8)

Claims and adjustment expenses 1,702.0 1,694.7

Impact of discounting (including PfAD) 29.0 (4.3)

Claims paid during the year (1,603.3) (1,548.4)

Net unpaid claim liabilities, end of year $ 2,742.9 $ 2,615.2

The consolidated net discounted claim liabilities as at December 31, 2019 increased by 4.9% or $127.7 million fromDecember 31, 2018 due primarily to an increase in business volumes and the impact of discounting. The main components ofthe discounted claim liabilities are case reserves, undiscounted incurred but not reported (“IBNR”), undiscounted internalclaims expense, and the discounting impact thereon.

The level of prior year claims development as a percentage of opening net unpaid claim liabilities and the impact on theclaims ratio by fiscal year, are as follows:

Figure 20

(in millions of dollars,except as otherwise noted) 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Net unpaid claim liabilities,beginning of the year,undiscounted $ 2,555.2 $ 2,410.4 $ 2,199.7 $ 2,122.8 $ 2,163.3 $ 2,108.6 $ 2,052.1 $ 2,122.6 $ 2,220.0 $ 2,200.1

(Favourable) adversedevelopment on prior yearclaims, undiscounted $ (37.9) $ (18.8) $ 32.6 $ (40.1) $ (73.1) $ (2.9) $ (63.0) $ (57.4) $ (128.9) $ (71.8)

(Favourable) adversedevelopment on prior yearclosing claims, undiscounted (1.5%) (0.8%) 1.5% (1.9%) (3.4%) (0.1%) (3.1%) (2.7%) (5.8%) (3.3%)

Impact on claims ratio (1.6%) (0.8%) 1.5% (2.1%) (3.8%) (0.2%) (3.6%) (3.4%) (8.0%) (4.3%)

ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities increased due primarily to the adoption of IFRS 16, which added lease liabilities of$28.6 million on January 1, 2019, the date of initial application of the standard. The balance of the change is due primarily tothe timing of billing and payment of invoices.

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6 — LIQUIDITY AND CAPITAL RESOURCESCAPITAL MANAGEMENT

As a mutual company with limited access to external sources of capital, we have adopted a capital management policyintended to maintain sufficient capital to protect us and our policyholders from adverse events. As a federally-regulated P&Cinsurance company, our capital position, along with those of our insurance subsidiaries, is monitored by OSFI. OSFI evaluatesour financial strength primarily through the Minimum Capital Test (“MCT”), which measures available capital against requiredrisk-weighted capital.

Available capital comprises total equity subject to adjustments prescribed by OSFI. Capital required is calculated by applyingrisk factors to certain assets and liabilities. As at December 31, 2019, our regulatory capital exceeded the supervisoryminimum MCT requirement of 150% required by OSFI, as well as a higher and more stringent internal target established in ourcapital management policy.

We actively monitor the MCT, and the effect that external and internal actions have on our capital base. In particular,management determines the estimated impact on capital before entering into any significant transactions to ensure thatpolicyholders are not put at unreasonable risk through the depletion of capital to unacceptable levels. The Board of Directorsreviews the MCT on, at least, a quarterly basis.

Figure 21 shows our regulatory capital position as at December 31. Capital available and capital required included in the figurebelow are determined in accordance with rules prescribed by OSFI.

Figure 21


Capital available $ 1,217.3 $ 1,146.4

Capital required $ 509.2 $ 504.9

MCT% 239.1% 227.0%

Excess capital at 175% $ 326.1 $ 262.8

Excess capital at 200% $ 198.8 $ 136.5

The MCT ratio continued to be well in excess of both minimum internal capital and external regulatory requirements. The MCTratio increased from December 31, 2018 due mainly to the generation of net income, supported by the positive investmentenvironment and improved underwriting results.

We continue to be adequately capitalized from a solvency standpoint. We regularly monitor our MCT ratio, our Own RiskSolvency Assessment ratio (“ORSA”), the results of our annual dynamic capital adequacy stress testing, and periodic stresstesting, to seek to ensure that an adequate regulatory capital position is maintained and take corrective actions as deemednecessary. Reinsurance is also used to protect our capital from large losses, including catastrophe losses, which could have adetrimental impact on capital. We have formal policies that specify tolerance for financial risk retention. Once the retentionlimits are reached, reinsurance is utilized to cover the excess risk.

We also have intercompany reinsurance agreements (the “Agreements”) in place, which results in Economical and eachinsurance company subsidiary, excluding Petline Insurance Company, reporting the same combined ratio. The Agreementsare supported by documented agreements between each of the companies, and the cash flows resulting from thearrangement are settled on a monthly basis. The Agreements allow the impact of any insurance losses to be spread acrosseach of the companies, enabling each of them to maintain its capital position without the need to move capital via dividendsor capital injections. Further supporting the Agreements, the participating insurance companies have pooled all of theirinvested assets into a partnership, TEIG Investment Partnership. The vast majority of invested assets of the companies areheld in the partnership with each company owning an interest in the partnership generally approximating to its participation inthe Agreements.

Own Risk and Solvency Assessment

The ORSA is a framework for federally-regulated insurers to internally assess their risks and determine the level of capitalrequired to support future solvency. The ORSA documents how risk assessment and capital management are integrated intoour decision-making process and are monitored to maintain financial viability.

We integrate the ORSA with our enterprise risk management framework, management reporting, and decision-makingprocesses. Our Board of Directors, Risk Review Committee, and Management Risk Committee review and provide challenge,advice, and guidance on the ORSA, critically assessing assumptions and results to confirm we consider them to be reasonablein the circumstances.

We develop the ORSA by reviewing our key risks and identifying key risk indicators, then performing a range of quantitativerisk sensitivity, stress testing, and other analyses, to relate our key risks to capital requirements. This process includesthoroughly assessing the methodology for relating risks to capital reflected in OSFI’s MCT guidelines and determining theappropriateness to our risk profile. As that regulatory methodology has been developed with consideration to the entireindustry, some capital factors are more suitable than others in addressing our risks. Depending on the risk, the regulatory

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approach may need to be modified to our circumstances, or we may determine that a different methodology is appropriate.We may also determine that the regulatory method is adequate and adopt it without modification. The output of this effort isthe relation of risks to ORSA capital requirements using both quantitative and qualitative methods in a deterministic capitalmodel. Stress testing is then utilized to assess the resiliency of our capital under a range of adverse conditions, includingextreme scenarios. The ORSA is integrated into the budgeting and planning process to determine our ability to meet internaland regulatory capital targets in the future, and to identify contingency plans and procedures should capital levels threaten tofall below pre-determined early-warning levels, as specified in our capital management policy. Our current ORSA capital levelis higher than our internal targets and early-warning levels established in our capital management policy.

FINANCIAL STRENGTH RATING

On November 15, 2019, AM Best reaffirmed our A- (Excellent) financial strength rating and “a-” issuer credit rating. The ratingsof A- (Excellent) and “a-” respectively provide further reinforcement of our financial strength assessment. The outlook forthese ratings remains stable.

LIQUIDITY

The liquidity requirements of our business are met primarily by funds generated by insurance operations and investmentreturns. Cash provided from these sources normally exceeds cash requirements to meet claim payments and operatingexpenses. We have no outstanding debt.

As at December 31, 2019, we have $94.7 million (2018: $135.3 million) of cash and cash equivalents and $228.1 million (2018:$329.7 million) of short-term investments. We also have a highly liquid investment portfolio comprising of actively tradedsecurities including: Canadian fixed income investments issued or guaranteed by domestic governments, investment-gradecorporate bonds, publicly-traded Canadian and foreign equities, and a foreign equity pooled fund. We believe our internalresources will provide sufficient funds to fulfil cash requirements during the next 12 months. Adherence to the liquidity policyseeks to ensure that we have sufficient cash and liquid resources to meet our financial obligations, to support our futuregrowth initiatives, and that excess cash is appropriately invested.

A summary of cash flows for the years ended December 31 is as follows:

Figure 22


Operating activities

Cash provided by operating activities $ 138.5 $ 44.6 93.9

Investing activities

Investments purchased, net of investments sold (204.5) (38.9) (165.6)

Commercial loans collected, net of commercial loans advanced 48.7 (5.3) 54.0

Other assets purchased (23.3) (49.5) 26.2

Business dispositions — 18.0 (18.0)

Cash used in investing activities (179.1) (75.7) (103.4)

Net decrease in cash and cash equivalents $ (40.6) $ (31.1) (9.5)

We generated positive cash flows from operations in 2019 and 2018. Cash flows from operations increased from 2018 dueprimarily to an increase in premiums collected, and a decrease in commissions and expenses paid due in part to reducedcosts as a result of the completion of the Vyne deployment in 2018 and reduced commission payments due to the quotashare reinsurance arrangement entered into in 2019. These were partially offset by an increase in claims paid and a decreasein income taxes recovered. Cash used in investing activities increased due primarily to an increase in net investmentspurchased, partially offset by commercial loans collected. The business disposition in 2018 pertained primarily to the sale ofour shareholding in a brokerage in the first quarter of 2018.

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7 — COMMITMENTS AND CONTINGENCIESCOMMITMENTS

Our commitments include lease commitments and certain non-cancellable contractual commitments. Our non-ownedbuildings, motor vehicles, computers, and office equipment are supplied through leases. The future contractual aggregateminimum lease payments under non-cancellable leases and other commitments are outlined below.

Figure 23


Within 1 year $ 33.1 $ 33.8

Later than 1 year but not later than 5 years $ 40.4 $ 50.9

Later than 5 years $ 13.8 $ 22.1

The total amount of commitments has decreased from 2018, due primarily to existing building commitments declining with thepassage of time.

OFF-BALANCE SHEET LIABILITIES AND CONTINGENCIES

In addition to litigation relating to claims made in respect of insurance policies written by us, we are subject to other litigationarising in the normal course of conducting our business. We are of the opinion that this non-claims litigation will not have asignificant effect on our financial position, results of operations, or cash flows. Refer to Section 10 — “Risk management andcorporate governance”, Claims reserving risk, which describes our process for ensuring appropriate provisions are recordedfor reported and unreported claims.

We participate in a securities lending program managed by a major Canadian and US financial institution, whereby we lendsecurities we own to other financial institutions to allow them to meet delivery commitments. The lending agents assume therisk of borrower default associated with the lending activity. As at December 31, 2019, securities with an estimated fair value of$597.5 million (2018: $591.6 million) have been loaned and securities with an estimated fair value of $617.4 million (2018:$608.5 million) have been received as collateral from the financial institutions. Lending collateral as at December 31, 2019 was100.0% (2018: 100.0%) held in cash and government-backed securities. The securities loaned under this program have notbeen removed from “Investments” in the consolidated balance sheet because we retain the risks and rewards of ownership.

The financial compensation we receive in exchange for securities lending is reflected in the consolidated statement ofcomprehensive income (loss) in “Interest”.

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8 — RELATED PARTY TRANSACTIONSFrom time to time, we enter into transactions in the normal course of business, which are measured at the exchange amounts,with certain directors, senior officers, and companies with which we are related. Management has established procedures toreview and approve transactions with related parties, and reports annually to the Corporate Governance Committee of theBoard of Directors on the procedures followed and the results of the review.

At the reporting date, commercial loans of $11.8 million (2018: $23.6 million) are due from companies subject to significantinfluence. The loans are included in “Investments” in the consolidated balance sheet and are initially measured at theexchange amount. The loans are subsequently measured in accordance with the accounting policy for loans and receivablesas noted in Note 2 — “Summary of significant accounting policies”, included in our audited consolidated financial statements.

POST-EMPLOYMENT BENEFIT PLANS

We provide certain pension and other post-employment benefits through defined benefit, defined contribution, and otherpost-employment benefit plans to eligible participants upon retirement. Information regarding transactions with the plans isincluded in Note 18 — “Post-employment benefits” of our audited consolidated financial statements.

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9 — ACCOUNTING AND INTERNAL CONTROLSINTERNAL CONTROLS AND PROCEDURES

We are responsible for designing and validating key disclosure controls and internal controls over financial reporting toreasonably ensure that accurate financial information is available internally to the Board of Directors and senior management,and externally to regulators, rating agencies, and policyholders, in a timely and appropriate manner.

It is important to recognize that inherent limitations exist in all control systems, and as such, an evaluation of those controlsystems can provide only reasonable assurance that fraud or errors are detected. We continue to monitor, assess, andimprove our system of internal controls and procedures.

CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES, AND ASSUMPTIONS

The preparation of our audited consolidated financial statements in conformity with IFRS requires management to makejudgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingentassets and liabilities as at the reporting date, and the reported amounts of revenues and expenses during the year. Actualresults could differ from these estimates. Although some variability is inherent in these estimates, management believes thatthe amounts provided are reasonable.

The most complex and significant judgments, estimates, and assumptions used in preparing our audited consolidatedfinancial statements are discussed below:

Judgments

In the process of applying our accounting policies, management has made the following judgments which have the mostsignificant effect on the amounts recognized in the audited consolidated financial statements.

We have applied judgment in our assessment of control or significant influence over investees, of the identification ofobjective evidence of impairment for financial instruments, the recoverability and recognition of tax losses, the determinationof cash-generating units, the evaluation of current obligations requiring provisions, and the identification of the indicators ofimpairment for property and equipment, goodwill, and intangible assets.

Estimates and assumptions

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have asignificant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial yearare discussed in Note 5 — “Significant accounting judgments, estimates and assumptions” of our audited consolidatedfinancial statements. The key estimates are as follows:

‰ Valuation of claim liabilities

‰ Impairment of long-lived assets

‰ Impairment of financial assets

‰ Valuation of post-employment benefits obligation

‰ Measurement of income taxes

Our significant accounting policies are discussed in Note 2 — “Summary of significant accounting policies” of our auditedconsolidated financial statements.

FUTURE ACCOUNTING AND REPORTING CHANGES

IFRS standards issued but not yet effective are discussed in Note 4 — “Standards issued but not yet effective” of our auditedconsolidated financial statements.

Effective January 1, 2019, we adopted IFRS 16 as discussed in Note 3 — “Adoption of new standard” of our auditedconsolidated financial statements.

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10 — RISK MANAGEMENT ANDCORPORATE GOVERNANCEOVERVIEW

A strong risk management culture contributes to making sound business decisions, both strategically and operationally. Ourcorporate governance and enterprise risk management frameworks are designed to provide reasonable assurance that:

(i) our business is understood from a risk perspective and our actions are consistent with our governing objectives,risk management capabilities, risk-taking capacity, and risk appetite; and

(ii) we maintain an appropriate risk and reward balance to protect us from events that have the potential to materiallyimpair our financial strength or our achievement of business objectives

Our enterprise risk management framework is rooted in the understanding that we are in the business of taking risk for anappropriate return. Balancing risk and reward is achieved through dynamic alignment between business strategy and riskappetite, diversifying risk, seeking appropriate compensation for risk, mitigating risk through preventive and detectivecontrols, and transferring risk to third parties, where appropriate. We have an integrated approach to the identification,assessment, monitoring, reporting and mitigation of risks across the organization, including emerging risks. All identified topand emerging risks are assessed relative to their potential impact on our corporate strategy, competitive position, operationalresults, reputation, and financial condition.

The Board of Directors, directly or through its Risk Review Committee, oversees the effective implementation of the enterpriserisk management framework by confirming whether senior management has put appropriate risk management policies inplace and whether risk management processes are effective. Regular reports on our risk profile, including significant risks, riskappetite exposures, and significant exceptions to risk management policies and controls, are provided to senior management,the Board of Directors, and its committees.

ALIGNMENT

We seek to align our risk appetite with our overall vision, mission, strategy and business objectives by considering whetherrisks are core, non-core, or collateral in nature.

Core risks are risks that we are willing to accept in order to achieve our return expectations and business objectives, andprimarily consist of insurance risks and financial risks. Non-core risks are those associated with activities outside of our riskappetite and approved business strategies, and are therefore generally avoided, regardless of expected returns. Collateralrisks are those we incur as a by-product of pursuing the risk and return optimization of core risks. Operational risks often fallinto this category. We endeavour to mitigate collateral risks to the extent that the benefit of risk reduction aligns with orexceeds the cost of mitigation.

We also seek to align our risk appetite with our risk management capabilities. We actively seek profitable risk-takingopportunities in those areas where we have established risk management capabilities, and seek to avoid risks that arebeyond those capabilities.

CORPORATE GOVERNANCE AND ACCOUNTABILITY

Our enterprise risk management framework addresses responsibility and authority for risk-taking, risk governance, and riskcontrol.

Governance Structure

BOARD OF DIRECTORS

Senior Management(Including Management Committees e.g. Executive Leadership Committee, Management Risk Committee, Public Disclosure Committee)

AuditCommittee

Corporate GovernanceCommittee

InvestmentCommittee

Risk ReviewCommittee

Ad hoc Committees(as required)

Human Resource &Compensation

Committee

Risk management occurs at all levels of the organization and is the responsibility of every employee. Our Board of Directorsapproves and oversees, among other things, our risk appetite, our internal control framework, significant policies, plans andstrategic initiatives related to the management of, or that materially impact, capital and liquidity, and our Code of BusinessConduct. It also provides challenge, advice, and guidance to senior management on the ORSA, our business performance,and the effectiveness and outcomes of risk management practices, as well as significant operational, business, risk, and crisismanagement policies. To assist the Board of Directors in confirming that the key risks are appropriately identified, criticallyassessed, and adequately managed, certain risk management accountabilities have been delegated to the followingcommittees:

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BOARD OF DIRECTORS COMMITTEES

Risk Review Committee The Risk Review Committee, composed entirely of independent directors, isresponsible for the oversight of the enterprise-wide risk management framework andthe regulatory compliance management program. The Risk Review Committeereviews the ORSA and the results of our regulatory compliance management program.It approves significant enterprise risk management policies and articulation of riskappetite. It also monitors our key and emerging risks.

Audit Committee The Audit Committee, composed entirely of independent directors, is responsible foroverseeing the integrity of our financial statements and related public disclosures; thequalifications, independence, appointment, and performance of our internal andexternal auditors; and the design, implementation, and evaluation of our internalcontrols, including internal controls over financial reporting and our disclosurecontrols.

Corporate Governance Committee The Corporate Governance Committee, composed entirely of independent directors,is responsible for developing effective corporate governance guidelines andprocesses, reviewing policies and processes to sustain ethical behavior, assessing theeffectiveness of the Board of Directors and its committees as well as the contributionsof individual directors, and identifying and recommending for election as directorsthose individuals with appropriate competencies, skills, and experience.

Human Resources andCompensation Committee

The Human Resources and Compensation Committee, composed entirely ofindependent directors, is responsible for overseeing our human resources practicesand policies. This includes reviewing our overall compensation philosophy, approvingcompensation to our senior executives, and reviewing retention, development, andsuccession plans.

Investment Committee The Investment Committee, composed of a majority of independent directors, isresponsible for the oversight of investment policies, practices, procedures, andcontrols related to the management of the investment portfolio, the performance ofthe investment portfolio, and monitoring the investment performance of our pensionplans.

From time to time, the Board of Directors may also strike ad hoc committees to provide dedicated oversight to key strategicinitiatives. We currently have two such committees: the Strategic Initiatives Committee and the Special Committee onDemutualization.

Three Line of Defence Risk Governance Model

We have implemented a three line of defence risk governance model, consisting of: front line risk-taking through businessoperations (first line), enterprise risk management and compliance functions (second line), and internal audit (third line). Eachline of defence has internal quality assurance and validation practices to oversee and confirm compliance with establishedpolicies and practices. Primary accountability for enterprise risk management resides with our President and Chief ExecutiveOfficer, who further delegates responsibilities throughout the Company under a framework of management authorities andresponsibilities. Key components of that framework include the following:

First Line of Defence

Business management provide day-to-day risk management and control:

Enterprise risk management andcompliance functions provide riskpolicies, tools, methodologies, andoversight:

Internal audit provides periodicindependent assurance:

Second Line of Defence Third Line of Defence

Responsibility to identify, take,assess, manage, and mitigate riskon a daily basis, adhering to ourapproved risk appetite statements,and supporting policies andpractices

Monitor and report on risks andcompliance with risk mitigationactivitiesComply with internal and externalpolicies and regulations

Review and test compliance withpolicies, standards, and requiredpractices, using a risk basedapproach

Provide assurance on the adequacyand effectiveness of first line internalcontrols, as well as enterprise riskmanagement policies, the enterpriserisk management framework, andrelated processes and practices

Management Risk Committeeoversees the management of majorexisting and emerging enterprise riskand control activities monitoringwhether the magnitude of those risksremains within our approved riskappetite.

Communicate internal and externalcompliance requirements andprovide support to help ensurecompliance

Through the ORSA, assess level ofcapital required to support futuresolvency

Perform independent review,challenge and monitoring of risk-taking and risk managementactivities

Develop and support the riskmanagement framework to identify,measure, assess, report, monitor,and respond to risks inherent

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MANAGEMENT OF KEY RISKS

The key risks we manage include insurance, financial, operational, and strategic risks, which are explained in greater detailbelow. Although we have described those risks that we believe to be material, other risks and uncertainties exist. If any ofthese risks or any other risks or uncertainties actually occur, it is possible that our business could be materially affected in anadverse manner. Our enterprise risk management framework cannot and is not designed to anticipate every risk in allenvironments, nor the timing or effect of every such risk.

Enterprise Risk Management Framework

Strategic Risk

Insurance Risk Financial Risk Operational Risk

Underwriting riskClaims reserving risk

Catastrophe risk

Interest rate riskStock price risk

Credit riskForeign exchange risk

Liquidity risk

People riskInformation security risk

Information technology riskCyber security risk

Regulatory and legal risksBusiness interruption risk

Strategic execution risk / Business, economic, and political environment risk / Competition risk / Distribution risk / Capital management risk / Reputational risk

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Risk Culture

Insurance risk

Underwriting risk

Underwriting and pricing

Underwriting risk is the risk of adverse financial exposures arising from various activities integral to the underwriting ofinsurance products, including product design, pricing, risk acceptance, and claims settlement. Our exposure toconcentrations of insured risks is mitigated by the use of segmentation, policy issuance and risk acceptance rules,individual limits, and reinsurance.

In particular, a financial loss occurs when the liabilities assumed exceed the expectation reflected in the pricing of aninsurance product. We price our products by taking into account numerous factors including product design and features,claim frequency and severity trends, product line expense ratios, special risk factors, capital requirements, regulatoryrequirements, and expected investment returns. These factors are reviewed and adjusted on an ongoing basis to ensurethey are reflective of current trends and market conditions. We endeavour to maintain pricing levels that produce anacceptable return by appropriately measuring and incorporating these factors into our pricing decisions. Pricingsegmentation and risk selection are used together with a view to attracting and retaining risks at acceptable return rates.The process of calculating pricing involves the use of models, which exposes us to model risk in the event that actualresults differ from those modelled, due to model limitations, data issues, human error, or other factors.

New products and product changes are subject to a detailed review by management, including our actuarial specialists,prior to their launch in order to mitigate the risk that they are priced at an inadequate level. The performance and pricing ofall of our products are regularly monitored, and corrective action is taken as considered necessary, including re-pricing ofthe products, modification of product terms, conditions, and eligibility requirements, the level of capacity provided, and theuse of reinsurance.

