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2019 SPECIAL MEETING OF ELIGIBLE MUTUAL POLICYHOLDERSNOTICE AND POLICYHOLDER INFORMATION CIRCULAR

HEAD OFFICE 111 Westmount Road South P.O. Box 2000, Waterloo, ON N2J 4S4 T 519 570 8500

For demutualization news and resources, visit joininourfuture.com

economical.com

2019 Special meeting notice and policyholder information circular_V4.indd 1 1/23/19 2:43 PM

WE WANT YOUTO JOIN IN OUR FUTURE

Economical is in the midst of transforming itself into one of Canada’s leading property and casualty insurers. Becoming apublic company will allow us to unlock our full potential and compete with multinational companies operating in our market.

The demutualization conversion plan submitted to our primary regulator and presented to you in this Circular was created byfollowing a government-mandated process. That process provided for rigorous oversight and broad participation by eligiblepolicyholders with the goal of reaching a fair and equitable agreement for eligible policyholders, while advancing the bestinterests of the Company. It will lead to the opportunity for financial benefits for eligible policyholders, a successful IPO for

Economical, and the potential for a bright future as a strong public company.

We invite you to review this Circular in detail, bearing the following context in mind, as well as the glossary of defined termsfound at the back of this Circular.

REVIEW THE FRAMEWORK OF RIGOROUS OVERSIGHT

‰ Read about how the Regulations, Court, and our primary regulator oversaw and promoted a fair and equitabledemutualization process, on page 12

‰ Understand how actuaries and other professionals have scrutinized the allocation of benefits and the financialaspects of demutualization, on page 30

UNDERSTAND THE BENEFITS ALLOCATION NEGOTIATED BY YOUR COMMITTEE

‰ Understand the role of the lawyers representing eligible policyholders in the negotiations and the actuaries andfinance experts that assisted your policyholder committee, on page 13

‰ Read about the negotiations between the Policyholder Committees, on page 15

‰ Review and understand the allocation of financial benefits negotiated by your policyholder committee, onpage 18

‰ Read the actuarial opinions on the fairness of allocation, on pages D-1 and E-1

LEARN IMPORTANT CONSIDERATIONS AND CONTEXT

‰ Read the messages from your policyholder committee and Board recommending you vote “FOR” the specialresolution on pages 4 and 3, respectively

‰ Understand the consequences of an “against” vote ending demutualization, on page VI

‰ Learn about the creation of the Economical Insurance Heritage Foundation and the important legacy ourdemutualization will leave, on page 29

JOIN IN OUR FUTURE

‰ Read why Economical Mutual’s Board unanimously recommends continuing the demutualization process onpage 3, and see what other options were considered, on page 8

‰ Understand the proposed IPO and the benefits that would be distributed, on page 26

‰ Cast your vote in accordance with the voting instructions on page II

‰ For questions or assistance with voting, contact us at 1-866-302-6046

A MESSAGE FROM OUR BOARD CHAIRDear eligible mutual policyholder:

On behalf of Economical Mutual’s Board of Directors, I have the honour of presenting to you the conversion plan for ourdemutualization, which sets the path for our initial public offering. As an eligible mutual policyholder, you have the opportunityto vote for the “By-Law Amendment Resolution” that will permit us to continue our journey toward demutualization, and helpEconomical compete as an independent, publicly-traded Canadian property and casualty insurer.

The process we are following is complex, but it is the only way for us to demutualize. From the initial governmentconsultations on demutualization, to awaiting the Regulations, and now following the government-mandated process, wehave made great progress in uncharted territory. Your policyholder committee actively participated in a robust and fairnegotiation process on your behalf for more than a year to produce an allocation of financial benefits that will result fromdemutualization.

Those negotiations are now complete, as is the regulatory review of our conversion plan. After eight years of doggedpersistence, we are now in a crucial phase of the process, which begins with the second special meeting of the eligiblemutual policyholders.

The policyholder committee representing your interests invested a great deal of time and effort, and had to work within acourt-supervised, confidential and balanced negotiation process imposed by the Regulations governing demutualization. Withthe assistance of their own experts, they and the committee representing eligible non-mutual policyholders have agreed to anegotiated allocation formula for the distribution of demutualization benefits.

The terms of this negotiated allocation are summarized in the accompanying policyholder information circular and containedin the attached conversion plan. In the Circular, you will also find the recommendation of your Eligible Mutual PolicyholderCommittee, opinions from experts, as well as the recommendation of Economical Mutual’s Board of Directors. I stronglyencourage you to read all of that material and to consult with your own professional advisors if necessary so that you areconfident in your ability to make an informed decision when it comes time to cast your vote.

We are also proud to announce that the Policyholder Committees decided to establish a new charitable foundation, which willreceive a portion of the proceeds of our demutualization. Built to honour all Economical policyholders and employees pastand present, the Economical Insurance Heritage Foundation will use the funds it receives to make a meaningful impact in ourcommunities. This historic gift will be an enduring legacy of our demutualization for many years to come.

It is important to appreciate the significance of this vote. You will effectively decide whether our demutualization journey willcontinue or not. We cannot change the allocation that the Policyholder Committees have approved and that our primaryregulator has reviewed. The Policyholder Committees have been disbanded pursuant to the Regulations and there is noopportunity to reopen negotiations. As I have said many times before at our annual meetings, if demutualization ends, there isno guarantee that a new demutualization process will be started. Given the way the eligibility rules for demutualization work,even if a new demutualization process does begin at some point in the future, the size and composition of the group ofeligible mutual policyholders and eligible non-mutual policyholders will be different than it is now.

Economical Mutual’s Board of Directors UNANIMOUSLY recommends you voteFOR the By-Law Amendment Resolution

We still have a great deal of work to do, but this is the crucial next step in our journey. As you review the information in theCircular, I encourage you to consider what is good for your fellow policyholders, for the future of Economical, for thebeneficiaries of the Economical Insurance Heritage Foundation and for the more than one million Canadians who depend onus to be there when they need us most. The negotiated allocation, the conversion plan, and your support are the toolsrequired to complete our demutualization. By voting FOR the By-Law Amendment Resolution, you can help Economicalachieve its vision.

As always, you have the appreciation of the Board of Directors for your on-going support.

Sincerely,

John BoweyChair of the Board of DirectorsChair of the Special Committee

Waterloo, OntarioJanuary 31, 2019

2019 Special Meeting of Eligible Mutual Policyholders Information Circular I

HOW TO VOTEEligible mutual policyholders may vote either in person at the Special Meeting, by using the enclosed proxy form, or byinternet or telephone, as explained below:

ATTEND THE SPECIAL MEETING IN PERSONA piece of government-issued photo identification will be required to register.

APPOINT A PROXYHOLDERAppoint a proxyholder to represent you at the Special Meeting by completing, signing, and dating the proxy formincluded with this Circular and returning it:

‰ by mail in the postage-paid envelope provided, or by mailing it to Computershare Investor Services Inc., 100University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1;

‰ in person to:O Computershare Investor Services Inc., 100 University Avenue, 8th Floor, Toronto, Ontario, Canada

M5J 2Y1, orO Economical Mutual Insurance Company (head office), 111 Westmount Road South, Waterloo, Ontario, Canada

N2J 4S4, Attention: Corporate Secretary;

‰ by fax to Computershare Investor Services Inc., at 1-866-249-7775 (toll-free in North America) or 1-416-263-9524(international); or

‰ via courier by calling Economical’s proxy solicitation agent, Laurel Hill Advisory Group at 1-877-304-6211 (toll-free)to arrange pick up of your completed proxy form.

SUBMIT YOUR VOTE ONLINEwebvotedirect.com

SUBMIT YOUR VOTE BY PHONE‰ Toll-free: 1-866-301-0994

‰ International: 1-514-982-8712

In order to be counted, your proxy form must reach Computershare or Economical, in the manner noted above, or you musthave registered your vote online or by phone, by no later than 10:30 a.m. (Eastern Time) on March 10, 2019 or, if the SpecialMeeting is adjourned or postponed, no later than 10 days before the new date set for the Special Meeting.

For more information on voting, including how to appoint a proxyholder to represent you and how to revoke a proxy, pleasesee “GENERAL PROXY AND VOTING INFORMATION” on page 90.

For any questions you may have regarding this Circular or the proxy form, or if you require assistance with voting, pleasecontact 1-866-302-6046 (toll-free in North America) or 1-514-982-8708 (international).

ECONOMICAL MUTUAL’S BOARD UNANIMOUSLY RECOMMENDSYOU VOTE FOR THE BY-LAW AMENDMENT RESOLUTION

FOR AGAINST

1. By-Law Amendment Resolution

II

NOTICE OF SPECIAL MEETINGNotice is hereby given that a special meeting of the eligible mutual policyholders of Economical Mutual Insurance Company(“Economical Mutual”) will be held on March 20, 2019 at 10:30 a.m. (the “Special Meeting”) to consider and vote on a specialresolution to amend the by-laws of Economical Mutual (the “By-Law Amendment Resolution”). The Special Meeting will beheld at Marshall Hall at Bingemans Conference Centre, 425 Bingemans Centre Drive, Kitchener, Ontario, Canada.

The Board of Directors of Economical Mutual determined on November 3, 2015, that it should begin the process to convertfrom a mutual company to a company with common shares. This conversion process is referred to as “demutualization.”

This is the second of three special meetings required to be held in connection with the demutualization of Economical Mutual.The first special meeting was held on December 14, 2015, where eligible mutual policyholders approved the special resolutionto authorize the commencement of negotiations with eligible non-mutual policyholders.

In order to continue the demutualization process, not less than two-thirds of eligible mutual policyholders voting in person orby proxy at the Special Meeting must approve the By-Law Amendment Resolution. If it is approved, the By-Law AmendmentResolution will permit the Economical Mutual Board of Directors to call the third and final special meeting in thedemutualization process for all eligible policyholders (mutual and non-mutual) to approve the terms of the demutualization(contained in a document called the “conversion plan”) and to authorize Economical Mutual to apply to the Minister ofFinance (Canada) to demutualize.

Under the Insurance Companies Act (Canada), each eligible mutual policyholder holding one or more individual mutualinsurance policies is entitled to cast one (1) vote on the By-Law Amendment Resolution. If one or more mutual policies isissued in the joint names of two or more eligible mutual policyholders, one (and only one) of the joint holders may cast one(1) vote on the By-Law Amendment Resolution in respect of the joint policy or policies held between them. Please see“GENERAL PROXY AND VOTING INFORMATION” on page 90 of the accompanying policyholder information circular (the“Circular”) for more details.

If the By-Law Amendment Resolution is not passed, the demutualization process will terminate.

The text of the By-Law Amendment Resolution is included on page 11 of the Circular. The Circular provides additionalinformation about the conversion plan, the demutualization process, the advantages and disadvantages of demutualization,expert professional opinions, and various recommendations. Eligible mutual policyholders are encouraged to read the Circularin its entirety, which is incorporated into and forms part of this notice.

By order of the Board of Directors,

Rowan Saunders

President and CEO


Eligible mutual policyholders of Economical Mutual, whether or not you attend the Special Meeting, are encouraged to complete, date, andsign the enclosed proxy form, and return it by mail in the postage-paid envelope provided, or by hand at 100 University Avenue, 8th Floor,Toronto, Ontario, M5J 2Y1, or fax it to Computershare Investor Services Inc. at 1-866-249-7775 (toll-free in North America) or 1-416-263-9524(international). Proxies may also be returned, by hand, to the head office of Economical Mutual at 111 Westmount Road South, Waterloo,Ontario, N2J 4S4, Attention: Corporate Secretary. In order to be valid, your proxy must reach Computershare Investor Services Inc. orEconomical Mutual , in the manner noted above, no later than 10:30 a.m. (Eastern Time) on March 10, 2019, or if the Special Meeting isadjourned or postponed, no later than 10 days before any adjournment or postponement thereof.

You may also register your vote at webvotedirect.com or over the telephone at 1-866-301-0994 (toll-free in North America) or 1-514-982-8712(international) no later than 10:30 a.m. (Eastern Time) on March 10, 2019, or if the Special Meeting is adjourned or postponed, no later than 10days before the new date determined by adjournment or postponement of the Special Meeting. If you or your appointed proxyholder areattending the Special Meeting in person a piece of government-issued photo identification will be required to register.

For any questions you may have regarding the Circular or the proxy form, or if you require assistance with voting, please contact1-866-302-6046 (toll-free in North America) or 1-514-982-8708 (international).

2019 Special Meeting of Eligible Mutual Policyholders Information Circular III

SUMMARY OF KEY INFORMATION

PURPOSE OF THE MEETING

This Special Meeting of eligible mutual policyholders has been called by Economical Mutual in connection with the next stepfor its demutualization (converting from a mutual company to a company with common shares).

The purpose of this meetingis to vote on the By-LawAmendment Resolution.

At the Special Meeting, eligible mutual policyholders will be asked to consider and vote onthe By-Law Amendment Resolution, which, if passed, will permit Economical Mutual tocontinue its demutualization process. The Regulations governing demutualization requireeligible non-mutual policyholders to vote in the Third Special Meeting, but as a mutualcompany, the by-laws of Economical Mutual currently do not allow for eligible non-mutualpolicyholders to vote. Therefore, Economical Mutual must change its by-laws in order for thedemutualization process to continue, and that step legally requires the approval of theeligible mutual policyholders. See “SUMMARY OF BY-LAW AMENDMENT” on page 11 and“GENERAL PROXY AND VOTING INFORMATION” on page 90 for more details.

The Circular for this Special Meeting provides eligible mutual policyholders with anopportunity to read the “conversion plan”, which sets out the terms of the demutualizationincluding the negotiated allocation of demutualization benefits, before eligible non-mutualpolicyholders have a chance to vote on it. However, the negotiated allocation cannot bealtered through this vote and the Policyholder Committees have been disbanded. If theBy-Law Amendment Resolution is not approved at the Special Meeting by a two-thirdsmajority, the demutualization process will end and the proposed initial public offering ofCommon Shares (“IPO”) will not be completed.

The outcome of this votedetermines whether thedemutualization processwill continue.

THE NEGOTIATED ALLOCATION

The Regulations contain afair and equitable processfor determining theAllocation ofdemutualization benefits.

As part of demutualization, the value of Economical Mutual will be distributed to “eligiblerecipients”, which includes eligible policyholders and also a new charitable foundation (the“Foundation”) in accordance with the negotiated allocation (the “Allocation”). TheAllocation was determined by court-appointed Policyholder Committees in a processrequired by the Regulations. The Policyholder Committees have now been disbandedpursuant to the Regulations.

The “demutualization benefits” distributed to eligible recipients will take the form of common shares of Economical’s newparent holding company (the “Common Shares”), cash, or a combination of both. Cash benefits are expected to be raised byselling Common Shares to investors.

In this way, the entire value of Economical Mutual will be provided to eligible recipients, but not by selling or distributing itsexisting assets or surplus.

The Allocation has two major components and was designed to reflect the considerationsrequired by the Regulations. First, it allocates benefits among eligible mutual policyholdersas a group, eligible non-mutual policyholders as a group, and the Foundation. Second, itallocates benefits to individual policyholders within each policyholder group. See“Policyholder Committee Rationale” on page 18 for the Policyholder Committees’ rationalefor the Allocation and the principles that gave rise to the final methodology.

The Allocation wasdetermined by court-appointed PolicyholderCommittees, and reflectsconsiderations that wereoutlined in the Regulations.

Group-Level Allocation

The Allocation provides for 20% of benefits to be allocated first to eligible mutual policyholders as a group (of which there are878), then the equivalent of $100 million of benefits to the Foundation, and then the remainder to eligible non-mutualpolicyholders as a group (of which there are approximately 630,000). The Valuation Report (as described on page 24) setsout an estimate of the IPO Valuation Range of approximately $1.3 billion to $1.9 billion as of May 31, 2018. We applied the IPOValuation Range to estimate that the allocation to the Foundation will equal between 5% to 8% of the benefits allocated, andthe allocation to eligible non-mutual policyholders will equal the remaining 72% to 75% of the benefits allocated. These areestimates based on a historical valuation range. The actual percentages will depend on the valuation conducted as part of ourfuture IPO and will not be known until that time.

IV

Individual-Level Allocation

Under the Allocation, individual policyholders will receive: (i) a “fixed” component, which will be the same for all eligiblepolicyholders of a class, and (ii) a “variable” component, which will vary among eligible policyholders, depending on certainpolicy-related attributes that differ for each individual policyholder.

The individual formula was determined based on the rationale that was used to negotiate the group-level allocation andconsideration of individual policy attributes as required by the Regulations. The fixed component for both eligible mutual andnon-mutual policyholders recognizes that both classes have consent rights in the demutualization process, through thepolicyholder votes (i.e., your consent to allow the process to continue). For eligible mutual policyholders, it also recognizestheir unique governance rights as mutual policyholders, and for eligible non-mutual policyholders it recognizes their rights toparticipate in the demutualization process as required by the Regulations. The variable component for both policyholderclasses accounts for their contribution to Economical Mutual’s surplus over time, and for eligible mutual policyholders it alsoreflects their historical commitment as a mutual policyholder of Economical Mutual.

For more details on the Allocation, see “THE METHOD OF ALLOCATION” on page 18.

WHAT DEMUTUALIZATION BENEFITS WILL YOU RECEIVE?

The actual value of demutualization benefits you may individually receive if demutualizationis completed is not known at this time. The value depends on the actual price of CommonShares that are sold in the IPO. Nevertheless, based on certain assumptions andqualifications contained in the Valuation Report, we can estimate ranges of average valuesin order to illustrate to eligible policyholders the possible magnitude of benefits that may bereceived. We have provided these estimates to assist you in your vote on the By-LawAmendment Resolution, and not to indicate to you the value of demutualization benefits thatyou or any eligible policyholders will receive at demutualization.

Applying the IPO Valuation Range, and subject to the related methods, assumptions,qualifications, and limitations contained in the Valuation Report, as of May 31, 2018, weestimate that:

The estimated ranges ofaverage values we provideare solely for illustrativepurposes to assist you inyour vote.

‰ the average eligible mutual policyholder could receive demutualization benefits with an approximate value of $300,000 to$430,000, estimated using the lowest to highest values within the IPO Valuation Range. As among individual eligible mutualpolicyholders, the variations within this group are expected to be small because a significant component of the individual-level allocation to eligible mutual policyholders relates to their common rights as mutual policyholders, as opposed to policyattributes that might vary from policyholder to policyholder; and

‰ the average eligible non-mutual policyholder could receive demutualization benefits with an approximate value of $1,500 to$2,300, estimated using the lowest to highest values within the IPO Valuation Range. We expect considerable variationamong individual eligible non-mutual policyholders because most of the individual-level allocation within this group relatesto unique policy attributes.

For more details on the underlying methods, assumptions, qualifications and limitations, as well as the estimated IPOValuation Range as of May 31, 2018 contained in the Valuation Report, see "THE ESTIMATED VALUE OF YOURDEMUTUALIZATION BENEFITS" on page 24 and Schedule 6 to the conversion plan on page A-29.

The IPO Valuation Range is not an estimate of Economical’s future IPO value. The actual IPO value may differ materially fromthe estimates and will depend on the value of Economical at the time of the IPO, which is not yet known. As a result, theestimated ranges of average values we provide are solely for illustrative purposes to assist you in your vote, and are notindicative of what you will receive if demutualization is successful. The estimated ranges may differ materially from the valueyou will receive at the time of the demutualization.

These estimates do not take into account the income tax consequences that will be applied to the demutualization benefitsthat may be received by eligible policyholders, or the potential consequences for an eligible policyholder’s social benefits asa result of receiving demutualization benefits. For a summary of these consequences, see “TAX CONSEQUENCES FORELIGIBLE POLICYHOLDERS” on page 32 and “SOCIAL BENEFITS CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS” onpage 35.

If demutualization issuccessful, eligiblepolicyholders will receiveCommon shares, cash, or acombination of both.

The form of demutualization benefits for eligible policyholders will be Common Shares,cash, or a combination of both. Eligible policyholders will be sent an Election Form later inthe demutualization process that may allow them to indicate their preference for sharesand/or cash (see “Electing Your Preference for Form of Demutualization Benefits” onpage 23). Demutualization benefits in the form of Common Shares will be issued on theEffective Date and will be subject to the Market Stabilization Restrictions (see “MarketStabilization Restrictions” on page 27), and cash will be distributed following the Offering.

For more details, see “BENEFITS FROM DEMUTUALIZATION” on page 22.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular V

WHAT HAPPENS WHEN THE BY-LAW AMENDMENT RESOLUTION IS APPROVED?

If eligible mutual policyholders vote FOR and approve the By-Law Amendment Resolution, we intend to proceed to the nextstep of the demutualization process by calling a third and final special meeting, which will include both eligible mutual andeligible non-mutual policyholders voting together, to approve the conversion plan and authorize Economical Mutual toformally apply to the Minister of Finance to demutualize.

WHAT HAPPENS IF THE BY-LAW AMENDMENT RESOLUTION IS NOT APPROVED?

If the By-Law AmendmentResolution is not approved,the demutualizationprocess will end.

If the By-Law Amendment Resolution is not approved, the Board will review and reassessEconomical Mutual’s options at that time, including the alternatives described below under“ALTERNATIVES CONSIDERED” on page 8. Importantly, the current process will NOTcontinue and there will NOT be any opportunity to change the terms of the conversion planor the negotiated Allocation (because the Policyholder Committees have already beenautomatically disbanded pursuant to the Regulations).

There can be no assurance that the Board would recommend a new demutualizationprocess in the near future, or at all. Given the way the eligibility rules for demutualizationwork, even if a new demutualization process does begin at some point in the future, the sizeand composition of the group of eligible mutual policyholders and eligible non-mutualpolicyholders will be different than it is now.

If Economical Mutual doesnot demutualize, it willremain a mutual insurancecompany and no one willreceive demutualizationbenefits from the proposedtransaction, including theFoundation.ADDITIONAL INFORMATION TO SUPPORT YOUR DECISION

This Circular contains supporting information to assist you in your decision:

‰ The Appointed Actuary’s opinion that the (i) demutualization benefits and the method of allocation are fair and equitable toeligible policyholders, and (ii) financial strength and vitality of Economical and the security of its policyholders will not bematerially adversely affected by demutualization (see “SUMMARIES OF ACTUARIAL OPINIONS – Appointed Actuary” onpage 30).

‰ The Independent Actuary’s opinion that the (i) demutualization benefits and the method of allocation are fair and equitableto eligible policyholders, and (ii) financial strength and vitality of Economical and the security of its policyholders will not bematerially adversely affected by demutualization (see “SUMMARIES OF ACTUARIAL OPINIONS – Independent Actuary”on page 30).

‰ The Valuation Report estimating the IPO Valuation Range as of May 31, 2018 (see “Summary of Valuation Report” onpage 24).