To minimize the risk arising from underwriting, we have policies that set out our underwriting risk appetite and criteria, aswell as specified tolerances for maximum financial risk retention and management processes to monitor compliance withthese limits. We utilize reinsurance in order to manage our exposure to insured risks. Once the retention limits are reached,reinsurance is utilized with the aim of covering the excess risk.

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Claims settlement

To control our exposure to unpredictable future developments that could negatively impact claims settlement, we promptlyrespond to new claims and actively manage existing claims, thereby shortening the claims cycle. In addition, our regulardetailed review of claims handling procedures, active litigation management, and proactive identification and investigationof possible fraudulent claims seeks to ensure our claims risk exposure does not exceed the claim cost expectationsinherent in the pricing of our products.

Legal and regulatory implications

In the normal course of our business, we are, from time to time, subject to a variety of legal and regulatory actions relatingto our business operations. In addition, plaintiffs continue to bring new types of legal claims against insurance and relatedcompanies. Current and future court decisions and legislative and regulatory activity may increase our exposure to thesetypes of legal claims. This risk of potential liability may make reasonable resolution of claims more difficult to obtain. Tomitigate our exposure to these types of legal claims we promptly respond to new insurance and legal claims and activelymanage existing insurance and legal claims. When necessary, claims reserves are adjusted to reflect potential legaldefence costs and potential settlements. We also monitor legal and regulatory developments.

Quality review procedures

Quality review procedures seek to ensure that our underwriting and claim activities fall within established guidelines,expected practices, and pricing structures. Head Office and field level reviews are conducted on a test basis. The results ofthese quality reviews are shared with the appropriate management and staff to ensure any issues identified can bepromptly addressed.

Reinsurance

We use reinsurance to manage our exposure to insurance risks. Reinsurance coverage risk arises because reinsuranceterms, conditions, availability, and pricing may change on renewal, particularly during times of high levels of catastropheevents, either in Canada or globally, or as a result of higher than expected claims activity on non-catastrophe reinsurancetreaties. In addition, reinsurers may seek to impose terms that are inconsistent with corresponding terms in the policieswritten by us. Ceding risk to reinsurers does not relieve us of the obligation to our policyholders for claims, therebyrequiring us to manage the level of credit risk associated with our reinsurers and our recoverable balances. Managementreviews our reinsurance program with the intention of ensuring its cost effectiveness and that adequate coverage isobtained, which reflects our risk tolerances, underwriting practices, and financial strength, while at the same time complyingwith our reinsurance and capital risk management policies.

Claims reserving risk

Claims reserving risk represents the risk that our estimates of claim liabilities are insufficient to cover future insurance claimpayments. We establish claim liabilities to cover the estimated liability for payment of all claims and claims adjustmentexpenses incurred with respect to insurance contracts underwritten by us. Claim liabilities do not represent an exactcalculation of the liability. Rather, they are our best estimate of the expected ultimate future cost of resolution andadministration of claims. The process of calculating claim liabilities involves the use of models, which exposes us to model riskin the event that actual results differ from those modelled, due to model limitations, data issues, human error, or other factors.To address inflation risk, expected inflation is taken into account when estimating claim liabilities.

Claim liabilities include an estimate for reported claims, as established by our claims adjusters based on the details ofreported claims, plus a provision for IBNR, as established by our corporate actuaries.

Individual claims estimates are determined by claims adjusters on a case-by-case basis in accordance with documentedpolicies and procedures. These specialists apply their experience, knowledge, and expertise, after taking into accountavailable information regarding the circumstances of the claim to set individual case reserve estimates. Uncertainty exists onreported claims in that all information may not be available at the valuation date. Uncertainty also exists regarding the numberand size of claims not yet reported as well as the timing of when the claims will be reported. Accordingly, the IBNR provision isintended to cover future additional costs emerging on both reported claims and claims that have occurred but have not yetbeen reported.

The valuation of claim liabilities is based on estimates derived by geographical region and line of business using generallyaccepted actuarial techniques. Numerous individual assumptions that impact average claim costs or frequency of latereported claims are made for each line of business. The main assumption in the majority of actuarial techniques employed isthat future claims development will follow a pattern similar to recent historical experience. However, there are times wherehistorical experience is deemed inappropriate for evaluating future development because there isn’t enough credible data, orbecause recent judicial decisions, changes to legislation or major shifts in a book of business indicate a departure fromhistorical trends. Such instances can require significant actuarial judgment, often supported by industry benchmarks, inestablishing an adequate provision for claim liabilities.

Establishing an adequate provision for claim liabilities is an inherently uncertain process and is closely monitored by ourcorporate actuarial department. Claim liabilities, including the provision for IBNR as established by our corporate actuaries, issubject to an internal and external peer review process to assess the adequacy of the provision for claim liabilities.

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As the outstanding claim liabilities are intended to represent payments that will be made in the future, they are discounted toreflect the time value of money. The discount rate used to discount the actuarial value of claim liabilities is based on the fairvalue yield of our bonds that support the claim liabilities. In assessing the risks associated with investment income andtherefore the discount rate, we consider the nature of the bond portfolio and the timing of claim payments, and the extent towhich they match, to expected investment cash flows. Future changes in the bond portfolio could change the value of claimliabilities by impacting the fair value yield.

The following table presents the interest rate sensitivity analysis for a one percentage point change in interest rates on the netclaim liabilities:

(in millions of dollars) 2019 2018

Impact on: +1% -1% +1% -1%

Net claim liabilities $ (75.1) $ 80.4 $ (71.8) $ 72.7

Catastrophe risk

Catastrophe risk may arise if we experience a considerable number of losses due to human-made or natural catastrophes thatresult in significant impacts on claims costs. Catastrophes can cause losses in a variety of different lines of business and mayhave continuing effects which, by their nature, could impede efforts to accurately assess the full extent of the damage theycause on a timely basis. Although we evaluate catastrophe events and assess the probability of occurrence and magnitude ofimpact through various commonly used, industry accepted modelling techniques and through the aggregation of limitsexposed in each geographical territory in which we operate, such events are inherently unpredictable and difficult to quantify.In addition, the incidence and severity of catastrophe events may become increasingly unpredictable as climate patternschange, and severe weather caused by climate change will likely continue to affect the P&C industry and result in higherclaims costs.

We manage our catastrophe events exposure through the deductibles charged to policyholders, by limitations on policies, bypurchasing reinsurance, by monitoring exposure to concentrations of insured risks, and by monitoring the impact on capitalposition and overall risk tolerances.

Financial risk

Our investment holdings are exposed to interest rate risk (including the impact of credit spreads), equity market price risk andpreferred stock price risk, credit risk, foreign exchange risk, and liquidity risk.

We have established a detailed investment policy for the investment portfolio, which is subject to regular review and approvalby our Investment Committee. The policy sets out our philosophy of investment management, which is to generate sufficientincome while preserving capital. The philosophy focuses on maximizing our long-term capital strength and risk-adjustedreturns. The policy includes specific guidelines for such items as asset mix, concentration levels in specific investments,required quality of the underlying investments, the use of derivatives, and exposure to foreign currencies. Compliance withthese guidelines, and the relevant requirements of the Insurance Companies Act (Canada), is routinely monitored bymanagement and reported to the Investment Committee.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values offinancial instruments. Changes in interest rates can occur from both changes in the Government of Canada yield curve andchanges in relevant market credit spreads. Typically, interest income will be reduced during sustained periods of declininginterest rates, but this will also generally increase the fair value of the bond portfolio. The reverse is true during a sustainedperiod of increasing interest rates.

As interest rate risk is a significant risk to us due to the nature of our investments and claim liabilities, a portion of our bondportfolio has been voluntarily designated as FVTPL financial assets which, together with a portion of AFS bonds, is managedto offset the effect that interest rate changes have on our claim liabilities.

The impact of an immediate hypothetical one percentage point change in interest rates (assuming a parallel shift across theyield curve), on the FVTPL and AFS bond portfolios, with all other variables held constant is as follows:


Impact on: +1% -1% +1% -1%

Fair value of FVTPL bonds and income before income taxes $ (72.7) $ 82.8 $ (68.8) $ 77.4

Fair value of AFS bonds and OCI before income taxes $ (52.8) $ 59.8 $ (44.3) $ 50.6

As discussed under “Claims reserving risk”, an immediate hypothetical one percentage point increase in the discount ratewould reduce net claim liabilities, and increase income before income taxes, by $75.1 million (2018: $71.8 million). This offsetsthe corresponding decrease income before income taxes on the FVTPL bond portfolio discussed above of $72.7 million(2018: $68.8 million).

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Common equity market price risk and preferred stock price risk

As part of our investment portfolio, a portion of the investments are held in Canadian and foreign equities. Economic trends,investee performance, the political environment, and other factors can positively or adversely impact the equity markets and,consequently, the value of equity investments we hold. Our AFS portfolio includes Canadian common stocks with fair valuemovements that are benchmarked against movements in the Toronto Stock Exchange 60 Index, and foreign stocks andpooled funds with fair values that are benchmarked against movements in the MSCI World Index. Also included in the AFSportfolio are our holdings of preferred stocks. Economic trends, interest rates, credit conditions, regulatory changes, and otherfactors can positively or adversely impact the value of preferred stocks that we hold. The fair value sensitivity of our preferredstocks is assessed against movements in the BMO 50 Resets Sub-Index.

The estimated impact of a 10% movement in the aforementioned indices to the value of our equity portfolio, with all othervariables held constant, to the extent we do not dispose of any of these equities during the year, is as follows:


Impact on: 10% -10% 10% -10%

Fair value of Canadian stocks and OCI before income taxes $ 23.0 $ (23.0) $ 28.3 $ (28.3)

Fair value of foreign stocks, pooled funds and OCI before income taxes $ 10.0 $ (10.0) $ 11.9 $ (11.9)

Fair value of preferred stocks and OCI before income taxes $ 31.7 $ (31.7) $ 28.5 $ (28.5)

Credit risk

Credit risk is the risk of financial loss caused by our counterparties not being able to meet payment obligations as theybecome due. Our credit risk is concentrated in the bond, preferred stock and commercial loan portfolios, the securitieslending program, premiums receivable, amounts owing from reinsurers, and structured settlements. Unless otherwise stated,our credit exposure is limited to the carrying amount of these assets. Our principal approach to mitigate credit risk is tomaintain high credit quality standards and to diversify credit exposures by limiting single name concentrations. Concentrationrisk also exists where multiple counterparties may be financially affected by changing economic conditions in a similarmanner. We have a concentration of investments in Canada and within the financial and energy sectors. These riskconcentrations are regularly monitored and adjusted as deemed necessary.

Bonds and preferred stocks

Our investment policy requires that we invest in bonds and preferred stocks of high credit quality, and limit exposure withrespect to any one issuer. On a regular basis, we also monitor publicly available information referencing the investmentsheld in the investment portfolio to determine whether there are investments which require closer monitoring of the creditrisk. Refer to Section 5 — “Financial position” for further details pertaining to our investment portfolio credit ratings andinvestment mix.

Securities lending

We participate in a securities lending program managed by a major financial institution, whereby we lend securities we ownto other financial institutions to allow them to meet delivery commitments. We manage credit risk associated with thisprogram by only dealing with counterparties who are rated “A” or higher by independent rating agencies and by obtainingcollateral with a fair value in excess of the value of the securities loaned under the program. Refer to Section 7 —“Commitments and contingencies” for further discussion.

Premiums receivable

Our credit exposure to any one individual policyholder or broker included in premiums receivable is not significant. Weregularly monitor amounts due from policyholders and follow up on all overdue accounts. As permitted by regulation, whenpremiums are overdue for an extended period of time, we cancel the insurance coverage under the applicable policy.Before a broker is granted a contract, we conduct due diligence reviews. Delinquent accounts are regularly monitored andwe take action against non-payment.

Commercial loans

We periodically issue commercial loans to brokers. Collateral, principally in the form of security over a borrowingbrokerage’s operating assets, is held to protect us against loss in the event of a default of any of these loans. Annually, andwhere required more frequently, financial reviews are undertaken to determine if the broker is expected to be able to makethe payments required by the loan as and when due. Our gross credit exposure on these commercial loans is limited totheir carrying value, which amounted to $52.8 million as at December 31, 2019 (2018: $101.5 million). Management does notconsider any of these current commercial loans to be impaired as at December 31, 2019.

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Reinsurance receivable and recoverable

Credit exposures on our reinsurance receivable and recoverable balances exist to the extent that any reinsurer may not bewilling or able to reimburse us under the terms of the relevant reinsurance arrangements. We have policies which limit theexposure to individual reinsurers and a regular review process to assess the creditworthiness of reinsurers from whom wepurchase coverage. Our reinsurance risk management policy generally precludes the use of reinsurers with credit ratingsless than “A-”. Currently, all reinsurers have a credit rating of “A-” or better as determined by independent rating agencies.Where appropriate, we obtain collateral for outstanding balances in the form of cash, letters of credit, offsetting balancespayable, guarantees, or assets held under reinsurance security agreements.

Structured settlements

We have purchased annuities from life insurers to provide for fixed and recurring payments to claimants. As a result of thesearrangements, we are exposed to credit risk to the extent to which any of the life insurers fail to fulfil their obligations. Thisrisk is managed by acquiring annuities from multiple life insurers with proven financial stability, all of which are rated “A-” orbetter by independent rating agencies. As at December 31, 2019, no information has come to our attention that wouldsuggest any weakness or failure in life insurers from which we have purchased annuities. Consequently, no provision forcredit risk was recorded (2018: nil). The original purchase price of the outstanding annuities is $313.3 million (2018: $305.8million).

Foreign exchange risk

Foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchangerates relative to the Canadian dollar. Our foreign exchange risk relates primarily to our foreign common stock and pooled fundholdings in the AFS portfolio, which are denominated in various foreign currencies.

Our largest foreign currency exposure is to the US dollar. The impact on the fair value of US dollar foreign stocks, pooledfunds, and OCI before income taxes from a 10% change in the US dollar relative to the Canadian dollar is $6.3 million (2018:$6.8 million). Under this same scenario, the impact on the fair value of non-US dollar foreign stocks, pooled funds, and OCIbefore income taxes is $1.3 million (2018: $1.9 million), assuming historical correlations between currency pairs remain intact.

Liquidity risk

Liquidity risk is the risk of having insufficient cash resources to meet current financial obligations, particularly those related toclaim payments. The liquidity requirements of our business are met primarily by funds generated from operations, assetmaturities, and investment returns. Liquidity risk arises in relation to each of those funding sources. To mitigate this risk, anappropriate portion of invested assets is maintained in short-term (less than one year) highly-liquid money market securities,which are used to satisfy our operational requirements. A large portion of invested assets are held in highly-liquid federal andprovincial government debt to protect against any unanticipated large cash requirements. We have no outstanding debt asidefrom bank overdraft operating lines and trade payables. Refer to Note 7 — “Financial risk management” included in ouraudited consolidated financial statements, for a summary of the Company’s financial assets and financial liabilities maturityprofile.

Operational risk

Operational risk is the risk of financial loss from inadequate or failed processes, people, systems, or due to external events.This may relate to any of our activities and includes, for example, faulty process, prohibited employee actions, deceptiveactions by third parties, human error, and technology failures. We manage operational risk through our three lines of defencerisk governance model (refer to “Corporate Governance and Accountability” above for more detail), and are continuallyenhancing our enterprise risk management framework to include current risk assessments for our strategic initiatives andsignificant business and functional areas. There is also ongoing monitoring and follow-up on risks, incidents, and associatedcontrols through regular reporting to senior management, the Management Risk Committee, the Risk Review Committee, andother relevant Board of Directors’ committees.

People risk

Successful implementation of our strategy depends, among other matters, on our ability to attract, develop, motivate, andretain employees with the necessary skills, capabilities, and knowledge. The inability to attract, motivate, or retain anappropriate staffing level and/or key employees with specialized skills, capabilities, or knowledge could adversely impact ourability to execute on strategic initiatives, our financial performance, our compliance with applicable legal requirements, orresult in an increased risk of operational errors. To mitigate this risk, we focus on the delivery of critical talent managementand performance enhancement programs to ensure we identify, attract, develop, motivate, and retain an adequate number ofemployees with the appropriate skill set. In addition, we continue to strengthen our senior management and executiveleadership team and Board of Directors so that the necessary competencies are represented at the leadership level and thatwe have adequate succession plans in place.

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Information security risk

Information security risk is the risk of loss or harm resulting from the failure to appropriately manage information during itslifecycle. We routinely collect, process, use, retain, and dispose of various types of information from numerous sources,including personal information, policyholder information, and business or internal proprietary information. An inadvertentdisclosure, unauthorized access, or other misuse of such information could have a negative impact on the privacy of ourpolicyholders or other individuals, on the confidentiality of our strategic plans, competitive initiatives, business information, orfinancial performance. The occurrence of such an event could result in reputational damage, financial loss, and/or legal orregulatory consequences. We mitigate this risk by employing physical and logical access restrictions. We attempt to limitaccess to data, information, and systems to the minimum required access levels and routinely review provisioned access.Through our cyber security program, we regularly enhance systems, networks, processes, and data protection measures todetect and reduce the risk of unauthorized access. We also provide employee information security awareness training.

Information technology risk

Our business depends on the successful and uninterrupted functioning of our computer and data processing systems anduser or system interfaces. We rely on third-party service providers for delivering key components of these systems, includingdata, telephony, information technology infrastructure, and data centre services. The failure of these systems, including failureof our third-party service providers to deliver these services on a timely basis, could interrupt our operations or materiallyimpact our ability to rapidly evaluate and commit to new business opportunities or otherwise conduct business. If sustained orrepeated, a system failure could result in the loss of existing or potential business relationships, compromise our ability toprocess transactions in a timely manner, or otherwise impair our ability to develop, modify, or execute our strategies, andultimately, could negatively affect our financial results and our reputation. To manage this risk, we have implemented internalcontrol and system monitoring processes. We also require our key third-party service providers to enter into service levelagreements to contractually secure their commitment to our minimum expected levels of service. To identify, triage, andrespond to critical technology incidents in a timely manner, we have an incident response process. Our data centre ismanaged by a reputable third-party who provides disaster recovery services, including annual testing of, and redundantsystems and facilities for, our critical services. Management regularly monitors the service levels provided by key third-partyservice providers, the stability of key systems, and the quantity and root cause of critical technology incidents.

To facilitate the achievement of operational and strategic objectives, we need to maintain and upgrade our computer anddata processing systems and information technology infrastructure. Such projects require the investment and coordination ofresources, and often necessitate trade-offs to balance risk management with execution speed and an appropriate return oninvestment. The implementation of significant new or revised systems and the adaption of processes have the potential tointroduce additional complexity and operational risk until full transition is completed. To address increased operational riskduring a transition period change, additional management oversight considerations are integrated into the implementationprocess, and additional manual and monitoring controls and reporting are implemented. Significant technology projects aremanaged and governed as corporate initiatives (refer to “Strategic execution risk” below for more detail).

Cyber security risk

Cyber security risk is the risk of unauthorized information access, or the loss of system integrity or availability, as a result of anattack delivered electronically or by direct access to our systems or systems provided by third-party service providers. Thereis an increasing prevalence of cyber-attacks affecting a variety of businesses with ever-increasing financial, operational, andreputational impact. We have a cyber security program which includes employee cyber security awareness training andreminders to reduce the risk of employee action inadvertently resulting in an exposure. Through our cyber security program,we regularly enhance systems, networks, processes, and data protection measures to detect and reduce the risk ofunauthorized access, increase system resilience, and minimize the impact of a cyber-attack if it were to occur. We alsoconduct exercises to test the effectiveness of our response plans. In addition, we also carry cyber incident insurance tomitigate exposure to significant losses arising from a cyber incident, subject to applicable policy limits.

Regulatory and legal risks

Regulatory risk

Regulatory risk refers to the risk that modifications to legislation, or how it is applied by regulators, including increasingvolume, complexity or stringency, will threaten our ability and capacity to conduct profitable business in the future.

As a participant in the P&C insurance industry, we are subject to significant legislative oversight by federal and provincialgovernments and administrative bodies, which are in addition to legislation of general applicability such as privacy, healthand safety, and employment standards. Insurance legislation delegates regulatory, supervisory, and administrative powersto federal, provincial, or other jurisdictional insurance commissioners and agencies. Such legislation is generally designedto protect policyholders and is related to matters including: rate setting; restrictions on types of investments; themaintenance of adequate capital to support unearned premiums and unpaid claims; the examination of insurancecompanies by regulatory authorities, including periodic market conduct examinations; and the licensing of insurers and theiragents and brokers. In particular, the personal automobile insurance product is subject to significant legislation in eachprovince and it is possible that future legislative changes may prevent us from taking actions, such as raising rates, to affectoperating results.

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Changes to capital and solvency standards, restrictions on certain types of investments, and periodic market conduct andfinancial examinations by regulators could also impact our ability to successfully implement our strategy. We are requiredby federal regulators to maintain sufficient capital in order to ensure our continued solvency and protect us and ourpolicyholders from adverse events. The primary solvency test we must comply with is the MCT, whereby we are required tohold at least 150% available capital against required risk-weighted capital. In addition, under the ORSA framework (refer to“Own Risk and Solvency Assessment” above for more detail), we internally assess our risks and determine the level ofcapital required to adequately support future solvency. The internal capital targets established in our capital managementpolicy are higher and more stringent than the regulatory minimum, and our current capital level is higher than our internaltargets.

The application of existing laws or regulatory policy may require a degree of interpretation, particularly with respect to newor emerging issues, or new operations. In addition, changes to laws and regulations, including changes in theirimplementation, interpretation, or application, or the introduction of new laws and regulations, could affect us by limiting theproducts or services we can provide, restricting the prices we are able to charge, impacting the manner in which we offerour products to the market, requiring specified claims payments, limiting the effectiveness of our policy wordings, and/orincreasing the ability of new or existing competitors to compete with our products and services. The brokers on whom werely to distribute our products are also subject to laws and regulations governing the conduct of their businesses, and thedisclosure they provide to policyholders. We are unable to control the extent to which those brokers comply with applicablelaws and regulations, and any failure by them to do so could result in the imposition of significant restrictions on their abilityto do business with us, which could adversely affect our results of operations or financial position.

Legal and regulatory action risk

Legal and regulatory action risk refers to the impact of court awards, settlements, penalties, fines, and restrictions orprecedents on the manner in which we carry on business as a result of lawsuits or non-compliance with applicable laws orregulatory requirements.

In the normal course of our business, we may, from time to time, be subject to a variety of legal and regulatory actionsrelating to our operations. In addition, plaintiffs continue to bring new types of legal claims against insurance and relatedcompanies. Current and future court decisions and legislative activity may increase our exposure to these types of claims.This risk of potential liability may make reasonable resolution of claims more difficult to obtain.

To manage legal and regulatory action risk, we have established procedures and controls through three lines of defencesupported by our Code of Business Conduct. Our regulatory compliance management program assesses whether we arecurrently in material compliance with applicable laws, rules, and regulations. There is also ongoing monitoring and follow-upon risks, incidents, and associated controls through regular reporting to the Management Risk Committee, the Risk ReviewCommittee, and other relevant Board of Directors’ committees. We also actively participate in discussions with regulatorsand governments, and in industry groups to ensure that significant concerns are communicated to these bodies. In addition,our Legal Risk Management Policy requires consultation with the legal department when transactions or activities, eitherdue to size or nature, may pose significant legal or regulatory risk, or in the event of actual or threatened litigation orregulatory or law enforcement activity.

Business interruption risk

Business interruption risk is associated with events that impact, or have the potential to impact, our ability to conduct businessas normal. Interruptions to business can be triggered by events affecting our facilities, technology, people, or third-partysuppliers; including events such as floods, earthquakes, technology failures, pandemics, etc. Such events can result in lossesof financial assets, property and equipment, key employees, and/or the inability to write business and process transactions.

To mitigate business interruption risk, we have established a specialized Enterprise Business Continuity Management(“EBCM”) function headed by the Chief Risk Officer. The EBCM function proactively assesses potential risks to theCompany and ensures resilient planning and continuity arrangements are in place. Resiliency plans are developed and testedto ensure critical functions can continue despite a disruptive event. For example, resiliency plans exist to support emergencyresponse, incident management, crisis management, crisis communication, disaster recovery, facilities recovery, regionalincident response, business continuity, and a pandemic. We have deployed a response structure that provides rapid responseto events, and have created teams at all levels to ensure quick and effective decisions can be made at the appropriate leveland are executed efficiently. We also conduct exercises to test the effectiveness of our resiliency plans. In addition, we alsocarry business interruption insurance to mitigate exposure to significant losses arising from business interruption events,subject to applicable policy limits.

Strategic risk

Strategic risk is the potential for loss or under-performance arising from the ineffective implementation of appropriatebusiness strategies and/or the inability to adapt strategies to changes in the business environment. Our strategy, and ourability to develop and implement the strategy, is influenced by, among other things, industry competition, changes in theregulatory environment or requirements, legal matters, general economic conditions, capital levels, and access to necessaryexpertise. Each year the executive leadership team reassesses our strategy in light of industry, general economic, regulatory,technological, and other conditions, and develops a detailed business plan which is reflective of this strategy. The businessplan and strategic risk analysis are presented for review and approval annually, or more frequently if required, by the Board ofDirectors.

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Strategic execution risk

Strategic execution risk is the risk that we are ineffective in implementing our business strategies. We closely monitor theenvironment in which we operate, and risks that may impact the execution of our strategy are regularly assessed, managed,and addressed by the executive leadership team, with oversight from the Board of Directors.

From time to time we may undertake strategic initiatives to implement our business strategies. Such initiatives require theinvestment and coordination of resources, and often necessitate trade-offs to balance risk management with execution speedand an appropriate return on investment. Changes to a strategic initiative’s scope, costs, or timing may impact the magnitudeor timing of benefits to be achieved from the initiative or the investment required to implement the initiative, and maynegatively impact other initiatives and financial performance. To address strategic execution risk, we dedicate resources toexecute and manage these strategic initiatives. Where a strategic initiative requires specialized skills or additional personnelnot available among our Company employees, we may engage third-party service providers to support strategic initiatives.We exercise careful oversight of third-party service providers to ensure deliverables comply with contractual terms andexpected timeliness, quality, and cost criteria, and to approve changes to scope, costs, or timing. We manage the risksassociated with strategic initiatives through specified management committees to prioritize and oversee specific strategicinitiatives. The Board of Directors also provides oversight to strategic initiatives both directly and through its committees.

Demutualization is one such strategic initiative. Demutualization is a complex process, prescribed by the regulationsestablished by the federal government, designed to allow federally-incorporated mutual P&C insurance companies todemutualize. A number of external or internal events could cause our demutualization process to terminate prior to itscompletion, including any one of the necessary special resolutions not being passed by at least two-thirds of thepolicyholders voting at a special meeting, regulatory and government approval not being obtained, or our Board of Directorspassing a resolution terminating the demutualization. To address and monitor these risks, we employ subject matter experts,engage third party advisors, and continue to actively engage with stakeholders. The execution of the demutualization processis managed by a specified management committee, overseen by the Board of Directors’ Special Committee onDemutualization, and the Board of Directors more broadly.

Business, economic, and political environment risk

Our business and results can be affected significantly by changes in the business, economic, and political environment.Depressed economic conditions may cause changes in the level of demand for insurance or reductions in policy coveragesand have been correlated with increases in claims fraud.

Increased political and governmental involvement in the insurance industry may otherwise change the business andeconomic environment in which we operate. Such changes could cause us to make unplanned modifications to our productsor services, or result in other industry participants altering their strategies in a manner that changes the level of competition inour target markets.

Competition risk

The financial performance of the P&C industry has historically tended to fluctuate in cyclical patterns of “soft” marketscharacterized generally by increased competition resulting in lower premium rates, followed by “hard” markets characterizedby reduced competition and increasing premium rates. The risk exists that these fluctuations in industry conditions couldproduce an underwriting environment that negatively impacts our underwriting results, premium levels, and financial position.

When there is intense competition in the P&C industry for any product line, our competitors may price their products at ratesthat appear to be below the level required to make a reasonable return in an effort to gain or retain market share. If we areunable to realize superior risk selection or sufficient expense efficiencies, our ability to establish or maintain competitivepricing could be adversely affected. Given our disciplined approach to underwriting, there may be market conditions orcompetitive actions which restrict our ability to grow or maintain our written premium levels.

The entrance of new market participants or a shift in the methods to select or price risks by competitors could also undermineour ability to establish or maintain competitive pricing. The introduction of disruptive innovations and changing technologiescould affect the way that our customers purchase insurance, how we price insurance, the demand for our products, and ourunderwriting and other decision-making processes. Our ability to effectively compete may be impaired if we do not respondadequately to new market participants or existing competitors who deploy such technologies.

Distribution risk

In order to meet our overall strategy, we must manage our distribution risk. Distribution risk includes the inherent risk ofdealing with independent brokers and new market entrants, as well as the risk that the broker distribution channel would notbe viable in a specific market.

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We write products through a network of select brokers across Canada. The ability of our broker network to be competitiveagainst other distributors and distribution channels, our ability to maintain a strong relationship with the brokers, and ourability to maintain acceptable service levels and appropriate pricing are critical for staying competitive in the market. Thecompetitive environment is further complicated by the consolidation of brokers, and the acquisition of brokers by other P&Cinsurance companies, which may have a direct impact on our market share and ability to grow profitably. We maintain closerelationships with brokers through the business development staff, who provide training and guidance to enhance thebrokers’ understanding and marketing of our products. Strong competition exists among insurers for brokers with a provenability to develop and deliver a profitable book of business. Premium volume and profitability could be negatively affected ifthere is a material decrease in the number of brokers that choose to sell our insurance products. We periodically issuecommercial loans to, or participate in equity investments in, certain profitable brokers to maintain broker loyalty. By doing so,we could be exposed to financial risk and potential relationship issues. To mitigate these risks, commercial loans and equityinvestments in brokers are subject to annual, or more frequent, financial reviews, and are supported by standard agreementterms for oversight and security assignment. The Board of Directors provides supervision by reviewing the loan portfolio andequity holdings semi-annually.

In recognition of ongoing industry growth in the direct distribution channel, we have implemented a multi-channel distributionstrategy. While our broker business will continue to be a core part of our business model, we have launched a separately-branded, digital direct channel offering to allow us to serve this distinct market segment. Given the relatively new nature ofthis distribution channel for us, there is risk that the implementation of the direct distribution channel may not yield thebenefits expected, or that it could result in negative reputational impact. We closely monitor the performance of both thedirect distribution channel and the broker network.

Capital management risk

Capital management risk refers to the risk of not being able to fully execute on our business strategy as a result of insufficient,or ineffective use of, capital. We are required by federal regulators and our capital management policy to maintain sufficientcapital in order to ensure our continued solvency and protect us and our policyholders from adverse events (refer to“Regulatory risk” above). A reduction in capital levels below our internal or regulatory targets could trigger corrective actionsas specified in the capital management policy and subject us to regulatory intervention.

If a rating agency downgraded our financial strength rating below minimum acceptable levels, it could result in a loss ofbusiness, particularly in our commercial lines business, where certain customers may require that we maintain minimumratings to enter into or renew business with us.

To ensure sufficient capital levels are maintained, we actively monitor the MCT ratio and the ORSA (refer to “Own Risk andSolvency Assessment” above), and the effect that external and internal forces and actions have on the capital base throughour capital management program. Senior management determines the potential impact on capital when establishing theannual business plan and setting strategy, and before entering into any acquisitions or significant investments, to confirm thatacceptable levels of capital are maintained.

Reputational risk

Reputational risk is the risk that negative publicity regarding the P&C insurance industry generally, our business practices, oractions by external parties, our employees or directors, whether true or not, will adversely affect our performance, operations,broker relationships, or customer base.

Reputational risk assessments involve a broad array of factors, including the extent and outcome of relevant legal andregulatory due diligence, the economic intent of particular transactions, the impact of events on the Company, the need forcustomer or public disclosure, conflicts of interest, fairness issues, and public perception. We consider the potentialreputational implications when implementing our business strategies and develop response plans to address anticipatedresponses where possible. We monitor public, broker, and customer sentiment through formal feedback, complaint handlingand ombuds mechanisms, and monitoring of both social and traditional media. Based on monitoring results, we implementresponse plans as necessary. Finally, we also have incident management and communication plans in place to addressincidents that may have reputational impact.

Conduct risk

Conduct risk is defined as business practices, or actions by external parties, our employees or directors, whether true ornot, that create risks of outcomes that would harm stakeholders or create reputational risk to the Company. We manageconduct risk by implementing our Code of Business Conduct, governance practices, enterprise risk management programs,and employee and broker training. All of our directors, officers, and employees have a responsibility to conduct theiractivities in accordance with our Code of Business Conduct.

Under our ethics reporting program, employees or other stakeholders are able to contact an independent service provideron a confidential and anonymous basis to communicate any concerns regarding compliance with our Code of BusinessConduct, including questionable accounting or auditing matters, internal controls over financial reporting, and our disclosurecontrols and procedures. All concerns raised are forwarded to designated individuals for investigation and follow-up.Complaint handling and ombuds mechanisms also represent a conduit for identifying and escalating conduct issues.

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11 — NON-GAAP FINANCIAL MEASURESWe measure and evaluate performance of our operations using a number of financial measures, which include assessingperformance against non-GAAP measures. These non-GAAP financial measures are derived from elements of our auditedconsolidated financial statements and do not have any standardized meaning prescribed by GAAP. They may not becomparable to similar measures presented by other companies. Accordingly, these measures should not be considered inisolation or as a substitute for analysis of our financial information reported under GAAP.

These non-GAAP financial measures are consistent with financial measures generally used in the P&C insurance industry, andfacilitate management’s comparisons to our historical operating results and to competitors’ operating results. They alsoprovide readers with greater transparency of supplemental information used by management in assessing results and foroperational decision-making. These non-GAAP measures are outlined and defined below:

Adjusted combined ratio Combined ratio excluding the financial impact of our investment in thedevelopment and implementation of the Vyne platform and the results of theunderwriting activity of Sonnet.

Claims ratio Claims and adjustment expenses (excluding the impact of discounting) duringa defined period expressed as a percentage of net earned premiums for thesame period.

Combined ratio Claims and adjustment expenses (excluding the impact of discounting),commissions, operating expenses (net of other underwriting revenues), andpremium taxes during a defined period expressed as a percentage of netearned premiums for the same period.

Core accident year claims ratio Claims ratio excluding catastrophe losses and claims development.

Expense ratio Underwriting expenses, including commissions, operating expenses (net ofother underwriting revenues), and premium taxes during a defined period,expressed as a percentage of net earned premiums for the same period.

Gross written premiums (GWP) The total premiums from the sale of insurance during a specified period.

Net written premiums (NWP) GWP less the cost of reinsurance coverage.

Return on equity (ROE) Net income (loss) after tax for the 12 months ended at a specified date dividedby the average retained earnings over the same 12-month period.

Underwriting income (loss) Net earned premiums for a defined period less the sum of claims andadjustment expenses (excluding the impact of discounting), net commissions,operating expenses (net of other underwriting revenues), and premium taxesduring the same period.

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12 — DEFINITIONSRefer to Section 11 — “Non-GAAP financial measures” for definitions of non-GAAP measures we use to measure and evaluateperformance of our operations.

Catastrophe loss An event causing gross losses in excess of $2 million, and generally greaterthan 100 claims.

Claims development The difference between prior year-end estimates of ultimate undiscountedclaim costs and the current estimates for the same block of claims. Afavourable development represents a reduction in the estimated ultimate claimcosts during the period for that block of claims.

Discounting To reflect the time value of money, the expected future payments of claimliabilities are discounted back to present value using the market yield rate ofthe investments used to support those liabilities. Provisions for adversedeviation are also included when determining the discounted value.

Frequency A measure of how often a claim is reported as a function of PIF.

Incurred but not reported (IBNR) The amount that is added to case reserves to establish the total claimliabilities. It is intended to cover future development on reported claims, aswell as claims that have occurred but not yet been reported to the Company.

Large loss A single claim with a gross loss in excess of $1 million.

Minimum capital test (MCT) A regulatory formula defined by the Office of the Superintendent of FinancialInstitutions Canada, that is a risk-based test of capital available relative tocapital required.

Net earned premiums The portion of NWP equal to the expired period of time an insurance policy isin effect.

Policies in force (PIF) The number of insurance policies for which we are at risk at a specified date.

Provision for adverse deviation (PfAD) An amount that is added to the discounted claims and adjustment expenses toreduce the uncertainty of potential adverse effects that are inherent in theassumptions and data used to estimate such liabilities.

Severity A measure of the average dollar amount paid per claim.

Total equity Retained earnings plus accumulated other comprehensive income (loss).

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CONSOLIDATED FINANCIAL STATEMENTS

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TABLE OF CONTENTSCONSOLIDATED FINANCIAL STATEMENTSREPORT OF MANAGEMENT’S ACCOUNTABILITY 48APPOINTED ACTUARY’S REPORT 49INDEPENDENT AUDITOR’S REPORT 50CONSOLIDATED BALANCE SHEET 52CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) 53CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 54CONSOLIDATED STATEMENT OF CASH FLOWS 55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS1. NATURE OF OPERATIONS 562. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 563. ADOPTION OF NEW STANDARD 644. STANDARDS ISSUED BUT NOT YET EFFECTIVE 645. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS 656. INVESTMENTS 677. FINANCIAL RISK MANAGEMENT 708. POLICY LIABILITIES 749. INSURANCE RISK MANAGEMENT 7610. REINSURANCE CONTRACTS 8011. PROPERTY AND EQUIPMENT 8112. INCOME TAXES 8213. GOODWILL AND INTANGIBLE ASSETS 8314. OTHER ASSETS 8415. INVESTMENTS IN ASSOCIATES 8516. ACCOUNTS PAYABLE AND OTHER LIABILITIES 8517. MEDIUM-TERM INCENTIVE PLAN 8518. POST-EMPLOYMENT BENEFITS 8719. CAPITAL MANAGEMENT 9020. PREMIUMS 9121. RATE REGULATION 9122. COMMITMENTS AND CONTINGENCIES 9223. DEMUTUALIZATION 9224. RESTRUCTURING EXPENSES 9225. RELATED PARTY TRANSACTIONS 9326. OPERATING SEGMENTS 93

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REPORT OF MANAGEMENT’SACCOUNTABILITYThe accompanying consolidated financial statements have been prepared by management in accordance with InternationalFinancial Reporting Standards and have been approved by the Board of Directors.

Management is responsible for ensuring that these consolidated financial statements, which include amounts based onestimates and judgments, are consistent with other information and operating data contained in the Annual Report, and fairlyreflect the business transactions and financial position of Economical Mutual Insurance Company (the “Company”), in allmaterial respects.

The integrity and reliability of the Company’s reporting systems are achieved through the use of formal policies andprocedures, the careful selection of employees, and appropriate delegation of authority and division of responsibilities.PricewaterhouseCoopers LLP has been retained to act as the Company’s internal auditor. The responsibility of the internalauditor is to monitor and assess the integrity of the internal controls within key business processes. The Company’s Code ofBusiness Conduct, which is communicated to all levels in the organization, requires employees to maintain high standards intheir conduct of the Company’s affairs.

The external auditor, Ernst & Young LLP, whose report on their audit of the consolidated financial statements follows, alsoreviews the Company’s systems of internal accounting control in accordance with Canadian generally accepted auditingstandards for the purpose of expressing their opinion on the consolidated financial statements.

The appointed actuary is appointed by the Board of Directors pursuant to the Insurance Companies Act (Canada). Theappointed actuary is responsible for ensuring that the assumptions and methods used in the valuation of policy liabilities arein accordance with accepted actuarial practice, and applicable legislation and associated regulations or directives. Theappointed actuary is also required to provide an opinion regarding the appropriateness of the policy liabilities at theconsolidated balance sheet date to meet all policyholder obligations of the Company. Examination of supporting data foraccuracy and completeness is an important element of the work required to form this opinion.

The Board of Directors annually appoints an Audit Committee comprising of directors who are not employees of theCompany. This committee meets regularly with management, the internal auditor, and the external auditor to reviewsignificant accounting, reporting, and internal control matters. Both the internal and external auditors and the appointedactuary have unrestricted access to the Audit Committee. Following its review of the consolidated financial statements andthe report of the external auditor, the Audit Committee submits its report to the Board of Directors for formal approval of theconsolidated financial statements.

ROWAN SAUNDERS PHILIP MATHERPresident and Chief Executive Officer Executive Vice-President and Chief Financial Officer

Waterloo, CanadaFebruary 14, 2020

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APPOINTED ACTUARY’S REPORTTo the Members of Economical Mutual Insurance Company:

I have valued the policy liabilities and reinsurance recoverables of Economical Mutual Insurance Company for its consolidatedbalance sheet at December 31, 2019 and their changes in the consolidated statement of comprehensive income (loss) for theyear then ended in accordance with accepted actuarial practice in Canada including selection of appropriate assumptions andmethods.

In my opinion, the amount of policy liabilities net of reinsurance recoverables makes appropriate provision for all policyobligations and the consolidated financial statements fairly present the results of the valuation.

LINDA M. GOSSFellow, Canadian Institute of Actuaries


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INDEPENDENT AUDITOR’S REPORTTo the Members of

Economical Mutual Insurance Company

Opinion

We have audited the consolidated financial statements of Economical Mutual Insurance Company and its subsidiaries (the“Company”), which comprise the consolidated balance sheet as at December 31, 2019, and the consolidated statement ofcomprehensive income (loss), consolidated statement of changes in equity and consolidated statement of cash flows for theyear then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects the consolidatedfinancial position of the Company as at December 31, 2019, and its consolidated financial performance and its consolidatedcash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Ourresponsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the ConsolidatedFinancial Statements section of our report. We are independent of the Company in accordance with the ethical requirementsthat are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethicalresponsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordancewith IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidatedfinancial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability tocontinue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis ofaccounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternativebut to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are freefrom material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance withCanadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and areconsidered material if, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professionalskepticism throughout the audit. We also:

‰ Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud orerror, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient andappropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud ishigher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, orthe override of internal control.

‰ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate inthe circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

‰ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and relateddisclosures made by management.

‰ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the auditevidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt onthe Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required todraw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if suchdisclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the dateof our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a goingconcern.

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‰ Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures,and whether the consolidated financial statements represent the underlying transactions and events in a manner thatachieves fair presentation.

‰ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities withinthe Company to express an opinion on the consolidated financial statements. We are responsible for the direction,supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of theaudit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Chartered Professional AccountantsLicensed Public Accountants


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CONSOLIDATED BALANCE SHEETAS AT DECEMBER 31

(in millions of dollars) Notes 2019 2018

ASSETS

Cash and cash equivalents $ 94.7 $ 135.3

Investments 6 4,191.0 3,940.7

Accrued investment income 18.8 15.5

Premiums receivable 850.7 837.0

Income taxes receivable 3.0 13.0

Reinsurance receivable and recoverable 8,10 95.1 64.7

Deferred policy acquisition expenses 8 235.6 230.1

Property and equipment 11 61.1 38.9

Deferred income tax assets 12 89.8 105.0

Goodwill and intangible assets 13 210.9 225.6

Other assets 14 105.8 104.6

$ 5,956.5 $ 5,710.4

LIABILITIES AND EQUITY

Unearned premiums 8 $ 1,294.5 $ 1,268.5

Claim liabilities 8,9 2,808.2 2,670.6

Accounts payable and other liabilities 16 240.6 204.0

Income taxes payable 2.2 –

4,345.5 4,143.1

EQUITY

Retained earnings 1,608.6 1,588.3

Accumulated other comprehensive income (loss) 2.4 (21.0)

Total equity 19 1,611.0 1,567.3

$ 5,956.5 $ 5,710.4

Commitments and contingencies 22

See accompanying notes.

On behalf of the Board:

J.H. Bowey, Director R.B. Saunders, Director

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CONSOLIDATED STATEMENT OFCOMPREHENSIVE INCOME (LOSS)FOR THE YEAR ENDED DECEMBER 31


Gross written premiums 20 $2,511.0 $2,456.3

Net written premiums 10,20 $2,331.0 $2,380.7

Net earned premiums 20 $2,343.2 $2,244.6

Other underwriting revenues 10.1 15.4

Total underwriting revenues 2,353.3 2,260.0

Underwriting expenses:

Net claims and adjustment expenses, undiscounted 8,10 1,702.0 1,694.7

Net commissions 10 361.3 381.0

Operating expenses 322.1 369.2

Premium taxes 86.2 80.7

2,471.6 2,525.6

Underwriting loss before the impact of discounting (118.3) (265.6)

Impact of discounting 8 (29.0) 4.3

Underwriting loss (147.3) (261.3)

Investment income:

Interest 6 82.5 71.8

Dividends 6 27.0 35.4

Recognized gains on investments 6 68.3 58.9

177.8 166.1

Other expense 23 10.1 5.0

Restructuring expenses 24 (0.8) 17.3

Income (loss) before income taxes 21.2 (117.5)

Income tax expense (recovery) 12 3.8 (44.5)

Net income (loss) $ 17.4 $ (73.0)

Items that may be reclassified subsequently to net income (loss):

Net unrealized gains (losses) on AFS investments 6 73.7 (90.3)

Reclassification to net income (loss) of net recognized gains on AFS investments 6 (39.2) (58.9)

Foreign exchange (loss) gain on investments in associates (1.5) 2.4

Income tax expense (recovery) 12 9.6 (40.2)

23.4 (106.6)

Items that will not be reclassified subsequently to net income (loss):

Post-employment benefit obligation gain 18 4.2 22.6

Income tax expense 12 1.3 6.1

2.9 16.5

Other comprehensive income (loss) 26.3 (90.1)

Comprehensive income (loss) $ 43.7 $ (163.1)


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CONSOLIDATED STATEMENT OFCHANGES IN EQUITYFOR THE YEAR ENDED DECEMBER 31


Retainedearnings

Accumulatedother

comprehensiveincome

Totalequity

Retainedearnings

Accumulatedother

comprehensiveloss

Totalequity

Balance, beginning of the year $ 1,588.3 $ (21.0) $ 1,567.3 $ 1,644.8 $ 85.6 $ 1,730.4

Net income (loss) 17.4 – 17.4 (73.0) – (73.0)

Other comprehensive income (loss) 2.91 23.4 26.3 16.51 (106.6) (90.1)

Total comprehensive income (loss) 20.3 23.4 43.7 (56.5) (106.6) (163.1)

Balance, end of the year $ 1,608.6 $ 2.42 $ 1,611.0 $ 1,588.3 $ (21.0)2 $ 1,567.3

1 Actuarial gains for the post-employment benefit obligation recognized in retained earnings (net of income tax expense of $1.3 million (2018: $6.1 million)).2 Included in accumulated other comprehensive income (loss) is $4.3 million (2018: $5.8 million) related to the cumulative foreign exchange gain on investments

in associates.