‰ The independent financial market and valuation expert’s opinion that:

‰ (i) cash distributions are an appropriate substitute for Common Shares (see “Common Shares or Cash” on page 23),

‰ (ii) the estimated IPO Valuation Range contained in the Valuation Report reasonably reflects prevailing market conditionsand the method and assumptions used to estimate the IPO Valuation Range are appropriate (see “Summary of ValuationOpinion” on page 25), and

‰ (iii) the measures to be taken by Economical in the two years following demutualization are likely to assist eligiblerecipients who receive Common Shares to sell them on a public market and address certain potential supply-demandimbalances (see “Summary of Liquidity Opinion” on page 28).

‰ The unanimous recommendation of your Eligible Mutual Policyholder Committee to vote FOR the By-Law AmendmentResolution (see “A MESSAGE FROM THE ELIGIBLE MUTUAL POLICYHOLDER COMMITTEE TO ELIGIBLE MUTUALPOLICYHOLDERS” on page 4).

‰ The Eligible Non-Mutual Policyholder Committee’s approval of the Allocation, which was required under the Regulations(see “SUMMARY OF THE NEGOTIATIONS” on page 13).

‰ The unanimous recommendations of the Company’s Board and Special Committee to vote FOR the By-Law AmendmentResolution (see “BOARD AND SPECIAL COMMITTEE RECOMMENDATIONS” on page 3).

‰ An overview of demutualization, including the differences between holding a mutual policy and common shares (see “Whatis Demutualization?” on page 5).

VI

TABLE OF CONTENTSA MESSAGE FROM OUR BOARD CHAIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I

HOW TO VOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II

NOTICE OF SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III

SUMMARY OF KEY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV

Purpose of the Meeting IVThe Negotiated Allocation IVWhat Demutualization Benefits Will You Receive? VWhat Happens When the By-Law Amendment Resolution is Approved? VIWhat Happens if the By-Law Amendment Resolution is Not Approved? VIAdditional Information to Support Your Decision VI

POLICYHOLDER INFORMATION CIRCULAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

BOARD AND SPECIAL COMMITTEE RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Description of the Special Committee 3Unanimous Recommendations of the Special Committee and the Board 3

A MESSAGE FROM THE ELIGIBLE MUTUAL POLICYHOLDER COMMITTEE TO ELIGIBLE MUTUAL POLICYHOLDERS . . . . . . . . . . . . . . . 4

OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

What is Demutualization? 5Advantages of Demutualization 5Disadvantages of Demutualization 7Alternatives Considered 8Benefits of Approving By-Law Amendment Resolution 10Risks from Continuing Demutualization 10Summary of By-Law Amendment 11

DEMUTUALIZATION PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Regulatory Framework 12Roles of the Actuaries 12Summary of the Negotiations 13What Will Happen Upon Demutualization? 17

DESCRIPTION OF CONVERSION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Eligible Recipients 18The Method of Allocation 18Benefits From Demutualization 22The Estimated Value of Your Demutualization Benefits 24Receiving Your Demutualization Benefits 25Initial Public Offering 26Ongoing Rights of Policyholders 28

CHARITABLE FOUNDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

SUMMARIES OF ACTUARIAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Appointed Actuary 30Independent Actuary 30

HOLDING COMPANY AND CORPORATE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Summary of Holding Company, and its Incorporating Instrument and By-Laws 31Corporate Reorganization 31

TAX CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Taxation of Holders Resident in Canada 32Taxation of Holders Not Resident in Canada 34Eligibility for Investment 34

SOCIAL BENEFITS CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

INFORMATION ABOUT ECONOMICAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Business of the Company 36Selected Financial Information 49Unaudited Pro Forma Financial Statements 51Financial Performance for the Years Ended December 31, 2017, 2016 and 2015 56Financial Position for the Years Ended December 31, 2017, 2016 and 2015 66Financial Performance for the Three and Nine Month Periods Ended September 30, 2018 and 2017 72Financial Position for the Quarter Ended September 30, 2018 79Business Developments and Operating Environment as of September 30, 2018 83Liquidity and Capital Resources as of September 30, 2018 85Non-GAAP Financial Measures 88

2019 Special Meeting of Eligible Mutual Policyholders Information Circular VII

Interested Persons 88Compensation Plans Following Demutualization 88Appointed Auditor 89Transfer Agent, Registrar, and Location of Securities Registers 89

GENERAL PROXY AND VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Solicitation of Proxies 90Who is Soliciting the Proxies 90Who May Vote 90Voting in Person 90Voting by Proxy 90

OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Policyholder Communications 92Contacting Us 92Website 92Printed Material 92Expert Consents 92Approval of the Board 92

APPENDIX “A”: CONVERSION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Schedule 6 — Valuation Report A-29

APPENDIX “B”: BY-LAW AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1

APPENDIX “C”: DEMUTUALIZATION OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1

APPENDIX “D”: APPOINTED ACTUARY’S OPINION AND SUMMARY REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1

APPENDIX “E”: INDEPENDENT ACTUARY’S OPINION AND SUMMARY REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1

APPENDIX “F”: VALUATION OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

APPENDIX “G”: CASH IN LIEU OF SHARES OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1

APPENDIX “H”: LIQUIDITY OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H-1

APPENDIX “I”: AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1

APPENDIX “J”: UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J-1

GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Glossary-1

VIII

POLICYHOLDER INFORMATION CIRCULARThis policyholder information circular (the “Circular”) has been prepared in connection with the special meeting (the “SpecialMeeting”) of the eligible mutual policyholders of Economical Mutual scheduled to be held on March 20, 2019 at 10:30 a.m. atMarshall Hall at Bingemans Conference Centre, 425 Bingemans Centre Drive, Kitchener, Ontario, Canada. Except whereotherwise noted, key terms in this Circular are defined in the Glossary of Terms found at the back of this Circular.

References to Economical Entities

References to “Economical Mutual” in this Circular are to Economical Mutual Insurance Company prior to demutualization,and “EIC” refers to Economical Mutual Insurance Company after demutualization.

References to “Economical”, the “Company”, “we”, “us”, and “our” in this Circular mean (i) prior to demutualization,Economical Mutual or (ii) after demutualization, the newly created holding company (“Economical Holdings” or “Holdco”) thatwill own EIC. In each case these terms include Economical Mutual’s or Economical Holdings’ subsidiaries where the contextso requires.

Financial Information

Unless otherwise indicated, all dollar amounts in this Circular are in Canadian dollars. Certain totals, subtotals, andpercentages may not reconcile due to rounding.

The financial information in this Circular should be read in conjunction with our audited consolidated financial statementsand accompanying notes for the years ended December 31, 2017 and 2016, which are included in the Circular in Appendix “I”on page I-1, and unaudited interim consolidated financial statements and accompanying notes for the third quarter endedSeptember 30, 2018, which are included in the Circular in Appendix “J” on page J-1.

Date of Information

The information contained in this Circular is current as of the date of this Circular, except where otherwise noted. Theinformation contained in the sections titled “Financial Performance for the Three and Nine Month Periods EndedSeptember 30, 2018 and 2017”, “Business Developments and Operating Environment as of September 30, 2018”, and“Liquidity and Capital Resources as of September 30, 2018” and any references to “year-to-date” or “to date” informationtherein, is provided as of September 30, 2018, except where otherwise noted. Information posted on our website may befound at economicalinsurance.com (for general corporate information) or joininourfuture.com (for demutualizationinformation). All references in this Circular to websites are inactive textual references provided for information only.Information contained in or otherwise accessible through the websites mentioned in this Circular does not form a part of thisdocument and is not incorporated by reference herein.

Forward-looking Information

This Circular may contain forward-looking information. Such forward-looking information may include, among other things,statements or information with respect to the timing of meetings of eligible policyholders, including the Special Meeting, theexpected costs and benefits of demutualization, the likelihood and timing of the completion of demutualization, anyestimated value of Economical at the time of demutualization, the size and success of the Offering, the quantum and form ofdemutualization benefits that may be distributed to eligible recipients as a result of demutualization, other matters related tothe completion of the demutualization, the financial condition, size, results of operations and future performance ofEconomical prior to the completion of the demutualization, the financial condition, size, results of operations and futureperformance of Economical Holdings after the completion of the demutualization, the proportional value of Economicalallocated to eligible mutual policyholders as a group and the eligible non-mutual policyholders as a group, the listing ofCommon Shares on a recognized stock exchange after demutualization and the maintenance of the listing post-demutualization, and the liquidity of the Common Shares post-demutualization.

Forward-looking information generally can be identified by the use of forward-looking terminology, as indicated by wordssuch as “anticipate”, “believe”, “could”, “estimate”, “expect”, “indication”, “intend”, “likely”, “looking to”, “may”, “outlook”,“objective”, “plan”, “potential”, “predict”, “project”, “seek”, “should”, “trends”, “will”, “would”, or negative or other variations ofthese words, or other similar or comparable expressions, words or phrases suggesting future events or outcomes.

Any forward-looking information contained in this Circular is based on our current expectations and is naturally subject touncertainty and changes in circumstances that may cause actual results or events to differ materially from those expressedor implied by such forward-looking information. Forward-looking information is based on estimates and assumptions madeby management based on management’s experience and perception of historical trends, current conditions, and expectedfuture developments, as well as other factors that management believes are appropriate in the circumstances. Althoughmanagement of Economical believes that the assumptions made and the expectations represented by such information arereasonable, there can be no assurance that the forward-looking information will prove to be accurate, as actual results andfuture events could differ materially from those anticipated in such forward-looking information. Accordingly, readers shouldnot place undue reliance on forward-looking information in this Circular.

By its nature, forward-looking information is based on assumptions and involves known and unknown risks, uncertainties andother factors that may cause actual results, performance or achievements, or industry results, to be materially different fromfuture results, performance or achievements expressed or implied by such forward-looking information.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular 1

POLICYHOLDER INFORMATION CIRCULAR

Factors that may cause such differences include but are not limited to general economic, political, business, technological,competitive, governmental, legislative and regulatory factors, including those affecting our proposed demutualization andour business; factors affecting the success and timing of the demutualization process and the outcome of a demutualizationtransaction, including the timing of the meetings of eligible policyholders, including the Special Meeting, actual insurance andstock market conditions and the financial condition, size, results of operations, prospects of Economical at the time of theOffering, failure to obtain required regulatory approvals to allow the demutualization to proceed, failure to obtain therequired eligible policyholder approvals to allow the demutualization to proceed, changes in law that negatively impact theability to or the desirability of proceeding with the demutualization, the risk that Economical Holdings may not realize thebenefits of the demutualization; Economical’s ability to appropriately price its products to produce an acceptable return; itsability to accurately assess the risks associated with the insurance policies that it writes; its ability to pay claims inaccordance with our insurance policies; Economical’s ability to obtain reinsurance coverage to alleviate risk; litigation andregulatory actions; management’s ability to accurately predict future claims frequency or severity, including the frequencyand severity of weather-related events; the occurrence of unpredictable catastrophe events; unfavourable capital marketdevelopments or other factors which may affect our investments; Economical’s ability to successfully manage credit risk fromits 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 manage the appropriate collection and storage ofinformation; Economical’s reliance on information technology and telecommunications systems; changes in governmentregulations, supervisory expectations or requirements, including risk-based capital guidelines; Economical’s ability torespond to events impacting its ability to conduct business as normal; Economical’s ability to implement its strategy oroperate its business as management currently expects; the competitive market environment; Economical’s reliance onindependent brokers to sell its products; and periodic negative publicity regarding the insurance industry or Economical.

These factors are not intended to represent a complete list of the factors that could impact Economical, and other factorsand risks could impact our actual results, performance, and achievements.

We do not undertake and have no intention to update or alter any of our forward-looking information, whether as a result ofnew information, future events or otherwise, except as required by law. All of the forward-looking information contained inthis Circular is qualified by these cautionary statements.

Property and Casualty Insurance Market and Industry Data

Property and casualty (“P&C”) insurance market and industry data presented in this Circular was obtained from third partysources, industry reports and publications, websites and other publicly available information, as well as industry and otherdata prepared by us or on our behalf on the basis of our knowledge of the Canadian P&C market and Canadian economy(including our opinions, estimates, and assumptions relating to the Canadian P&C market and Canadian economy based onthat knowledge).

We believe that the P&C market and industry data presented in this Circular is reasonably stated and, with respect to dataprepared by us or on our behalf, that our opinions, estimates, and assumptions are currently appropriate and reasonable, butthere can be no assurance as to the accuracy or completeness thereof. The accuracy and completeness of the P&C marketand industry data presented in this Circular are not guaranteed and we do not make any representation as to the accuracyof such data.

Actual outcomes may vary materially from those forecast in such reports or publications, and the prospect for materialvariation can be expected to increase as the length of the forecast period increases. Although we expect it to be reliable, wehave not independently verified any of the data from third party sources referred to in this Circular, analyzed or verified theunderlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying market, economic,and other assumptions relied upon by such sources. Market and industry data is subject to variations and cannot be verifieddue to limits on the availability and reliability of data inputs, the voluntary nature of the data gathering process, and otherlimitations and uncertainties inherent in any statistical survey.

2

BOARD AND SPECIAL COMMITTEERECOMMENDATIONSDESCRIPTION OF THE SPECIAL COMMITTEE

The Board of Directors of Economical Mutual (the “Board”) created the Special Committee to consider relevant informationregarding demutualization, including the advice of financial and legal advisors, to assess the Company’s strategic options, andto evaluate the risks and opportunities of the demutualization process, with a view to the best interests of Economical Mutual.Prior to the Board’s initiation of demutualization on November 3, 2015, the Special Committee determined thatdemutualization is in the best interests of Economical Mutual and recommended that the Board initiate the demutualizationprocess.

The current members of the Special Committee are John Bowey (Chair), Dick Freeborough, and Susan Monteith, each ofwhom is independent (as defined in the “GLOSSARY OF TERMS” found at the back of this Circular). One of the members ofthe Special Committee holds non-mutual policies that would give rise to eligibility in demutualization but to avoid anyperceived conflict of interest, the director has agreed to disclaim their entitlement to any demutualization benefits received.

UNANIMOUS RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD

The Special Committee has unanimously recommended to the Board that it is in the best interests of Economical Mutualand its policyholders to recommend that eligible mutual policyholders vote FOR the By-Law Amendment Resolution.

The Special Committee made this decision after evaluating the conversion plan and other supporting materials andinformation, and after assessing the Company’s strategic options and the risks and opportunities of the demutualizationprocess. The Special Committee concluded that passing the By-Law Amendment Resolution is in the best interests ofEconomical Mutual as a whole because:

‰ the By-Law Amendment is required for the demutualization process to continue;

‰ the advantages of demutualization continue to outweigh the disadvantages of demutualization;

‰ demutualization continues to be superior to other strategic alternatives for the future of Economical Mutual;

‰ demutualization will continue to protect the interests of policyholders;

‰ both Policyholder Committees unanimously approved the method of allocation; and

‰ the method of allocation meets all of the requirements set out in the Regulations, and was determined through a fairnegotiation process that was properly executed.

In adopting the Special Committee’s recommendation and recommending that eligible mutual policyholders vote FOR theBy-Law Amendment Resolution, the Board considered and relied upon the same factors and considerations that the SpecialCommittee relied upon, as described above, and adopted the Special Committee’s analyses in their entirety.

The Board unanimously recommends that eligible mutual policyholders vote FOR the By-Law Amendment Resolution.


A MESSAGE FROM THE ELIGIBLE MUTUALPOLICYHOLDER COMMITTEE TO ELIGIBLEMUTUAL POLICYHOLDERSWith the assistance of legal counsel, financial advisors, and actuarial advisors, the Eligible Mutual Policyholder Committeeundertook confidential, complex, lengthy, and intense negotiations with the Eligible Non-Mutual Policyholder Committee toestablish the method of allocating the value of Economical Mutual to eligible policyholders and to determine that benefitswould be provided to the Economical Insurance Heritage Foundation, as described under the heading “SUMMARY OF THENEGOTIATIONS” at page 13. The Honourable Dennis O’Connor was engaged to facilitate the negotiation process, whichstarted on February 22, 2017, and ended on June 26, 2018.

These negotiations concluded with the Eligible Mutual Policyholder Committee unanimously passing a joint allocationresolution which sets out the Allocation negotiated and agreed to by the respective committees (as set out at page 19). Theamounts that eligible mutual policyholders may expect to receive under the Allocation are set out at page 24. The rationalefor the Allocation is set out in detail under the heading “Policyholder Committee Rationale” at page 18.

Your policyholder committee negotiated over many months, receiving presentations from expert advisors and carefullyreviewing materials from previous insurance demutualizations, before ultimately reaching agreement on the Allocation so thatthe demutualization may proceed. It is the unanimous view of your policyholder committee members that this is the bestoutcome we could achieve for the eligible mutual policyholders. In accordance with the Regulations established by thefederal government for the demutualization of Economical Mutual, the negotiation process has concluded and furthernegotiation is not permitted. If the eligible mutual policyholders do not pass the By-Law Amendment Resolution at the SpecialMeeting, the demutualization process will terminate.

We unanimously and strongly recommend that eligible mutual policyholders vote in favour of the By-Law AmendmentResolution to amend Economical Mutual’s by-laws to permit the eligible non-mutual policyholders to vote together with theeligible mutual policyholders at the Third Special Meeting. By passing the By-Law Amendment Resolution, the eligible mutualpolicyholders will allow the demutualization process to proceed to the Third Special Meeting.

We further unanimously and strongly recommend that, once Economical Mutual’s by-laws are amended following the SpecialMeeting, eligible mutual policyholders vote in favour of the Conversion Approval Resolutions at the Third Special Meetingwhich will allow Economical Mutual to make an application to the Minister of Finance to approve the conversion plan and toissue the Letters Patent of Conversion, in accordance with the Regulations and Insurance Companies Act.

Your votes in favour of the By-Law Amendment Resolution at this Special Meeting, and the Conversion ApprovalResolutions at the Third Special Meeting, are the best way of ensuring that the demutualization of Economical Mutual canoccur and that the significant benefits to be allocated to eligible mutual policyholders can be realized and distributed.

4

OVERVIEWWHAT IS DEMUTUALIZATION?

Canadian P&C insurance companies generally have one of two forms of corporate organization. One form is the traditionallimited liability corporation with common shares (a “share company”). The other form is a mutual company.

Mutual companies provide governance rights to mutual policyholders, whereas share companies provide governance rights toshareholders. For both forms of company, the governance rights are typically contained in the Insurance Companies Act(“Act”) and the company’s governing documents, like letters patent (or articles of incorporation, or equivalent) and by-laws.The key similarities and differences between holding a mutual policy of Economical Mutual or a common share in a sharecompany will be:

Mutual Policy Common Share

Evidence of governance rights Insurance contract Share

TransferabilityMutual policies are not always transferable(Mutual policies of Economical Mutual are not)

Shares are usually transferable, subjectto certain restrictions

VotingMutual policyholders vote to elect directorsand on other matters

Common shareholders vote to electdirectors and on other matters

Dividends/ Distributions

Mutual policyholders may participate in alimited distribution of profits, by way ofdividend, bonus, or other benefit, if such adistribution is declared by the Board in theordinary course of business

Shareholders are entitled to receivedividends on common shares ifdeclared by the board of directors

Rights on liquidation

In the event of Economical Mutual’sinsolvency, it may be possible for mutualpolicyholders to participate in the distributionof any remaining surplus after satisfaction ofall obligations

Shareholders are entitled to participatein the distribution of any remainingsurplus on a liquidation or winding-up,after satisfaction of all obligations

Capital contribution

It is possible that mutual policyholders couldbe called upon to make capital contributionsto Economical Mutual, if its governingdocuments were changed

Shareholders would not be called uponto make capital contributions

Insurance coverageIncluded as the primary purpose of paying fora mutual policy; a policy cancellation or lapsewould mean a loss of governance rights

Owning a share carries no insurancecoverage; holding an insurance policycarries no governance rights

A “demutualization” is a regulated legal process in which a mutual insurance company converts from a company with mutualpolicyholders as its voting members, to a share company with share capital and voting shareholders.

In the process of demutualizing, the value of Economical Mutual will be distributed in the form of common shares ofEconomical’s new parent holding company (the “Common Shares”) and/or cash to eligible recipients (referred to as“demutualization benefits”). In this way, the entire value of Economical Mutual will be provided to eligible recipients, but notby selling or distributing its existing assets or surplus. The terms of the demutualization are set out in the “conversion plan”attached to this Circular in APPENDIX “A” on page A-1.

When considering demutualization, the Special Committee and the Board looked closely at the opportunities and risksassociated with remaining a mutual company; the possible advantages and disadvantages of any resulting demutualizationand conducting business as a public company; and the benefits and risks of amending Economical Mutual’s by-laws to allowthe eligible non-mutual policyholders to vote on the conversion plan. The Special Committee and the Board also consideredalternatives to the demutualization of Economical Mutual.

Throughout the demutualization process, both the Special Committee and the Board have revisited these considerationsperiodically to evaluate if demutualization continues to be in the best interests of Economical Mutual and its policyholders,and they have determined that, in their opinion, it is in the best interests of Economical Mutual and its policyholders. Asummary of key considerations is provided below.

ADVANTAGES OF DEMUTUALIZATION

Positions Economical for Industry Consolidation

The Canadian P&C insurance industry continues to consolidate, continuing the trend of large companies becoming larger andmore powerful, while mid-sized and smaller companies are at risk of becoming marginalized, confined to market niches, orface being taken over.

Demutualization will provide the opportunity for Economical to participate meaningfully in industry consolidation as anacquirer, by having the ability to issue shares to raise funds for acquisitions or to deploy as acquisition currency. However, it


OVERVIEW

will increase the risk of Economical being acquired in the future (see “DISADVANTAGES OF DEMUTUALIZATION” onpage 7).

Access to Capital and Improved Stability for the Company

The Company’s vision is to be one of Canada’s top P&C insurers, recognized for its business innovation and how well it takescare of its customers. Economical believes it cannot fully achieve this vision without access to the capital markets. AlthoughEconomical is presently adequately capitalized to operate its current business, it requires significantly more capital to financeits growth aspirations, particularly through acquisitions in the rapidly consolidating P&C insurance industry. As a mutualcompany, Economical Mutual’s ability to raise capital is very limited. Following demutualization, with a share company as theparent company of the corporate group, Economical will have significantly improved access to capital. The ability to issueCommon Shares as acquisition currency or for cash will enable Economical to fund acquisitions or other business growthareas such as product development, technology, distribution, and marketing while continuing to serve our customers.

Greater access to capital will also improve stability. Mutual companies cannot issue common shares in the capital markets inorder to raise funds in response to adverse market events or to repair damage done by a significant insurance loss event,such as a major earthquake. Instead, mutual companies must rely on retained profits from their underlying businesses, whichslows down their recovery and prolongs the vulnerability created by the initial adverse event. Demutualization would open upother avenues to access funds in such cases.

In addition, Canadian businesses are increasingly relying on rating agencies to assess an insurer’s ability to pay insuranceclaims and to guide their insurance purchasing decisions. In order to receive ratings comparable to share companies, mutualcompanies are generally required to maintain higher levels of capital (well in excess of regulatory capital requirements)because they cannot access capital markets to replenish capital quickly after an extreme impairment event, such as asignificant insurance loss event. This leaves less capital available for a mutual company to invest in growing its business.