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CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31


Operating activities:

Receipts:

Premiums collected (net of reinsurance ceded) $ 2,318.8 $ 2,242.5

Interest received 88.2 79.4

Dividends received 29.8 38.3

Income taxes recovered 15.0 44.0

2,451.8 2,404.2

Payments:

Claims paid 8 1,603.3 1,548.4

Commissions and expenses paid 616.1 723.6

Premium taxes paid 88.8 80.4

Income taxes paid 2.9 4.3

Restructuring expenses paid 24 2.2 2.9

2,313.3 2,359.6

Net cash provided by operating activities 138.5 44.6

Investing activities:

Investments purchased (7,626.2) (5,974.0)

Investments sold, redeemed or matured 7,421.7 5,935.1

Commercial loans advanced (0.5) (12.7)

Commercial loans collected 49.2 7.4

Other assets purchased (23.3) (49.5)

Business dispositions – 18.0

Net cash used in investing activities (179.1) (75.7)

Cash and cash equivalents:

Net decrease during the year (40.6) (31.1)

Balance, beginning of the year 135.3 166.4

Balance, end of the year $ 94.7 $ 135.3

Cash $ 93.2 $ 96.6

Cash equivalents 1.5 38.7

Total cash and cash equivalents $ 94.7 $ 135.3


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NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS1. NATURE OF OPERATIONS

Economical Mutual Insurance Company (the “Company”) is a mutual insurance company which, along with its wholly ownedsubsidiaries, offers property and casualty (“P&C”) insurance in Canada. The Company is incorporated and is domiciled inCanada. Its registered office and principal place of business is 111 Westmount Road South, Waterloo, Ontario, Canada.

These consolidated financial statements were approved by the Company’s Board of Directors on February 14, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards(“IFRS”) and Canadian accepted actuarial practice and reflect the requirements of the Office of the Superintendent of FinancialInstitutions Canada (“OSFI”).

These consolidated financial statements have been prepared on a historical cost basis, except for those financial instruments,including those held in the defined benefit pension plan, that have been measured at fair value, and claim liabilities andbenefit plan obligations which are valued on a discounted basis in accordance with accepted actuarial practice.

The financial statements of the subsidiaries and material associates are prepared for the same reporting period as theCompany. Where necessary, adjustments are made to bring the accounting policies of subsidiaries and associates in line withthe Company. The consolidated financial statements include the accounts of Economical Mutual Insurance Company and itswholly owned subsidiaries, Waterloo Insurance Company, Perth Insurance Company, The Missisquoi Insurance Company,Sonnet Insurance Company, Petline Insurance Company (“Petline”), Westmount Financial Inc., Family Insurance Solutions Inc.and the TEIG Investment Partnership (which manages the investment portfolio for all insurance companies in the group,except for Petline). Each of the subsidiaries operate and are incorporated or established in Canada.

The Company’s non-controlling interest investments in companies subject to significant influence are accounted for using theequity method and are included in “Other assets”. Under the equity method, the original cost of the investments is increasedby the comprehensive income of the non-controlling interest since acquisition and reduced by any dividends received. Allinter-company transactions and balances have been eliminated on consolidation to the extent of the interest in the associate.

All amounts in the notes are shown in millions of Canadian dollars, unless otherwise stated.

(b) Insurance contracts

Insurance contracts are those contracts which transfer significant insurance risk at inception. The Company (the insurer) hasaccepted significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if aspecified event (the insured event) with uncertain timing or amount adversely affects the policyholder. Similarly, by purchasingreinsurance, the Company transfers significant insurance risk to the reinsurers. As a general guideline, the Companydetermines whether significant insurance risk has been transferred for insurance and reinsurance contracts by comparingwhether significantly more would be paid or received if the insured event occurs, versus if the insured event did not occur.

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime,even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire.

Premiums and unearned premiums

Premiums are recognized in net earned premiums in the consolidated statement of comprehensive income (loss) on a pro-ratabasis over the contract period. Premiums on policies written are accounted for in full in gross written premiums in the yearwritten. Premiums receivable include the premiums due for the remaining months of the contracts. Written premiums on multi-year policies are recognized in gross written premiums in the year written and are recognized in net earned premiums on apro-rata basis over the contract period. Unearned premiums (“UPR”) represent the portion of premiums written relating toperiods of insurance coverage subsequent to the reporting date and are presented as a liability gross of amounts ceded toreinsurers. UPR ceded to reinsurers is included in “Reinsurance receivable and recoverable”.

Claim liabilities

Claim liabilities are calculated based on Canadian accepted actuarial practice. The claim liabilities consist of reserves forreported claims as determined on a case-by-case basis by claims adjusters and an actuarially determined provision forincurred but not reported claims (“IBNR”). The estimates include related investigation, settlement, and internal and externaladjustment expenses. Measurement uncertainty in these estimates exists due to internal and external factors that cansubstantially impact the ultimate settlement costs. Consequently, the Company reviews and re-evaluates claims and reserveson a regular basis and any resulting adjustments are included in “Net claims and adjustment expenses” in the consolidatedstatement of comprehensive income (loss) in the period the adjustment is made. Claims and adjustment expenses arereported net of reinsurance. The claim liabilities are valued on a discounted basis using a rate that is derived from the fair

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Insurance contracts (continued)

Claim liabilities (continued)

value yield of the bonds that have been identified as supporting the claim liabilities and adding in a provision for adversedeviation (“PfAD”). The effect of discounting plus PfAD is included in “Impact of discounting” in the consolidated statement ofcomprehensive income (loss). The claim liabilities are extinguished when the obligation to pay a claim expires, is dischargedor is cancelled.

Deferred policy acquisition expenses

The amount of deferred policy acquisition expenses (“DPAE”) represents the brokers’ commission, premium taxes, and certaindirect expenses in respect of the Company’s digital direct business, all of which are associated with the unearned portion ofthe premiums written during the year to the extent they are considered recoverable. The costs are expensed in the year inwhich the related premiums are recognized as income. To the extent deferred commissions and premium taxes areconsidered non-recoverable, they are expensed as incurred in the consolidated statement of comprehensive income (loss).The maximum deferrable amount is calculated through the liability adequacy test.

Liability adequacy test

Quarterly, an assessment is made of whether the policy liabilities are adequate, which includes both claim liabilities andpremium liabilities. Claim liabilities are assessed using current estimates of future cash flows of unpaid claims and adjustmentexpenses, discounted to reflect the time value of money. If that assessment shows that the carrying amount of the claimliabilities is insufficient in light of the current expected future cash flows, the deficiency is recognized in the consolidatedstatement of comprehensive income (loss). Premium liabilities are assessed using current estimates of the discounted futureclaims and expenses associated with the unexpired portion of written insurance policies. A premium deficiency would berecognized immediately as a reduction of DPAE to the extent that the unearned premiums are not considered adequate tocover DPAE and premium liabilities. If the premium deficiency is greater than DPAE, a liability is accrued for the excessdeficiency.

Industry pools

When certain automobile owners are unable to obtain insurance via the voluntary insurance market, they are insured by theFacility Association (“FA”). In addition, entities can choose to cede certain risks to industry administered risk sharing pools(“RSP”) or in Quebec, the Plan de Repartition des Risques (“PRR”) (collectively “the pools”). The related risks associated withFA insurance policies and policies ceded by companies to the pools are aggregated and shared by the entities in the P&Cinsurance industry, generally in proportion to market share and volume of business ceded to the pools. In accordance with theOSFI guidelines, the Company applies the same accounting policies to FA and pool insurance it assumes and cedes as itdoes to insurance policies issued by the Company directly to policyholders. The Company’s share of the pool assets backingpolicy liabilities is included in “Reinsurance receivable and recoverable”.

Reinsurance

Reinsurance receivable and recoverable includes reinsurers’ share of UPR and claim liabilities. The Company presents thirdparty reinsurance balances in the consolidated balance sheet on a gross basis to indicate the extent of credit risk related tothird party reinsurance and its obligations to policyholders. The estimates for the reinsurers’ share of claim liabilities aredetermined on a basis consistent with the related claim liabilities. Reinsurance assets are reviewed at least quarterly forimpairment.


In the normal course of claims settlement, the Company enters into annuity agreements with various Canadian life insurancecompanies, that are required to have credit ratings of at least “A-” or higher, to provide for fixed and recurring payments toclaimants in full satisfaction of the claim liability. Under such arrangements, the Company removes the liability from itsconsolidated balance sheet when the liability to its claimants is substantially discharged and legal release has also beenobtained from the claimant, although the Company remains exposed to the credit risk that life insurers will fail to fulfil theirobligations. See note 7 for further discussion of credit risk.

(c) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances on deposit with banks, and term deposits having originalmaturities of ninety days or less. Fair values approximate carrying values for term deposits. The amount of cash not readilyavailable for use by the Company is not significant.

(d) Financial instruments including investments

All of the Company’s financial instruments are classified into one of the following four categories as defined below:

‰ available for sale (“AFS”)‰ financial assets and liabilities at FVTPL‰ loans and receivables‰ other financial liabilities

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(d) Financial instruments including investments (continued)

All financial instruments are initially recognized at fair value and are subsequently accounted for based on their classificationas described below. The classification depends on the purpose for which the financial instruments were acquired and theircharacteristics. Instruments voluntarily designated as FVTPL to support the claim liabilities may never be reclassified and,except in very limited circumstances, the reclassification of other financial instruments is not permitted subsequent to initialrecognition. Financial assets purchased and sold, where the contract requires the asset to be delivered within an establishedtimeframe, are recognized on a settlement-date basis. Transaction costs are expensed as incurred for FVTPL financialinstruments. For other financial instruments, transaction costs are capitalized on initial recognition. The effective interest ratemethod of amortization is used to account for any transaction costs capitalized on initial recognition and purchased premiumsor discounts earned on bonds.

The fair value of a financial instrument on initial recognition is normally the transaction price, i.e. the fair value of theconsideration given. Subsequent to initial recognition, the fair values are determined based on available information. The fairvalues of investments, excluding commercial loans, are based on quoted bid market prices where available or observablemarket inputs. The fair values of commercial loans and other financial instruments are obtained using discounted cash flowanalysis at the current market interest rate for comparable financial instruments with similar terms and risks.

Financial instruments are no longer recognized when the right to receive cash flows from the investments have expired orhave been transferred and the Company has transferred substantially all the risks and rewards of ownership.

Available for sale

All short-term investments, equities (including preferred stocks, common stocks and pooled funds), and bonds, except thosevoluntarily designated as FVTPL, are designated as AFS. Short-term investments consist of term deposits having originalmaturities of greater than ninety days and less than one year. AFS financial instruments are carried at fair value. Changes infair value are recorded, net of income taxes, in “Other comprehensive income (loss)” (“OCI”) in the consolidated statement ofcomprehensive income (loss) until the disposal of the financial instrument, or when an impairment loss is recognized. Whenthe financial instrument is disposed of, the gain or loss is reclassified from “Accumulated other comprehensive income (loss)”(“AOCI”) to “Recognized gains on investments” in the consolidated statement of comprehensive income (loss). Gains andlosses on the sale of AFS financial instruments are calculated on an average cost basis.

The Company assesses its AFS financial instruments for objective evidence of impairment quarterly. Objective evidence ofimpairment exists for individual equities (including common stocks and pooled funds) when there has been a significant orprolonged decline in fair value or net asset value below cost. Objective evidence of impairment exists for individual bondswhen a loss event that has a reliably estimable impact on the future cash flows of the financial instrument has occurred.Factors that are considered include, but are not limited to, a decline in current financial position, defaults on debt obligations,failure to meet debt covenants, significant downgrades in credit status, and severity and/or duration of the decline in value.For individual preferred stocks, the key features of the preferred stock are assessed to determine if the instrument is morecharacteristic of an equity instrument or a debt instrument and objective evidence of impairment is evaluated accordingly.Preferred stock that are redeemable at the Company’s option, and perpetual preferred stock purchased to produce dividendincome for the long-term, are assessed using the same methodology as the bond impairment analysis.

When objective evidence of impairment exists for a financial instrument, the impairment loss is measured as the differencebetween carrying value and fair value. Impairment losses on AFS financial instruments are reclassified from AOCI to“Recognized gains on investments” in the consolidated statement of comprehensive income (loss) in the period such criteriaare met. Subsequent fair value increases on previously impaired individual equities and pooled funds are recognized directlyin OCI and not reversed through net income (loss), while subsequent fair value decreases are recognized directly in netincome (loss). For individual bonds or preferred stocks, subsequent fair value increases that can be attributed to anobservable positive development are recognized directly in net income (loss), but otherwise, are recognized directly in OCI.Any subsequent reversal of an impairment loss on a bond or preferred stock is recognized in net income (loss), to the extentthat the carrying value of the asset does not exceed its amortized cost at the reversal date.

Fair value through profit or loss

The Company has voluntarily designated a portion of its bonds as FVTPL. Changes in fair values as well as gains and losseson disposal of FVTPL financial instruments are recorded in “Recognized gains on investments” in the consolidated statementof comprehensive income (loss) with the related tax impact included in “Income tax expense (recovery)”. Gains and losses onthe sale of FVTPL financial instruments are calculated on an average cost basis. As changes in the fair value of FVTPLfinancial instruments are reflected directly within net income (loss) in the consolidated statement of comprehensive income(loss), it is not necessary to record an impairment loss when there has been a significant or prolonged decline in the fair valueof FVTPL financial instruments.

The designation of the FVTPL bond portfolio aims to reduce the accounting mismatch in net income (loss) that wouldotherwise be generated by the fluctuations in fair values of underlying claim liabilities due to changes in interest rates. Incompliance with OSFI guidelines, the Company manages the FVTPL portfolio’s quantum and duration so that the impact ofchanges in interest rates on claim liabilities and on the FVTPL portfolio reasonably offset each other.

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(d) Financial instruments including investments (continued)

Derivative financial instruments

Derivatives are financial instruments that have value derived from underlying interest rates or other financial instrument pricesor indices. Derivatives are classified as FVTPL. There are currently no derivatives designated as a hedge for accountingpurposes. Derivatives are initially measured at fair value at the settlement date and subsequently remeasured at fair value atthe end of each reporting date. The gains and losses arising from remeasuring the derivatives at fair value are recognized in“Recognized gains on investments” in the consolidated statement of comprehensive income (loss) with the related tax impactincluded in “Income tax expense (recovery)”.

Loans and receivables/Other financial liabilities

Financial instruments classified as loans and receivables, including commercial loans, and other financial liabilities are initiallyrecognized at fair value and subsequently measured at amortized cost using the effective interest rate method. When there isevidence of impairment, the value of these financial instruments is written down to the estimated net realizable value through“Recognized gains on investments” in the consolidated statement of comprehensive income (loss).

Evidence of impairment exists for individual commercial loans when there is a deterioration in the counterparties financialperformance to the extent that the Company no longer has reasonable assurance of timely collection of the full amount ofprincipal and interest.

Investment income recognition

Interest income is recognized on bonds and commercial loans on the accrual basis and includes the amortization of premiumsand discounts over the life of the investment using the effective interest rate method. The treatment of recognized gains andlosses on disposal of AFS and FVTPL investments is discussed in “Available for sale” and “Fair value through profit or loss”above.

Dividend income is recognized on the ex-dividend date.

(e) Property and equipment

Property and equipment are recorded at historical cost less accumulated depreciation and accumulated impairment losses, ifany.

Cost includes amounts directly attributable to the acquisition of the items of property and equipment. Subsequent costs areadded to the cost of the asset only when it is probable that economic benefits will flow to the Company in the future and thecost can be reliably measured.

Depreciation is recorded on a straight-line basis to write down the cost of such assets to their residual value over theirexpected useful lives. Each component of property and equipment with a cost that is significant in relation to the total cost ofthe asset is depreciated separately. Residual values, depreciation rates and useful lives are reviewed at least annually andadjusted, if appropriate, at the reporting date. Land is not subject to depreciation and is carried at cost.

Property and equipment are depreciated on a straight-line basis as follows:

Depreciation period

Buildings — structure 50 years

Buildings — infrastructure 25 years

Buildings — fixtures 15 years

Furniture and equipment 5 years

Computer equipment 4 years

Right-of-use assets Lesser of the lease term and useful life

Property and equipment are derecognized upon disposal or when no further future economic benefits are expected from theiruse or disposal. Gains and losses on disposal are calculated as the difference between proceeds and net carrying value andare recognized in “Operating expenses” in the consolidated statement of comprehensive income (loss). Fully depreciatedproperty and equipment are retained in cost and accumulated depreciation accounts until such assets are removed fromservice.

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(f) Leases

The Company recognizes a right-of-use asset and a corresponding lease liability in the consolidated balance sheet withrespect to all lease arrangements in which it is the lessee, except for short-term leases (leases with a lease term of 12 monthsor less) and leases of low value assets. For short-term and low value leases, the Company recognizes the lease payments in“Operating expenses” in the consolidated statement of comprehensive income (loss) on a straight-line basis over the term ofthe lease unless another systemic basis is more representative of the time pattern in which economic benefits from the leasedassets are consumed.

Lease liabilities are initially measured at the present value of the lease payments, discounted by using the rate implicit in thelease. If this rate cannot be readily determined, the Company uses an estimate of its incremental borrowing rate at thecommencement of the lease. Lease payments are allocated between interest expense and a reduction of the outstandinglease liability. Lease liabilities are recognized in “Accounts payable and other liabilities” in the consolidated balance sheet.

At the commencement date of the lease, the cost of right-of-use assets comprise the initial measurement of thecorresponding lease liabilities, lease payments made at or before the commencement date, and any initial direct costs. Theyare subsequently measured at cost less accumulated depreciation and impairment losses. These assets are depreciated overthe shorter of the lease term or their useful life. Right-of-use assets are recognized in “Property and equipment” in theconsolidated balance sheet. Incentives received from the lessor, such as rent-free periods, are recognized as part of themeasurement of the right-of-use assets and lease liabilities.

Interest expense and depreciation expense are recognized in “Operating expenses” in the consolidated statement ofcomprehensive income (loss).

Prior to the adoption of IFRS 16 – Leases (“IFRS 16”), leases of property and equipment where the Company was not exposedto substantially all of the risks and rewards of ownership were classified as operating leases. Operating leases wererecognized on a straight-line basis over the lease term. The adoption of IFRS 16 is disclosed in note 3.

(g) Basis of consolidation

Business combinations are accounted for using the acquisition method. The acquisition method requires that the acquirerrecognizes, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interestin the acquiree, at the acquisition date. Acquisition costs directly attributable to the acquisition are expensed in the yearincurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination aremeasured at fair value at the date of acquisition, irrespective of the extent of any non-controlling interest. Any contingentconsideration is also measured at fair value at the acquisition date.

The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of anynon-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assetsacquired and liabilities assumed, all measured as of the acquisition date. After initial recognition, goodwill is measured at costless any accumulated impairment losses.

When the Company is exposed, or has rights, to variable returns from its involvement with an investee and has the ability toaffect those returns through its power over the investee, the investee is considered a subsidiary. Subsidiaries are fullyconsolidated from the date that control is obtained by the Company. Subsidiaries are deconsolidated from the date thatcontrol ceases.

When the Company has significant influence over an investee, that is the power to participate in the financial and operatingdecisions of the investee but does not have control or joint control over those decisions, the investee is considered to be anassociate. Associates are accounted for under the equity method.

(h) Intangible assets

Intangible assets include capitalized software costs, where the software is not integral to the hardware on which it operates.Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in abusiness combination is their fair value as at the date of acquisition, and include assets such as brand, distribution network,and customer relationships. Costs that are directly attributable to the development and testing of identifiable and uniquesoftware products controlled by the Company are recognized in software when the criteria specified in InternationalAccounting Standard (“IAS”) 38 – Intangible Assets (“IAS 38”) are met. Capitalized costs include employee costs for staffdirectly involved in software development and other direct expenditures related to the project. Other developmentexpenditures that do not meet the capitalization criteria under IAS 38 are recognized as an expense as incurred. Followingthe initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses,if any.

Intangible assets with finite useful lives are amortized over their estimated useful economic life. Amortization is recorded in“Operating expenses” in the consolidated statement of comprehensive income (loss). The amortization period and theamortization method for an intangible asset with a finite useful life are reviewed at least annually. Intangible assets withindefinite lives and intangible assets which are under development are not amortized, but are tested at least annually forimpairment.

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(h) Intangible assets (continued)

Intangible assets are amortized on a straight-line basis as follows:

Amortization period

Brand Indefinite life

Distribution network 11 years

Customer relationships 8 years

Software 1 – 10 years

Other intangible assets 5 – 7 years

(i) Impairment of assets

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any suchindication exists, or when annual impairment testing for an asset is required, the Company compares the asset’s recoverableamount to the asset’s carrying value. An asset’s recoverable amount is calculated based on its value-in-use (“VIU”) using adiscounted cash flow model. The recoverable amount is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, therecoverable amount is determined for the cash-generating unit (“CGU”) to which the asset belongs.

For assets, excluding goodwill and certain financial instruments, an assessment is made at each reporting date as to whetherthere is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such anindication exists, the Company compares the recoverable amount to the carrying value of the asset. If the recoverable amountexceeds the carrying value of the asset, the carrying value is increased to the lesser of the recoverable amount and thecarrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the assetin prior years. Such reversal is recognized in the consolidated statement of comprehensive income (loss).

The following criteria are also applied in assessing impairment of specific assets:

Goodwill

Goodwill is tested for impairment in accordance with IAS 36 – Impairment of Assets, which requires goodwill impairment to beassessed at a CGU level. For the purposes of impairment testing, goodwill acquired in a business combination is allocated toeach of the Company’s CGUs, or groups of CGUs, that are expected to benefit from the synergies of the combination,irrespective of whether other assets or liabilities of the Company are assigned to those units or groups of units.

Goodwill relating to an associate is included in the carrying amount of the investment and is not tested separately forimpairment.

The Company performs a goodwill impairment review at least annually and whenever there is an indication that goodwill maybe impaired. The fair value of each CGU has been determined based on the VIU using a discounted cash flow model.Impairment occurs when the carrying amount of the CGU exceeds the recoverable amount, in which case goodwill impairmentis recognized prior to impairing other assets. Any impairment of goodwill or other assets is recorded in “Other expense” in theconsolidated statement of comprehensive income (loss) in the year that such an impairment becomes evident. Previouslyrecorded impairment losses for goodwill are not reversed in future years if the recoverable amount increases.

Investments in associates

After application of the equity method, the Company determines whether there are any indicators of an impairment loss of theCompany’s investments in associates. If there is objective evidence of impairment, the Company calculates the amount ofimpairment as the difference between the fair value of the associate and the carrying value, and recognizes this amount in theconsolidated statement of comprehensive income (loss) in “Other expense”.

(j) Income taxes

Income tax expense (recovery) is comprised of current and deferred income tax. Income tax is recognized in net income (loss)except to the extent that it relates to items recognized in OCI or directly to retained earnings.

Current income tax is based on the results of operations in the current year, adjusted for items that are not taxable or notdeductible. Current income tax is calculated based on income tax laws and rates enacted or substantively enacted as at thereporting date. Interest income or expenses arising on tax assessments, if any, are included in “Other expense” in theconsolidated statement of comprehensive income (loss).

Deferred income tax is provided using the liability method on temporary differences between the tax bases of assets andliabilities and their respective carrying amounts for financial reporting purposes at the reporting date. Deferred income tax iscalculated using income tax laws and rates enacted or substantively enacted as at the reporting date, which are expected toapply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

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(j) Income taxes (continued)

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is nolonger probable that sufficient taxable income will be available to allow all or part of the deferred income tax asset to beutilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extentthat it has become probable that future taxable income will allow the deferred income tax asset to be recovered.

(k) Pensions, other post-employment benefits and other employee benefits

The Company provides certain pension and other post-employment benefits to eligible participants upon retirement.

Pension benefits

The Company operates a defined benefit pension plan for certain employees hired prior to January 1, 2002, which requirescontributions to be made to a separately administered fund. The benefit is based on the employee’s length of service andfinal average pensionable earnings. The cost of the defined benefits is actuarially determined and accrued using theprojected unit credit valuation method pro-rated on service. This method involves the use of the market interest rate at themeasurement date on high-quality debt instruments for the discount rate, and management’s best estimates concerning suchfactors as salary escalation and retirement ages of employees. Costs recognized in the consolidated statement ofcomprehensive income (loss) include the cost of pension benefits provided in exchange for employees’ services renderedduring the year, and the net interest cost calculated by applying a discount rate to the net defined benefit obligation. Actuarialgains and losses are recognized in full in OCI in the year in which they occur and then immediately in retained earnings. Theyare not reclassified to net income (loss) in subsequent years. Past service costs, which are a result of a plan amendment orcurtailment, are recognized in “Other expense” in the consolidated statement of comprehensive income (loss) when theamendment or curtailment has occurred.

The defined benefit asset or liability comprises the fair value of plan assets less the defined benefit obligation out of which theobligations are to be settled directly. This is recorded in the consolidated balance sheet in “Other assets” if the balance is inan asset position, and is recorded in “Accounts payable and other liabilities” if in a liability position. Plan assets are held by along-term employee benefit fund and are not available to creditors of the Company, nor can they be paid directly to theCompany. Fair value is based on market price information and in the case of quoted securities it is the published closing price.The value of any defined benefit asset is restricted to the present value of any economic benefits available in the form ofrefunds from the plan or reductions in future contributions to the plan.

The Company also has a defined contribution pension plan for certain employees, for which Company contributions areexpensed in the year. The Company has no further payment obligations once the Company contributions and applicableadministration fees have been paid.

Non-pension benefits

The Company provides other post-employment benefits for eligible employees hired prior to July 3, 2012. The Companyaccounts for the cost of all non-pension post-employment benefits, including medical benefits, dental care and life insurancefor eligible retirees, their spouses and qualified dependants, on an accrual basis. These costs are recognized in “Operatingexpenses” in the consolidated statement of comprehensive income (loss) in the year during which services are rendered andare actuarially determined using the projected unit credit valuation method pro-rated on service. This method involves the useof the market interest rate at the measurement date on high-quality debt instruments for the discount rate, and management’sbest estimates concerning such factors as salary escalation, retirement ages of employees and expected health care costs.The impact of a plan curtailment is recognized in “Other expense” in the consolidated statement of comprehensive income(loss) when an event giving rise to a curtailment has occurred.

Actuarial gains and losses, except for long-term disability benefits, are recognized in full in OCI in the year in which they occurand then immediately in retained earnings. They are not reclassified to net income (loss) in subsequent years. Actuarial gainsand losses for long-term disability benefits are recognized in “Operating expenses” in the consolidated statement ofcomprehensive income (loss).

The accumulated value for non-pension post-employment benefits is recorded in the consolidated balance sheet in “Accountspayable and other liabilities”.

Termination benefits

Termination benefits are payable when employment is terminated, without cause, by the Company before the normalretirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Companyrecognizes termination benefits at the earlier of the following dates: (a) when the Company can no longer withdraw the offerof those benefits; and (b) when the Company recognizes costs for a restructuring that is within the scope of IAS 37 –Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”) and involves the payment of termination benefits. In thecase of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number ofemployees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period arediscounted to their present value.

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(k) Pensions, other post-employment benefits and other employee benefits (continued)

Short-term incentive plan

The Company recognizes a liability and an expense for bonuses based on a formula that takes into consideration variousfinancial metrics and qualitative performance criteria. The Company recognizes a provision when contractually obliged orwhere there is a past practice that has created a reasonable expectation of a constructive obligation.

Medium-term incentive plan

Under the Medium-Term Incentive Plan (“MTIP” or “Plan”), notional units (hereinafter referred to as Restricted Units (“RUs”) orPerformance Units (“PUs”)) are granted annually to certain members of management, with a unit value based on the bookvalue of the Company. The value of the RUs will fluctuate based solely on the book value of the Company, while the value ofthe PUs will fluctuate based on the book value of the Company and the Company’s performance measured against certainperformance criteria. The RUs and PUs vest over one to three years after the grant date, depending on the specific grant, andare then settled in cash. There are floor and ceiling mechanisms in place to ensure that the PUs do not pay when performanceis below a minimum threshold and that the total Plan payout does not exceed the ceiling even in periods of significantoutperformance.

The cost of the awards is recognized as an expense over the vesting period based on the estimated payout under the Plan atthe end of the vesting period, with a corresponding financial liability recorded in “Accounts payable and other liabilities”. TheCompany re-estimates the value of awards that are expected to vest at each reporting period. The ultimate liability for anypayment of RUs and PUs is dependent on the book value of the Company at the vesting date. For PUs, the liability is alsodependent on the Company’s performance relative to the performance criteria.

(l) Provisions

Provisions, including restructuring provisions, are recognized when the Company determines that there is a present legal orconstructive obligation as a result of a past event or decision, it is more likely than not that an outflow of resources will berequired to settle the obligation, and the amount can be reliably estimated.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to theobligation.

(m) Foreign currency translation

Functional and presentation currency

The consolidated financial statements are presented in millions of Canadian dollars, which is also the functional currency ofthe Company. Each entity within the consolidated group determines its own functional currency based upon the currencyused in the entity’s primary operating environment, and measures financial results based on that functional currency.

Translation of foreign subsidiaries’ accounts

Assets and liabilities of the Company’s foreign subsidiaries are translated from their functional currencies into Canadiandollars at the exchange rate in effect at the reporting date, except for goodwill acquired prior to the IFRS transition date ofJanuary 1, 2010 (“transition date”).

Any goodwill arising on the acquisition of a foreign operation subsequent to the transition date and any fair value adjustmentsto the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreignoperation and translated at the closing rate.

Revenues and expenses are translated at the monthly weighted average rate prevailing during the year. On consolidation,exchange differences arising from the translation of the net investment in foreign entities are recorded in OCI. On the disposalof a foreign operation, the cumulative amount of exchange differences relating to that operation is recognized in net income(loss).

Translation of foreign currency transactions

Transactions incurred in currencies other than the functional currency of the reporting entity are converted to the functionalcurrency at the rate in effect on the transaction date. Monetary assets and liabilities denominated in a currency other than thefunctional currency are converted to the functional currency at the exchange rate in effect at the reporting date. Unrealizedforeign currency gains and losses on AFS financial instruments are included in OCI. All other foreign currency gains andlosses are included in net income (loss).

(n) Embedded derivatives

At least annually, the Company conducts a search for embedded derivatives within its significant contracts. No materialembedded derivatives were identified that required bifurcation.

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3. ADOPTION OF NEW STANDARD

In January 2016, the International Accounting Standards Board (“IASB”) issued IFRS 16, which replaced IAS 17 – Leases (“IAS17”) and IFRIC 4 – Determining Whether an Arrangement Contains a Lease (“IFRIC 4”). IFRS 16 establishes principles for therecognition, measurement, presentation and disclosure of leases. The standard provides a single lessee accounting model,requiring lessees to recognize assets and liabilities for all leases, unless the lease term is 12 months or less or the underlyingasset has a low value. At the commencement date of a lease, a lessee recognizes a liability to make lease payments and anasset representing the right to use the underlying asset during the lease term. Lessees are required to separately recognizethe interest expense on the lease liability and the depreciation expense on the right-of-use asset. The standard is effective forannual periods beginning on or after January 1, 2019.

The Company adopted IFRS 16 on January 1, 2019 (date of initial application of IFRS 16) using the modified retrospectiveapproach and, therefore, comparative information has not been restated. The Company has elected to apply the practicalexpedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, thedefinition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply to those leases entered or modified beforeJanuary 1, 2019. The Company has elected to use the exemptions in the standard on lease contracts for which the lease termends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value.The Company has also elected to apply the practical expedient to rely on its assessment of whether leases are onerousapplying IAS 37 immediately before the date of initial application as an alternative to performing an impairment review.

On the date of initial application of IFRS 16, right-of-use assets of $28.6 million and lease liabilities of $28.6 million wererecorded in “Property and equipment” and “Accounts payable and other liabilities”, respectively, in the consolidated balancesheet pertaining to the Company’s building leases. The lease liabilities were discounted using the Company’s incrementalborrowing rate, which reflects the estimated rate of interest that the Company would have to pay to borrow over a similarterm, and with a similar security, the funds necessary to obtain an asset of a similar value in a similar economic environment.The weighted average of the Company’s incremental borrowing rate applied to lease liabilities recognized in the consolidatedbalance sheet at the date of initial application was 5.23%.

Reconciliation of the difference between operating lease commitments measured under IAS 17, and lease liabilitiesrecognized in the consolidated balance sheet on January 1, 2019:

(in millions of dollars)

Operating lease commitments measured under IAS 17 $ 40.3

Less:

Short-term and low value leases 6.0

Lease liabilities, undiscounted 34.3

Lease liabilities, discounted 28.6

4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

The following IFRS standards have been issued but are not yet effective.

(a) Insurance Contracts

In May 2017, the IASB issued IFRS 17 – Insurance Contracts (“IFRS 17”), which replaces IFRS 4 – Insurance Contracts (“IFRS 4”).IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. There aretwo measurement methodologies under IFRS 17, the general model and the premium allocation approach. The general modelrequires insurance contracts to be measured using current estimates of discounted future cash flows, an adjustment for risk,and a contractual service margin representing the profit expected from fulfilling the contracts. The premium allocationapproach is a simplified model that can be applied to insurance contracts with coverage periods of one year or less (which isthe coverage period of many P&C insurance contracts), or where the premium allocation approach approximates the generalmodel. Presentation changes in the consolidated balance sheet and the consolidated statement of comprehensive income(loss) are required in addition to new disclosures.

In June 2019, the IASB issued an exposure draft – Amendments to IFRS 17 which included a proposal to defer the date ofinitial application of IFRS 17 by one year to annual periods beginning on or after January 1, 2022. Retrospective application isrequired unless impracticable, in which case a modified retrospective approach or fair value approach is to be used fortransition. The Company plans to adopt the new standard on the required effective date together with IFRS 9 – FinancialInstruments (“IFRS 9”). The Company expects to apply the premium allocation approach to its insurance contracts. Thedisclosure and measurement differences on adoption are expected to be significant. The Company is currently analysing theimpact these standards will have on its consolidated financial statements.

(b) Financial Instruments: Classification and Measurement

In July 2014, the IASB issued the final version of IFRS 9, which reflects all phases of the financial instruments project andreplaces IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”) and all previous versions of IFRS 9. IFRS 9sets out the requirements for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sellnon-financial items. This single, principle-based approach replaces existing rule-based requirements and is intended toimprove and simplify the reporting for financial instruments.

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4. STANDARDS ISSUED BUT NOT YET EFFECTIVE (CONTINUED)

(b) Financial Instruments: Classification and Measurement (continued)

Debt instruments are classified as amortized cost, fair value through other comprehensive income (“FVOCI”), or FVTPL basedupon the entity’s business model, contractual cash flow characteristics of the instrument, and the entity’s election, if any, onclassification. Equity instruments are classified as FVTPL unless the entity qualifies and elects them as FVOCI. Gains or losseson equity instruments classified as FVOCI are not reclassified to profit and loss and are therefore not required to be reviewedfor impairment. Impairment requirements for debt instruments classified as amortized cost or FVOCI are based on theexpected credit loss model which is intended to recognize credit losses earlier compared to IAS 39. IFRS 9 is effective forannual periods beginning on or after January 1, 2018. Retrospective application is required with certain exceptions.

In September 2016, the IASB issued amendments to IFRS 4 to address issues arising from the different effective dates of IFRS9 and the new insurance contracts standard (IFRS 17). The amendments introduce two alternative options of applying IFRS 9for entities issuing contracts within the scope of IFRS 4: an overlay approach and a temporary exemption. The overlayapproach permits an entity applying IFRS 9 to remove from profit or loss and present instead in OCI, the impact of measuringqualifying financial assets at FVTPL under IFRS 9 when they would not have been so measured under IAS 39. The temporaryexemption permits eligible entities to defer the implementation date of IFRS 9 until annual periods beginning on or afterJanuary 1, 2021. In June 2019, the IASB issued an exposure draft - Amendments to IFRS 17 which included a proposal to deferthe date of initial application of IFRS 17 by one year, and as a result proposed extending the implementation date of IFRS 9under the temporary exemption by one year, to annual periods beginning on or after January 1, 2022. An entity whoseactivities are predominantly connected with insurance at its annual reporting date that immediately precedes April 1, 2016 iseligible to apply the temporary exemption. As the Company’s activities were predominantly connected with insurance as atDecember 31, 2015 and there have not been any changes to its activities since that date that require it to reassess itseligibility, the Company is eligible to apply the temporary exemption. The Company has chosen to apply the temporaryexemption from IFRS 9 to defer the application of IFRS 9 until the effective date of IFRS 17.

5. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the Company’s consolidated financial statements in conformity with IFRS requires management to makejudgments, estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingentassets and liabilities as at the reporting date, and the reported amounts of revenues and expenses during the year. Actualresults could differ from these estimates. Although some variability is inherent in these estimates, management believes thatthe amounts provided are reasonable. The most complex and significant judgments, estimates and assumptions used inpreparing the Company’s consolidated financial statements are discussed below.

Judgments

In the process of applying the Company’s accounting policies, management has made the following judgments which havethe most significant effect on the amounts recognized in the consolidated financial statements.

The Company has applied judgment in its assessment of control or significant influence over investees, of the identification ofobjective evidence of impairment for financial instruments, the recoverability and recognition of tax losses, the determinationof CGUs, the evaluation of current obligations requiring provisions, and the identification of the indicators of impairment forproperty and equipment, goodwill, and intangible assets.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have asignificant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year,are discussed below.

(a) Valuation of claim liabilities

The Company is required by applicable insurance laws, regulations, and IFRS to establish liabilities for payment of claims andclaims adjustment expenses that arise from the Company’s insurance products. These liabilities represent the expectedultimate cost to settle claims occurring prior to, but still outstanding as of, the reporting date. The Company establishes itsclaim liabilities by geographic region, product line, type and extent of coverage, and year of occurrence.

Claim liabilities fall into two categories: reserves for reported claims and provision for IBNR losses. Additionally, liabilities areheld for claims adjustment expenses, which contain the estimated legal and other expenses expected to be incurred tofinalize the settlement of the losses.

Determining the provision for unpaid claims and adjustment expenses, and the related reinsurers’ share involves anassessment of the future development of claims. 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.This process takes into account the consistency of the Company’s claim handling procedures, the amount of informationavailable, the characteristics of the line of business from which the claim arises, and the delays in reporting claims. Claimliabilities include estimates subject to variability, which could be material. Changes to the estimates could result from futureevents such as receiving additional claim information, changes in judicial interpretation of contracts, or significant changes inseverity or frequency of claims from past trends.

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5. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (continued)

(a) Valuation of claim liabilities (continued)

In general, the longer the term required for the settlement of a group of claims, the greater the potential for variability in theestimate. Any future changes in estimates would be reflected in the consolidated statement of comprehensive income (loss) inthe year in which the change occurred. Note 9 contains additional analysis of the impact of the key assumptions on claimliabilities.

The principal assumptions made in establishing claim liabilities are best estimates. Claim liabilities have been discounted toreflect future investment income in accordance with Canadian accepted actuarial practice. The rate used to discount the claimliabilities is based on the fair value yield of the bond portfolio supporting the claim liabilities. To increase the likelihood thatthe claim liabilities are adequate to pay future benefits, margins for adverse deviation are required to be included forassumptions regarding future claims development, interest rates, and reinsurance recoverables. The Canadian Institute ofActuaries recommends a range of appropriate margins for each of these variables. The combined effect of all the marginsproduces the PfAD.

Reinsurance recoverables include amounts for expected recoveries from reinsurers related to claim liabilities. Amountsrecoverable from reinsurers are evaluated in a manner consistent with the provisions of the reinsurance contracts. The failureof reinsurers to honour their obligations could result in losses to the Company, as the ceding of insurance does not relieve theCompany of its primary liability to its insured parties.

(b) Impairment of long-lived assets

The Company determines whether long-lived assets are impaired on an annual basis or more frequently if there are indicatorsof potential impairment. Impairment testing of long-lived assets requires an estimation of the recoverable amount of the CGUsto which the assets are allocated.

(c) Impairment of financial assets

The Company assesses its AFS financial instruments for objective evidence of impairment at each reporting date. Objectiveevidence of impairment includes a significant or prolonged decline in the fair value or net asset value below cost, or when aloss event that has a reliably estimable impact on the future cash flows of the financial instrument has occurred. Significanceof the decline is evaluated against the original cost of the investment and prolonged decline is measured against the period inwhich the fair value has been below its original cost. The determination of what is significant or prolonged requires judgment.In making this judgment, the Company evaluates, among other factors, a decline in current financial position, defaults on debtobligations, failure to meet debt covenants, significant downgrades in credit status, and severity and/or duration of the declinein value.

(d) Valuation of post-employment benefits obligation

The projected cost of defined benefit pension plans and other non-pension future benefits is determined using actuarialvaluations performed by external pension actuaries. The actuarial valuation involves making assumptions about discountrates, future salary increases, mortality rate, expected health care costs, inflation, and future pension increases. The details ofthe assumptions are disclosed in note 18. Due to the long-term nature of these plans, such estimates are subject to significantuncertainty. Actual experience that differs from the assumptions will affect the amounts of the benefit obligation recognized inthe consolidated balance sheet, the expense recognized in net income (loss), and actuarial gains or losses recognized in OCI(or in operating expenses as discussed in note 2) in the consolidated statement of comprehensive income (loss). Noestimation is required for the defined contribution pension plan given the plan structure.

(e) Measurement of income taxes

The Company is subject to income tax laws in various federal and provincial jurisdictions where it operates. Various tax lawsare potentially subject to different interpretations by the taxpayer and the relevant tax authority. To the extent that theCompany’s interpretations differ from those of tax authorities or the timing of realization is not as expected, the provision forincome taxes may increase or decrease in future periods to reflect actual experience. The Company maintains provisions foruncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit dispute or appealwith tax authorities, or which are otherwise considered to involve uncertainty.

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6. INVESTMENTS

(a) Investment income and balances

Investment income by financial instrument classification is as follows:

(in millions of dollars) 2019

FVTPL AFSLoans and

receivables Total

Interest $ 40.9 $ 37.9 $ 3.7 $ 82.5

Dividends – 27.0 – 27.0

Interest and dividend income 40.9 64.9 3.7 109.5

Realized gains on sale of investments 12.6 39.5 – 52.1

Net impairment losses on AFS investments – (0.3) – (0.3)

Unrealized gains on FVTPL financial instruments 16.5 – – 16.5

Recognized gains on investments 29.1 39.2 – 68.3

$ 70.0 $ 104.1 $ 3.7 $ 177.8


FVTPL AFSLoans and

receivables Total

Interest $ 34.2 $ 33.4 $ 4.2 $ 71.8

Dividends – 35.4 – 35.4

Interest and dividend income 34.2 68.8 4.2 107.2

Realized (losses) gains on sale of investments (22.4) 74.6 – 52.2

Net impairment losses on AFS investments – (15.7) – (15.7)

Unrealized gains on FVTPL financial instruments 22.4 – – 22.4

Recognized gains on investments – 58.9 – 58.9

$ 34.2 $ 127.7 $ 4.2 $ 166.1

The fair value yield as at December 31, 2019 for the FVTPL bond portfolio was 2.18% (2018: 2.33%) and for the AFS bondportfolio was 2.12% (2018: 3.02%).

Investment carrying values by financial instrument classification are as follows:


FVTPL AFSLoans and

receivables Total

Short-term investments $ – $ 228.1 $ – $ 228.1

Bonds 1,833.6 1,390.2 – 3,223.8

Preferred stocks – 345.1 – 345.1

Common stocks – 296.8 – 296.8

Pooled funds – 44.4 – 44.4

Commercial loans – – 52.8 52.8

$ 1,833.6 $ 2,304.6 $ 52.8 $ 4,191.0


FVTPL AFSLoans and

receivables Total

Short-term investments $ – $ 329.7 $ – $ 329.7

Bonds 1,779.8 1,012.6 – 2,792.4

Preferred stocks – 334.0 – 334.0

Common stocks – 329.9 – 329.9

Pooled funds – 53.2 – 53.2

Commercial loans – – 101.5 101.5

$ 1,779.8 $ 2,059.4 $ 101.5 $ 3,940.7

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6. INVESTMENTS (continued)

(a) Investment income and balances (continued)

The commercial loans have an amortized cost of $52.8 million (2018: $101.5 million) and fair value of $50.4 million (2018:$94.2 million).

The gross unrealized gains (losses) on AFS investments are detailed below. The cost of all AFS investments, except AFSbonds, is the purchase price less cumulative impairment losses, if applicable. The cost of all AFS bonds is the amortized costadjusted for cumulative impairment losses.


Cost/amortized

costUnrealized

gainsUnrealized

losses Fair value

Short-term investments $ 226.2 $ 1.9 $ — $ 228.1

Bonds:

Government 830.9 0.8 (6.1) 825.6

Corporate 559.5 5.5 (0.4) 564.6

1,390.4 6.3 (6.5) 1,390.2

Canadian preferred stocks 403.7 0.7 (59.3) 345.1

Common stocks:

Canadian 217.0 26.6 (1.4) 242.2

Foreign 26.1 28.6 (0.1) 54.6

Foreign pooled funds 43.2 1.2 — 44.4

286.3 56.4 (1.5) 341.2

$ 2,306.6 $ 65.3 $ (67.3) $2,304.6


Cost/amortized

costUnrealized

gainsUnrealized

losses Fair value

Short-term investments $ 328.9 $ 0.8 $ — $ 329.7

Bonds:

Government 174.7 2.6 (0.3) 177.0

Corporate 843.5 1.2 (9.1) 835.6

1,018.2 3.8 (9.4) 1,012.6

Canadian preferred stocks 390.1 0.1 (56.2) 334.0

Common stocks:

Canadian 265.9 11.4 (12.1) 265.2

Foreign 37.0 28.1 (0.4) 64.7

Foreign pooled funds 55.8 0.2 (2.8) 53.2

358.7 39.7 (15.3) 383.1

$ 2,095.9 $ 44.4 $ (80.9) $ 2,059.4

(b) Financial instruments measured at fair value

The Company categorizes its fair value measurements according to a three-level hierarchy, which prioritizes the inputs usedby the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level inputsignificant to the fair value measurement in its entirety. The Company recognizes transfers between the levels of the fair valuehierarchy at the end of the reporting period during which the change has occurred. The three levels of the fair value hierarchyare defined as follows:

(i) Level 1 fair value measurements reflect unadjusted, quoted prices in active markets for identical assets, and liabilitiesthat the Company has the ability to access at the measurement date. If an instrument classified as Level 1 subsequentlyceases to be actively traded, it is transferred out of Level 1 and into Level 2 or Level 3 as appropriate. Included in theLevel 1 category are exchange-traded derivatives and all stocks, except the pooled funds.