Flexibility to Develop and Grow the Company

After demutualization, Economical will have access to additional capital to invest in its business. In a rapidly changing industryand a market that is increasingly subject to disruption, this flexibility becomes increasingly important.

Economical will also have the flexibility to, and intends to, use a holding company structure, which could facilitate the growthof new lines of business for Economical in the future. As a mutual company without shares, Economical Mutual cannotcurrently be owned by a holding company. Therefore, any other company held outright within the Economical group must beowned by Economical Mutual (as a subsidiary) as opposed to being owned by a holding company (as an affiliate ofEconomical Mutual). As a result, the types of businesses that Economical can acquire outright are limited to the types ofbusinesses that an insurance company can own, which is limited by investment restrictions set out in the Act.

The Regulations require that any holding company of EIC must be an insurance holding company governed by the Act.However, the insurance holding company might, with regulatory approval, be able to convert to a non-insurance holdingcompany such as a company governed by the Canada Business Corporations Act (“CBCA”). This structure would be subjectto fewer investment restrictions and offer significantly more flexibility in the types of acquisitions and investments Economicalcould make, while at the same time maintaining adequate regulatory oversight over insurance operations.

Greater Disclosure and Transparency

After successful completion of its demutualization and IPO, Economical will become a public company and be required tomake regular, comprehensive public disclosure of its operations and financial results, continuing the path to greaterdisclosure and transparency begun by Economical in the last several years. Shareholders of public companies have directfinancial interests in the companies’ performance through dividend payments and changes in share price, and thecomprehensive level of reporting required of public companies is intended to lead to greater management accountability forfinancial performance.

Employee Attraction and Retention

Economical believes that becoming a share company, particularly with the shares of our new holding company, EconomicalHoldings, listed on a recognized stock exchange, would help to attract, retain, and motivate employees.

As a public company, Economical may gain greater exposure and recognition in its industry, which would help to attract andmotivate employees. The improved ability of Economical to participate in industry consolidation would help ensure thatEconomical remains successful and relevant within the industry. This is expected to assist Economical in attracting andmotivating key personnel by giving employees a broader range of career opportunities to contribute to achieving theCompany’s vision of being one of Canada’s top P&C insurers.

Becoming a public company will also enable Economical to establish compensation plans that promote director andemployee share ownership, which we believe will to a greater degree allow employees to benefit from the growth andsuccess of the Company, and position Economical as a more desirable place for employees to work. For more information onthese plans, see “COMPENSATION PLANS FOLLOWING DEMUTUALIZATION” on page 88.

6

OVERVIEW

Benefits of Common Share Ownership for Policyholders

Mutual policyholders currently have governance and other rights in Economical Mutual, beyond the insurance coverage intheir mutual policy. The most important of these are the right:

‰ to vote on matters submitted to mutual policyholders, such as to elect members of the Board;

‰ to participate in the distribution of profits of Economical Mutual as determined by the Board in the ordinary course(historically in the form of premium refunds);

‰ to participate in demutualization (together with eligible non-mutual policyholders) as provided under the Regulations; and

‰ in the unlikely event of the insolvency of Economical Mutual, the potential to participate in the distribution of any remainingsurplus on a liquidation of Economical Mutual after the satisfaction of all obligations.

However, mutual policyholder rights are subject to four important limitations under Economical Mutual’s existing structure:

‰ mutual policies cannot be sold or otherwise transferred;

‰ the Act prohibits Economical Mutual from making any distributions to mutual policyholders other than those made in theordinary course of business;

‰ in the absence of demutualization under the regulatory framework, there is no value to a mutual policy beyond theinsurance coverage it provides and certain limited governance rights; and

‰ mutual policyholder rights generally exist for only as long as the insurance underpinning the mutual policy remains in force.

Owning common shares in a share company has many advantages. Shareholders are entitled to:

‰ vote on matters submitted to shareholders, such as electing the members of the board of directors;

‰ receive dividends on common shares if dividends are declared by the board of directors; and

‰ participate in the distribution of any remaining surplus on a liquidation or winding-up, after satisfaction of all obligations.

In addition, share ownership has three important advantages over the current rights of mutual policyholders:

‰ shares can be sold, transferred, or pledged as collateral (after the expiry of the Market Stabilization Restrictions, in the caseof the Common Shares);

‰ if the shares are listed on a public market, the market price of the shares will establish a clear value for the shares, whichcan be realized for cash when sold or used for security for loans; and

‰ shareholder rights continue for as long as the shares are held, regardless of whether an insurance policy is in force.

The benefits of share ownership will be available to eligible recipients who receive Common Shares. However, the marketprice of Common Shares may be subject to significant fluctuations after the Offering, and it may decline below the IPO price ofCommon Shares. There are many factors that may negatively impact the market price of the Common Shares, in addition tothe financial position and results of operation of Economical Holdings, including broad market and industry factors beyond ourcontrol. Hence, the price of Common Shares could fluctuate based upon factors that have little or nothing to do with us, andthese fluctuations could materially reduce the price of Common Shares regardless of our operating performance.

DISADVANTAGES OF DEMUTUALIZATION

Loss of Voting Control for Mutual Policyholders

Currently, mutual policyholders have the exclusive right to elect the members of the Board of Economical Mutual and to voteon other matters submitted to them at policyholder meetings. As a result of demutualization, the mutual policyholders will nolonger hold exclusive voting control.

However, the eligible mutual policyholders that become shareholders after demutualization will have voting rights inEconomical Holdings, the new parent company of Economical. These voting rights will be shared with other shareholders,including eligible non-mutual policyholders who will be issued and hold shares from the demutualization, and future investorsin the Company. As a result, there will be a loss of voting control by the mutual policyholders based on the negotiatedAllocation of demutualization benefits and any new Common Shares that Economical may issue to investors.

Increased Exposure to Takeover for the Company

It would be very difficult for another company to acquire control of Economical Mutual while it is a mutual company, becauseEconomical Mutual does not have common shares that can be purchased. Control of a mutual company like EconomicalMutual could only be acquired through a friendly transaction involving assumption reinsurance of all of Economical Mutual’spolicies and the purchase of the shares of its subsidiaries, or in an amalgamation with another insurance company that wouldhave to result in a combined mutual company.

After demutualization, because the Common Shares will be freely transferrable (after expiry of the Market StabilizationRestrictions) and are anticipated to be listed on a stock exchange, a buyer could attempt to acquire enough Common Sharesto gain control of Economical Holdings, which would also give the buyer indirect control of EIC and Economical’s othersubsidiaries. In addition, a buyer could purchase EIC directly by buying the common shares of EIC from Economical Holdings.


OVERVIEW

However, there is takeover protection built into the Regulations. Under the Act, the Minister of Finance must approve anyacquisition, directly or indirectly, by any person of more than 10% of an insurance company’s shares. The Regulations providethat for a period of two years following a demutualization, the Minister of Finance will not approve an acquisition by anyperson of more than 20% of any class of voting shares (i.e., a “major shareholder”) of Economical Holdings or EIC (unless suchcompany is in financial difficulty and the Minister of Finance believes the acquisition will improve the company’s financialposition). This ensures that Economical Holdings will remain widely-held for at least two years and that Economical Holdings isthe only major shareholder of EIC during this period, providing time for Economical to make the transition followingdemutualization. Following the two-year period, any takeover of Economical Holdings or EIC will still be subject to theapproval of the Minister of Finance as well as certain other regulatory approvals.

Following demutualization, Economical Holdings could also be acquired by amalgamating with another P&C insurancecompany. The shareholders of Economical Holdings would not necessarily retain a control position (or remain shareholders)of the resulting amalgamated entity (depending on the terms of the amalgamation). However, the terms of the amalgamationwould have to be set out in an amalgamation agreement negotiated by Economical Holdings and the acquirer. The agreementwould require the approval of the Office of the Superintendent of Financial Institutions (“OSFI”) and the shareholders of eachamalgamating company. The amalgamation would have to be approved by the Minister of Finance on a joint application of theamalgamating companies, which is subject to the share acquisition limits described in the previous paragraph.

Cost of Demutualization

The costs of continuing the demutualization process, the corporate restructuring of the Company, and the Offering aresubstantial. Economical relies on professional advisors in various capacities throughout the demutualization process. As well,significant advisory and financing fees are also expected to be incurred in connection with the Offering, corporaterestructuring, and related stock exchange listing.

To date, Economical has already incurred significant costs in the demutualization process, including costs to support thepolicyholder committee negotiations which included the counsel fees of McCarthy Tétrault and TGF, compensation to thepolicyholder committee members, and the fees of their consulting actuaries and financial experts. Demutualization costs forthe 9 months ended September 30, 2018 totaled $8.1 million (compared to $9.2 million for the same period in 2017). In 2017,demutualization costs for the entire year totaled $13.4 million, compared to $7.0 million for 2016.

After receiving a receipt from securities regulators for a final prospectus for the IPO, Economical Holdings will be a publiccompany subject to reporting and other obligations under applicable Canadian securities laws and the rules of anyrecognized stock exchange on which the Common Shares are listed. These reporting and other obligations will placesignificant demands on our management, administrative, operational, legal, and accounting resources as well as increase ourcompliance costs.

ALTERNATIVES CONSIDERED

The Special Committee reviewed structural alternatives other than demutualization for Economical Mutual and reported to theBoard. After its review, the Special Committee recommended, and the Board concluded, that demutualization is in the bestinterests of Economical Mutual because it will allow Economical to become a public company and be better positioned tocompete more effectively with other leaders in our industry.

The other structural alternatives, the reasons why they were determined to not be as advantageous as pursuingdemutualization and other considerations relevant to you are set out below.

Retain the Mutual Structure

Economical Mutual could retain its current mutual structure.

The Special Committee and Board believe that this would be an inferior alternative to pursuing demutualization because:

‰ Economical would have limited access to capital and would not be able to meaningfully participate in industry consolidationor make investments which would require significant capital.

‰ As a mutual company, the ability of Economical Mutual to pursue its business strategies would be limited.

Under this alternative, Economical Mutual would remain subject to the provisions under the Act which limit the ability of amutual company to distribute profits to mutual policyholders other than those made in the ordinary course of business.Therefore, under this alternative there would be no mechanism by which the value of Economical Mutual could be distributedto its policyholders in a manner similar to the demutualization process.

Adopt Mutual Holding Company Structure

The Special Committee and Board considered whether there would be any advantage to adopting a mutual holding companystructure. Adopting such a structure would be complicated from a legal and tax perspective, and would likely requirepolicyholder and regulatory approvals. It would ultimately entail a subsidiary being held by another mutual company, alsogoverned by the Act. This could potentially achieve some improved flexibility for Economical to pursue its business strategies

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OVERVIEW

and access capital, but would not offer the same degree of flexibility or access to capital that demutualization would provide.Therefore, the Special Committee and Board concluded that adopting a mutual holding company structure would not be asadvantageous as demutualization.


Transfer All of Economical Mutual’s Insurance Policies and Shares of its Subsidiaries

Economical could be sold, as a whole, through the assumption reinsurance of all Economical Mutual’s policies and thepurchase of the shares of its subsidiaries. Under this option, Economical would essentially cease to exist.

The Special Committee and Board concluded the interests of Economical Mutual are best served by continuing as a majorcompetitor in the Canadian P&C insurance market. The Special Committee and Board also concluded that this type of salewas not a practical alternative because, while demutualization is a complex process, selling Economical while EconomicalMutual remains a mutual company would also be lengthy and complicated. Economical Mutual does not have shares that canbe transferred, so a sale would have to occur through the transfer of all Economical Mutual’s policies to another P&Cinsurance company, along with the sale of the shares of its subsidiaries, and then Economical Mutual would have to bewound-up. This type of transaction would be highly unusual, and there is no guarantee that another party would be interestedin purchasing Economical this way.

Even if Economical was sold in this way, an extraordinary dividend or mutual policy distribution would have to be declared inorder to distribute value from the sale to mutual policyholders. However, Economical Mutual would remain subject to theprovisions under the Act which limit the ability of a mutual company to distribute profits to mutual policyholders other thanthose made in the ordinary course of business. Therefore, under this alternative there would be no mechanism by which thevalue of Economical Mutual could be distributed to its policyholders in a manner similar to the demutualization process.

Closing to New Business

Economical Mutual and its P&C insurance subsidiaries could stop selling new insurance, gradually run-off their businesses inan orderly fashion as policies terminate, or sell their businesses and eventually cease operations. The cash generated wouldbe distributed to mutual policyholders over time as policy dividends or mutual policy distributions.

The Special Committee and Board concluded that closing to new business would not be in the best interests of EconomicalMutual for the following reasons:

‰ the implementation of the run-off would be an unusual transaction, unlikely to be recommended by the Board whileEconomical Mutual was a viable, thriving company, and subject to significant costs, risks, and uncertainties such as the needto retain capital for some time to support the run-off and unforeseen future contingencies;

‰ key management and employees would likely leave Economical;

‰ the value of the Company’s existing businesses and its goodwill would likely decline, which would decrease its realizablevalue; and

‰ mutual policyholders’ rights to dividends and distributions would terminate with their policies, and they may not be able toreceive the same share of value as full distribution could be deferred until the run-off was complete.

Similar to “Transfer All of Economical Mutual’s Insurance Policies and Shares of its Subsidiaries” above, the SpecialCommittee and Board concluded the interests of Economical Mutual are best served by continuing as a major competitor inthe Canadian P&C insurance market.


Amalgamate with Other Insurance Companies (and Retain Mutual Structure)

As a mutual P&C insurance company, Economical Mutual is permitted under the Act to amalgamate with another P&Cinsurance company. The resulting amalgamated entity would be required by law to be a mutual P&C insurance company.

The Special Committee and Board determined that although this could facilitate growth for Economical Mutual, theopportunities for amalgamation are too limited to be a viable alternative for achieving the Company’s long-term goals to grownew lines of business and achieving its vision of becoming one of Canada’s top P&C insurers because:

‰ there are likely a very small number of insurance companies in the Canadian P&C sector that would be interested inamalgamating with Economical (since any amalgamated entity would be a mutual company, the majority of which have smallrural, regionally-based operations); and


OVERVIEW

‰ each amalgamation would be a lengthy and costly process, thereby likely outweighing the benefit of amalgamating with asmall company.

As well, you should consider that all of the disadvantages set out above under “Retain the Mutual Structure” would alsoapply if Economical were to pursue amalgamation with other insurance companies as an alternative to demutualization.

BENEFITS OF APPROVING BY-LAW AMENDMENT RESOLUTION

Approving the By-Law Amendment Resolution is Necessary to Move Forward with Demutualization

Voting to amend Economical Mutual’s by-laws so that eligible non-mutual policyholders may vote on the conversion plan, andauthorize the Company to apply for demutualization, is the required next step to move forward with the demutualizationprocess and realize the many advantages to demutualization that were discussed above.

If the By-Law Amendment Resolution is passed, Economical Mutual will call the Third Special Meeting of all eligiblepolicyholders to vote on the Conversion Approval Resolutions.

If the By-Law Amendment Resolution is not passed, the demutualization process will end. There is no opportunity to reopennegotiations because the Policyholder Committees have already been automatically disbanded pursuant to the Regulations.There can be no assurance that the Board would recommend commencing a new demutualization process in the future.Given the way the eligibility rules for demutualization work, even if a new demutualization process does begin at some pointin the future, the size and composition of the group of eligible mutual policyholders and eligible non-mutual policyholders willbe different than it is now.

RISKS FROM CONTINUING DEMUTUALIZATION

Continues to Take Away Resources from the Ordinary Operations of the Company

The demutualization process has required a significant degree of effort and resources on the part of the Company’smanagement and employees, and continued effort and resources will be required to complete the demutualization processand Offering. As discussed under “Cost of Demutualization” on page 8, the cost of the demutualization process issubstantial.

There is no guarantee that approving the By-Law Amendment Resolution will result in a successful demutualization. Theconversion plan must also be approved at the Third Special Meeting of all eligible policyholders, and the conversion planmust be approved by the Minister of Finance. If the By-Law Amendment Resolution is approved but demutualization is notsuccessful, the time, resources, and costs to be incurred from this point will be wasted and could have been invested inotherwise growing the Company’s business.

Process May be Terminated or Otherwise Fail

The demutualization process will terminate if the By-Law Amendment Resolution is not passed at the Special Meeting by atleast two-thirds of all eligible mutual policyholders voting in person or by proxy.

The process will also not proceed if:

‰ OSFI does not provide regulatory approval for Economical Mutual to hold the Third Special Meeting;

‰ the notice of the Third Special Meeting is not sent to all eligible policyholders within one year of OSFI providing approval forEconomical Mutual to do so;

‰ the Conversion Approval Resolutions are not passed at the Third Special Meeting by at least two-thirds of all eligiblepolicyholders voting in person or by proxy at that meeting;

‰ the Board passes a resolution terminating the demutualization process (which it may do at any time before Letters Patent ofConversion are issued to complete the demutualization); or

‰ the Minister of Finance refuses to approve Economical Mutual’s conversion.

The Regulations provide that OSFI may extend certain deadlines, but the likelihood of any future extension is uncertain.

If the process is terminated or fails, the resulting uncertainty as to the future of Economical and the dedication of substantialresources to demutualization could negatively impact the Company’s current business relationships including recruiting andretaining employees, attracting and retaining brokers, clients, and key suppliers. This could adversely affect the current andfuture operations, financial position, and prospects of Economical.

The Regulations Could be Amended, Repealed, or Replaced

The federal government has the discretion to amend, repeal, or replace the Regulations, and the Regulations are the onlyprocess for Economical Mutual to demutualize. If the current demutualization process is terminated, there can be noassurance that the existing framework, or any other regime, will continue to exist in the future.

There is No Guarantee that an IPO will be Successful

Even if all remaining steps in the demutualization process are satisfied, the success and timing of our IPO are highlydependent on, among other factors, Economical’s financial position, historical performance, results of operations, market

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OVERVIEW

views of the Company’s future prospects, investor demand, regulatory and exchange approvals, and general economic andstock market conditions at the time of the Offering. Given the factors above, among others, there is no guarantee as to thesize and timing of the Offering. As well, the IPO price of Common Shares will be determined by Economical and theUnderwriters only after the marketing campaign for the IPO. The IPO price of Common Shares will impact the value of thedemutualization benefits received by eligible recipients (see “Allocation Methodology Framework” on page 18) and the sizeof the Offering may determine the form of demutualization benefits received by eligible recipients regardless of their electionfor cash or Common Shares (see “Allocation Waterfall” on page 22).

SUMMARY OF BY-LAW AMENDMENT

Overview

The process for demutualization contained in the Regulations entitles all eligible mutual and eligible non-mutual policyholdersto vote on the Conversion Approval Resolutions at the Third Special Meeting. Economical Mutual’s existing by-laws state thatonly a mutual policyholder (or their proxyholder) may vote at Economical Mutual’s annual and special meetings. Therefore,Economical Mutual must amend its by-laws to allow eligible non-mutual policyholders to vote at the Third Special Meeting (the“By-Law Amendment”). This requires not less than two-thirds of the eligible mutual policyholders voting in person or by proxyat this Special Meeting to approve the By-Law Amendment Resolution by way of a special resolution. This vote effectivelygives the eligible mutual policyholders, as a class, an opportunity to end the demutualization process now before proceedingto the third and final vote with eligible non-mutual policyholders.

Effect of the By-Law Amendment Resolution

The following is a summary of the key provisions of the By-Law Amendment. Eligible mutual policyholders should review thecomplete terms of the By-Law Amendment attached as APPENDIX “B” to this Circular. Briefly, the By-Law Amendmentprovides that:

‰ the Chair of the Third Special Meeting will be the Chair of the Board, the President of Economical Mutual, or the Vice-Chairof the Board (if any), and if none of these individuals are present within 15 minutes of the meeting starting, eligiblepolicyholders may appoint their own meeting Chair;

‰ in addition to the right of mutual policyholders to vote at Economical Mutual’s policyholder meetings, each eligiblepolicyholder (whether mutual or non-mutual) is entitled to one vote, and one vote only, at the Third Special Meeting on theConversion Approval Resolutions;

‰ eligible policyholders (whether mutual or non-mutual) may vote at the Third Special Meeting by appointing a proxyholder;and

‰ because an eligible policyholder may in fact be two or more persons jointly holding a policy, any one of those persons mayvote at the Third Special Meeting or appoint a proxyholder to vote on their behalf, but if they attend the Third SpecialMeeting together, then only the person whose name first appears on the policy or the appointed proxyholder may vote.Only one vote in total will be allowed for each eligible policyholder.

The By-Law Amendment Resolution

At the Special Meeting, eligible mutual policyholders will be asked to approve the following special resolution:

“RESOLVED THAT:

1. By-law No. A.6 of Economical Mutual Insurance Company, a copy of which is attached as Appendix “B” to thePolicyholder Information Circular dated January 31, 2019, be and is hereby approved, adopted, ratified, and confirmed;and

2. Any one director or officer of Economical Mutual Insurance Company be and is hereby authorized and directed to do allsuch acts and things, and to execute and deliver all such documents, instruments, and assurances as in the opinion ofsuch director or officer may be necessary or desirable to give effect to the foregoing resolutions.”

The Board and your policyholder committee unanimously recommend that eligible mutual policyholders vote FOR theBy-Law Amendment Resolution.


DEMUTUALIZATION PROCESSREGULATORY FRAMEWORK

Since its founding in 1871, Economical Mutual has been a mutual insurance company. While this structure has served theCompany well up to now, demutualization provides an opportunity to reach our full potential. The advantages ofdemutualization are discussed above under “ADVANTAGES OF DEMUTUALIZATION” on page 5.

The process to demutualize is established in the Act and Regulations.

The demutualization process is complex. It was designed to ensure that both eligible mutual and eligible non-mutualpolicyholders, are treated fairly and equitably in a demutualization process that is orderly and transparent. The focus onstakeholder participation results in a process with many steps and dependencies outside of the Company’s control. Thisincluded the participation of both eligible mutual policyholders and eligible non-mutual policyholders in the approval process,and representation in the form of Policyholder Committees that were appointed by the Court. Each Policyholder Committeewas advised by court-appointed legal counsel, and had the ability to, and in fact did, retain other experts (such as financialand actuarial advisors) to support their negotiations. Throughout the negotiations, both of the Policyholder Committees wereprovided information by Economical on an equal basis. The Allocation they negotiated had to be reviewed by bothEconomical’s Appointed Actuary and the Independent Actuary.

There are four main phases to demutualization:

(1) Board Initiates Process: determination by the Board that demutualization was in thebest interests of Economical Mutual, and the passing of a resolution by the Boardinitiating demutualization (occurred November 3, 2015)

(2) First Vote to Proceed: first special meeting of eligible mutual policyholders to move tothe negotiation phase of demutualization (passed on December 14, 2015)

(3) Negotiate Allocation and Develop Conversion Plan: identification of eligiblepolicyholders and sending of notice of intent to negotiate, court process to appointcounsel and the Policyholder Committees, committee negotiations to determine theAllocation, and development of conversion plan (completed in June 2018)

(4) Approvals: submission of conversion plan to OSFI, this Special Meeting (eligiblemutual policyholders only), Third Special Meeting (eligible mutual and non-mutualpolicyholders), and application to the Minister of Finance for approval (current phase)

A detailed description ofthe demutualizationprocess is included inAPPENDIX “C”.

If all four phases are successfully completed and the Minister of Finance issues the Letters Patent of Conversion effectingEconomical Mutual’s demutualization, Economical Mutual will convert into a share company. Economical will then reorganizeinto a holding company structure, and the holding company will be able to offer Common Shares to investors in order to raisefunds to distribute the cash benefits of demutualization to eligible recipients. The Offering of Common Shares is expected toinvolve an IPO and the Company will also pursue a listing on a recognized stock exchange in Canada (subject to regulatoryand exchange approval), which if successful will give eligible recipients who receive Common Shares a public market throughwhich to sell those shares in the future. The Offering may also include a concurrent private placement of Common Shares (see“Plan for the Offering” on page 26 for more details). Given the variables outside of our control, Economical cannot currentlystate when the demutualization process will end, and when the Offering and distribution will occur, if at all.

The demutualization process includes the regular involvement of OSFI, our primary regulator. Economical Mutual receivedOSFI’s authorization to send this Circular and the supporting materials, including the conversion plan, to all eligible mutualpolicyholders and to hold the Special Meeting. If the By-Law Amendment Resolution is passed at the Special Meeting,Economical Mutual must seek OSFI’s authorization to hold the Third Special Meeting and send another information circularwith supporting materials to eligible policyholders, which will include eligible non-mutual policyholders.

The demutualization process can be terminated by the Board at any time prior to the Letters Patent of Conversion beingissued. The process will also end if the By-Law Amendment Resolution or Conversion Approval Resolutions are not passed byeligible policyholders, Economical Mutual does not meet certain deadlines that are set out in the Regulations, or regulatoryand Ministerial approval is not received.

ROLES OF THE ACTUARIES

The Regulations require both a company’s appointed actuary and an independent actuary to provide separate opinionsregarding (i) the fairness and equity of the demutualization benefits and the method of allocation to eligible policyholders, and(ii) the financial strength and vitality of Economical and the security of its policyholders.

An independent actuary’s opinion is typically required by the Act in significant transactions involving insurance companies,because a company’s appointed actuary is usually an executive of the company and may have conflicts that routinely impactthe work they are required to do. The role of an independent actuary is then to provide an opinion that the board of directorsof that company, its policyholders, and OSFI can rely on.

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DEMUTUALIZATION PROCESS

Similarly, the Regulations require an independent actuary to review and opine on the same questions as the Company’sAppointed Actuary as a safeguard to ensure that the process has resulted in a fair and equitable outcome. In discharging hisduties, the Company’s Independent Actuary separately and independently reviewed and considered all relevant documentsand information as he considered necessary to provide his opinion.

As disclosed in her opinion, the Appointed Actuary is an eligible mutual policyholder. The Regulations do not prohibit theAppointed Actuary from being an eligible policyholder because of the professional standards that govern the AppointedActuary’s work and because the process requires an opinion from the Independent Actuary. As a result, the fairness of theAllocation has been tested by different sources, one of which was completely independent from the Company.

As a further safeguard, above and beyond what the Regulations contemplated, Economical engaged another impartial actuaryto conduct a peer review of the Appointed Actuary’s fairness opinion to confirm that, in his view, it is free from bias and thatthe assumptions underlying her opinion are reasonable. This was to further ensure that the demutualization process remainedorderly and transparent and with no appearance of bias.

The peer review actuary is Jim Christie of RSM Canada, a Fellow of the CanadianInstitute of Actuaries and a Fellow of the Casualty Actuarial Society. Mr. Christiereviewed the Appointed Actuary’s opinion and supporting work on fairness of theallocation of demutualization benefits.

For more details regarding theactuaries’ analysis and opinions,see “SUMMARIES OF ACTUARIALOPINIONS” on page 30.

SUMMARY OF THE NEGOTIATIONS

As required by the Regulations, the two Policyholder Committees representing the eligible mutual policyholders and theeligible non-mutual policyholders have negotiated to determine the method of allocating the value of Economical Mutual, andto determine whether other persons or classes of persons other than eligible policyholders should be entitled to receivedemutualization benefits.

The Policyholder Committees together with appointed legal counsel, and senior actuarial and financial experts, undertookintensive negotiations in order to reach an agreement on the Allocation. In addition to their own advisors, the PolicyholderCommittees were assisted impartially by the Honourable Dennis O’Connor, as process facilitator, andPricewaterhouseCoopers LLP (“PwC”) as allocation advisor. Mr. O’Connor is the former Associate Chief Justice of Ontario,and PwC’s Canadian deals practice has acted as financial advisor on numerous large transactions and complex restructuringsworldwide, including transactions subject to public scrutiny.

The following is a summary of the Policyholder Committees appointment and negotiation process.

Appointment of Eligible Mutual and Eligible Non-Mutual Policyholder Counsel

Under the Regulations, the Court was required to appoint counsel for the eligible mutual policyholders as a class and for theeligible non-mutual policyholders as a class, in respect of the policyholder negotiations described below. Six law firms appliedfollowing the process set out in the initial order. Under the Regulations, the Court assessed the ability of each firm to fairly andadequately represent the interests of the class of eligible policyholders in question.

On September 22, 2016, the Honourable Justice Hainey appointed McCarthy Tétrault LLP (“McCarthy Tétrault”) asrepresentative counsel to the eligible mutual policyholders of Economical Mutual and Thornton Grout Finnigan LLP (“TGF”) asrepresentative counsel to the eligible non-mutual policyholders of Economical Mutual. McCarthy Tétrault is distinguished forits national and international corporate transaction and restructuring, negotiation, litigation, and dispute resolution expertiseacross a wide range of industries. McCarthy Tétrault has played a critical role in demutualizations in Canada, acting as leadcounsel in the demutualizations and initial public offerings of three Canadian life insurance companies, and on significantmergers and acquisitions in the insurance industry. TGF is widely recognized for its leading national and internationalcommercial litigation and insolvency practice, and has deep experience representing stakeholders in negotiations anddisputes involving competing groups. They have been involved in some of Canada’s most difficult reorganizations.

The Policyholder Committees

Under the Regulations, the Court was required to appoint between three and nine eligible policyholders to be members ofeach policyholder committee, taking into account their ability to fairly and adequately represent the interests of theirpolicyholder class, their experience in negotiations, business and financial affairs, and any objections received. The Courtappointed nine eligible mutual policyholders to the Eligible Mutual Policyholder Committee and six eligible non-mutualpolicyholders to the Eligible Non-Mutual Policyholder Committee.

Counsel for the eligible mutual policyholders, McCarthy Tétrault, initially proposed that six committee members would satisfythe prescribed criteria, and fairly and adequately represent the interests of eligible mutual policyholders. Three additionalcommittee members were later proposed in response to a notice of objection and proposal to include eligible policyholderswho held both mutual and non-mutual policies. As stated in McCarthy Tétrault’s submissions to the Court, the proposed ninecommittee members would be able to fairly and adequately represent the interests of the entire class of eligible mutualpolicyholders.



Counsel for the eligible non-mutual policyholders, TGF, proposed six committee members after considering the committeeapproval requirements for the method of allocating the value of Economical Mutual pursuant to the Regulations, the need for acommittee that was representative of the broader eligible policyholder group, and the need for operational efficiency in acomplex and time consuming process.

The appointment process for each policyholder committee is explained in more detail below.

Appointment of the Eligible Mutual Policyholder Committee

Following McCarthy Tétrault’s appointment as counsel to the eligible mutual policyholders, it received a total of 51applications for appointment to the Eligible Mutual Policyholder Committee.

After excluding applicants with actual or perceived conflicts of interest, McCarthy Tétrault created a shortlist of 15 individualswith a view to obtaining a diverse Eligible Mutual Policyholder Committee of qualified applicants who would fairly andadequately represent all eligible mutual policyholders. Each of the 15 shortlisted individuals were interviewed by McCarthyTétrault by telephone. Six proposed committee members were selected, based on the requirement in the Regulations for theEligible Mutual Policyholder Committee to have between three and nine members, and McCarthy Tétrault’s view that theseindividuals had the requisite experience prescribed by the Regulations.

The six-member proposed committee consisted of a representative group of eligible mutual policyholders from differentbackgrounds and cities. Further, the proposed committee included individuals who have held policies with Economical Mutualfor various lengths of time. At the time, McCarthy Tétrault was not aware of any objections to the list of proposed committeemembers. On November 15, 2016, McCarthy Tétrault served and filed a motion record for a motion to appoint the sixproposed members of the Eligible Mutual Policyholder Committee.

On November 24, 2016, McCarthy Tétrault received a notice of objection (“Notice of Objection”) with respect to the motion toappoint the six proposed members of the Eligible Mutual Policyholder Committee. The Notice of Objection was on the basisthat McCarthy Tétrault had excluded applicants for the Eligible Mutual Policyholder Committee who also held qualifyingnon-mutual policies. McCarthy Tétrault had excluded such dual eligible policyholders as, in their view, it would create at leasta perceived and likely also an actual conflict of interest for such dual eligible policyholders to serve on the Eligible MutualPolicyholder Committee. A meeting between McCarthy Tétrault and counsel to the objectors who filed the Notice of Objectiontook place on December 20, 2016, where it was proposed that the Eligible Mutual Policyholder Committee be expanded toinclude dual eligible mutual policyholders who were prepared to surrender any interests in demutualization benefits aseligible non-mutual policyholders.

McCarthy Tétrault considered the objectors’ concerns and the proposal presented. McCarthy Tétrault determined that it wasin the best interest of the class of eligible mutual policyholders that the Eligible Mutual Policyholder Committee be expandedto nine members and include eligible policyholders who held mutual and non-mutual policies who were prepared to surrendertheir demutualization benefits as eligible non-mutual policyholders. In McCarthy Tétrault’s view, there would be no actual orperceived conflict of interest if such dual eligible policyholders agreed to surrender their benefits as eligible non-mutualpolicyholders as a condition of appointment to the Eligible Mutual Policyholder Committee. McCarthy Tétrault then consideredand interviewed additional candidates for appointment to the Eligible Mutual Policyholder Committee including certain of theobjectors. On January 12, 2017, McCarthy Tétrault served and filed a motion to appoint an additional three proposed members(one of whom was an objector) of the Eligible Mutual Policyholder Committee to bring the committee size from the original sixmembers to nine.

On January 19, 2017, McCarthy Tétrault was advised by counsel to the objectors noted above that one of the candidates putforth for appointment to the Eligible Mutual Policyholder Committee was no longer able to serve on the committee. As a result,McCarthy Tétrault considered and interviewed alternative candidates and on February 13, 2017, served and filed a motion toreplace the proposed member who was no longer able to serve with an alternative proposed member of the Eligible MutualPolicyholder Committee.

On February 22, 2017, the Honourable Justice Hainey issued an order, among other things, formally appointing RickCharnuski, Patrick Collins, Gordon Dowsley, Craig Glynn, Brendon Hunt, Ralph Hunter, Rose Mailloux, William McCrea, andWilliam Wayne McKinnon as the nine members of the Eligible Mutual Policyholder Committee.

Appointment of the Eligible Non-Mutual Policyholder Committee

Following its appointment as counsel to the eligible non-mutual policyholders, TGF received a total of 40 applications forappointment to the Eligible Non-Mutual Policyholder Committee. This total does not include two applications which werewithdrawn after they were submitted. Fourteen applications erroneously made for the Eligible Mutual Policyholder Committeewere also offered the opportunity to be resubmitted for the Eligible Non-Mutual Policyholder Committee. However, only five ofthese applicants reapplied to the Eligible Non-Mutual Policyholder Committee.

TGF reviewed all applications received to assess the merits and suitability of each applicant. TGF invited each applicant toparticipate in an interview. One of the applicants did not respond to the invitation and one other was unavailable to beinterviewed. Each of the remaining applicants were interviewed by TGF in person or by telephone to obtain furtherinformation about their candidacy including experience in negotiations, business and financial matters, availability, views ondemutualization, and conflicts of interest. There were many more qualified applicants than positions available. Based on itsreview of the applications and interviews of the applicants, TGF proposed that the Eligible Non-Mutual Policyholder

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Committee be comprised of six members. This proposal was informed by the requirement that at least two-thirds of themembers of the committee approve the method of allocating the value of Economical Mutual pursuant to the Regulations, theneed to have a committee that was representative of the broader eligible policyholder group, and the need for operationalefficiency in a process that would be complex and time consuming.

On November 15, 2016, TGF served and filed a motion record to appoint six of the applicants as members of the EligibleNon-Mutual Policyholder Committee. An eligible mutual policyholder objected to the appointment of one of the applicants asa member of the Eligible Non-Mutual Policyholder Committee. This objection was dismissed by the Court.

On February 22, 2017, the Honourable Justice Hainey issued an order appointing Adriana Davies, Paul Duncan, GeorgeFowlie, Guy Legault, William Paul McCrossan, and Wilberdien (Willy) Robinson as the six members of the Eligible Non-MutualPolicyholder Committee.

The Negotiation Process

Confidentiality Undertakings

On February 22, 2017, the Honourable Justice Hainey also issued an order for the protection and maintenance ofconfidentiality of documents and information in the negotiations between the two Policyholder Committees.

Following their appointment, members of each policyholder committee as well as counsel for the eligible policyholders signeda confidentiality undertaking. At later stages of the demutualization process, the confidentiality undertaking was signed by alladvisors subsequently engaged by the Policyholder Committees for assistance in the negotiations.

Appointed Actuary Conflict of Interest

Under the Regulations, the appointed actuary and independent actuary are each required to provide an opinion on whetherthe proposed method of allocation is fair and equitable to the eligible policyholders. In October 2016, Economical Mutualadvised McCarthy Tétrault and TGF that the appointed actuary of Economical Mutual (the “Appointed Actuary”), Ms. LindaGoss, together with her husband, jointly held a mutual policy of Economical Mutual, and as a result, would be eligible mutualpolicyholders in demutualization.

Ms. Goss stated that this interest did not affect her ability to assess the fairness and equity of the Allocation. Nevertheless,Economical, McCarthy Tétrault, and TGF agreed that Economical would engage Jim Christie of Collins Barrow TorontoActuarial Services Inc. (now RSM Canada) to act as a peer review actuary and further reinforce the demutualization processrequirements. Mr. Christie is independent from Economical Mutual and was engaged to review the Appointed Actuary’sfairness opinion to assess whether it is free from bias and that the assumptions are reasonable, individually and in theaggregate.

Preparations and Initial Negotiations

Following their appointment, the Policyholder Committees met separately with their respective counsel. The Eligible MutualPolicyholder Committee held its first meeting on March 9, 2017, and the Eligible Non-Mutual Policyholder Committee held itsfirst meeting on March 16, 2017.

The Policyholder Committees approved the appointment of William T. Weiland, Principal of Eckler Ltd., as the independentactuary for the demutualization as required by the Regulations (the “Independent Actuary”).

On March 28, 2017, each policyholder committee and their counsel met separately at the offices of Blake Cassels & GraydonLLP, counsel to Economical, with Economical, the Appointed Actuary, the Independent Actuary, PwC, and Mr. O’Connor.

Following this meeting, in consultation with counsel to the eligible policyholders, each policyholder committee independentlydecided to retain, (i) actuarial experts to assist it with understanding the actuarial aspects of the allocation of the benefitsbetween the eligible mutual and eligible non-mutual policyholders; and (ii) financial advisors to assist it with understanding thefinancial aspects of the allocation of the benefits between the eligible mutual and eligible non-mutual policyholders. Counselto each policyholder committee separately researched and interviewed actuarial and financial advisor candidates.

On McCarthy Tétrault’s recommendations on April 12, 2017, the Eligible Mutual Policyholder Committee approved theappointment of Eric Keen and Paul Della Penna as actuarial consultants to the Eligible Mutual Policyholder Committee and, onMay 10, 2017, the Eligible Mutual Policyholder Committee approved the appointment of Alexander Capital Group Inc. asfinancial advisors to the Eligible Mutual Policyholder Committee. On TGF’s recommendations on March 16, 2017, the EligibleNon-Mutual Policyholder Committee approved the appointment of Barb Addie of Baron Insurance Services Inc. as actuarialconsultant to the Eligible Non-Mutual Policyholder Committee. On June 15, 2017, the Eligible Non-Mutual PolicyholderCommittee approved the appointment of Morrison Park Advisors Inc. as financial advisors to the Eligible Non-MutualPolicyholder Committee.

Throughout May and June of 2017, each policyholder committee met separately and on a regular basis to discuss strategyand to hear presentations from (i) PwC regarding, among other things, precedent demutualization transactions; (ii) Economicalregarding considerations for developing an allocation methodology framework; and (iii) their own advisors. The PolicyholderCommittees made several requests for information from Economical and they and their advisors relied on the data providedby Economical in order to form opinions with respect to the actuarial and financial considerations central to a fair andequitable allocation methodology framework.



In addition, counsel to the eligible policyholders had meetings with Mr. O’Connor to discuss procedural matters.

On June 5, 2017, counsel for the eligible policyholders, together with their financial and actuarial advisors met to receive apresentation by the Appointed Actuary and the Independent Actuary on their assessments of the contributions to EconomicalMutual’s surplus by each group of eligible policyholders.

In July, August, and into September of 2017, among other things:

‰ the Policyholder Committees continued working with their respective advisors to formulate positions with respect to thenegotiations;

‰ various information requests were made to Economical by the advisors to the Policyholder Committees through PwC;

‰ McCarthy Tétrault and TGF met on a number of occasions, including to exchange initial positions on what factors should beconsidered to determine the method of allocating the value of Economical Mutual on behalf of their respective PolicyholderCommittees;

‰ Alexander Capital Group Inc. and Morrison Park Advisors Inc., as financial advisors, met to discuss factors that should beconsidered, including financial methodologies;

‰ PwC made presentations to each policyholder committee on certain international precedents;

‰ Economical made presentations to each policyholder committee about considerations for developing an allocationmethodology framework; and

‰ allocation proposals were advanced by both Policyholder Committees through eligible policyholder counsel.

Facilitation Process

In September 2017, following four negotiation meetings between eligible policyholder counsel, it was apparent that thePolicyholder Committees were far apart in their positions on the allocation of demutualization benefits and had reached animpasse. As a result, the Policyholder Committees agreed that Mr. O’Connor, supported by PwC, should assist in facilitatingthe negotiations and bridging the gap between them.

The first meeting between eligible policyholder counsel and advisors to the Policyholder Committees and Mr. O’Connor washeld at his office in Toronto on September 26, 2017. The parties agreed on a protocol for trying to reach an agreement on theallocation of demutualization benefits. In line with this protocol, the participants attended several meetings with Mr. O’Connorstarting in October 2017. In addition, the Policyholder Committees continued to regularly meet with eligible policyholdercounsel and their advisors for updates on the status of the facilitation sessions and to determine their strategy at upcomingsessions. Throughout this time, the Policyholder Committees exchanged various allocation proposals. Economical wasprovided updates on the status of negotiations but not the substantive negotiating positions of the Policyholder Committees.

By the end of October 2017, a significant gulf remained in the positions of the Policyholder Committees. The PolicyholderCommittees agreed that Mr. O’Connor could then take a more active role in the negotiations in order to bring the PolicyholderCommittees closer to an agreement. The Policyholder Committees scheduled a number of meetings with Mr. O’Connor andPwC in November 2017, with the goal of reaching an agreement by November 27, 2017, on the allocation of demutualizationbenefits between the two policyholder groups and to determine whether any of those benefits should be provided to anypersons or classes of persons other than the eligible policyholders of Economical Mutual pursuant to Section 12(4) of theRegulations (“other recipients”), including former or ineligible policyholders of Economical.

The Policyholder Committees engaged in rigorous analysis of each of the offers made over the course of the meetings inNovember 2017 with their legal, financial, and actuarial advisors. On November 21, 2017, financial advisors to the PolicyholderCommittees met with Mr. O’Connor and PwC to discuss the assumptions underlying their Policyholder Committees’ offers andto narrow the disagreements between the groups. The Policyholder Committees also held their own meetings with counseland other experts to discuss various aspects of the negotiations.

On November 27, 2017, the Policyholder Committees and their advisors attended a final facilitation session with Mr. O’Connorand PwC to which they brought nine months’ worth of rigorous analysis, advice, and thinking on a fair and equitable allocationof demutualization benefits. After an all-day session that went well into the evening, each of the Policyholder Committeesreached a unanimous agreement in principle on the group-level allocation of financial benefits from the planneddemutualization of Economical Mutual together with the high-level parameters for the Allocation within the eligiblepolicyholder groups. This agreement was subject to obtaining from the Appointed Actuary and the Independent Actuary theformulas required to allocate the variable allocations of the benefits within the various classes of eligible policyholders.Furthermore, the agreement in principle provided that the Policyholder Committees would work together to settle on the formof a charitable foundation agreed to be the other recipient of demutualization benefits under Section 12(4) of the Regulations.

While a major milestone had been reached, further work was required to understand and agree on the variable allocationmethodology, the structure of the Foundation, and the final wording of the allocation resolution that the PolicyholderCommittees would approve. As a result, various meetings were held throughout December 2017 and into January 2018involving eligible policyholder counsel to the Policyholder Committees, the Policyholder Committees’ actuarial experts,Economical, PwC, the Appointed Actuary, and the Independent Actuary to work out the variable allocation formulas requiredto finalize the method of allocation based on the agreement in principle. On February 8, 2018, Economical issued a pressrelease announcing that the Policyholder Committees had reached an agreement in principle on the allocation of financialbenefits. Although the 12 month deadline for submitting the conversion plan and required actuarial opinions was February 22,

16


2018, due to the complexity of the process OSFI extended it to June 30, 2018, to allow for more time to complete theconversion plan and opinions.

A Foundation sub-committee was formed by the Policyholder Committees to consider and oversee the formation of theFoundation, including its governance structure, objects and mission (the “Foundation Sub-Committee”). The members of theFoundation Sub-Committee are Adriana Davies, Brendon Hunt, Wilberdien (Willy) Robinson and William McCrea. MarkBlumberg of Blumberg Segal LLP, an expert in advising non-profits and registered charities, was retained to assist theFoundation Sub-Committee.

Throughout late January and into March 2018, the Foundation Sub-Committee, in consultations with the PolicyholderCommittees, worked with their respective legal counsel and Mr. Blumberg to finalize the structure of the Foundation alongwith its charitable mandate. The Foundation Sub-Committee also met on a number of occasions with Economical and PwC.Ultimately the parties agreed on terms for the formation of the Economical Insurance Heritage Foundation, which is describedin more detail under “CHARITABLE FOUNDATION” on page 29.

During this time, Mr. William Paul McCrossan, a member of the Eligible Non-Mutual Policyholder Committee, resigned withoutproviding reasons from the Eligible Non-Mutual Policyholder Committee on January 23, 2018. The five remaining members ofthe Eligible Non-Mutual Policyholder Committee continued to discharge their duties to represent the class of eligiblenon-mutual policyholders of Economical Mutual in the demutualization process.