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(b) Financial instruments measured at fair value (continued)

(ii) Level 2 fair value measurements use inputs other than quoted prices included within Level 1 that are observable for theasset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in activemarkets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable but arenot prices such as interest rates and credit risks and inputs that are derived from or corroborated by observable marketdata. Included in the Level 2 category are all bonds which are valued on a discounted cash flow basis, the pooled fundswhich are valued based on quoted prices of the underlying securities in an active market, and short-term investmentswhich are valued on a discounted cash flow basis. The inputs into the discounted cash flow model for the bonds andshort-term investments are an estimate of the expected cash flows discounted at a pre-tax risk-free rate plus anappropriate adjustment for credit risk.

(iii) Level 3 fair value measurements use significant non-market observable inputs, including assumptions about risk orliquidity. As at December 31, 2019, the Company has no financial instruments in this category (2018: nil).

Commercial loans are measured at cost, but fair value is disclosed. The fair value is measured on a discounted cash flowbasis. The inputs into the discounted cash flow model are an estimate of the expected cash flows discounted at apre-tax risk-free rate plus an appropriate adjustment for credit risk.

Distribution of financial instruments measured at fair value in the three-level hierarchy is as follows:


Level 1 Level 2 Level 3 Total

Short-term investments $ — $ 228.1 $ — $ 228.1

Bonds — 3,223.8 — 3,223.8

Preferred stocks 345.1 — — 345.1

Common stocks 296.8 — — 296.8

Pooled funds — 44.4 — 44.4

$ 641.9 $ 3,496.3 $ — $ 4,138.2


Level 1 Level 2 Level 3 Total

Short-term investments $ — $ 329.7 $ — $ 329.7

Bonds — 2,792.4 — 2,792.4

Preferred stocks 334.0 — — 334.0

Common stocks 329.9 — — 329.9

Pooled funds — 53.2 — 53.2

$ 663.9 $ 3,175.3 $ — $ 3,839.2

There were no transfers of financial instruments between the levels during the year.

(c) Impairment review

Impairment reclassification of unrealized losses from AOCI to net income (loss) is as follows:


Common stocks:

Canadian $ 0.2 $ 15.2

Foreign 0.1 0.5

$ 0.3 $ 15.7

The remaining gross unrealized losses of $67.3 million (2018: $80.9 million) on the AFS investments have not beenrecognized in net income (loss) as the Company does not believe there is currently objective evidence of impairment.

The Company has determined that there is no evidence of significant impairment of any individual commercial loan becauseall balances are current, and a review of the financial condition of the debtors and pledged collateral indicates that there isreasonable assurance of timely collection of the full amounts of principal and interest.

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(d) Securities lending

The Company participates in a securities lending program managed by a major financial institution, whereby the Companylends securities it owns to other financial institutions to allow them to meet delivery commitments. The lending agents assumethe risk of borrower default associated with the lending activity. As at December 31, 2019, securities with an estimated fairvalue of $597.5 million (2018: $591.6 million) have been loaned and securities with an estimated fair value of $617.4 million(2018: $608.5 million) have been received as collateral from the financial institutions. Lending collateral as at December 31,2019 was 100.0% (2018: 100.0%) held in cash and government-backed securities. The securities loaned under this programhave not been removed from “Investments” in the consolidated balance sheet because the Company retains the risks andrewards of ownership.

The financial compensation the Company receives in exchange for securities lending, amounting to $0.6 million (2018: $0.8million), is reflected in the consolidated statement of comprehensive income (loss) in “Interest”.

(e) Derivative financial instruments

The Company holds future contracts, which are contractual obligations to buy or sell financial instruments on a future date at aspecified price established in an organized market. The futures contracts are exchange-traded and collateralized by cash. Asat December 31, 2019, the Company had derivative financial instruments with a notional amount of $22.0 million (2018: nil).These derivatives have an expected maturity date within the next year. The fair value of the derivative financial instruments isnot significant.

Fair values of exchange-traded derivatives are based on quoted market prices. Equity or bond index futures are standardizedcontracts transacted on an exchange. They are based on an agreement to pay or receive a cash amount based on thedifference between the contracted price level of an underlying stock or bond index and its corresponding market price levelat a specified future date. There is generally no actual delivery of stocks or bonds that comprise the underlying index. Thesecontracts are in standard amounts with standard settlement dates.

7. FINANCIAL RISK MANAGEMENT

The Company’s financial instruments, including investments, are exposed to interest rate risk (including the impact of creditspreads), equity market price risk and preferred stock price risk, credit risk, foreign exchange risk, and liquidity risk. TheCompany’s Investment Policy Statement (“IPS”) establishes asset mix parameters and risk limits which minimize undueexposure to these risks in the investment portfolio. The IPS is reviewed at least annually by the Investment Committee of theBoard of Directors. Compliance with the IPS is monitored quarterly by the Investment Committee.

(a) Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values offinancial instruments. Changes in interest rates can occur from both changes in the Government of Canada yield curve andchanges in relevant market credit spreads. Typically, interest income will be reduced during sustained periods of declininginterest rates, but this will also generally increase the fair value of the bond portfolio. The reverse is true during a sustainedperiod of increasing interest rates.

As interest rate risk is a significant risk to the Company due to the nature of its investments and claim liabilities, a portion ofthe Company’s bond portfolio has been voluntarily designated as FVTPL financial assets which, together with a portion of AFSbonds, is managed to offset the effect that interest rate changes have on the Company’s claim liabilities. The effect of interestrate risk associated with discounting claim liabilities is disclosed in note 9.

The impact of an immediate hypothetical one percentage point change in interest rates (assuming a parallel shift across theyield curve), on the FVTPL and AFS bond portfolios, with all other variables held constant is as follows:


Impact on: + 1% - 1% + 1% - 1%

Fair value of FVTPL bonds and income before income taxes $ (72.7) $ 82.8 $ (68.8) $ 77.4

Fair value of AFS bonds and OCI before income taxes $ (52.8) $ 59.8 $ (44.3) $ 50.6

(b) Common equity market price risk and preferred stock price risk

Economic trends, investee performance, the political environment, and other factors can positively or adversely impact theequity markets and, consequently, the value of equity investments the Company holds. The Company’s AFS portfolio includesCanadian common stocks with fair value movements that are benchmarked against movements in the Toronto StockExchange 60 Index, and foreign stocks and pooled funds with fair values that are benchmarked against movements in theMSCI World Index. Also included in the AFS portfolio are the Company’s holdings of preferred stocks. Economic trends,interest rates, credit conditions, regulatory changes, and other factors can positively or adversely impact the value ofpreferred stocks that the Company holds. The fair value sensitivity of the Company’s preferred stocks is assessed againstmovements in the BMO 50 Resets Sub-Index.

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7. FINANCIAL RISK MANAGEMENT (continued)

(b) Common equity market price risk and preferred stock price risk (continued)

The estimated impact of a 10% movement in the aforementioned indices to the value of the Company’s equity portfolio, withall other variables held constant, to the extent the Company does not dispose of any of these equities during the year, is asfollows:


Impact on: + 10% - 10% + 10% - 10%

Fair value of Canadian stocks and OCI before income taxes $ 23.0 $ (23.0) $ 28.3 $ (28.3)

Fair value of foreign stocks, pooled funds and OCI before income taxes $ 10.0 $ (10.0) $ 11.9 $ (11.9)

Fair value of preferred stocks and OCI before income taxes $ 31.7 $ (31.7) $ 28.5 $ (28.5)

(c) Credit risk

Credit risk is the risk of financial loss caused by the Company’s counterparties not being able to meet payment obligations asthey become due. The Company’s credit risk is concentrated in the bond, preferred stock and commercial loan portfolios, thesecurities lending program, premiums receivable, amounts owing from reinsurers, and structured settlements. Unlessotherwise stated, the Company’s credit exposure is limited to the carrying amount of these assets. The Company’s principalapproach to mitigate credit risk is to maintain high credit quality standards and to diversify credit exposures by limiting singlename concentrations. Concentration risk also exists where multiple counterparties may be financially affected by changingeconomic conditions in a similar manner. As noted below, the Company has a concentration of investments in Canada andwithin the financial and energy sectors. These risk concentrations are regularly monitored and adjusted as deemednecessary.

Bonds and preferred stocks

The Company’s IPS requires the Company to invest in bonds and preferred stocks of high credit quality, and limit exposurewith respect to any one issuer. On a regular basis, the Company also monitors publicly available information referencing theinvestments held in the investment portfolio to determine whether there are investments which require closer monitoring ofthe credit risk. Of the bonds held as at December 31, 2019, 91.1% (2018: 92.8%) were rated “A-” or better and 83.6% (2018:84.3%) of the preferred stocks were rated “P2” or better. “A-” and “P2” represent the ratings provided by two recognizedrating services for high-grade bonds and preferred stocks, respectively, where both asset and earnings protection are wellassured.

Of the preferred stocks and corporate bonds held, the industry of issuer is as follows:

2019 2018

Financial services 62.4% 59.9%

Energy 9.9% 13.2%

Industrials 6.6% 6.6%

Utilities 6.0% 6.3%

Communication services 5.3% 3.7%

Real estate 2.7% 4.6%

Other 7.1% 5.7%

100.0% 100.0%

Of the preferred stocks and bonds held, the country of issuer is as follows:

2019 2018

Canada 99.8% 98.2%

United States 0.1% 1.5%

Other 0.1% 0.3%

100.0% 100.0%

Securities lending

As disclosed in note 6, the Company participates in a securities lending program. The Company manages credit risk associatedwith this program by only dealing with counterparties who are rated “A” or higher by independent rating agencies and byobtaining collateral with a fair value in excess of the value of the securities loaned under the program. The ratio of fair value ofcollateral obtained in excess of the fair value of the securities loaned as at December 31, 2019 is 103.3% (2018: 102.9%).

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(c) Credit risk (continued)

Premiums receivable

The Company’s credit exposure to any one individual policyholder or broker included in premiums receivable is not significant.The Company regularly monitors amounts due from policyholders and follows up on all overdue accounts. As permitted byregulation, when premiums are overdue for an extended period of time the Company cancels the insurance coverage underthe applicable policy. Before a broker is granted a contract, due diligence reviews are conducted by the Company. Delinquentaccounts are regularly monitored and the Company takes action against non-payment. The allowance for doubtful accounts inthe current and comparative periods is insignificant as overdue receivables are not material.

Commercial loans

The Company periodically issues commercial loans to brokers. Collateral, principally in the form of security over a borrowingbrokerage’s operating assets, is held to protect the Company against loss in the event of a default of any of these loans.Annually, and where required more frequently, financial reviews are undertaken to determine if the broker is expected to beable to make the payments required by the loan as and when due. The Company’s gross credit exposure on thesecommercial loans is limited to their carrying value as disclosed in note 6. Management does not consider any of these currentcommercial loans to be impaired as at December 31, 2019.

Reinsurance receivable and recoverable

Credit exposures on the Company’s reinsurance receivable and recoverable balances exist to the extent that any reinsurermay not be willing or able to reimburse the Company under the terms of the relevant reinsurance arrangements. TheCompany has policies which limit the exposure to individual reinsurers and a regular review process to assess thecreditworthiness of reinsurers from whom the Company purchases coverage. The Company’s reinsurance risk managementpolicy generally precludes the use of reinsurers with credit ratings less than “A-”.

Currently, all reinsurers have a credit rating of “A-” or better as determined by independent rating agencies. Whereappropriate, the Company obtains collateral for outstanding balances in the form of cash, letters of credit, offsetting balancespayable, guarantees, or assets held under reinsurance security agreements. The Company has recorded an allowance forlosses on reinsurance receivable and recoverable of $0.5 million (2018: $0.5 million).


The Company has purchased annuities from life insurers to provide for fixed and recurring payments to claimants. As a resultof these arrangements, the Company is exposed to credit risk to the extent to which any of the life insurers fail to fulfil theirobligations. This risk is managed by acquiring annuities from multiple life insurers with proven financial stability, all of whichare rated “A-” or better by independent rating agencies. As at December 31, 2019, no information has come to the Company’sattention that would suggest any weakness or failure in life insurers from which it has purchased annuities. Consequently, noprovision for credit risk was recorded (2018: nil). The original purchase price of the outstanding annuities is $313.3 million(2018: $305.8 million).

(d) Foreign exchange risk

Foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchangerates relative to the Canadian dollar. The Company’s foreign exchange risk relates primarily to its foreign common stock andpooled fund holdings in the AFS portfolio which are denominated in various foreign currencies.

The Company’s largest foreign currency exposure is to the US dollar. The impact on the fair value of US dollar foreign stocks,pooled funds, and OCI before income taxes from a 10% change in the US dollar relative to the Canadian dollar is $6.3 million(2018: $6.8 million). Under this same scenario, the impact on the fair value of non-US dollar foreign stocks, pooled funds, andOCI before income taxes is $1.3 million (2018: $1.9 million) assuming historical correlations between currency pairs remainintact. The estimated impact on income taxes would be calculated at the statutory rate of 26.8% (2018: 26.9%).

(e) Liquidity risk

Liquidity risk is the risk of having insufficient cash resources to meet current financial obligations, particularly those related toclaim payments. The liquidity requirements of the Company’s business are met primarily by funds generated from operations,asset maturities, and investment returns. Liquidity risk arises in relation to each of those funding sources. Cash provided fromthese sources normally exceeds cash requirements to meet claim payments and operating expenses.

As at December 31, 2019, the Company has $94.7 million (2018: $135.3 million) of cash and cash equivalents and$228.1 million (2018: $329.7 million) of short-term investments. The Company also has a highly liquid investment portfolio. Asat December 31, 2019, Canadian fixed income investments issued or guaranteed by domestic governments, investment-gradecorporate bonds, publicly traded Canadian and foreign equities and the pooled funds have a fair value of $3,853.5 million(2018: $3,457.0 million).

The table below summarizes the maturity profile of the financial assets and financial liabilities of the Company.

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(e) Liquidity risk (continued)

For claim liabilities and reinsurance receivable and recoverable, maturity profiles are determined based on estimated timing ofnet cash flows on an undiscounted basis. DPAE, UPR, and the reinsurers’ share of UPR have been excluded from the analysisas they are not of themselves contractual obligations. Included in accounts payable and other liabilities are undiscountedlease payments of $6.1 million (less than 1 year), $17.6 million (1-5 years), $7.6 million (6-10 years), and nil (10 years +).


Less than 1year 1-5 years 6-10 years 10 years + Total

Assets:

Cash and cash equivalents $ 94.7 $ – $ – $ – $ 94.7

Short-term investments 228.1 – – – 228.1

FVTPL bonds 199.1 825.1 750.5 58.9 1,833.6

AFS bonds 107.6 653.3 624.3 5.0 1,390.2

Preferred stocks 97.7 238.4 9.0 – 345.1

Commercial loans 13.4 18.3 21.1 – 52.8

Accrued investment income 18.8 – – – 18.8

Premiums receivable 850.7 – – – 850.7

Income taxes receivable 3.0 – – – 3.0

Reinsurance receivable and recoverable 34.8 22.4 3.8 0.6 61.6

$ 1,647.9 $ 1,757.5 $ 1,408.7 $ 64.5 $ 4,878.6

Liabilities:

Claim liabilities $ 821.7 $ 1,363.9 $ 420.7 $ 111.1 $ 2,717.4

Accounts payable and other liabilities 176.7 25.6 16.8 26.3 245.4

Income taxes payable 2.2 – – – 2.2

$ 1,000.6 $ 1,389.5 $ 437.5 $ 137.4 $ 2,965.0


Less than 1year 1-5 years 6-10 years 10 years + Total

Assets:

Cash and cash equivalents $ 135.3 $ – $ – $ – $ 135.3

Short-term investments 329.7 – – – 329.7

FVTPL bonds 69.8 1,101.3 608.7 – 1,779.8

AFS bonds 58.9 391.9 561.8 – 1,012.6

Preferred stocks 159.1 174.9 – – 334.0

Commercial loans 17.2 36.5 47.8 – 101.5

Accrued investment income 15.5 – – – 15.5

Premiums receivable 834.6 2.4 – – 837.0

Income taxes receivable 13.0 – – – 13.0

Reinsurance receivable and recoverable 40.4 13.3 2.2 0.3 56.2

$ 1,673.5 $ 1,720.3 $ 1,220.5 $ 0.3 $ 4,614.6

Liabilities:

Claim liabilities $ 813.6 $ 1,289.5 $ 400.5 $ 105.1 $ 2,608.7

Accounts payable and other liabilities 164.0 7.5 8.6 23.9 204.0

$ 977.6 $ 1,297.0 $ 409.1 $ 129.0 $ 2,812.7

Note 18(c) contains the maturity profile for other post-employment benefit obligations.

The Company believes that it currently has the flexibility to obtain the funds needed to meet cash requirements on anongoing basis.

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8. POLICY LIABILITIES

These consolidated financial statements contain an actuarial estimate of the policy liabilities of the Company. Policy liabilitiesrepresent the amount of the obligation of the Company on account of policies effective on or before the reporting date andconsist of premium and claim liabilities. Claim liabilities are associated with claims that have occurred on or before thereporting date, whether the claim has been reported to the Company at that time or not, whereas premium liabilities areassociated with claims that may occur in the future on policies in force on the reporting date.

(a) Premium liabilities

Premium liabilities are represented by the amount of net UPR less the amount of net DPAE. Generally, the commissions andpremium taxes corresponding to the net UPR are deferrable; however, this amount is written down if the resulting expectedfuture net policy costs are greater than the net UPR. No such write-down to DPAE was considered necessary for the yearended December 31, 2019 (2018: nil).

The following changes have occurred in the DPAE during the year:


DPAE, beginning of year $ 230.1 $ 221.2

Acquisition costs deferred 422.7 428.2

Amortization of acquisition costs (417.2) (419.3)

DPAE, end of year $ 235.6 $ 230.1

The following changes have occurred in UPR during the year:


GrossCeded

(Note 10) Net GrossCeded

(Note 10) Net

UPR, beginning of year $ 1,268.5 $ 9.0 $ 1,259.5 $ 1,131.4 $ 8.0 $ 1,123.4

Premiums written during year 2,511.0 180.0 2,331.0 2,456.3 75.6 2,380.7

Premiums earned during year (2,485.0) (141.8) (2,343.2) (2,319.2) (74.6) (2,244.6)

UPR, end of year $ 1,294.5 $ 47.2 $ 1,247.3 $ 1,268.5 $ 9.0 $ 1,259.5

The following table presents the Company’s UPR by line of business as at December 31.


Gross UPR Ceded UPR Net UPR

Personal lines:

Auto $ 665.0 $ 25.0 $ 640.0

Property 311.8 11.7 300.1

976.8 36.7 940.1

Commercial lines:

Auto 126.3 1.4 124.9

Property and liability 191.4 9.1 182.3

317.7 10.5 307.2

$ 1,294.5 $ 47.2 $ 1,247.3


Gross UPR Ceded UPR Net UPR

Personal lines:

Auto $ 655.0 $ — $ 655.0

Property 271.0 — 271.0

926.0 — 926.0

Commercial lines:

Auto 127.2 1.9 125.3


342.5 9.0 333.5

$ 1,268.5 $ 9.0 $ 1,259.5

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8. POLICY LIABILITIES (continued)

(b) Claim liabilities

Claim liabilities are established to reflect the estimate of the full amount of all liabilities associated with the insurancecontracts at the end of the year, including IBNR. The ultimate cost of these liabilities may vary from the best estimate made atany point in time. Note 5 contains additional information on the judgments, estimates and assumptions used in determiningclaim liabilities. The discount rate as at December 31, 2019 used to discount the claim liabilities was 2.16% (2018: 2.50%).

The following table presents the movement of the Company’s claim liabilities during the year.


Gross claimliabilities

Ceded claimliabilities

Net claimliabilities

Claim liabilities, beginning of year $ 2,670.6 $ 55.4 $ 2,615.2

Current year claims incurred 1,800.1 60.2 1,739.9

Prior year favourable claims development (45.4) (7.5) (37.9)

Claims and adjustment expenses, undiscounted 1,754.7 52.7 1,702.0

Increase due to discounting (including PfAD) 29.0 – 29.0

Claims and adjustment expenses 1,783.7 52.7 1,731.0

Claims paid during the year 1,646.1 42.8 1,603.3

Claim liabilities, end of year $ 2,808.2 $ 65.3 $ 2,742.9





Claim liabilities, beginning of year $ 2,527.7 $ 54.5 $ 2,473.2

Current year claims incurred 1,730.9 17.4 1,713.5

Prior year (favourable) adverse claims development (7.4) 11.4 (18.8)

Claims and adjustment expenses, undiscounted 1,723.5 28.8 1,694.7

(Decrease) increase due to discounting (including PfAD) (4.0) 0.3 (4.3)

Claims and adjustment expenses 1,719.5 29.1 1,690.4

Claims paid during the year 1,576.6 28.2 1,548.4

Claim liabilities, end of year $ 2,670.6 $ 55.4 $ 2,615.2

The following table presents the Company’s claim liabilities by line of business as at December 31.





Personal lines:

Auto $ 1,763.5 $ 28.3 $ 1,735.2

Property 150.1 3.7 146.4

1,913.6 32.0 1,881.6

Commercial lines:

Auto 442.1 3.7 438.4


894.6 33.3 861.3

$ 2,808.2 $ 65.3 $ 2,742.9

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8. POLICY LIABILITIES (continued)

(b) Claim liabilities (continued)





Personal lines:

Auto $ 1,609.7 $ 9.3 $ 1,600.4

Property 140.3 2.6 137.7

1,750.0 11.9 1,738.1

Commercial lines:

Auto 443.8 9.0 434.8


920.6 43.5 877.1

$ 2,670.6 $ 55.4 $ 2,615.2

9. INSURANCE RISK MANAGEMENT

By the very nature of an insurance contract, there is uncertainty as to whether an insured event will occur and the amount ofloss that would arise in such an event. In the course of these insurance activities, there are several risks the Company mustaddress by applying appropriate underwriting and claims policies and processes. The following discussion outlines the mostsignificant insurance risks and the practices employed to mitigate these risks.

(a) Underwriting risk

Underwriting risk is the risk of adverse financial exposures arising from various activities integral to the underwriting ofinsurance products, including product design, pricing, risk acceptance, and claims settlement. The Company’s exposure toconcentrations of insured risks is mitigated by the use of segmentation, policy issuance and risk acceptance rules, individuallimits, and reinsurance.