Parallel with this process, throughout January, February and March 2018, counsel to Economical and the policyholders settledon the form of a joint allocation resolution to be formally approved by each policyholder committee. The form of jointallocation resolution was then provided to OSFI on April 25, 2018. Each of the Policyholder Committees unanimously andformally approved the joint allocation resolution on June 11, 2018.

On June 26, 2018, Economical submitted the completed conversion plan, which included the Policyholder Committees’negotiated Allocation, along with the required actuarial opinions, Valuation Report and opinions of the independent financialmarket and valuation expert to OSFI for review. From June to January 2019, Economical continued to engage with OSFI andprovide the materials and information as required by, and to support, their review. On January 31, 2019, OSFI authorizedEconomical Mutual to proceed with the Special Meeting by sending this Circular, including the conversion plan and othersupporting materials, to all eligible mutual policyholders. The conversion plan is included as APPENDIX “A”, and summariesof the required opinions are contained at APPENDICES “D” through “H”.

Upon Economical mailing the Circular and accompanying materials to eligible mutual policyholders, in accordance withSection 9(9) of the Regulations, the Policyholder Committees were automatically disbanded.

WHAT WILL HAPPEN UPON DEMUTUALIZATION?

On the Effective Date and at the effective time stated in the Letters Patent of Conversion, Economical Mutual will cease to bea mutual P&C company and will become a P&C company with common shares.

‰ Corporate Structure. The new share company will become a wholly-owned subsidiary of a new Economical holdingcompany, which for purposes of this Circular and the conversion plan we will refer to as Economical Holdings Corporation,or “Economical Holdings” or “Holdco”. This type of holding company structure is common for large financial institutions andis contemplated in the Regulations. Following demutualization, all of Economical Mutual’s assets will be held by EconomicalHoldings, either directly or indirectly. Economical Holdings has no present intention to issue insurance policies or to directlyinsure risks. For a summary of the legal documents that will create and govern Economical Holdings, see “SUMMARY OFHOLDING COMPANY, AND ITS INCORPORATING INSTRUMENT AND BY-LAWS” on page 31.

‰ Insurance Policies. All persons who held insurance policies with Economical Mutual immediately prior to demutualizationwill continue to hold their policies immediately afterwards. Insurance coverage and policy terms will not be affected bydemutualization, except that Economical Mutual’s outstanding mutual policies will become non-mutual insurance policies ofEIC. When those replacement non-mutual policies expire at the end of the original mutual policy’s three-year term, weexpect only one-year renewal terms will be available, subject to normal underwriting practices. Non-mutual insurancepolicies will be unaffected.

‰ Demutualization Benefits. The distribution of demutualization benefits will be in the form of Common Shares or cash. Thecash is expected to come from proceeds raised in the Offering. At the time of, or shortly after the Offering, Economicalintends for Economical Holdings to become a publicly-traded company with its Common Shares listed on a recognizedstock exchange in Canada (which requires stock exchange approval). Shareholders of Economical Holdings will be entitled,among other things, to vote at meetings of Economical Holdings’ shareholders and to receive dividends on their shares asdeclared by the board of directors of Economical Holdings.

The timing, price of Common Shares and size of the Offering depend on the successful completion of the remaining steps inthe demutualization process (including eligible policyholder votes), and also, among other factors, on Economical’s financialposition, historical performance, results of operations, market views of the Company’s future prospects, investor demand,regulatory and exchange approvals, and general economic and stock market conditions at the time of the Offering.


DESCRIPTION OF CONVERSION PLANELIGIBLE RECIPIENTS

Early in the process, Economical undertook a rigorous analysis of its policyholder and policy records to identify the eligiblepolicyholders in accordance with the Regulations, the Board’s initiating resolution, and guidance from OSFI in respect ofeligibility requirements. In some cases, a person was identified as both an eligible mutual and eligible non-mutualpolicyholder, and in that circumstance, that person is both an eligible mutual policyholder and an eligible non-mutualpolicyholder. An eligible policyholder may also have been identified as two or more persons jointly holding a policy orpolicies, and each unique combination of eligible policyholders identified was treated as a distinct eligible policyholder (seeSection 4.3 of the conversion plan on page A-7 for more information and examples).

Economical sent a letter to eligible policyholders that included the official notice for demutualization required under theRegulations, and described the demutualization process and stated whether the person was an eligible mutual policyholder oran eligible non-mutual policyholder.

The database of eligible policyholder information is called the “Masterfile” and is more fully described in Schedule 3 to theconversion plan, “SUMMARY DESCRIPTION OF DEVELOPMENT OF MASTERFILE”, on page A-17.

The Regulations also provide that other recipients may receive demutualization benefits if approved by the PolicyholderCommittees. The Policyholder Committees approved the Foundation as an other recipient to receive demutualizationbenefits. As a clarifying matter, the Policyholder Committees also explicitly confirmed and recognized that the Allocationwould include certain persons identified as eligible policyholders in the Masterfile (those referenced in Section 3(3) ofSchedule 3 to the conversion plan, “SUMMARY DESCRIPTION OF DEVELOPMENT OF MASTERFILE”, on page A-18). As aresult, the Masterfile provides Economical with a definitive list of eligible recipients and will be used to facilitate an orderlydemutualization process. As used in this Circular, the term “eligible recipients” means eligible policyholders and otherrecipients, including the Foundation.

THE METHOD OF ALLOCATION

The negotiation determined the method of allocating demutualization benefits not only between the eligible mutual andeligible non-mutual policyholder classes and the Foundation (the “group-level allocation”), but also the formula to determinean individual eligible recipient’s allocation (the “individual-level allocation”).

The Appointed Actuary and Independent Actuary have each concluded that the demutualization benefits and the method ofallocating the value of Economical Mutual are fair and equitable to eligible policyholders. See “SUMMARIES OF ACTUARIALOPINIONS” on page 30 for more details.

Policyholder Committee Rationale

The Policyholder Committees provided a rationale for the negotiated Allocation, which can be found in Section 5.3 of theconversion plan on page A-9. The Allocation is intended to:

a) be fair and equitable to eligible policyholders, having regard to the different classes and contributions of eligiblepolicyholders (including the unique rights of eligible mutual policyholders and the requirements of the Regulations);

b) take into account historical Canadian and international demutualization precedents and corporate precedents (whereapplicable and relevant);

c) be based on objective, determinable criteria, which reflect Economical’s data limitations;

d) be simple, rational, and understandable;

e) be negotiated with the best long-term interests of Economical in mind, including its strategic goal of demutualization;and

f) recognize the contribution to the success of Economical of policyholders past and present.

Allocation Methodology Framework

The method of allocation is based on a framework that is rooted in how Economical’s value was built up over time and fromvarious sources, including the financial contributions of eligible policyholders. In addition, the framework recognizes that theunique governance rights of mutual policyholders will be lost or diminished on demutualization, and that there is an excesscomponent of value that cannot be attributed to eligible policyholders but is still required to be distributed throughdemutualization. The different aspects of the allocation methodology framework are explained in more detail below.

Economical’s value or “surplus” reflects the profits of the Company accumulated throughout its history, which is acombination of premiums paid by policyholders and investment income, reduced by claims paid to policyholders, expenses ofoperating the business, and taxes. Because eligible policyholders only represent a portion of all of the policyholders, past andpresent, who have financially contributed to our surplus, only a portion of the surplus can be attributed to contributions ofeligible policyholders. The remaining surplus was contributed from other sources and by other policyholders that are noteligible in this process, such as former policyholders, policyholders of Economical Mutual’s subsidiary insurance companies,or newer policyholders, and is therefore not attributable to the financial contributions of eligible policyholders.

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DESCRIPTION OF CONVERSION PLAN

In the Allocation, the portion attributable to the financial contributions of eligible policyholders is called the “contribution tosurplus” or “CTS”. Contribution to surplus is an actuarial concept for P&C insurance and actuaries can calculate its value usinggenerally accepted actuarial practices and principles. The Policyholder Committees relied on the Appointed Actuary’scalculation of CTS, which was validated by the Independent Actuary and reviewed by the Policyholder Committees’ ownconsulting actuaries. It provided that, as of December 31, 2016, for the purposes of the CTS calculation, approximately$939 million of the Company’s surplus was attributable to the contributions of eligible policyholders, of which approximately$2 million was attributable to the mutual policies of 878 eligible mutual policyholders and $937 million was attributable to thenon-mutual policies of approximately 630,000 eligible non-mutual policyholders. If an eligible mutual policyholder also held aqualifying non-mutual policy, the CTS of both their qualifying mutual and non-mutual policies were included in the calculations.A mutual or non-mutual policy that was issued by Economical Mutual, and held by an eligible policyholder and in force onNovember 3, 2015, as recorded in the Masterfile, is referred to as a “qualifying policy”. Due to data limitations, inceptiondates for qualifying non-mutual policies went back only as early as 1993, which is the oldest year that sufficiently credible datawas available.

The framework also recognizes that mutual policyholders have unique and inherent governance rights and benefits inEconomical Mutual as a mutual company that are attributable to mutual policyholders only, and those rights and benefits willbe lost or diminished as a result of demutualization. For example, mutual policyholders may attend Economical Mutual’sannual general meetings and only they may vote on the election of directors and other matters. The framework recognizesthat in addition to the financial contributions of mutual policyholders (i.e., CTS), an additional portion of value ought to beattributed to their “inherent rights”.

As a result, the combination of the CTS of all eligible policyholders and inherent rights of only mutual policyholders can besaid to be “attributable” to eligible policyholders, whereas the remaining portion of Economical’s value cannot be attributableto eligible policyholders. For purposes of the Allocation, we refer to that non-attributable portion as “excess”.

Non-Attributable

Attributable Attributable

Contributions from all other sources

Contributions from all eligible policyholders&Inherent rights of eligible mutual policyholders

Inherent rights ofeligible mutual

policyholders Contribution to surplus (CTS) of eligible mutual policyholders

Contribution to surplus (CTS) of eligible non-mutual policyholders

To

tal v

alu

e o

f E

con

om

ical

This frameworkwas used to helpthe PolicyholderCommitteesdistinguishbetween differentsources ofCompany value.

Allocation Methodology Framework*

* The relative sizes of the bars are illustrative only.

Even though the excess portion cannot be attributed to eligible policyholders, the Regulations require the PolicyholderCommittees to include this portion in the Allocation, because the Regulations require the full value of Economical Mutual to beallocated to eligible recipients. This requirement in the Regulations was addressed by rationally connecting the excess portionto the eligible policyholders’ rights in the demutualization transaction. This includes their rights to vote at each of the specialmeetings (“transactional consent rights”) and to otherwise participate in demutualization, the mutual policyholders’ long-standing commitment to Economical (“historical commitment”), as well as to the rights of any other recipient (as determinedby the Policyholder Committees) to participate in demutualization.

Allocation Overview

The Allocation provides for 20% of demutualization benefits to be allocated first to eligible mutual policyholders (of whichthere are 878), then the equivalent of $100 million of demutualization benefits to the Foundation and the remainder to eligiblenon-mutual policyholders (of which there are approximately 630,000). The Valuation Report (as described on page 24) setsout an estimate of the IPO Valuation Range of approximately $1.3 billion to $1.9 billion as of May 31, 2018. We applied the IPOValuation Range to estimate that this remainder to eligible non-mutual policyholders will equal between 72% to 75% of thedemutualization benefits. This is an estimate only based on current information and as if the IPO occurred in May 2018. Theactual percentage will not be known until the Offering.



The 20% allocation to eligible mutual policyholders primarily reflects their inherent rights, though it also includes anapproximately $2 million allocation to eligible mutual policyholders for their qualifying mutual policies (for their CTS) and aportion of the excess.

The allocation to the Foundation is based on a recognition that the excess comes from the contributions of policyholders thatare not participating in demutualization, such as former and ineligible policyholders. While it depends on the value ofEconomical Mutual at the time of the Offering, it is expected that the Foundation will receive a portion of the excess and muchof the excess will still be allocated among the eligible policyholders for their transactional consent rights. Nevertheless, theallocation to the Foundation is significant (we estimate 5%-8% applying the IPO Valuation Range) and will have a meaningfuland positive long-lasting impact on Canadian communities. It is intended to serve as an enduring legacy for Economical’spolicyholders past and present who have contributed to the Company’s past success over many years, respects its history asa mutual insurer, and recognizes the contributions of those not directly participating in the process.

The remaining allocation to eligible non-mutual policyholders is the largest component of the Allocation. It primarily reflects theCTS of qualifying policies for the eligible non-mutual policyholders ($937 million), and includes a portion of the excess as well.

Allocation Overview*

Excess

Attributable

Inherent rights

Participationrights

Contribution to surplus

Transactionalconsent rights

Transactional consent rights

Contribution to surplus

Eligible MutualPolicyholders

(20% of overall)

Eligible Non-MutualPolicyholders

(80% of overallminus $100 million)

Foundation($100 million)

Historicalcommitment

Recognition ofcontributions of

ineligible, subsidiary,and former

policyholders

To

tal v

alu

e o

f E

con

om

ical


Allocation to Eligible Mutual Policyholders

The allocation to eligible mutual policyholders was determined based on the following, which was derived from the allocationmethodology framework:

‰ 6% of the total Allocation is allocated to reflect the transactional consent rights of eligible mutual policyholders. Individually,each eligible mutual policyholder will receive an equal (fixed) portion of this amount (with joint holders treated as one). ThePolicyholder Committees considered that eligible mutual policyholders have exclusive rights to vote at the first specialmeeting and at this Special Meeting, and all eligible policyholders (mutual and non-mutual) have the right to vote at the ThirdSpecial Meeting, and determined that eligible mutual policyholders and eligible non-mutual policyholders, as two groups,have equal voting rights in the process because each group has an effective veto in the process. Eligible mutualpolicyholders decide whether demutualization can proceed past the first special meeting and this Special Meeting and,given their overwhelming majority, the eligible non-mutual policyholders will determine the outcome of the Third SpecialMeeting. As a result, the allocation of transactional consent rights to the eligible mutual policyholder group is equal to theeligible non-mutual policyholder group.

‰ The allocation for CTS for the qualifying mutual policies of eligible mutual policyholders (approximately $2 million in total) isallocated to individual eligible mutual policyholders as a variable amount based on the policy characteristics of their ownmutual policies (i.e., premium, duration, etc.).

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‰ The allocation for “historical commitment” of eligible mutual policyholders (approximately $2 million in total), whichrecognizes their long-standing commitment to the Company, is allocated to each eligible mutual policyholder (with jointholders treated as one), and is variable based on how long each has held a qualifying mutual policy with Economical Mutual,with long-time mutual policyholders receiving more than newer mutual policyholders.

‰ The allocation for inherent rights of eligible mutual policyholders (the remaining balance of the total 20% allocation) isallocated to eligible mutual policyholders, with each receiving an equal (fixed) portion of this amount (with joint holderstreated as one).

Eligible Mutual Policyholder Allocation*

Fixed amount Fixed amount

Historical commitment

Amount forqualifying policies

(CTS)

Variableamounts

Inherent rightsTransactional consent rights


Allocation to Eligible Non-Mutual Policyholders

The allocation to eligible non-mutual policyholders was determined based on the following, which was also derived from theallocation methodology framework:

‰ 6% of the total Allocation is allocated to reflect the transactional consent rights of eligible non-mutual policyholders.Individually, each eligible non-mutual policyholder will receive an equal (fixed) portion of this amount (with joint holderstreated as one). This directly mirrors the 6% transactional consent rights of the eligible mutual policyholders.

‰ The allocation for CTS for qualifying non-mutual policies of eligible policyholders (approximately $937 million in total) isallocated to individual eligible non-mutual policyholders as a variable amount based on the policy characteristics of theirown non-mutual policies (i.e., premium, duration, etc.).

‰ The participation rights of eligible non-mutual policyholders (the remaining balance of the total Allocation) is allocated toeligible non-mutual policyholders, with each receiving an equal (fixed) portion of this amount (with joint holders treated asone). This recognizes that the Regulations required the participation of eligible non-mutual policyholders as a fundamentalaspect of demutualization.

Eligible Non-Mutual Policyholder Allocation*

Fixed amount

Transactionalconsent rights

Participation rights

Fixed amount

Variable amount

Amount for qualifying policies(CTS)


Variable Components of Individual-Level Allocation

As described above, individual policyholders will receive both a fixed component (which will be allocated equally among alleligible policyholders of a class, with joint holders treated as one) and a variable component (which will vary amongpolicyholders). The variable component consists of the allocation for CTS to all eligible policyholders and the allocation forhistorical commitment to the eligible mutual policyholders.



The Allocation recognizes that each type of policy carries its own risks, and has its own expenses and profit levels, whichresults in different contributions to the Company’s surplus. As a result, CTS was calculated by grouping policies based onpolicy type. This is consistent with the principle of grouping policies to calculate risk in pricing insurance policies and followsthe way in which Economical manages its business. Within each policy type group, the CTS is then subdivided individuallyusing the individual policy’s average annual premium and policy duration (with the qualifications, adjustments, and detailsdescribed in the conversion plan attached to this Circular in APPENDIX “A” on page A-1). The CTS allocation recognizes thatprofits varied significantly by policy type, that premiums varied substantially among eligible policyholders, and that eligiblepolicyholders have been customers of Economical Mutual for various lengths of time.

The allocation to reflect the historical commitment of eligible mutual policyholders will vary based on how long each eligiblemutual policyholder has held a qualifying mutual policy.

Allocation Waterfall

Demutualization benefits will be allocated in the following priority: eligible mutual policyholders will first receive an allocationof 6% divided equally, followed by their CTS allocation, historical commitment allocation, and then another equal allocation oftheir remaining 20%. Next, the Foundation will be allocated $100,000,000. Finally, eligible non-mutual policyholders willreceive an allocation of 6% divided equally, followed by their CTS allocation, and then another equal allocation of theremaining amount. These steps are summarized in the “Summary of Method of Allocation” chart below, and described inmore detail in Section 5.2 of the conversion plan on page A-8.

This priority “waterfall” is part of the negotiated Allocation and means that the entire allocation at each step is made beforemoving onto the next allocation step, in this order. If there are insufficient demutualization benefits to complete all of theseallocation steps, then the last allocation step for which there are any demutualization benefits remaining will be reduced andthe individual allocations in respect of that step proportionately adjusted, and the allocation for the remaining steps will bereduced to zero.

Summary of Method of Allocation

Eligible Mutual Policyholders Foundation Eligible Non-Mutual Policyholders

OverallAllocation:

20% of total value $100,000,000 Remaining total value

Ind

ivid

ual

Allo

cati

on

Fixed –

Fixed as equalallocation foreach policyholderof the class


6% of total value allocated equallybetween all eligible mutualpolicyholders


6% of total value allocated equallybetween all eligible non-mutualpolicyholders

Variable –

Allocation variesbased onindividualcircumstances

Amount for qualifying policies (CTS)

Variable amount for each eligible mutualpolicyholder, depending on theiraverage premium and the duration oftheir qualifying mutual policies,representing approximately $2,000,000of the total value

Amount for qualifying policies (CTS)

Variable amount for each eligiblenon-mutual policyholder, depending ontheir type of qualifying non-mutualpolicies, average premium and theduration of their qualifying non-mutualpolicies, representing approximately$937,000,000 of the total valueHistorical commitment

Variable amount for each eligible mutualpolicyholder, depending only on thelength of their qualifying mutual policies,representing approximately another$2,000,000 of the total value

Fixed –

Fixed as equalallocation foreach policyholderof the class

Inherent rights

The portion of 20% of total value thatremains after the allocated amountsabove have been calculated, allocatedequally between all eligible mutualpolicyholders

Participation rights

The percentage of total value remainingafter all other allocated amounts havebeen calculated, allocated equallybetween all eligible non-mutualpolicyholders

BENEFITS FROM DEMUTUALIZATION

If all remaining steps in the demutualization process are successful, the value of Economical Mutual will be distributed toeligible recipients. This will be done by the distribution of Common Shares, or cash in lieu thereof raised in the Offering, and isnot a distribution of Economical’s assets or surplus.

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Eligible recipients will receive Common Shares, cash or a combination of both. The calculations to determine which and howmuch of these benefits are distributed to different eligible recipients are expected to occur on or shortly before the EffectiveDate, after the IPO price of the Common Shares has been determined. As a result, the actual monetary value of thedemutualization benefits that eligible policyholders will receive can only be determined at that time. This uncertainty occursbecause the allocation formula used to finally determine demutualization benefits requires the actual IPO price, which will notbe known until shortly prior to the completion of the IPO. For now, we can only estimate the ranges of average values ofdemutualization benefits using the estimated IPO Valuation Range (see “THE ESTIMATED VALUE OF YOURDEMUTUALIZATION BENEFITS” on page 24).

The form of benefits available for distribution will also depend on the amount of cash available for distribution asdemutualization benefits, and the cash available for distribution depends on the size of the Offering (see “Size and Price ofthe Offering” on page 27).

Common Shares or Cash

The Common Shares distributed as demutualization benefits will be the Common Shares of Economical Holdings, which willbe Economical’s new holding company. On the Effective Date, after Economical Mutual converts into a company with commonshares, EIC will issue EIC common shares to Economical Holdings. In exchange for this, Economical Holdings will issueCommon Shares to eligible recipients. Economical Holdings will also issue Common Shares to investors as part of theOffering, thereby generating cash for distribution to eligible recipients and to pay for the costs of the Offering. CommonShares issued as demutualization benefits will be issued on the Effective Date, and are subject to the Market StabilizationRestrictions (see “Market Stabilization Restrictions” on page 27). Cash paid as demutualization benefits will be distributedfollowing the Offering.

For details regarding the specific rights, privileges, restrictions, and conditions attached to the Common Shares, see Section 3(Common Shares) of Schedule 5 to the conversion plan, “ECONOMICAL HOLDINGS CORPORATION BY-LAW NO. 2”, onpage A-24.

The independent financial market and valuation expert for our demutualization process, Origin Merchant Partners, opined thatthe cash distributions (as described in the opinion) are an appropriate substitute for the Common Shares (as described in theopinion) as of May 31, 2018 (the “Cash in Lieu of Shares Opinion”), subject to the methods, qualifications, limitations,assumptions, and conditions set forth in the opinion. A copy of the Cash in Lieu of Shares Opinion is attached asAPPENDIX “G” to this Circular on page G-1. Eligible policyholders should read the complete Cash in Lieu of Shares Opinion tounderstand it more fully.

Electing Your Preference for Form of Demutualization Benefits

Later in the demutualization process (after the Third Special Meeting, if the Conversion Approval Resolutions are passed),eligible recipients (other than the Foundation) will be sent an Election Form, which may be in different formats for differentgroups of eligible recipients. The Election Form will (i) allow certain eligible recipients to indicate their preferences to receivetheir demutualization benefits in the form of Common Shares or cash, and/or (ii) certify if they are a Foreign Recipient,Government, or Minor. This election does not guarantee that eligible recipients will receive their preferred form ofdemutualization benefits (see “Distribution Priority” on page 24).

Cash Recipients

Subject to adjustment if the IPO is not completed, the conversion plan provides that the following eligible recipients are toreceive all demutualization benefits as cash:

‰ The Foundation.