The concentration of gross written premiums, claims and adjustment expenses, and other underwriting expenses (the sum ofnet commissions, operating expenses, premium taxes, and net of other underwriting revenues) by line of business is as follows:

Gross writtenpremiums

Claims andadjustment expenses

Other underwritingexpenses

2019 2018 2019 2018 2019 2018

Personal auto 50.3% 49.8% 57.8% 51.5% 46.3% 46.8%

Personal property 25.2% 22.6% 19.2% 18.6% 25.5% 24.2%

Commercial auto 9.5% 10.3% 9.9% 12.6% 9.1% 9.5%

Commercial property and liability 15.0% 17.3% 13.1% 17.3% 19.1% 19.5%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

The concentration of gross written premiums by geographical region is as follows:

2019 2018

Ontario 60.3% 61.2%

Alberta and Prairies 14.2% 14.4%

British Columbia 10.1% 10.7%

Atlantic 8.2% 7.7%

Quebec 7.2% 6.0%

100.0% 100.0%

A financial loss occurs when the liabilities assumed exceed the expectation reflected in the pricing of an insurance product.The Company prices its products by taking into account numerous factors including product design and features, claimfrequency and severity trends, product line expense ratios, special risk factors, capital requirements, regulatory requirements,and expected investment returns. These factors are reviewed and adjusted on an ongoing basis to ensure they are reflectiveof current trends and market conditions. The Company endeavours to maintain pricing levels that produce an acceptablereturn by appropriately measuring and incorporating these factors into its pricing decisions. Pricing segmentation and riskselection are used together with a view to attracting and retaining risks at acceptable return rates. The process of calculatingpricing involves the use of models, which exposes the Company to model risk in the event that actual results differ from thosemodelled, due to model limitations, data issues, human error, or other factors.

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9. INSURANCE RISK MANAGEMENT (continued)

(a) Underwriting risk (continued)

New products and product changes are subject to a detailed review by management, including the Company’s actuarialspecialists, prior to their launch in order to mitigate the risk that they are priced at an inadequate level. The performance andpricing of all of the Company’s products are regularly monitored, and corrective action is taken as considered necessary,including re-pricing of the products, modification of product terms, conditions, and eligibility requirements, the level ofcapacity provided, and the use of reinsurance.

To minimize the risk arising from underwriting, the Company has policies that set out the underwriting risk appetite andcriteria, as well as specifying tolerances for maximum financial risk retention and management processes to monitorcompliance with these limits. The Company utilizes reinsurance in order to manage its exposure to insured risks. Once theretention limits are reached, reinsurance is utilized with the aim of covering the excess risk. The Company reviews theadequacy of its reinsurance programs, at least annually, with the objective of ensuring sufficient reinsurance protection is inplace at an appropriate cost.

To control the Company’s exposure to unpredictable future developments that could negatively impact claims settlement, theCompany promptly responds to new claims and actively manages existing claims, thereby shortening the claims cycle. Inaddition, the Company’s regular detailed review of claims handling procedures, active litigation management, and proactiveidentification and investigation of possible fraudulent claims seeks to ensure the claims risk exposure does not exceed theclaim cost expectations inherent in the pricing of the Company’s products.

In the normal course of business, the Company is, from time to time, subject to a variety of legal and regulatory actionsrelating to its operations. In addition, plaintiffs continue to bring new types of legal claims against insurance and relatedcompanies. Current and future court decisions and legislative and regulatory activity may increase the Company’s exposure tothese types of claims. This risk of potential liability may make reasonable resolution of claims more difficult to obtain.

Quality review procedures seek to ensure that the Company’s underwriting and claim activities fall within establishedguidelines, expected practices, and pricing structures. Head Office and field level reviews are conducted on a test basis. Theresults of these quality reviews are shared with the appropriate management and staff to ensure any issues identified can bepromptly addressed.

The Company uses reinsurance to manage its exposure to insurance risks. Reinsurance coverage risk arises becausereinsurance terms, conditions, availability, and pricing may change on renewal, particularly during times of high levels ofcatastrophe events, either in Canada or globally, or as a result of higher than expected claims activity on non-catastrophereinsurance treaties. In addition, reinsurers may seek to impose terms that are inconsistent with corresponding terms in thepolicies written by the Company. Ceding risk to reinsurers does not relieve the Company of the obligation to its policyholdersfor claims, thereby requiring the Company to manage the level of credit risk associated with reinsurers and the Company’srecoverable balances. Management reviews the Company’s reinsurance program with the intention of ensuring its costeffectiveness and that adequate coverage is obtained, which reflects the Company’s risk tolerances, underwriting practices,and financial strength, while at the same time complying with its reinsurance and capital risk management policies.

The P&C industry is subject to significant government regulation. As a result, it is possible that future regulatory changes orchanges in interpretations may limit the Company’s ability to adjust prices, adjudicate claims, or take other actions that wouldimpact operating results. The Company seeks to mitigate this risk through regular discussions with regulators and P&Cindustry groups to ensure the Company is aware of proposed changes and by providing feedback to regulators on proposedchanges. The Company monitors compliance with relevant regulations and considers the implications of potential changes inregulation or interpretation on future results. Note 19 provides information on regulatory capital requirements. Note 21provides additional details on rate regulation.

(b) Claims reserving risk

Claims reserving risk represents the risk that the Company’s estimates of claim liabilities are insufficient to cover futureinsurance claim payments. The Company’s underwriting profitability depends upon the ability to accurately assess the riskassociated with the insurance contracts underwritten by the Company. The Company establishes claim liabilities to cover theestimated liability for payment of all claims and claims adjustment expenses incurred with respect to insurance contractsunderwritten by the Company. Claim liabilities do not represent an exact calculation of the liability. Rather, they are theCompany’s best estimate of the expected ultimate future cost of resolution and administration of claims. The process ofcalculating claim liabilities involves the use of models, which exposes the Company to model risk in the event that actualresults differ from those modelled, due to model limitations, data issues, human error, or other factors. To address inflationrisk, expected inflation is taken into account when estimating claim liabilities.

Claim liabilities include an estimate for reported claims, as established by the Company’s claims adjusters based on thedetails of reported claims, plus a provision for IBNR, as established by the Company’s corporate actuaries.

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(b) Claims reserving risk (continued)

Individual claims estimates are determined by claims adjusters on a case-by-case basis in accordance with documentedpolicies and procedures. These specialists apply their experience, knowledge, and expertise, after taking into accountavailable information regarding the circumstances of the claim to set individual case reserve estimates. Uncertainty exists onreported claims in that all information may not be available at the valuation date. Uncertainty also exists regarding the numberand size of claims not yet reported as well as the timing of when the claims will be reported. Accordingly, the IBNR provision isintended to cover future additional costs emerging on both reported claims and claims that have occurred but have not yetbeen reported.

The valuation of claim liabilities is based on estimates derived by geographical region and line of business using generallyaccepted actuarial techniques. Numerous individual assumptions that impact average claim costs or frequency of latereported claims are made for each line of business. The main assumption in the majority of actuarial techniques employed isthat future claims development will follow a pattern similar to recent historical experience. However, there are times wherehistorical experience is deemed inappropriate for evaluating future development because there is not enough credible data,or because recent judicial decisions, changes to legislation or major shifts in a book of business indicate a departure fromhistorical trends. Such instances can require significant actuarial judgment, often supported by industry benchmarks, inestablishing an adequate provision for claim liabilities.

As the outstanding claim liabilities are intended to represent payments that will be made in the future, they are discounted toreflect the time value of money, effectively recognizing that the bonds held to support insurance liabilities will earn a returnduring that period. The discount rate used to discount the actuarial value of claim liabilities is based on the fair value yield ofthe Company’s bonds that support the claim liabilities (note 6). In assessing the risks associated with investment income andtherefore the discount rate, the Company considers the nature of the bond portfolio and the timing of claim payments, and theextent to which they match, to expected investment cash flows. Future changes in the bond portfolio could change the valueof claim liabilities by impacting the fair value yield.

The following table presents the interest rate sensitivity analysis for a one percentage point change in interest rates on the netclaim liabilities:


Impact on: + 1% - 1% + 1% - 1%

Net claim liabilities $ (75.1) $ 80.4 $ (71.8) $ 72.7

Establishing an adequate provision for claim liabilities is an inherently uncertain process and is closely monitored by theCompany’s corporate actuarial department. Claim liabilities, including the provision for IBNR as established by the Company’scorporate actuaries, is subject to an internal and external peer review process to assess the adequacy of the provision forclaim liabilities. The sheer volume and diversity of considerations makes it impracticable to measure the impact on theCompany’s insurance contracts resulting from a change in a particular assumption or group of assumptions. The analysisbelow demonstrates the impact of changing assumptions for all lines of business and geographical regions in such a way thatthe average claim severity and frequency is altered significantly. The analysis below also isolates the impact within theaverage claims severity of a change in internal claims expenses on claim liabilities. The impacts below are on the reportedclaim liabilities as at December 31.


Impact of change in net claim liabilities due to: +5% -5% +5% -5%

Change in average claims severity $ 129.5 $ (129.5) $ 123.6 $ (123.6)

Change in frequency on unreported claims $ 13.0 $ (13.0) $ 9.5 $ (9.5)

Change in internal claims expenses $ 7.5 $ (7.5) $ 7.1 $ (7.1)

Assumptions and methods of estimation have been used that the Company believes produce reasonable results givencurrent information. As additional experience and other data become available, the estimates could be revised. Any futurechanges in estimates would be reflected in the consolidated statement of comprehensive income (loss) in the year in whichthe change occurred.

The following table shows the development of claims over a period of time. The table reflects development for net claims,which is gross claims less reinsurance recoveries. The triangle in the table (“Estimate of ultimate claims”) shows how theultimate estimates of total claims for each accident year develop over time as more information becomes known regardingindividual claims and overall claims frequency and severity. Each column tracks the claims relating to a particular “accidentyear” which is the year in which such loss events occurred, regardless of when they were reported. The rows reflect theestimates in subsequent years for each accident year’s claims. Claims are presented on an undiscounted basis in the triangle.“Cumulative claims paid” in the table presents the cumulative amounts paid for claims for each accident year as atDecember 31, 2019.

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(b) Claims reserving risk (continued)

The claims development table excludes the FA, RSP/PRR and the effect of discounting (including PfAD), which are shown asseparate reconciling items below the table.

Claims development table, net of reinsurance:

Accident Year

(in millions of dollars) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total

Estimate of ultimate claims

At end of accident year $ 1,198.3 $ 1,129.6 $ 1,058.6 $ 1,225.0 $ 1,258.5 $ 1,273.5 $ 1,425.5 $ 1,602.6 $ 1,686.9 $ 1,704.0

1 year later 1,085.8 1,038.7 1,005.6 1,211.9 1,241.1 1,248.0 1,445.0 1,586.3 1,672.1

2 years later 1,086.7 1,031.5 1,003.5 1,211.5 1,238.1 1,278.9 1,448.9 1,581.3

3 years later 1,088.0 1,050.9 1,003.4 1,225.1 1,245.2 1,277.0 1,446.7

4 years later 1,099.6 1,047.5 1,010.5 1,234.6 1,252.7 1,273.6

5 years later 1,097.6 1,045.8 1,014.6 1,232.9 1,252.9

6 years later 1,090.7 1,042.2 1,015.0 1,228.7

7 years later 1,083.4 1,040.4 1,016.3

8 years later 1,081.3 1,042.9

9 years later 1,081.0

(Favourable) adverse development recognized in the year,undiscounted (0.3) 2.5 1.3 (4.2) 0.2 (3.4) (2.2) (5.0) (14.8) $ (25.9)

Favourable development recognized from 2009 and prior accident years (3.8)

Favourable development recognized from FA and RSP/PRR ceded and assumed in the year (8.2)

Total favourable development recognized in the year $ (37.9)

Reconciliation to the consolidated balance sheet

Current estimate of ultimate claims 1,081.0 1,042.9 1,016.3 1,228.7 1,252.9 1,273.6 1,446.7 1,581.3 1,672.1 1,704.0 $ 13,299.5

Cumulative claims paid 1,061.4 1,014.6 974.9 1,166.1 1,133.5 1,081.8 1,154.8 1,174.4 1,142.9 860.8 10,765.2

Current unpaid and unreported claims before discounting 19.6 28.3 41.4 62.6 119.4 191.8 291.9 406.9 529.2 843.2 2,534.3

Current unpaid and unreported claims before discounting pertaining to 2009 and prior accident years 84.6

Impact of discounting (including PfAD) 88.9

FA and RSP/PRR ceded and assumed, unpaid and unreported 35.1

Unpaid and unreported claims, net of reinsurance $ 2,742.9

(c) Catastrophe risk

Catastrophe risk may arise if the Company experiences a considerable number of losses due to human-made or naturalcatastrophes that result in significant impacts on claims costs. Catastrophes can cause losses in a variety of different lines ofbusiness and may have continuing effects which, by their nature, could impede efforts to accurately assess the full extent ofthe damage they cause on a timely basis. Although the Company evaluates catastrophe events and assesses the probabilityof occurrence and magnitude of impact through various commonly used, industry accepted modelling techniques and throughthe aggregation of limits exposed in each geographical territory in which it operates, such events are inherently unpredictableand difficult to quantify. In addition, the incidence and severity of catastrophe events may become increasingly unpredictableas climate patterns change, and severe weather caused by climate change will likely continue to affect the P&C industry andresult in higher claims costs.

The Company manages its catastrophe events exposure through the deductibles charged to policyholders, by limitations onpolicies, by purchasing reinsurance, by monitoring exposure to concentrations of insured risks, and by monitoring the impacton capital position and overall risk tolerances.

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10. REINSURANCE CONTRACTS

The Company follows the policy of underwriting and reinsuring contracts of insurance which limits the liability of the Companyfor individual large losses and in the event of a series of claims arising out of a single occurrence. These limits were asfollows:


Individual loss

Property

Net company retention $ 3.0 $ 3.0

Maximum limit 60.0 60.0

Auto and general liability

Net company retention 4.0 4.0

Maximum limit 40.0 40.0

Catastrophe – primary

Net company retentions1 30.0 30.0

Maximum limit 1,100.0 1,150.0

1 In addition to the catastrophe net retention limit, the Company had a maximum $64.9 million (2018: $63.6 million) participation in higher layers of the treaty. If acatastrophe breaches the retention level, the Company is required to pay an automatic reinstatement premium commensurate with the reinsurance coverageutilized. Further reinstatement coverage may be sought by the Company at an additional cost.

In 2019, the Company entered into two treaties effective January 1, 2019: a quota share treaty ceding a proportion of certainbroker personal lines business to facilitate overall growth levels, and a catastrophe aggregate treaty to provide protectionagainst the potential for increased frequencies of smaller value catastrophe losses. In addition, the Company purchasesfacultative reinsurance coverage as required in line with its underwriting guidelines.

(a) Underwriting impact of reinsurance contracts

The following amounts relate to reinsurance ceded recorded in the consolidated statement of comprehensive income (loss):


Premiums written 8,20 $ 180.0 $ 75.6

Premiums earned 8 141.8 74.6

Claims and adjustment expenses, undiscounted 8 52.7 28.8

Commissions 28.4 3.6

(b) Reinsurance receivable and recoverable

The amounts presented under reinsurance receivable and recoverable in the consolidated balance sheet represent theCompany’s contractual rights under reinsurance contracts and are evaluated in a manner consistent with the gross liabilities.


Reinsurers’ share of UPR 8 $ 47.2 $ 9.0

Reinsurers’ share of claim liabilities 8 65.3 55.4

Reinsurer receivables 12.8 13.0

Reinsurer payables (14.8) (10.5)

Unearned reinsurance commissions (15.4) (2.2)

$ 95.1 $ 64.7

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11. PROPERTY AND EQUIPMENT

Property and equipment, as presented in the consolidated balance sheet, is composed of the following:

(in millions of dollars)

Notes

2019

Land andbuilding

structureBuilding

infrastructureBuildingfixtures

Furnitureand

equipmentComputer

equipment

Right-of-use

assets Total

Cost:

Balance, beginning of year 3 $ 34.5 $ 14.4 $ 10.9 $ 28.1 $ 15.7 $ 28.6 $ 132.2

Additions 1.1 0.8 — 0.3 0.6 2.4 5.2

Disposals (0.4) — — — (0.4) — (0.8)

Balance, end of year $ 35.2 $ 15.2 $ 10.9 $ 28.4 $ 15.9 $ 31.0 $ 136.6

Accumulated depreciation:

Balance, beginning of year $ 12.2 $ 8.3 $ 9.3 $ 23.0 $ 11.9 $ — $ 64.7

Depreciation charge 1.8 0.5 0.1 2.2 1.8 5.2 11.6

Depreciation on disposals (0.4) — — — (0.4) — (0.8)

Balance, end of year $ 13.6 $ 8.8 $ 9.4 $ 25.2 $ 13.3 $ 5.2 $ 75.5

Net book value, end of year $ 21.6 $ 6.4 $ 1.5 $ 3.2 $ 2.6 $ 25.8 $ 61.1


Land andbuilding

structureBuilding

infrastructureBuildingfixtures

Furniture andequipment

Computerequipment Total

Cost:

Balance, beginning of year $ 31.4 $ 14.1 $ 10.9 $ 27.5 $ 15.2 $ 99.1

Additions 3.4 0.3 — 0.7 1.1 5.5

Disposals (0.3) — — (0.1) (0.6) (1.0)

Balance, end of year $ 34.5 $ 14.4 $ 10.9 $ 28.1 $ 15.7 $ 103.6

Accumulated depreciation:

Balance, beginning of year $ 10.3 $ 7.9 $ 9.2 $ 20.2 $ 10.3 $ 57.9

Depreciation charge 2.1 0.4 0.1 2.9 2.1 7.6

Depreciation on disposals (0.2) — — (0.1) (0.5) (0.8)

Balance, end of year $ 12.2 $ 8.3 $ 9.3 $ 23.0 $ 11.9 $ 64.7

Net book value, end of year $ 22.3 $ 6.1 $ 1.6 $ 5.1 $ 3.8 $ 38.9

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12. INCOME TAXES

(a) Income tax expense (recovery)

The reconciliation of income tax calculated at the Canadian statutory tax rate to the income tax expense (recovery) at theeffective tax rate recorded in net income (loss) in the consolidated statement of comprehensive income (loss) is provided inthe table below:


Income tax expense (recovery) calculated based on statutory tax rates 26.8% $ 5.7 26.9% $ (31.6)

Canadian dividend income not subject to tax (31.3%) (6.6) 6.9% (8.1)

Effect of change in tax rates 3.0% 0.6 0.2% (0.2)

Non-deductible expenses 1.3% 0.3 (0.2%) 0.2

Other 18.2% 3.8 4.1% (4.8)

Income tax expense (recovery) recorded in net income (loss) 18.0% $ 3.8 37.9% $ (44.5)


Current income taxes $ (0.2) $ (7.1)

Deferred income taxes 4.0 (37.4)

Income tax expense (recovery) $ 3.8 $ (44.5)

The major components of the current income tax recovery are as follows:


Income taxes related to current year $ (1.5) $ (4.1)

Income taxes related to prior years 1.3 (3.0)

$ (0.2) $ (7.1)

Income taxes included in OCI are as follows:


Income tax on items that may be reclassified subsequently to net income (loss):

Net unrealized gains (losses) on AFS investments $ 20.3 $ (24.3)

Reclassification to net income (loss) of net recognized gains on AFS investments (10.7) (15.9)

9.6 (40.2)

Income tax on items that will not be reclassified subsequently to net income (loss):

Post-employment benefit obligation gain 1.3 6.1

Income tax expense (recovery) $ 10.9 $ (34.1)

(b) Deferred income taxes

The components comprising net deferred income tax assets are as follows:


Net claim liabilities $ 36.3 $ 35.1

Post-employment benefit plans 8.7 9.5

DPAE 0.2 0.3

Property and equipment (4.1) 3.2

Intangible assets (8.4) (13.5)

Investments (0.3) —

Income tax loss carryforwards 40.4 63.3

Unused tax credits 6.1 6.2

Other 10.9 0.9

$ 89.8 $ 105.0

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12. INCOME TAXES (continued)

(b) Deferred income taxes (continued)

The Company plans to be able to generate sufficient taxable income from ordinary operations to utilize its deferred incometax assets.

The net movement of the deferred income taxes is as follows:


Balance, beginning of year $ 105.0 $ 33.4

Income tax (expense) recovery:

Recorded in net income (loss) (4.0) 37.4

Recorded in other comprehensive income (loss) (11.2) 34.2

Balance, end of year $ 89.8 $ 105.0

13. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets, as presented in the consolidated balance sheet, is composed of the following items:


Goodwill $ 46.1 $ 46.1

Intangible assets 164.8 179.5

$ 210.9 $ 225.6

(a) Goodwill

Goodwill has been allocated to two individual CGUs. The carrying amount of goodwill allocated to each of the CGUs is shownbelow:


Economical Mutual Insurance Company $ 26.9 $ 26.9

Petline 19.2 19.2

$ 46.1 $ 46.1

Goodwill is subject to an impairment test that is performed at least annually. When testing for impairment, the recoverableamount of the CGU is determined based on VIU calculations using a discounted cash flow model based on financial forecastsapproved by management covering a five-year period and an estimate of the terminal values for the period beyond the five-year forecast.

The key assumptions used for the impairment calculations are as follows:

‰ Growth rates represent the rates used to extrapolate new business contributions beyond the business plan period. Thegrowth rates are based on historic performance adjusted for management expectations. The growth rates used for currentyear impairment calculations of 2.0% (2018: 2.0%) for Economical Mutual Insurance Company and 4.0% (2018: 4.0%) forPetline do not exceed the historic long-term average growth rates.

‰ Pre-tax, market adjusted discount rates of 9.4% (2018: 9.4%) for Economical Mutual Insurance Company and itssubsidiaries are used to discount expected profits from future new business.

Management does not believe that a reasonable change in these assumptions would result in the carrying value of the CGUsexceeding the recoverable amounts.

The goodwill impairment testing for the current year determined that there was no evidence of impairment (2018: nil).

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13. GOODWILL AND INTANGIBLE ASSETS (continued)

(b) Intangible assets


Brand Software

Otherintangible

assets Total

Cost:

Balance, beginning of year $ 4.2 $ 211.5 $ 23.6 $ 239.3

Additions — 17.4 1.7 19.1

Balance, end of year $ 4.2 $ 228.9 $ 25.3 $ 258.4

Accumulated amortization:

Balance, beginning of year $ — $ 45.9 $ 13.9 $ 59.8

Amortization expense — 32.3 1.5 33.8

Balance, end of year $ — $ 78.2 $ 15.4 $ 93.6

Net book value, end of year $ 4.2 $ 150.7 $ 9.9 $ 164.8


Brand Software

Otherintangible

assets Total

Cost:

Balance, beginning of year $ 4.2 $ 182.1 $ 68.7 $ 255.0

Additions — 31.7 0.7 32.4

Disposals — (2.3) (45.8) (48.1)

Balance, end of year $ 4.2 $ 211.5 $ 23.6 $ 239.3

Accumulated amortization:

Balance, beginning of year $ — $ 28.4 $ 43.6 $ 72.0

Amortization expense — 19.8 7.0 26.8

Amortization on disposals — (2.3) (36.7) (39.0)

Balance, end of year $ — $ 45.9 $ 13.9 $ 59.8

Net book value, end of year $ 4.2 $ 165.6 $ 9.7 $ 179.5

Included in software is $3.5 million (2018: $1.8 million) that has not yet commenced being amortized as the assets are stillunder development. Other intangible assets include the distribution network and customer relationships arising from theacquisition of Petline.

In 2018, the Company wrote-off the remaining carrying value of its legacy policy administration system due to its replacementby the Vyne platform, as disclosed in note 24, which was included in disposals in other intangible assets.

14. OTHER ASSETS

Other assets, as presented in the consolidated balance sheet, are composed of the following:


Investments in associates 15 $ 80.2 $ 89.1

Pension asset 18 12.7 6.8

Prepaid expenses and other 12.9 8.7

$ 105.8 $ 104.6

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15. INVESTMENTS IN ASSOCIATES

The Company has only individually immaterial associates. Key financial information about the Company’s investments inimmaterial associates is shown below, on a gross basis in aggregate:


Total assets $ 897.5 $ 491.5

Total liabilities 684.5 255.1

Total revenue 190.7 203.1

Total net (loss) income (0.9) 25.2

The Company’s share of the comprehensive loss of individually immaterial associates is $0.7 million (2018: income of$4.4 million).

Impairment testing for the Company’s investments in associates determined that an impairment loss was not required. In 2018,impairment testing resulted in an impairment loss of $1.7 million due to the write-off of the remaining carrying value of one ofthe Company’s investments in associates, which was recorded in the consolidated statement of comprehensive income (loss).

All of the Company’s investments in associates are private entities that are not traded on a public exchange. Therefore, thereare no published price quotations for the fair value of these investments.

16. ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities, as presented in the consolidated balance sheet, are composed of the following:


Accounts payable and other $ 97.0 $ 86.7

Commissions payable 46.4 48.5

Pension and non-pension benefit obligations 18 45.6 41.9

Lease liabilities 3 26.5 –

Premium and other taxes payable 24.2 23.0

Restructuring provision 24 0.9 3.9

$ 240.6 $ 204.0

17. MEDIUM-TERM INCENTIVE PLAN

Restricted units

The following table shows the outstanding units and current estimated liability pertaining to the RUs issued under theCompany’s incentive plan as at December 31.

2019

Performance cycles Number of units

Liability(in millions of

dollars)

2017-2019 104,011 $ 1.7

2018-2020 263,823 3.1

2019-2021 320,732 1.9

688,566 $ 6.7

2018


Liability(in millions of

dollars)

2016-2018 58,194 $ 0.9

2017-2018 66,556 1.1

2017-2019 110,244 1.2

2018-2020 340,559 2.5

575,553 $ 5.7

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17. MEDIUM-TERM INCENTIVE PLAN (continued)

Restricted units (continued)

The following table shows the movements in the RUs during the year.

2019 2018

Number of units Number of units

Outstanding, beginning of year 575,553 322,508

Awarded 332,992 356,241

Cancelled (41,317) (38,244)

Settled (178,662) (64,952)

Outstanding, end of year 688,566 575,553

A reconciliation of the RU liability is provided below:



Provisions made during the year 3.8 3.6

Payments made during the year (2.8) (1.1)


Performance units

The following table shows the outstanding units and current estimated liability pertaining to the PUs issued under theCompany’s incentive plan as at December 31.

2019


Liability(in millionsof dollars)

2017-2019 140,773 $ 2.4

2018-2020 177,294 2.1

2019-2021 276,674 1.7

594,741 $ 6.2

2018


Liability(in millionsof dollars)

2016-2018 87,291 $ 1.1

2017-2018 99,834 1.7

2017-2019 145,964 1.6

2018-2020 186,103 1.1

519,192 $ 5.5

The following table shows the movements in the PUs during the year.

2019 2018

Number of units Number of units

Outstanding, beginning of year 519,192 464,378

Awarded 287,012 203,656

Cancelled (24,338) (51,413)

Settled (187,125) (97,429)

Outstanding, end of year 594,741 519,192

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17. MEDIUM-TERM INCENTIVE PLAN (continued)

Performance units (continued)

A reconciliation of the PU liability is provided below:



Provisions made during the year 3.4 3.0



The liability for the RUs and PUs is recorded in “Accounts payable and other liabilities”. The amount charged to “Operatingexpenses” for the MTIP was $7.2 million for the year ended December 31, 2019 (2018: $6.6 million).

18. POST-EMPLOYMENT BENEFITS

The Company provides certain pension and other post-employment benefits through defined benefit, defined contributionand other post-employment benefit plans to eligible participants upon retirement.

The contributory defined benefit pension plans provide pension benefits based on length of service and final averagepensionable earnings. The most recent actuarial valuation was prepared as of January 1, 2018. The contribution to be paid bythe Company is determined each year by the Company’s pension actuaries. The Company’s funding policy is to makecontributions in amounts that are required to discharge the benefit obligations over the life of the plan. Based on the latestactuarial valuations of all its plans, the total required contributions by the Company to the pension plans are expected to be$2.3 million in 2020. The contributions are expected to be made in the form of cash. Discretionary pension contributions forthe year ended December 31, 2019 were nil (2018: nil). Pension plan matters are regulated by the Financial ServicesRegulatory Authority.

Plan assets associated with the pension plans are funded pursuant to a trust agreement through a trust company as selectedby the Company. Ultimate responsibility for governance of the plan lies with the Company’s Board of Directors and specificallywith the Investment Committee, and the Human Resources and Compensation Committee. Regular administration duties aredelegated to the Management Pension Committee as appropriate.

Under the defined contribution component of the pension plan, the Company contributes a fixed percentage of anemployee’s pensionable earnings to the plan. Contributions under the defined contribution component of the pension plantotalled $11.9 million (2018: $11.5 million).

(a) Plan movements

The following table presents the movement of the Company’s pension plan and other benefit plan obligations and plan assetsduring the year.


Amountsrecognized

in net income(loss)

(Gains)losses

recognizedin OCI

Present value of benefit planobligations

Fair value ofplan assets

Other benefitplans

Pensionplans

Pensionplans

Balance, beginning of year $ 41.9 $ 206.2 $ 213.0

Current service cost $ 3.1 $ — 0.3 2.8 —

Interest cost 8.8 — 1.5 7.3 —

Interest income (7.5) — — — 7.5

Return on plan assets excluding interest income — (20.2) — — 20.2

Actuarial losses (gains)

Due to changes in demographic assumptions 0.1 — 0.1 — —

Due to changes in financial assumptions 0.1 16.6 2.8 13.9 —

Due to changes in experience losses 1.0 (0.6) 0.4 — —

Contributions by employer — — — — 2.7

Administration cost 0.5 — — — (0.5)

Contributions by plan participants — — — 0.3 0.3

Benefits paid — — (1.4) (9.2) (9.2)

Balance, end of year $ 6.1 $ (4.2) $ 45.6 $ 221.3 $ 234.0

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18. POST-EMPLOYMENT BENEFITS (continued)

(a) Plan movements (continued)


Amountsrecognizedin net loss

Losses(gains)

recognizedin OCI

Present value of benefit planobligations

Fair value ofplan assets

Other benefitplans

Pensionplans

Pensionplans

Balance, beginning of year $ 62.8 $ 213.2 $ 220.4

Current service cost $ 4.3 $ — 0.4 3.9 —

Interest cost 9.2 — 2.1 7.1 —

Interest income (7.4) — — — 7.4

Return on plan assets excluding interest income — 8.2 — — (8.2)

Actuarial (gains) losses

Due to changes in financial assumptions (0.4) (24.4) (19.2) (5.6) —

Due to changes in experience losses (0.1) (6.4) (2.9) (3.6) —

Contributions by employer — — — — 2.8

Administration cost 0.6 — — — (0.6)

Contributions by plan participants — — — 0.3 0.3

Benefits paid — — (1.3) (9.1) (9.1)

Balance, end of year $ 6.2 $ (22.6) $ 41.9 $ 206.2 $ 213.0

The amounts recognized in net income (loss) were recorded in “Operating expenses”.

The actual return on plan assets was a gain of $27.7 million (2018: $0.8 million loss).

(b) Funding status of defined benefit plans

The amounts recognized for pension plans in the consolidated balance sheet in “Other assets” at the reporting date are asfollows:


Defined benefit obligation $ (221.3) $ (206.2)

Fair value of plan assets 234.0 213.0

Net defined benefit asset $ 12.7 $ 6.8

Actuarial (gains) losses on plan assets $ (20.2) $ 8.2

Actuarial losses (gains) on plan liabilities $ 13.9 $ (9.2)

The amounts recognized for other benefit plans in the consolidated balance sheet in “Accounts payable and other liabilities”at the reporting date are as follows:


Defined benefit obligation $ (45.6) $ (41.9)

Actuarial losses (gains) on plan liabilities $ 3.3 $ (22.1)

(c) Maturity analysis of defined benefit obligations

The weighted average duration of the pension plan obligation is 14 years (2018: 13 years) and the weighted average durationof the other benefit plans obligation is 14 years (2018: 14 years).

The expected maturity of the defined benefit obligations are as follows:


Less than 1 year 1-5 years 6-10 years 10 years + Total

Pension plans $ 9.6 $ 49.1 $ 46.1 $ 116.5 $ 221.3

Other benefit plans 2.1 8.0 9.2 26.3 45.6

$ 11.7 $ 57.1 $ 55.3 $ 142.8 $ 266.9

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(c) Maturity analysis of defined benefit obligations (continued)


Less than 1 year 1-5 years 6-10 years 10 years + Total

Pension plans $ 9.4 $ 46.1 $ 43.4 $ 107.3 $ 206.2

Other benefit plans 1.9 7.5 8.6 23.9 41.9

$ 11.3 $ 53.6 $ 52.0 $ 131.2 $ 248.1

(d) Pension plan asset allocation

The table below shows the allocation of defined benefit pension plan assets:


Cash $ 8.7 3.7% $ 8.5 4.0%

Canadian fixed income securities (investment grade)

Government of Canada 35.3 15.1% 26.5 12.4%

Provincial and municipal 41.8 17.9% 25.0 11.8%

Corporate 45.4 19.4% 35.0 16.4%

Pooled equity funds

Canadian 28.2 12.1% 36.5 17.1%

Foreign 66.6 28.4% 73.6 34.6%

Other 8.0 3.4% 7.9 3.7%

$ 234.0 100.0% $ 213.0 100.0%

Of the corporate bonds held in the pension plan, the industry of issuer is as follows:

2019 2018

Financial services 37.0% 48.4%

Energy 15.7% 15.7%

Utilities 12.5% 7.4%

Industrials 11.8% 8.4%

Consumer discretionary 6.2% 2.8%

Consumer staples 4.6% 2.8%

Communication services 4.5% 6.0%

Other 7.7% 8.5%

100.0% 100.0%

The Company undertakes an asset-liability study as deemed necessary. The goal of the asset-liability study is to balance theexpected long-term cost of the plan with the risk tolerance of the Company. To achieve this balance, the assets in the plan areallocated to fixed income securities, foreign equities, and Canadian equities.

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(e) Assumptions applied

The principal actuarial assumptions used in determining the defined benefit obligations for the Company’s pension plans andother benefit plans are as follows:

Other benefit plans Pension plans

2019 2018 2019 2018

To determine benefit obligation, end of year:

Discount rate 3.1% 3.6% 3.1% 3.6%

Future salary increases – – 2.5% 2.5%

Future pension increases – – 0.0% 0.0%

Inflation assumption – – 2.0% 2.0%

Prescription drug cost increase 6.7% 6.9% – –

Medical claims cost increase 4.0% 4.0% – –

To determine benefit expense for the year: – – – –

Discount rate 3.6% 3.4% 3.6% 3.4%

Future salary increases – – 2.5% 2.5%

Future pension increases – – 0.0% 0.0%

Inflation assumption – – 2.0% 2.0%

Prescription drug cost increase 6.9% 7.7% – –

Medical claims cost increase 4.0% 4.5% – –

The mortality assumptions used to assess the Company’s defined benefit obligations for the pension and other post-employment benefit plans as of December 31, 2019 are based on the Canadian Pensioners’ Mortality – Private Sector mortalitytables as established by the Canadian Institute of Actuaries.

The discount rate is the assumption that has the largest impact on the value of these obligations. The impact of a 1% change inthis rate is as follows:


Impact on: + 1% - 1% + 1% - 1%

Defined benefit obligation – pension plans $ (26.6) $ 32.8 $ (24.5) $ 30.1

Defined benefit obligation – other benefit plans $ (5.5) $ 6.7 $ (5.0) $ 6.1

The impact of a 1% change in the health care cost assumption is as follows:


Impact on: + 1% - 1% + 1% - 1%

Defined benefit obligation – other benefit plans $ 6.5 $ (5.4) $ 5.6 $ (4.6)

Aggregate of total service cost and interest cost $ 0.2 $ (0.2) $ 0.2 $ (0.2)

(f) Risks arising from post-employment benefits

The key risks to which the Company is exposed to as a result of sponsoring the defined benefit pension plans and other post-employment benefit plans include inflation risk, interest rate risk, equity market price risk, foreign exchange risk, and lifeexpectancy risk.

19. CAPITAL MANAGEMENT

Management develops the capital strategy for the Company and supervises the capital management processes. The Board ofDirectors is responsible for overseeing management’s compliance with the capital management policies. As a federallyregulated P&C insurance company, the Company’s capital position is monitored by OSFI. OSFI evaluates the Company’scapital adequacy through the Minimum Capital Test (“MCT”), which measures available capital against required risk-weightedcapital. Available capital comprises total equity plus or minus adjustments prescribed by OSFI. Capital required is calculatedby applying risk factors to the assets and liabilities of the Company. As at December 31, 2019, the Company’s capital availableis $1,217.3 million and capital required is $509.2 million. The Company’s MCT ratio of 239.1% as at the reporting date exceedsthe minimum capital ratio of 150% required by OSFI.

Management actively monitors the MCT and the effect that external and internal actions have on the capital base of theCompany. In particular, management determines the estimated impact on capital before entering into any significanttransactions to seek to ensure that policyholders are not put at risk through the depletion of capital to unacceptable levels.

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19. CAPITAL MANAGEMENT (continued)

The Board of Directors reviews the MCT on, at least, a quarterly basis. In accordance with regulatory requirements and theCompany’s capital management policies, the Board of Directors has set internal targets at levels higher and more stringentthan OSFI’s minimum requirements. Management also conducts its own risk and solvency assessment on at least an annualbasis and provides regular updates to its Management Risk Committee, the Risk Review Committee and the Board ofDirectors.

Reinsurance is also used to protect the Company’s capital level from large losses, including those of a catastrophic nature,which could have a detrimental impact on capital. The Company has adopted policies that specify tolerance for financial riskretention. Once the retention limits are reached, as disclosed in note 10, reinsurance is utilized to cover the excess risk.

On at least an annual basis, the Company performs stress testing, including Dynamic Capital Adequacy Testing, on theCompany’s capital position to ensure that the Company has sufficient capital to withstand a number of significant adversescenarios.

20. PREMIUMS

Net written premiums and net earned premiums, as presented in the consolidated statement of comprehensive income (loss),are composed of the following:


Direct written premiums $ 2,511.0 $ 2,456.3

Premiums assumed from other companies – –

Gross written premiums 2,511.0 2,456.3

Premiums ceded to other companies 10 (180.0) (75.6)

Net written premiums 2,331.0 2,380.7

Change in gross unearned premiums (26.0) (137.1)

Change in ceded unearned premiums 38.2 1.0

Net earned premiums $ 2,343.2 $ 2,244.6

21. RATE REGULATION

In common with the P&C insurance industry in general, the Company is subject to regulation in certain jurisdictions wherebyrates charged to customers for certain automobile insurance policies must be approved by the applicable regulatory body.This type of business comprises 51.9% (2018: 51.1%) of the Company’s total direct written premiums during the year. TheCompany is subject to three types of regulatory processes as follows:

Category Description

File and use Insurers file their rates with the regulatory authority and wait for a certain amount of time before implementingthem.

File and approve Insurers file their rates with the regulatory authority and wait for approval before implementing them.

Use and file Insurers file their rates with the regulatory authority within a specified period after they are implemented.

The following table outlines the jurisdictions, regulatory authorities and regulatory processes that the Company is subject to:

Jurisdiction Regulatory authority Regulatory process

Alberta Alberta Automobile Insurance Rate Board File and approve

New Brunswick New Brunswick Insurance Board File and approve

Nova Scotia Nova Scotia Utility and Review Board File and use or file and approve

Ontario Financial Services Regulatory Authority File and use or file and approve

Prince Edward Island Island Regulatory and Appeals Commission File and use

Quebec Autorité des Marchés Financiers Use and file

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22. COMMITMENTS AND CONTINGENCIES

Commitments

The Company’s commitments include lease commitments and certain non-cancellable contractual commitments. TheCompany’s non-owned buildings, motor vehicles, computers, and office equipment are supplied through leases. The futurecontractual aggregate minimum lease payments under non-cancellable leases and other commitments are as follows:


Within 1 year $ 33.1 $ 33.8

Later than 1 year but not later than 5 years 40.4 50.9

Later than 5 years 13.8 22.1

Under certain circumstances, the Company may be required to acquire outstanding share ownership of various strategicallyaligned brokers in accordance with the terms of the Company’s contracts with those brokers.

Contingencies

In addition to litigation relating to claims made in respect of insurance policies written, the Company is subject to otherlitigation arising in the normal course of conducting its business. The Company is of the opinion that this non-claims litigationwill not have a significant effect on its financial position, results of operations, or cash flows. The Company’s process forensuring appropriate provisions are recorded for reported and unreported claims is discussed in note 9.

23. DEMUTUALIZATION

Demutualization is the process whereby a mutual company converts into a share company. On November 3, 2015, theCompany’s Board of Directors announced its decision to proceed with demutualization within the federal demutualizationregulatory framework. At the first special meeting on demutualization held on December 14, 2015, the Company’s eligiblemutual policyholders passed a special resolution to authorize the start of negotiations of the allocation of demutualizationbenefits with eligible non-mutual policyholders. Following the completion of those negotiations, a second special meeting washeld on March 20, 2019 where eligible mutual policyholders passed a special resolution that amended company by-laws in atargeted manner to permit eligible non-mutual policyholders to participate in a third, and final, special meeting ondemutualization.

If there is a successful outcome at that third special meeting, the Company will be in a position to apply to the federal Ministerof Finance for approval to demutualize. The Company will continually evaluate market conditions, company performance, andother relevant factors that may impact the timing and success of an initial public offering and, by extension, thedemutualization process.

Demutualization costs are included in “Other expense” in the consolidated statement of comprehensive income (loss).

24. RESTRUCTURING EXPENSES

In February 2018, the Company announced that it would be updating its operational structure to optimize efficiency andsimplicity for broker partners and customers. The changes to the operational structure included the consolidation of theCompany’s brands and headcount reductions, aimed at improving future operating results. The Company executed this planin phases during 2018 and 2019. The provisions made to date reflect decisions and plans communicated as of December 31,2019.

The restructuring provision includes employee severance and outplacement services, and decommissioning costs associatedwith the Company’s legacy policy administration system, which is recorded in “Accounts payable and other liabilities” in theconsolidated balance sheet. The corresponding expense is recorded in “Restructuring expenses” in the consolidatedstatement of comprehensive income (loss).

A reconciliation of the restructuring provision is provided below:


Balance, beginning of year $ 3.9 $ –

Provisions made during the year (0.8) 6.8



In addition to the above amounts, $10.5 million of other expenses were included in “Restructuring expenses” in 2018 relatedprimarily to the write-off of the carrying value of the Company’s legacy policy administration system, which was maderedundant by the implementation of the new policy administration and billing platform.

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25. RELATED PARTY TRANSACTIONS

From time to time, the Company enters into transactions in the normal course of business, which are measured at theexchange amounts, with certain directors, senior officers, and companies with which it is related. Management hasestablished procedures to review and approve transactions with related parties, and reports annually to the CorporateGovernance Committee of the Board of Directors on the procedures followed and the results of the review.

The compensation of key management personnel, defined as the Company’s directors, president and chief executive officer,executive vice-presidents, and senior vice-presidents, is as follows:


Salaries $ 4.9 $ 4.7

Short-term and medium-term incentive plans 3.2 8.0

Retention and signing bonuses 2.6 1.1

Post-employment defined contribution pension benefits 0.6 0.5

Other short-term employment benefits 0.1 0.1

Directors’ fees* 1.6 1.5

$ 13.0 $ 15.9

*Directors’ fees disclosed above include fees accrued in respect of all controlled entities in the group.

Post-employment benefit plans

The Company makes contributions to post-employment benefit plans on behalf of its employees, including both definedcontribution and defined benefit plans. Information regarding transactions with the plans is included in note 18.

Associates

At the reporting date, commercial loans of $11.8 million (2018: $23.6 million) are due from companies subject to significantinfluence. The loans are included in “Investments” in the consolidated balance sheet and are initially measured at the exchangeamount. The loans are subsequently measured in accordance with the accounting policy for loans and receivables (note 2).

26. OPERATING SEGMENTS

The Company’s management and directors review the results of operations based on one reportable segment, the P&Cinsurance segment. The operating results of this segment are regularly reviewed by the Company’s senior management tomake decisions about the allocation of resources and to assess the performance of the Company.

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COMMITTEES*

1. Audit2. Corporate Governance3. Human Resources and Compensation4. Investment5. Risk Review6. Special7. Strategic Initiatives

*As of April 1, 2020

BOARD OF DIRECTORS*

JOHN BOWEY Chair (2, 3, 6, 7)

ELIZABETH DELBIANCO (2, 3)

MICHEÁL KELLY (1, 2, 7)

DANIEL FORTIN (3, 5, 7)

ROWAN SAUNDERS(4)

BARBARA FRASER (3, 4, 7)

MICHAEL STRAMAGLIA (1, 4, 5)

DICK FREEBOROUGH (1, 2, 5, 6)

SUSAN MONTEITH(4, 5, 6)

ROBERT MCFARLANE(1, 5, 6)

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*As of April 1, 2020

EXECUTIVE MANAGEMENT TEAM*

INNES DEYSenior Vice-President,

Legal and Strategy

ROWAN SAUNDERSPresident and

Chief Executive Officer

HANS REIDLSenior Vice-President,

Claims

LINDA GOSSSenior Vice-President and

Chief Actuary

ROGER DUNBARSenior Vice-President,

Sonnet

TOM REIKMANSenior Vice-President and Chief Distribution Officer

ALICE KEUNGSenior Vice-President and

Chief Transformation Officer

PAUL MACDONALDExecutive Vice-President,

Personal Insurance

FABIAN RICHENBERGERExecutive Vice-President,

Commercial Insurance

PHILIP MATHERExecutive Vice-President

and Chief Financial Officer

LIAM MCFARLANEChief Risk and

Actuarial Officer

BRIGID PELINOSenior Vice-President and Chief Human Resources

Officer

Economical Insurance includes the following companies: Economical Insurance includes the following companies: Economical Mutual Insurance Company, Family Insurance Solutions Inc., Sonnet Insurance Company, Petline Insurance Company. ©2020 Economical Insurance. All rights reserved. All Economical intellectual property, including but not limited to Economical® and related trademarks, names and logos are the property of Economical Mutual Insurance Company and/or its subsidiaries and/or affiliates and are registered and/or used in Canada. All other intellectual property is the property of their respective owners.

The combined environmental certifications associated with the paper used in this report (Supreme Gloss Cover, Supreme Silk Text and 50 lb Rolland Enviro) are as follows:

HEAD OFFICE 111 Westmount Road South P.O. Box 2000, Waterloo, ON N2J 4S4 T 519 570 8500 F 519 570 8389

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economical insurance | 2019 annual report...with strong, committed leaders and employees, economical...

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