‰ Eligible recipients who, on the Election Deadline, have an address listed in the Masterfile that is outside of Canada who donot certify on their Election Form (or in some other manner acceptable to Economical) that they are a Canadian resident forthe purposes of the Income Tax Act (Canada) (“Foreign Recipients”).

‰ Eligible recipients who (to Economical’s knowledge) are Her Majesty in right of Canada or of a province or an agent (as thatterm is defined under section 406.1 of the Act) or agency of Her Majesty in either of those rights, or the government of aforeign country or any political subdivision thereof, or any agent or agency thereof (“Governments”). Under the Act,Governments are not entitled to be registered as a shareholder or to vote any shares they hold. To avoid contraveningthese rules, only cash benefits will be given to Governments and any Common Shares issued to Governments under theterms of the conversion plan will be cancelled.

‰ Eligible recipients who (to Economical’s knowledge) are less than the age of majority in the jurisdiction where they reside onthe Effective Date (“Minors”).

‰ Eligible recipients whose allocation is equivalent to fewer than 200 Common Shares (“Small Lot Shareholders”). Given thenumber of eligible recipients in our demutualization process, this is a practical step to reduce the administrative cost ofmaintaining what would otherwise be an exceptionally large shareholder register. It also means that Small Lot Shareholderswill not have to incur disproportionately high costs to sell their relatively small number of Common Shares.



Distribution Priority

Cash proceeds from the Offering will be distributed in the following order of priority (to the extent cash is available).

‰ First, to the Foundation, to satisfy the negotiated allocation of $100,000,000;

‰ Second, to Foreign Recipients, Governments and Minors;

‰ Third, to Small Lot Shareholders; and

‰ Fourth, to remaining eligible recipients who elected to receive cash.

If there is cash remaining following the above distributions, cash may be allocated to eligible recipients who elected apreference to receive Common Shares (if applicable). The amount of cash available will depend on, among other factors,Economical’s financial position, historical performance, results of operations, market views of the Company’s future prospects,investor demand, and general economic and stock market conditions at the time of the Offering. If Economical is unable toraise sufficient cash in the Offering to fund each step above, the eligible recipients who would otherwise receive cash in theremaining steps will instead receive Common Shares. For the first step where there are insufficient cash proceeds to fundpayment, the remaining cash proceeds that are available after funding the prior steps will be split on a pro rata basis amongthe eligible recipients in that step, as applicable. However, if the first step in which there are insufficient cash proceeds to fundcash payments is to Small Lot Shareholders, the cash proceeds that are available will first be paid to Small Lot Shareholderswith the smallest allocation, and if two or more Small Lot Shareholders have an identical allocation, then starting with theSmall Lot Shareholder with the earliest inception date for their qualifying policies to the latest inception date.

If the IPO cannot be completed for whatever reason and as a result Economical is unable to raise cash for payment of thedemutualization benefits, then eligible recipients (except for Foreign Recipients, Governments and Minors) will receiveCommon Shares only instead of cash, regardless of the form of benefits chosen by them. Foreign Recipients, Governmentsand Minors will still receive cash.

Fractional Shares and Nominal Cash Allocations

Economical will not issue fractions of Common Shares or cash payments of less than $20 to eligible recipients. Instead, theCompany will adjust their demutualization benefits as provided for in the conversion plan.

Giving Up Your Demutualization Benefits

Eligible recipients may elect to give up their demutualization benefits in any manner that Economical considers acceptable.This decision will be irrevocable after the Election Deadline, and the eligible recipient gives up any rights in thedemutualization benefits.

THE ESTIMATED VALUE OF YOUR DEMUTUALIZATION BENEFITS

The actual value of demutualization benefits that each eligible mutual policyholder (or jointly for those that hold their policy orpolicies jointly) may receive will not be known until the IPO. However, we have estimated the ranges of average values usingcertain assumptions and qualifications based on current information as if the IPO occurred on May 31, 2018. This is based inpart on the estimated IPO Valuation Range as of May 31, 2018, as contained in the Valuation Report.

Summary of Valuation Report

Economical’s financial advisors, BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc., were retained to prepare theValuation Report for the exclusive use of the Board in connection with the conversion plan. The Valuation Report containstheir estimate of the IPO Valuation Range and a description of how it was determined, including the methodology used andthe underlying assumptions made. The term “IPO Valuation Range” means a range of estimated equity market values forEconomical Holdings, based solely on estimated prices at which the Common Shares could have been expected to be offeredas of May 31, 2018, in an IPO of the Common Shares conducted in a manner consistent with the terms of the conversion plan,as if the date of the closing of the IPO was May 31, 2018. While the IPO Valuation Range has been estimated with respect toEconomical Holdings, the Valuation Report assumes that the IPO Valuation Range is the same as the range of estimatedequity market values for Economical Mutual.

The Valuation Report states that the IPO Valuation Range as of May 31, 2018, is approximately $1.3 billion to $1.9 billion and,assuming that 100 million Common Shares are outstanding at the time of the IPO, approximately $13 to $19 per Common Share.

A copy of the Valuation Report, which describes the information relied on and describes its methods, assumptions, limitations,and qualifications, is attached as Schedule 6 to the conversion plan, on page A-29. This summary is qualified in its entirety byreference to the full text of the Valuation Report. Eligible policyholders should read the complete Valuation Report in order tounderstand it more fully. The actual IPO price of the Common Shares at the time of demutualization may differ materiallyfrom the estimated IPO Valuation Range contained in the Valuation Report. The actual IPO price and subsequent tradingprices for the Common Shares will be determined by the public capital markets and will be influenced by Economical’sfinancial results and business performance, market views of Economical’s future prospects, general economic conditions,

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the prevailing conditions in the stock markets, other transactions (if any) that Economical undertakes prior to the IPO, theprices at which generally comparable public companies are trading, the level of demand for the Common Shares, andother factors. The estimates presented are solely for illustrative purposes to assist you in your vote, and are not indicative ofwhat you will receive. The estimates will not be updated. The Valuation Report does not constitute a recommendation as tohow any eligible mutual policyholder should vote on the By-Law Amendment Resolution, how they should exercise theirelection (if applicable), or whether to buy or sell Common Shares.

Summary of Valuation Opinion

The independent financial market and valuation expert, Origin Merchant Partners, has given an opinion to the Board that themethod and assumptions used by BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. to estimate the IPO ValuationRange for purposes of the Valuation Report are appropriate and that such estimated IPO Valuation Range reasonably reflectsprevailing market conditions as of May 31, 2018, subject to the methods, qualifications, limitations, assumptions, and conditionsset forth in the opinion (the “Valuation Opinion”). A copy of the Valuation Opinion is attached as APPENDIX “F” to this Circularon page F-1. Eligible policyholders should read the complete Valuation Opinion in order to understand it more fully.

Allocation Estimates

The actual value of demutualization benefits you may receive if demutualization is completed is not known at this time. Thevalue depends on the actual price of Common Shares that are sold in the IPO. Nevertheless, based on certain assumptionsand qualifications contained in the Valuation Report, we can estimate ranges of average values in order to illustrate to eligiblepolicyholders the possible magnitude of benefits that may be received. We have provided these estimates to assist you inyour vote on the By-Law Amendment Resolution, and not to indicate to you the value of demutualization benefits that youor any eligible policyholders will receive at demutualization.

Applying the IPO Valuation Range, and subject to the related methods, assumptions, qualifications, and limitations containedin the Valuation Report, as of May 31, 2018, we estimate that the average eligible mutual policyholder could receivedemutualization benefits with an approximate value of $300,000 to $430,000, estimated using the lowest to highest valueswithin the IPO Valuation Range, and that the average eligible non-mutual policyholder could receive demutualization benefitswith an approximate value of $1,500 to $2,300, estimated using the lowest to highest values within the IPO Valuation Range.These estimates do not take into account the income tax consequences that will be applied to the demutualization benefitsthat may be received by eligible policyholders, or the potential consequences for an eligible policyholder’s social benefits asa result of receiving demutualization benefits. For a summary of these consequences, see “TAX CONSEQUENCES FORELIGIBLE POLICYHOLDERS” on page 32 and “SOCIAL BENEFITS CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS” onpage 35.

RECEIVING YOUR DEMUTUALIZATION BENEFITS

Common Shares

On the Effective Date, Economical will issue and register Common Shares in the name of eligible recipients who are receivingCommon Shares, in the direct share registration system that will be maintained by Economical’s transfer agent.

Shortly after the Offering has been completed, which is anticipated to occur as soon as reasonably practicable afterdemutualization on the Effective Date (see “Sequencing of Demutualization and the Offering” on page 27), Economical willsend evidence of Common Share ownership in the form of a direct registration system statement (“DRS Statement”) toeligible recipients who are receiving shares. Economical does not plan to send physical share certificates to eligiblerecipients. The direct registration system is a convenient, cost-effective, industry-standard form of electronic shareregistration. DRS Statements provide evidence of share ownership and facilitate the convenient sale or transfer of shares.

After you receive the DRS Statement and following the expiry of the Market Stabilization Restrictions (see “MarketStabilization Restrictions” on page 27), you will be able to sell or transfer your shares, including through use of the ShareSelling Service that Economical will provide (see “Selling Your Shares After the IPO” on page 28).

Cash

Shortly after the Offering, eligible recipients receiving cash will receive a cheque, direct deposit, wire transfer, or other form ofpayment, net of any applicable withholding tax and other required deductions. Depending on the circumstances, the availableforms of payment option may vary for different eligible recipients.

Restrictions on Distribution of Demutualization Benefits

Prior to sending demutualization benefits to an eligible policyholder, if Economical becomes aware that any of the followingrestrictions apply, it will instead deposit such demutualization benefits with Economical’s depositary agent for demutualization(the “Depositary Agent”):

1. A court, regulatory authority, or agency with statutory authority has established that another person has an interest in orright to the eligible recipient’s demutualization benefits



2. The eligible recipient is subject to trust, fiduciary, or other similar duties or obligations or is a nominee with respect totheir demutualization benefits

3. A court, regulatory authority or agency with statutory authority has imposed terms and conditions on the distribution ofdemutualization benefits to the eligible recipient, and Economical has reasonable grounds, to believe that the eligiblerecipient will not, may not, or does not intend to comply with such duties, obligations, terms or conditions

In such a case, if the eligible recipient or other applicable person confirms, in a manner satisfactory to Economical, that therestriction has been removed or that the eligible recipient will comply with the restriction, the demutualization benefits thathave been held by the Depositary Agent will be transferred to the eligible recipient together with accrued dividends, if any(but without interest and net of any applicable brokerage fees).

Lost Recipients

Economical has built a process to facilitate eligible recipient address and contact information changes, and sent a letter toeligible recipients (excluding the Foundation) notifying them of their eligibility. However, there may be eligible recipientswhose addresses are incorrect in Economical’s records, or who have moved without notifying Economical. Eligible recipientsare responsible for providing updated address and contact information to Economical.

If Economical mailed a demutualization notice or document to an eligible recipient and the notice or document was returnedas undeliverable, and Economical was not subsequently provided an updated address, then the eligible recipient will betreated as a “Lost Recipient”.

On the Effective Date, the demutualization benefits to which Lost Recipients are entitled will be deposited with Economical’sDepositary Agent. The Depositary Agent will hold such demutualization benefits in trust for up to 35 months after the EffectiveDate (the “Lost Recipient Claim Deadline”). After the Lost Recipient Claim Deadline, (i) Lost Recipients will lose anyentitlement to demutualization benefits, (ii) Economical will cancel any Common Shares held for the benefit of Lost Recipients,and (iii) all cash held for the benefit of Lost Recipients will be transferred to Economical by the Depositary Agent, for theaccount of Economical.

Before the Lost Recipient Claim Deadline expires, Lost Recipients can contact Economical to confirm their current addressand claim their demutualization benefits. Once their claim is validated in a manner satisfactory to Economical, the DepositaryAgent will transfer the demutualization benefits to the former Lost Recipient. If the former Lost Recipient was to receiveCommon Shares, they will also receive all accrued dividends or other distributions made prior to that date in respect of suchCommon Shares since the date of demutualization up until the date of their claim, but without any interest and less anyaccrued taxes and other expenses. Former Lost Recipients that are to receive cash (including as a result of any accrueddividends) will be paid the cash amount, without any interest, by cheque, direct deposit, wire transfer or other form ofpayment, net of any applicable withholding taxes and other required deductions and applicable fees.

INITIAL PUBLIC OFFERING

Plan for the Offering

Before the Effective Date, Economical Mutual and Economical Holdings intend to enter into an underwriting agreement (the“Underwriting Agreement”) with Economical’s underwriters (the “Underwriters”). As part of the IPO, Common Shares will besold to IPO investors and will generate cash proceeds in order to fund the distribution of demutualization benefits as cash.Economical’s Board may also decide to sell additional Common Shares to one or more other investors in a concurrent privateplacement, which is a form of securities offering that is often used for selling shares to a single or small group of institutionalinvestors. The proceeds from this private placement will also fund distribution of demutualization benefits as cash. The“Offering” refers to both the IPO and any concurrent private placement.

In the Offering, Economical intends to sell at least enough Common Shares to distribute cash to eligible recipients fordemutualization and to pay for the expense of the Offering. Both the Appointed Actuary and Independent Actuary haveprovided their opinion that demutualization will not materially adversely impact the financial strength of Economical (see“SUMMARIES OF ACTUARIAL OPINIONS” on page 30).

Role of the Underwriters

The Underwriters will assist Economical with, among other things, the preparation and the execution of the IPO, including thesales and marketing campaign to solicit interest from potential investors. Upon completion of the sales and marketingcampaign, which will occur prior to the IPO and is expected to last several weeks, we expect the Underwriters will enter intothe Underwriting Agreement to agree to purchase the Common Shares from Economical at a fixed price, which will be the IPOprice, and then distribute the Common Shares to IPO investors at this price.

The Underwriters will charge a fee for their services, called an underwriting fee or commission, which will be charged on a pershare basis. Economical plans to issue additional Common Shares from treasury and sell them in the Offering to pay theunderwriting fee and other costs of the Offering. The underwriting fee will be disclosed in the prospectus that will be sent toIPO investors as part of the IPO.

The Underwriters’ marketing efforts will increase awareness of Common Shares with investors, especially among largeinstitutional investors such as pension plans and mutual funds, and with equity research analysts. This is designed to create

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demand for the IPO and foster an active trading market after the Offering, which will benefit eligible recipients who keep theirCommon Shares and who may want to sell them in the future (after expiry of the Market Stabilization Restrictions).

Size and Price of the Offering

Size of the Offering

Economical and the Underwriters will determine how many Common Shares will be sold in the Offering and the IPO price ofthe Common Shares based on Economical’s financial position, historical performance, results of operations, market views ofthe Company’s future prospects, outside investor demand, general economic and stock market conditions, and other factors.Economical will try to sell a sufficient number of Common Shares to fund the cash payments elected by eligible recipients, butit is possible the amount of cash that is raised in the Offering will not equal the cash needed to fund payments to eligiblerecipients who are required to receive cash or elected a preference for cash. If this occurs, some eligible recipients may notreceive Common Shares or cash in the proportion they elected their preference for (see “Distribution Priority” on page 24).

In addition, Economical expects to grant to the Underwriters an option to acquire additional Common Shares at the IPO priceto cover additional demand, known as over-allotments, and for market stabilization purposes. This type of option is a commonfeature of IPOs and may be exercised at the discretion of the Underwriters. Underwriters typically have until the date that is30 days after the closing of an offering to exercise their over-allotment option. The specific terms of the over-allotment optionfor the IPO remain subject to negotiation between Economical and the Underwriters. Proceeds from the sale of CommonShares under the over-allotment option will not form part of the proceeds of the Offering available to pay demutualizationbenefits.

Price of the IPO

The IPO price of the Common Shares will be determined by Economical and the Underwriters in the future. The IPO price, aswell as the market trading price, of the Common Shares will be affected by a number of factors, including but not limited to:

‰ the financial position, historical performance, results of operations and market views of the future business prospects ofEconomical, including Economical Mutual and its subsidiaries; and

‰ investor demand, prevailing industry and general economic conditions, and equity market values, including the prices atwhich shares of comparable public companies are trading.

Prospectus

The Common Shares sold in the IPO will be sold under a prospectus, a document required by securities law that givesdetailed information about a company whose securities are being sold to the public. The prospectus will be prepared after theThird Special Meeting for demutualization (if the Conversion Approval Resolutions are passed) and must be filed with andreviewed by applicable securities regulators. This review process is in addition to the approvals required at each stage of thedemutualization process (for more details on the demutualization approvals, see “REGULATORY FRAMEWORK” on page 12).

Sequencing of Demutualization and the Offering

The Offering can only be completed after Economical Mutual demutualizes, but is anticipated to occur shortly after thedemutualization. The success and timing of the Offering are subject to, among other factors, Economical’s financial position,historical performance, results of operations, market views of the Company’s future prospects, investor demand, regulatoryand exchange approvals, general economic and stock market conditions at the time of the Offering, the boards of directors ofEIC and Economical Holdings determining that proceeding with the Offering is in the best interests of both companies, andEIC, Economical Holdings, and the Underwriters entering into an Underwriting Agreement in respect of the IPO.

Listing on a Recognized Stock Exchange

If demutualization is successful, Economical intends to apply for a listing of Common Shares on a recognized stock exchangein Canada, and to maintain such listing, for at least two years following demutualization to help ensure that eligible recipientswho receive Common Shares will be able to sell those shares on a public market. Both steps are subject to regulatory andexchange approval.

Market Stabilization Restrictions

It is a common feature of Canadian IPOs to impose certain trading restrictions on shares held by private companyshareholders for a period of time after the company goes public. This is necessary to prevent the sale of substantial amountsof shares in an uncontrolled manner in the period following the offering, which could negatively impact outside investorconfidence and reduce the IPO price and the price that the shares might otherwise trade at after the offering. Accordingly, inorder to create an orderly public trading market for the Common Shares after the Offering of Economical Holdings, certaintrading restrictions (the “Market Stabilization Restrictions”) will apply to the Common Shares received by eligible recipientsfor a period of time after the Offering. The absence of Market Stabilization Restrictions could jeopardize the success of theOffering, and for this reason they have been included in the terms of the conversion plan (see Section 6.9 of the conversionplan on page A-12).



The Market Stabilization Restrictions will apply for 180 calendar days following the later of the Effective Date or the closing ofthe Offering. Economical Holdings may from time to time in its sole discretion permit certain types of transfers of CommonShares during the period in which the Market Stabilization Restrictions apply. Any permitted transfer of Common Shares mustalso be made in accordance with applicable securities laws, including that a transfer that occurs prior to the date that is fourmonths and one day after Economical Holdings becomes a reporting issuer must be made pursuant to an exemption from theprospectus requirement of applicable Canadian securities laws. Economical Holdings will become a reporting issuer inconnection with the IPO.

Summary of Liquidity Opinion

The independent financial market and valuation expert, Origin Merchant Partners, has given an opinion to the Board that themeasures to be taken by Economical as set out in the conversion plan, in the two years following the Effective Date, are likelyto assist the eligible recipients who receive Common Shares to sell such Common Shares on a public market and to addressany potential imbalances that may arise between the volume of Common Shares offered for sale by them and the volume ofCommon Shares sought for purchase by public market participants, subject to the methods, qualifications, limitations,assumptions, and conditions set forth in the opinion (the “Liquidity Opinion”). A copy of the Liquidity Opinion is attached asAPPENDIX “H” to this Circular. Eligible policyholders should read the complete Liquidity Opinion in order to understand itmore fully.

Selling Your Shares After the IPO

Following expiry of the Market Stabilization Restrictions, eligible policyholders who received Common Shares asdemutualization benefits will be able to sell them either through their own brokerage account or through a share sellingservice (the “Share Selling Service”) offered by Economical and managed by a third party (the “Share Sales Agent”).

The Share Selling Service provides eligible policyholders who receive Common Shares with a convenient and low-cost way tosell their Common Shares. We expect the Share Selling Service will be made available on the 180th calendar day after the dateof the IPO, and will remain available for two years after the IPO. Economical can terminate the Share Selling Service earlier,but will first provide at least 90 days’ written notice to all eligible policyholders entitled to use the service.

Under the Share Selling Service, it is anticipated that eligible policyholders will be able to sell their Common Shares byinstructing the Share Sales Agent to do so. The Share Sales Agent will arrange for the shares to be sold through a dealer on arecognized stock exchange in Canada on which the Common Shares are listed, for current market prices at the time of sale.Eligible policyholders who use the Share Selling Service will not be able to purchase additional shares through the service.

There will be a fee involved with the Share Selling Service, but eligible policyholders will not be required to create their ownbrokerage account. We therefore anticipate that the Share Selling Service will offer a more convenient way for many eligiblepolicyholders to sell Common Shares than if they sold them on their own.

More information about the Share Selling Service will be provided to eligible policyholders after the Third Special Meeting.The Share Selling Service is subject to securities regulator approval, and the ability to offer the service on a commerciallyreasonable basis. By establishing the Share Selling Service, neither Economical nor the Share Sales Agent is making arecommendation to sell or keep the Common Shares. Eligible policyholders are encouraged to consult their financial and/orlegal advisors to fully understand the tax and other possible implications of any decision to sell or keep any Common Sharesthey receive from demutualization.

ONGOING RIGHTS OF POLICYHOLDERS

After demutualization, there will be no changes in the contractual rights of policyholders under their existing insurancepolicies. Mutual policies will become non-mutual policies with the same insurance coverage and policy terms. While theremaining portion of the 3-year term of former mutual policies will continue, we intend that only one-year terms will beavailable on renewal, subject to normal underwriting practices. Non-mutual policies will be unaffected. Your insurancecoverage will not be affected by demutualization.

With the removal of the mutual policy structure, after demutualization no policyholders will have a right, as policyholders, toparticipate in the governance of the Company. The right to vote in governance matters will be limited to shareholders. Eligiblerecipients who receive and retain Common Shares will acquire shareholder voting rights in Economical Holdings. Eachshareholder of Economical Holdings will be entitled to one vote for each Common Share held. The board of directors ofEconomical Holdings will be elected by its shareholders.

Following demutualization, Economical will continue to be subject to the same federal regulations and oversight that monitorsthe financial strength of insurance companies to help ensure that companies can meet their insurance obligations topolicyholders.

The Appointed Actuary and Independent Actuary have each concluded that the financial strength and vitality of Economicaland the security of its policyholders with respect to the continuation of their policies will not be materially adversely affectedby demutualization. See “SUMMARIES OF ACTUARIAL OPINIONS” on page 30 for more details.

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CHARITABLE FOUNDATIONRecognizing the contributions that Economical’s subsidiaries and ineligible and former policyholders have made to the valueof Economical, the Policyholder Committees agreed to allocate $100,000,000 of proceeds from the demutualization towardsa new charitable foundation, to be known as the Economical Insurance Heritage Foundation.

The mission of the Foundation is:

To honour the Economical policyholders and employees past and present by workingto have the greatest impact on our communities.

The creation of this Foundation will create a positive enduring legacy of this demutualization and the people who participatedin it. It will also continue Economical’s proud history of community involvement, and significantly amplify Economical’s positiveimpact on communities and to causes across Canada. In addition to the altruistic benefits, this commitment to socialresponsibility will positively contribute to the reputation of Economical in the eyes of multiple key stakeholders including thecommunities we serve and our employees, brokers, policyholders, and future investors.

During the course of the policyholder committee negotiations, the creation of the Foundation and the social good that wouldensue proved to be common ground on which both Policyholder Committees agreed. They were able to use this shared beliefas a catalyst for the negotiations, and it allowed them to maintain momentum as other terms of the Allocation werenegotiated. The end result was a significant allocation towards this new Foundation, which will be further bolstered by theongoing support of Economical in terms of donations, resources, and expertise.

The Foundation has been incorporated under the Canada Not-for-profit Corporations Act as 10551635 Canada Foundation,and registered as a charity under the Income Tax Act (Canada). The Foundation’s initial members and directors are themembers of the Foundation Sub-Committee. Before funds are received as proceeds of demutualization, additional membersand directors of the Foundation will be added. This will consist of two nominees of Economical, and members of the public,including prominent Canadians who have a demonstrated skill and commitment to improving their communities. TheFoundation will be independent of, and arm’s length from, Economical, and Economical will not have the ability to control themanagement or distribution of the funds that have been allocated to the Foundation by way of demutualization benefits.

The allocation of demutualization benefits to the Foundation will work to achieve a meaningful impact across Canada. Thiscommitment will create a positive ongoing legacy of our demutualization and the policyholders who brought it to life andenabled it.


SUMMARIES OF ACTUARIAL OPINIONSEligible policyholders should read the actuarial opinions and summary reports and consider them in the context of all of theinformation in this Circular.

APPOINTED ACTUARY

In accordance with the Act, Linda Goss, a Fellow of the Canadian Institute of Actuaries and a Fellow of the Casualty ActuarialSociety, has served as the Company’s Appointed Actuary for more than 16 years. Part of the Appointed Actuary’s role is tovalue the Company’s policy liabilities at each financial year end and provide an opinion that the amount of policy liabilitiesmakes appropriate provision for all policy obligations. Furthermore, the Appointed Actuary analyzes the financial condition ofthe Company each year, to test the adequacy of the Company’s total surplus under plausible adverse economic and businessconditions.

For demutualization, the Regulations require the Appointed Actuary to give an opinion on specified aspects of thedemutualization that affect policyholders.

In the opinion of Linda Goss, in her capacity as the Appointed Actuary:

‰ the demutualization benefits to be provided to eligible policyholders and other recipients and the method of allocating thevalue of Economical Mutual as described in detail in the conversion plan are fair and equitable to the eligible policyholders;and

‰ the financial strength and vitality of Economical and the security of its policyholders with respect to the continuation of theirpolicies will not be materially adversely affected by the demutualization of Economical.

The Appointed Actuary’s opinion and summary report is attached as APPENDIX “D” to this Circular on page D-1.

As Linda Goss is an eligible mutual policyholder, as a further safeguard above and beyond what the Regulations contemplate,Economical engaged Jim Christie, a Fellow of the Canadian Institute of Actuaries and a Fellow of the Casualty ActuarialSociety, of RSM Canada as a peer review actuary to ensure there is no bias in her assessment of the Allocation and to helpensure that the demutualization process remained orderly, transparent and with no appearance of bias. Mr. Christie reviewedthe Appointed Actuary’s opinion and supporting work on fairness of the allocation of demutualization benefits and confirmedthat in his view it was free from bias and that the individual assumptions underlying her opinion are reasonable, individuallyand in the aggregate.

INDEPENDENT ACTUARY

The Act permits OSFI to request that an independent actuary be engaged to assess and report on the effects of a major,proposed transaction on policyholders’ interests and to opine on the fairness of the transaction to the policyholders.

For demutualization, the Regulations require an independent actuary to give an opinion on the same aspects ofdemutualization as the Appointed Actuary. William T. Weiland, a Fellow of the Canadian Institute of Actuaries and a Fellow ofthe Casualty Actuarial Society, of Eckler Ltd. is the Independent Actuary.

In the opinion of William T. Weiland, in his capacity as the Independent Actuary:

‰ the demutualization benefits to be provided to eligible policyholders and other recipients, and the method of allocating thevalue of Economical Mutual, as described in detail in the conversion plan, are fair and equitable to the eligible policyholders;and

‰ the financial strength and vitality of Economical, and the security of its policyholders with respect to the continuation of theirpolicies, will not be materially adversely affected by the demutualization of Economical.

The Independent Actuary’s opinion and summary report is attached as APPENDIX “E” to this Circular on page E-1.

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HOLDING COMPANY AND CORPORATEREORGANIZATIONSUMMARY OF HOLDING COMPANY, AND ITS INCORPORATING INSTRUMENT AND BY-LAWS

Economical Holdings will be formed under the Act pursuant to “Letters Patent of Conversion” issued under that Act.However, Economical Holdings may, with regulatory approval, continue under a different governing statute, such as theCBCA. Although regulatory approval has not been received to continue Economical Holdings under the CBCA, the conversionplan and the summaries of the appointed and independent actuaries’ opinions included in this Circular reflect consideration ofthis potential structure. Approval of eligible policyholders is not required to effect a continuance. While the Valuation Reportnoted that Holdco would exist under the Act at the Effective Time, Economical expects that a continuance under the CBCAwould not have altered the estimate of the IPO Valuation Range as of the Valuation Date.

Economical Holdings’ governing documents will consist of the letters patent and by-laws.

Economical Holdings’ authorized capital under its by-laws will consist of unlimited numbers of Common Shares and preferredshares, each without nominal or par value. The preferred shares may be issued in series as determined by EconomicalHoldings’ board of directors. The board of directors is authorized to fix the number, consideration per share, designation andrights and restrictions and conditions attached to each series of preferred shares.

Each Common Share entitles the holder to one vote at meetings of the shareholders of Economical Holdings, except formeetings at which only holders of another class or series of shares are entitled to vote separately as a class or series.Common Shares are entitled to receive dividends if and when declared by the board of directors. Dividends must be declaredand paid in equal amounts per share on all Common Shares, subject to the rights of holders of any outstanding series ofpreferred shares. Holders of Common Shares will participate in any distribution of the net assets of Economical Holdings uponits liquidation, dissolution or winding-up on an equal basis per share, subject to the rights of the holders of any series ofpreferred shares.

The preferred shares of a series rank on a parity with the preferred shares of each other series with respect to the payment ofdividends and the return of capital on the liquidation, dissolution or winding-up of Economical Holdings. The preferred sharesare entitled to preference over the Common Shares and any other shares ranking junior to the preferred shares with respectto the payment of dividends and the return of capital, but are subordinate to any other shares ranking senior to the preferredshares with respect to the payment of dividends and return of capital. The special rights and restrictions attaching to thepreferred shares as a class or a series may not be amended without such approval as may then be required by law, subject toa minimum requirement of approval by the affirmative vote of at least two-thirds of the votes cast at a meeting of the holdersof the class or series held for that purpose.

The holders of the preferred shares are not entitled as such to any voting rights, except as required by law or as specified inthe rights, privileges, restrictions, and conditions attached from time to time to any series of preferred shares.

The Act, including the Regulations, contains restrictions on the purchase or other acquisition, issue, transfer and voting of theshares of Economical Holdings.

The by-laws will also set out governance matters regarding the corporate affairs of Economical Holdings, including mattersrelating to the composition of the board of directors and the conduct of its meetings, advance notice provisions relating to theelection of directors, the indemnification by Economical Holdings of its officers and directors and limitation of their liability,and matters relating to meetings of shareholders such as required quorum and approval thresholds.

CORPORATE REORGANIZATION

Economical intends to complete a corporate reorganization in connection with the demutualization for capital efficiencypurposes. Following the IPO, and subject to the receipt of applicable corporate and regulatory approvals, the shares ofEconomical’s subsidiary Westmount Financial Inc. will be transferred from EIC to Economical Holdings through several steps.Following the reorganization, Economical Holdings will remain the parent company of EIC and will hold, directly or indirectly,all of the assets held by Economical Mutual prior to demutualization.


TAX CONSEQUENCES FOR ELIGIBLEPOLICYHOLDERSIn the opinion of Blake, Cassels & Graydon LLP, counsel to Economical, the following is a summary of the principal Canadianfederal income tax considerations under the Income Tax Act (Canada) and the regulations thereunder (the “Tax Act”) that aregenerally applicable to participation in the demutualization by eligible policyholders (including eligible policyholders that arenon-mutual policyholders), subject to the limitations and qualifications described below. In particular, this summary addresses(i) the income tax treatment under the Tax Act of demutualization benefits received in the form of cash from EIC and/orCommon Shares from Holdco, and (ii) the consequences under the Tax Act of holding and disposing of any Common Sharesreceived as a result of demutualization. This summary only applies to an eligible policyholder (i) that receives cash from EICand/or Common Shares from Holdco in respect of an Economical Mutual policy held by the eligible policyholder, and (ii) that,for purposes of the Tax Act and at all relevant times, deals at arm’s length with Economical Mutual, EIC, and Holdco, and is notaffiliated with Economical Mutual, EIC or Holdco (a “Holder”).

This summary is not applicable to a Holder (i) that is a “financial institution” for the purposes of the mark-to-market rules underthe Tax Act; (ii) that is a “specified financial institution” as defined in the Tax Act; (iii) an interest in which is a “tax shelterinvestment”, as defined in the Tax Act; (iv) that has elected to report its “Canadian tax results” (as defined in the Tax Act) in acurrency other than Canadian currency; (v) that has entered, or will enter, into a “derivative forward agreement”, as defined inthe Tax Act, with respect to Common Shares; (vi) that is governed by a Plan (as defined under “Eligibility for Investment”), aretirement compensation arrangement, or a superannuation or pension fund or plan; (vii) that receives a demutualizationbenefit in respect of a policy the cost of coverage under which was borne by individuals other than the Holder who wereinsured under the policy in the course of or because of their employment; or (viii) that makes a payment or transfers CommonShares where such payment or transfer could reasonably be viewed as being for the purpose of distributing all or part of theHolder’s demutualization benefits to individuals other than the Holder. This summary assumes that Holders will receive anydemutualization benefits to which they are entitled no later than one year after the demutualization.

This summary is based on the facts set out in this Circular, a certificate from an officer of Economical as to certain factualmatters, an advance income tax ruling from the Canada Revenue Agency (“CRA”), the current provisions of the Tax Act, andcounsel’s understanding of the current administrative policies and assessing practices of the CRA made publicly available inwriting prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act publiclyannounced by or on behalf of the Minister of Finance prior to the date hereof (the “Tax Proposals”). However, there can be noassurances that the Tax Proposals will be enacted in the form publicly announced, or at all. This summary does not otherwisetake into account or anticipate any changes in the law or in administrative policy or assessing practice, whether by legislative,governmental or judicial action or decision, nor does it take into account any other federal or any provincial, territorial orforeign tax considerations which may differ significantly from those discussed herein.

This summary does not address the tax consequences to a Holder that elects to disclaim the demutualization benefits towhich the Holder is otherwise entitled. Holders that are considering disclaiming demutualization benefits should consult withtheir own tax advisors.

This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to the demutualization.The income and other tax consequences of participating in the demutualization, and of holding and disposing of any CommonShares received pursuant to the demutualization thereafter, will vary depending on a Holder’s particular circumstances,including the province or territory in which the Holder resides or carries on business. Accordingly, this summary is of ageneral nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particularHolder. Holders should consult their own tax advisors with respect to the income tax consequences to them of thedemutualization based on their particular circumstances.

TAXATION OF HOLDERS RESIDENT IN CANADA

The following portion of this summary applies to a Holder who, at all relevant times and for purposes of the Tax Act, isresident in Canada and holds any Common Shares as capital property (a “Resident Holder”).

Generally, Common Shares will be considered to be capital property to a Holder provided the Holder does not hold theCommon Shares in the course of carrying on a business of trading or dealing in securities and has not acquired them in one ormore transactions considered to be an adventure or concern in the nature of trade. Certain Holders whose Common Sharesmight not otherwise constitute capital property may be eligible to make an irrevocable election in accordance with subsection39(4) of the Tax Act to have their Common Shares and every other “Canadian security” (as defined in the Tax Act) owned bysuch Holder in the taxation year in which the election is made and in all subsequent taxation years, be deemed to be capitalproperty. Holders contemplating such an election should first consult their own tax advisors.

Consequences of Demutualization

Pursuant to the detailed rules in the Tax Act regarding the demutualization of mutual insurance corporations, a ResidentHolder will not realize any income, loss, capital gain, or capital loss as a result of the exchange or disposition of the ResidentHolder’s “ownership rights” (as defined in the Tax Act) in Economical Mutual occurring as a result of the demutualization.However, the receipt of demutualization benefits in the form of cash or Common Shares may have consequences for theResident Holder as described below.

32

TAX CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS

Resident Holders who Receive Cash Upon Demutualization

If a Resident Holder receives a demutualization benefit in the form of a cash payment from EIC, the Resident Holder will bedeemed to receive a taxable dividend under the Tax Act, in an amount equal to the amount of the cash payment, which will beincluded in the income of the Resident Holder generally for the year in which the cash payment is received. Any such dividenddeemed to be received by a Resident Holder will generally be subject to the same tax treatment as dividends received onCommon Shares as described below under the heading “Holding of Common Shares — Dividends Received on CommonShares”.

It is expected that a substantial portion of the dividends deemed to be received by Resident Holders as a result of cashdemutualization benefits will be “ineligible dividends” (and will not be “eligible dividends”) for the purposes of the Tax Act.

Resident Holders who Receive Common Shares Upon Demutualization

No income or capital gain will be realized by a Resident Holder as a result of receiving a demutualization benefit in the form ofCommon Shares from Holdco. The cost and initial adjusted cost base of such Common Shares to the Resident Holder will benil.

Holding of Common Shares

Dividends Received on Common Shares

A Resident Holder will be required to include in computing its income for a taxation year, any taxable dividends received ordeemed to be received on a Common Share. In the case of a Resident Holder who is an individual (other than certain trusts),such taxable dividends will be subject to the gross-up and dividend tax credit rules normally applicable to taxable dividendsreceived from taxable Canadian corporations under the Tax Act. Taxable dividends received on a Common Share which aredesignated as “eligible dividends” for the purposes of the Tax Act will be subject to an enhanced gross-up and dividend taxcredit regime in accordance with the rules in the Tax Act. However, no assurances can be given that all dividends paid on theCommon Shares following the demutualization will be designated as “eligible dividends”. Taxable dividends received on aCommon Share not so designated will generally be “ineligible dividends” and be subject to the ordinary dividend gross-upand tax credit regime under the Tax Act.

A Resident Holder that is a corporation will be required to include any dividends received or deemed to be received on aCommon Share in computing its income for purposes of the Tax Act and generally will be entitled to deduct the amount ofsuch dividends in computing its taxable income. A Resident Holder that is a “private corporation” or a “subject corporation”(each as defined in the Tax Act) may be liable to pay a refundable tax on dividends received (or deemed to be received) on aCommon Share in a taxation year to the extent that such dividends are deductible in computing the corporation’s taxableincome for the year. In certain circumstances, a taxable dividend received or deemed to be received by a Resident Holderthat is a corporation will be deemed to be proceeds of disposition or a capital gain. Resident Holders that are corporations areurged to consult their own tax advisors having regard to their particular circumstances.

Disposition of Common Shares

A disposition or deemed disposition by a Resident Holder of a Common Share (except to Holdco, unless purchased byHoldco in the open market in the manner in which shares are normally purchased by any member of the public in the openmarket) will generally result in such holder realizing a capital gain (or capital loss) equal to the amount by which the proceedsof disposition of the Common Share exceed (or are less than) the aggregate of the adjusted cost base to such ResidentHolder and any reasonable costs of disposition. Such capital gain (or capital loss) will be subject to the tax treatmentdescribed below under “Taxation of Capital Gains and Capital Losses”.

Taxation of Capital Gains and Capital Losses

Generally, one-half of any capital gain (a “taxable capital gain”) realized by a Resident Holder in a taxation year must beincluded in such holder’s income for the year. One-half of any capital loss (an “allowable capital loss”) realized by a ResidentHolder in a taxation year must be deducted from taxable capital gains realized by such holder in such year. Allowable capitallosses in excess of taxable capital gains realized in a taxation year generally may be carried back and deducted in any of thethree preceding taxation years or carried forward and deducted in any subsequent taxation year, in each case subject to thedetailed rules contained in the Tax Act.

The amount of any capital loss realized by a Resident Holder that is a corporation on the disposition of Common Shares maybe reduced by the amount of any dividends received or deemed to be received by the Resident Holder on such CommonShares (or on shares for which the Common Shares have been substituted) to the extent and under the circumstancesdescribed in the Tax Act. Similar rules may apply where a Common Share is owned by a partnership or trust of which acorporation, trust or partnership is a member or beneficiary.

Alternative Minimum Tax

Capital gains realized, and dividends received, by a Resident Holder that is an individual or trust, other than certain specifiedtrusts, may give rise to a liability for alternative minimum tax under the Tax Act.


TAX CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS

Additional Refundable Tax

A Resident Holder that is, throughout its taxation year, a “Canadian-controlled private corporation” (as defined in the Tax Act)may be subject to a refundable tax on its “aggregate investment income” (as defined in the Tax Act), including amounts inrespect of taxable capital gains, and certain dividends.

TAXATION OF HOLDERS NOT RESIDENT IN CANADA

The following portion of this summary applies to a Holder that, at all relevant times and for purposes of the Tax Act, is notresident or deemed to be resident in Canada for purposes of the Tax Act, does not use or hold, and is not deemed to use orhold, a qualifying policy in a business carried on in Canada, and will not use or hold, and will not be deemed to use or hold,Common Shares in a business carried on in Canada (a “Non-Resident Holder”). Special rules which apply to non-residentinsurers carrying on business in Canada and elsewhere are not discussed in this summary. This portion of the summaryassumes that no Non-Resident Holder will receive demutualization benefits in the form of Common Shares.

Consequences of Demutualization

Pursuant to the detailed rules in the Tax Act regarding the demutualization of mutual insurance corporations, a Non-ResidentHolder will not realize any income, loss, capital gain, or capital loss as a result of the exchange or disposition of theNon-Resident Holder’s “ownership rights” (as defined in the Tax Act) in Economical Mutual occurring as a result of thedemutualization. However, the receipt of demutualization benefits may have consequences for the Non-Resident Holder asdescribed below.

A demutualization benefit received by a Non-Resident Holder in the form of a cash payment from EIC will be deemed to be adividend under the Tax Act.

Any such dividend deemed to be paid to a Non-Resident Holder will generally be subject to Canadian withholding tax at therate of 25% on the gross amount of such dividend unless the rate is reduced under the provisions of an applicable income taxtreaty or convention between Canada and the country of residence of the Non-Resident Holder. For example, under theCanada-United States Tax Convention (1980) (as amended) (the “US Treaty”), the withholding tax rate in respect of a dividendpaid to a person who is the beneficial owner of the dividend and who is resident in the United States for the purposes of, andis entitled to full benefits under, the Treaty, is generally reduced to 15%. Non-Resident Holders are urged to consult their owntax advisors to determine any entitlement to relief under an applicable income tax treaty or convention.

ELIGIBILITY FOR INVESTMENT

In the opinion of Blake, Cassels & Graydon LLP, counsel to Economical, subject to the restrictions, limitations and assumptionsset out under the heading “TAX CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS”, Common Shares will be, if listed on adesignated stock exchange (within the meaning of the Tax Act) at a particular time, a qualified investment under the Tax Act atthat time for trusts governed by registered retirement savings plans (“RRSPs”), registered retirement income funds (“RRIFs”),registered education savings plans (“RESPs”), deferred profit sharing plans (“DPSPs”), registered disability savings plans(“RDSPs”), and tax-free savings accounts (“TFSAs” and, together with RRSPs, RRIFs, RESPs, DPSPs, and RDSPs, “Plans”).

Notwithstanding that Common Shares may be qualified investments for Plans, the holder of a TFSA or RDSP, subscriber of anRESP or the annuitant under an RRSP or RRIF will be subject to a penalty tax if the Common Shares are a “prohibitedinvestment” (as defined in the Tax Act) for such a Plan. Common Shares generally will not be a prohibited investment for sucha Plan provided the holder of a TFSA or RDSP, subscriber of a RESP or the annuitant under an RRSP or RRIF, as the case maybe, (i) deals at arm’s length with Holdco for purposes of the Tax Act and (ii) does not have a “significant interest” (as defined inthe Tax Act) in Holdco. In addition, Common Shares will not be a prohibited investment if such shares are “excluded property”as defined in the Tax Act for such a Plan. Holders to whom these rules may be relevant should consult their own tax advisorsas to the application of these rules.

Economical intends to apply to have the Common Shares listed on a designated stock exchange, which listing is intended tooccur shortly following the demutualization. A policyholder contemplating a contribution of Common Shares to a trustgoverned by a Plan at any time when the Common Shares are not listed on a designated stock exchange should consult withhis or her own tax advisors.

34

SOCIAL BENEFITS CONSEQUENCES FORELIGIBLE POLICYHOLDERSDepending on their personal circumstances, eligible policyholders may need to consider the potential social benefitsconsequences that may arise from receiving demutualization benefits. Ownership of shares of a demutualized company thatare received on demutualization may also give rise to some social benefits consequences if dividends are received on suchshares or gains are realized on the disposition of such shares.

If an eligible policyholder elects or is required to receive their demutualization benefits in the form of cash instead of CommonShares, the cash received will be deemed a dividend for Canadian income tax purposes. Such dividend will be required to beincluded in a Canadian resident eligible policyholder’s income for Canadian income tax purposes, as described above under“TAX CONSEQUENCES FOR ELIGIBLE POLICYHOLDERS” on page 32. This will increase the eligible policyholder’s incomeand may reduce entitlement (for the eligible policyholder or their dependants) to income-based social benefits. Examples ofincome-based social benefits that may be affected include the Guaranteed Income Supplement, Old Age Security, provincialpublic drug plans, provincial long-term care and home care programs, and other similar programs.

If an eligible policyholder elects or is required to receive their demutualization benefits in the form of Common Shares, therewill not be any immediate impact on entitlement to income-based social benefits. However, eligibility for some social benefitsprograms is determined based on financial resources or wealth, which will increase by the value of any Common Shares.Therefore, entitlement to these programs may be affected if Common Shares are kept. In addition, any dividends received onsuch shares will be required to be included in a Canadian resident’s income for Canadian income tax purposes and may affectthe holder’s entitlement to income-based social benefits. Examples of income-based social programs include financial andemployment assistance programs such as the Ontario Works Program, Alberta Works Income Support, and British ColumbiaIncome Assistance Services; disability support programs such as the Ontario Disability Support Program (ODSP), AlbertaAssured Income for the Severely Handicapped, and British Columbia Disability Assistance Services; and various provincialstudent assistance programs such as the Ontario Student Assistance Program (OSAP), Alberta Student Aid, and StudentAidBC.

In many cases, the demutualization benefits could exceed the resulting reduction in social benefits entitlements. However,there may be instances where the reduction in social benefits entitlement is very significant compared to demutualizationbenefits. If receiving demutualization benefits will reduce social benefits entitlement, the change in entitlement will occur inthe year following the year in which demutualization benefits are received.

Economical strongly recommends that eligible policyholders receiving social assistance benefits consider the potential effectof receiving demutualization benefits on their social assistance benefits and seek any personal financial, tax, and legal advicethat might be appropriate, including from the federal or provincial government agencies which administer the programs inquestion. In the very exceptional case where receiving demutualization benefits may ultimately be disadvantageous, aneligible policyholder may elect to give up their demutualization benefits (see “Giving Up Your Demutualization Benefits” onpage 24).


INFORMATION ABOUT ECONOMICALBUSINESS OF THE COMPANY

Company Overview

Economical is a leading P&C insurer in Canada with more than one million customers across the country. We are the eighthlargest P&C insurer in Canada, with 4.4% market share1 and $2.3 billion in gross written premiums (“GWP”) in 2017. Our P&Cinsurance business is supported by our investment management activities with approximately $4.0 billion in invested assetsas at December 31, 2017.

We rank among the top ten P&C insurance companies in Canada in both personal and commercial lines.2 Our personal linesinsurance operations, representing approximately 65% of our GWP in 2017, include property, auto, liability, and pet insuranceproducts. Our commercial lines insurance operations, representing approximately 35% of our GWP in 2017, include auto,property, liability, and specialty insurance 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 digital direct channel. This includes Sonnet which was launched in 2016, our pet insurance channelPetline, which was acquired in 2017, and portions of our group insurance offering. Our commercial insurance products areonly sold through brokers. Broker and direct distribution represented 94% and 6%, respectively, of our total GWP in 2017.

Economical is currently pursuing demutualization to convert from a mutual company to a public share company. Through asuccessful demutualization process and initial public offering, we will have greater access to capital, enhanced financialflexibility, and the ability to pursue larger growth opportunities. As a public company, we believe we will be better positionedto compete more effectively with other leaders in our industry.

Company History

Economical has been insuring Canadians since 1871. Through a combination of organic growth and corporate acquisitions, wehave expanded and diversified our P&C insurance product offering.

Our acquisition history includes the addition of Perth Mutual of Stratford in 1968, which added non-standard personal auto andproperty to our product offering, Waterloo County Mutual Fire Insurance Company in 1980, which added group expertise; andFamily Insurance Solutions in 1999, which expanded our presence in British Columbia. In 1997, we amalgamated with WesternGeneral Mutual Insurance Company, which significantly expanded our farm division, and in 2017, we completed theacquisition of Petline Insurance Company (“Petline“), which added pet insurance to our product suite.

In 2010, we announced our intention to pursue demutualization with the objective of converting Economical into a companywith common shares. The demutualization process was formally initiated in 2015 under newly created federal regulations. Ourobjective to become a strong, independent public company has driven investments to expand and strengthen our corporatecapabilities in the areas of enterprise risk management, sales and distribution management, in-house legal, corporatestrategy, and retail marketing. Additional expertise and improved systems have enhanced our corporate finance function withincreased sophistication in reporting, planning, procurement, and capital management. We have also invested in ourcorporate development capabilities, which are required to execute and integrate acquisitions and to support the expansion ofour broker investment activities.

A strong operational foundation for the Company was established through our deep and longstanding commitment to dataanalytics technology and processing. We created our first data warehouses in the early 1990s. In 2008, we formed ouranalytics modeling team and implemented predictive analytics tools and methodologies into our pricing and underwritingmodels through better use of our data warehouses. The continued expansion and integration of our analytics capabilities ledto the establishment of our Analytics Centre of Expertise in 2011, which includes our advanced analytics and businessintelligence groups. The use of analytics supported the transformation and centralization of our personal underwriting functionand customization of our pricing for personal lines products, which led to improvements in our risk selection, risk pricing, andbroker management. Significant investments in our analytics team and related software and technology infrastructure haveincreased our use of big data as a key strategic differentiator.

More recently, our focus on product and operational innovation has increased. We have continued to invest in our analyticalcapabilities to better align pricing and claims experience. In 2016, we introduced a multi-channel distribution strategy with thelaunch of Sonnet, our digital direct business that enables customers to buy insurance directly online with full quote-to-bindcapability. Sonnet is the first fully digital P&C insurance company operating coast-to-coast in Canada, with award winningcustomer service and a streamlined application process that allows customers to buy insurance online in five minutes or less.3

In 2018, we launched Vyne™, a new policy administration and billing system for our personal lines and individually ratedcommercial auto (“IRCA”) broker business. Vyne provides a broader range of customer-centric products, an enhanced pricingmodel, and an improved service and workflow experience for our broker partners. It also increases the speed at which

1 As of December 31, 2017, based on direct written premiums (“DWP”), company filings and overall industry data published by MSA Research Inc. All industryranking and market share comparisons exclude primary mortgage insurance carriers, Insurance Corporation of British Columbia (“ICBC”), Lloyd’s UnderwritersCanada, and Saskatchewan Auto Fund from industry data. GWP is adjusted for assumed reinsurance premiums. Our DWP and GWP are substantially the same.

2 As of December 31, 2017, based on volume of DWP, from overall industry data published by MSA Research Inc.3 Based on customer observation and internal testing.

36

INFORMATION ABOUT ECONOMICAL

Economical can bring new products and pricing changes to market. Both Sonnet and Vyne use the same advanced dataanalytics and quoting technology to process large volumes of data and to provide faster and more reliable service whileenabling future innovation and scalability.

From an operational perspective, we have recently realigned functional accountabilities and added new leadership for ourpersonal insurance, commercial insurance, and Sonnet business lines, and our claims function. Our current leadership teamhas an average of over 20 years of experience in their respective domains at Economical and other large, well-establishedorganizations. Similarly, our Board has experienced significant renewal and increased diversity since 2010, driven by thecomplexity of our operations, the competitive dynamics of our industry, the broad range of operational and corporateinitiatives we have undertaken, and our preparations to become a public company. New directors have been added withexpertise in marketing, technology, operational transformation, law, risk management, accounting, capital markets, mergersand acquisitions, and corporate governance.

Corporate Organization

The following chart illustrates our corporate structure as of the date of this Circular, including the jurisdiction of incorporationor establishment of each of our principal subsidiaries. Each subsidiary shown is directly or indirectly wholly-owned byEconomical Mutual Insurance Company.

EconomicalMutual Insurance

Company(Canada)

Petline InsuranceCompany

(Canada)

Perth InsuranceCompany

(Canada)

WaterlooInsuranceCompany(Canada)

Sonnet InsuranceCompany

(Canada)

WestmountFinancial Inc.

(Ontario)

Family InsuranceSolutions Inc.

(Canada)

The MissisquoiInsuranceCompany(Canada)

TEIG InvestmentPartnership4

(Ontario)

9558047Canada Inc.

(Canada)

4

Economical is in the process of streamlining its operating structure. Following the required regulatory notice period, newpolicies that would otherwise be underwritten by Waterloo Insurance Company, The Missisquoi Insurance Company, andPerth Insurance Company will be underwritten by Economical Mutual, while existing policies will transition in a similar mannerat renewal. Economical’s operating structure will be more efficient and streamlined, which will facilitate simplified rate filings,contracting, and future system enhancements that all support our multi-channel distribution strategy.

Business Overview

Business Structure and Segments

Economical offers a wide range of commercial and personal insurance products. We generated total GWP of $2.3 billion,consisting of $1.5 billion in personal lines and $0.8 billion in commercial lines, for the year ended December 31, 2017. We haveapproximately 2,500 employees in 17 locations across Canada.

We report our financial results along four business segments:

‰ personal auto

‰ personal property

‰ commercial auto

‰ commercial property and liability

Financial results can also be segmented along five geographic regions:

‰ Ontario

‰ Alberta & Prairies

‰ British Columbia

‰ Quebec

‰ Atlantic

Alberta & Prairies includes Alberta, Saskatchewan, Manitoba, and the territories. Atlantic includes Nova Scotia, NewBrunswick, Prince Edward Island, and Newfoundland & Labrador.

4 TEIG Investment Partnership manages the investment portfolio for Economical Mutual Insurance Company and its insurance company subsidiaries, excludingPetline.



Breakdown of Economical’s 2017 GWP by line of business and geography5

60%

13%

14%

7%6%

GWP by Geography

45%

22%

12%

21%

GWP by Line of Business

Ontario

British Columbia

Alberta & Prairies

Atlantic

Quebec

Personal Auto

Personal Property

Commercial Auto

Commercial Property andLiability

Financial Summary

Statement of Income

(in millions of dollars, except as otherwise noted) 2017 2016 2015

Gross Written Premiums6 2,287 2,084 2,008

Net Written Premiums6 2,218 2,011 1,935

Net Earned Premiums 2,166 1,956 1,906

Underwriting Income (Loss) (296) (178) 49

Investment Income 139 135 180

Net Income (Loss) (93) (20) 176

Combined Ratio6 113.7% 109.1% 97.4%

Statement of Financial Position7

Total Assets 5,622 5,481 5,345

Total Liabilities 3,892 3,678 3,566

Total Equity 1,730 1,803 1,779

Minimum Capital Test6 242.1% 276.1% 285.2%

Our recent profitability has been impacted by costs related to demutualization, strategic investments, legislative reform inpersonal auto lines in several provinces, and ongoing remedial measures to improve our personal and commercial linesbusinesses. This has contributed to increases to our combined ratio and reductions in net income. To improve underwritingperformance, the Company initiated a number of corrective underwriting, pricing, and broker management actions in 2017with further actions planned for this year. In early 2018 we announced that we are also optimizing our organizational structure,aligning support functions, increasing operational efficiencies, and streamlining processes. These actions are anticipated toresult in a headcount reduction of approximately 10% to our workforce, as well as substantial reductions in third-partyexpenses. These actions commenced in early 2018 and are expected to be completed by late 2019.

Economical had $5.6 billion in total assets, $1.7 billion in total equity, and a minimum capital test ratio of 242.1%, as atDecember 31, 2017. On November 14, 2018, A.M. Best Rating Services, Inc. affirmed a financial strength rating of A- (Excellent)and a long-term issuer credit rating of a- for Economical Mutual Insurance Company. The outlook for both ratings is stable.The ratings recognize our overall financial strength. We believe our recent significant investments in innovation andoperational efficiency are building the foundation for strong, long-term performance as we pursue demutualization and aim toconvert from a mutual company to a publicly-traded share company.

A financial strength rating of A to A- assigned to an insurance company indicates that in A.M. Best’s opinion, the insurer has anexcellent ability to meet its ongoing insurance obligations. A long term issuer credit rating of a+ to a- means that, in theopinion of A.M. Best, the insurer has an excellent ability to meet its ongoing senior financial obligations. The rating notches of+ or – indicate whether credit quality or financial strength is near the top or bottom of the rating category. A credit rating orfinancial strength rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawalat any time by the rating agency.

For more information about Economical’s Liquidity and Capital Resources, please see “LIQUIDITY AND CAPITALRESOURCES AS OF SEPTEMBER 30, 2018” on page 85.

5 For the year ended December 31, 2017.6 These items are non-GAAP measures which are defined in “NON-GAAP FINANCIAL MEASURES” on page 88.7 As at December 31 of each year.

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Brands

In 2018, to simplify the user experience for our brokers and customers, we streamlined some of our broker distribution brandsunder a single brand identity. We now distribute P&C insurance products under four primary brands, as described below.

Brand Description

Economical

Our flagship brand with brokers; represents 86% of our total GWP in 2017. Economical offers arange of auto, property, liability, and specialty insurance products to individuals and businesses inall provinces and territories in Canada. Economical’s offerings also include:

‰ Group insurance, providing Canadians with access to exclusive, discounted group auto andhome insurance through their employer or professional association (formerly Economical Select)

‰ Farm insurance, protecting Canadian farming operations with customized insurance solutions fortheir homes, cars, trucks, machinery, and operations (formerly Western General)

‰ Non-standard insurance, a leading provider of personal lines auto and home insurance to higherrisk drivers and home owners (formerly Perth Insurance). We do not sell non-standardcommercial products.

Family

A leading distributor of home and optional auto personal insurance to brokers in British Columbia;represents 8% of our total GWP in 2017. Optional auto insurance provides individuals in BritishColumbia with additional coverage over basic insurance or the universal compulsory coveragewhich is required to operate a vehicle in the province. Only ICBC, a provincial Crown corporation,can provide basic personal auto insurance in the province.

PetsecureCanada’s longest-standing pet health insurance company; represents 3% of our total GWP in 2017.Petsecure is a leader8 in the market with innovative coverage options to meet the pet insuranceneeds of individuals in all provinces and territories of Canada.

Sonnet

Our digital direct insurance offering that targets individuals who prefer to purchase insuranceonline in Alberta, British Columbia, New Brunswick, Nova Scotia, Ontario, Prince Edward Island,and Quebec; represents 3% of our total GWP in 2017. Sonnet’s primary product offering includespersonal lines home and auto coverage.

Personal Lines


Gross Written Premiums

Auto 1,041 920 859

Property 496 398 390

Total 1,537 1,318 1,250

Claims Ratio9,10

Auto 81.9% 77.2% 68.4%

Property 58.5% 62.8% 52.7%

Expense Ratio9,10

Auto 26.6% 26.7% 26.3%

Property 34.2% 36.0% 35.3%

Combined Ratio10

Auto 108.5% 103.9% 94.7%

Property 92.7% 98.8% 88.0%

With GWP of $1,537 million in 2017, we are the eighth largest provider of personal lines P&C insurance in Canada and thefourth largest based on distribution within the broker channel.11 Our personal lines product offering consists of auto, property,general and umbrella liability, and pet insurance sold to individuals or groups of individuals under the Economical, Sonnet,Family, and Petsecure brands. Our personal insurance products are distributed through our broker and direct-to-customerchannels.

8 As of December 31, 2017. Based on in-force GWP of each pet insurance carrier as stated in the State of the Industry Report 2018 published by the NorthAmerican Pet Health Insurance Association.

9 These items are non-GAAP measures which are defined in “NON-GAAP FINANCIAL MEASURES” on page 88.10 These adjusted ratios exclude the impact of our strategic investments.11 Overall and broker specific rankings are based on DWP and as per overall industry data published by MSA Research Inc.



Our market position is supported by our overall scale, reputation, highly-rated claims service, and deep, longstandingrelationships with an extensive network of brokers across the country. Our broad product offering and customer-focusedclaims services have offered consistently high customer and broker satisfaction.

In our digital direct channel, Sonnet uses innovative technology, easy-to-understand policy wordings, extensive analytics, andthird-party data to produce personalized access to insurance coverage. Sonnet is differentiated in the Canadian market byoffering customers a way to obtain a quote and buy insurance coverage in real-time.

Our personal auto insurance business, with $1,041 million in GWP in 2017, provides coverage to our customers for accidentbenefits (or personal injury), physical damage to their own vehicles, and liability. Auto liability covers the payments ofdamages by insured persons who have caused bodily injury or property damage to third parties as a result of an accident.

Our personal property insurance business, with $496 million in GWP in 2017, provides coverage to our customers for damageto their properties and related assets, caused by a wide range of perils, including flood, earthquake, fire, theft, vandalism,wind, water, hail, and lightning, and liability. Property liability protects an individual from legal risk due to injury or negligence.Our personal property business includes pet insurance, which provides pet owners with comprehensive health coverage fordogs and cats.

Personal lines products are sold on an individual or group basis. Our group programs include auto and property productsrepresenting $234 million in GWP or 15% of our personal lines business in 2017. Group products are currently marketed tomore than 1,000 groups, representing 2.9 million members, in all provinces in Canada except Newfoundland & Labrador.Discounts on personal auto and property coverage are provided to members of employer and affinity groups, with pricingbased on the unique risk characteristics of the group. Group participants include employers, labour unions, professional andalumni associations, and other non-profit organizations.

We insure both traditional and non-standard risks for individuals. Our non-standard business includes auto and propertyproducts. Our personal lines non-standard business represented $112 million in GWP or 5% of our overall portfolio in 2017.12

The majority of our non-standard business is auto, which represented $107 million in GWP in 2017.12 Our non-standardproducts are now mainly sold under our Economical brand in Ontario, New Brunswick, and Nova Scotia. We also sellnon-standard products under our Sonnet brand, in all provinces in which Sonnet sells products.

Significant underwriting investments have been and continue to be made across all personal lines. In 2016, we launchedSonnet, our fully digital direct brand with largely automated underwriting processes, which continues to build volume. Sonnetprovides customers with award-winning customer service and individualized products and pricing, and significantly expandsour addressable market beyond the broker channel. We have recently deployed Vyne, a new personal lines and IRCA offeringfor brokers that includes a new policy administration and billing system. The new offering allows brokers to transact moreefficiently with their clients with faster processing and less manual intervention for brokers and underwriters. Both Sonnet andVyne benefit from our simplified products and easily understandable policy wordings, which provide clear risk and coverageoptions while utilizing our big data technology platform to streamline the application process, process large and varied datasets, and provide personalized solutions.

Our pricing sophistication has been further enhanced through our move to individualized, risk-based pricing across all of ourpersonal lines through Sonnet and Vyne. A flexible technology platform partnered with our analytics capabilities is expectedto better enable the use of third-party data and support improved underwriting performance, while also supporting targetedmarketing activities, increased speed to market, and operational efficiencies for our broker distribution network.

In conjunction with these system, product, and pricing changes, we have shifted our operating model to service brokerbusiness under the single Economical brand for all personal lines in Ontario, Prince Edward Island, Nova Scotia, NewBrunswick, Quebec, and Alberta. For our non-standard business under the Economical brand, this expands the regions inwhich we sell our products and our customers will no longer have to enter into new agreements when they transition betweenstandard and non-standard markets. We believe providing standard, non-standard, and group exposures on the same policywill generate cost synergies and retention benefits while further simplifying the insurance process for our brokers andcustomers.

For more information about Economical’s Personal Lines, please see “FINANCIAL PERFORMANCE FOR THE YEARSENDED DECEMBER 31, 2017, 2016 and 2015 — RESULTS BY LINE OF BUSINESS” on page 62 and “FINANCIALPERFORMANCE FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 and 2017 — RESULTS BYLINE OF BUSINESS” on page 75.

12 Excludes Sonnet.

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Commercial Lines


Gross Written Premiums

Auto 281 286 265

Property & Liability 469 481 495

Total 750 766 759

Claims Ratio

Auto 93.3% 72.9% 64.2%

Property & Liability 66.6% 68.0% 65.2%

Expense Ratio

Auto 29.8% 28.8% 28.7%


Combined Ratio

Auto 123.1% 101.7% 92.9%


With GWP of $750 million in 2017, we are the seventh largest provider of commercial lines insurance in Canada.13 Our corecommercial lines product offerings include auto, property, liability, and specialty insurance. All commercial products aredistributed through our network of brokers and managing general agents under the Economical brand in all provinces ofCanada except Newfoundland & Labrador.

Our commercial auto insurance business, with $281 million in GWP in 2017, provides coverage for IRCA, as well as fleets ofcommercial vehicles, public vehicles, and garage risks.

Our commercial property and liability insurance business, with $469 million in GWP in 2017, provides coverage to businessesfor building and contents, stock and equipment, fidelity, crime, business interruption, cyber risk, inland marine, boilermachinery, mechanical breakdown, surety, and general liability.

We market our commercial insurance products to small businesses and mid-market companies, as well as specialty offeringsfor larger enterprises. Target customers in the small business segment generally have less complex insurance needs withtypical annual premiums of less than $10,000. Our mid-market operations are focused on customers in select industries withmore complex insurance requirements and annual premiums typically in the range of $10,000 to $100,000. Our specialtycommercial operations provide coverage for complex risks requiring specialized underwriting, risk management, and claimshandling expertise.

We are continuing to strengthen our commercial lines business through profitability actions and the implementation of aseries of targeted, customer-centric strategies. Recent changes to our management team and reporting structure haveresulted in clearer accountability while adding significant technical expertise. Near-term corrective actions, such as pricingadjustments and exiting unprofitable lines of business continue to flow through the portfolio. Our array of mid-marketproducts, services, and underwriting capacity offered to mid-market customers will be expanded by focusing on selectindustry segments. New rating models and greater use of third-party data will also allow us to improve pricing sophistication,underwriting practices, and risk selection. In addition, our Vyne broker platform delivers IRCA products faster and moreefficiently, by requiring less manual intervention by our employees and brokers.

For more information about Economical’s Commercial Lines, please see “FINANCIAL PERFORMANCE FOR THE YEARSENDED DECEMBER 31, 2017, 2016 AND 2015 — RESULTS BY LINE OF BUSINESS” on page 62 and “FINANCIALPERFORMANCE FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017 — RESULTS BYLINE OF BUSINESS” on page 75.

Distribution

We distribute our products through both our broker and direct channels. Included in broker and direct volumes are groupdistribution, which has unique characteristics.

Broker Distribution

Throughout our history, the primary channel for distribution of our products has been through our broker network. Wemaintain a prominent position in the broker channel with strong relationships with brokers across Canada. Our scale and thestrength of our relationships with our broker partners support a continued source of opportunities to grow our business andextend our product offerings. Our success in the broker channel depends on providing brokers with a strong valueproposition, by delivering quality service to both brokers and insureds, offering competitive products and prices for thecoverage that customers need, and being easy to do business with.

13 Based on overall industry data published by MSA Research Inc.



Our dedicated business development teams across Canada support brokers and assist them with sales planning, newbusiness generation, marketing support, training, product knowledge, and underwriting support services. Our three nationalbroker support centres, with two located in Ontario and one located in Quebec, provide quality service to brokers throughdedicated teams for personal insurance and non-complex commercial business insurance. Regional branch offices andservice centres across Canada offer a broad range of products and services for more complex commercial insurancebusiness, with the regional teams having the capability to provide underwriting expertise for more complex commercialinsurance business specific to regional conditions and coverage needs.

We pay brokers through a compensation structure that rewards performance. The compensation we pay to brokers includesbase commissions and the opportunity to participate in the profitability of the premiums earned with us through contingentprofit commission and other payments. We believe that our compensation practices are generally in line with the industry,although the structure and amount payable may vary by broker and over time.

We also provide financing and other financial transaction support for a segment of our brokers who have strong potential forfuture growth and underwriting profitability. By investing in our broker network we enable our brokers to achieve theirfinancial and strategic objectives, including growth and succession planning. Our financial support includes a range of equityinvestment and debt financing options aimed at strengthening our strategic alignment and relationship with key brokers.

The deployment phase of Vyne commenced in mid-2018 and is substantially complete. Automated conversion of the existingEconomical in-scope policies will continue through 2019. Through Vyne, we are making significant investments in theoperating platform that supports our broker channel. Vyne has been recognized for improving the broker experience throughthe global Guidewire Innovation Award (2018) and Insurance Nexus’ Canadian Insurance Carrier of the Year 2018 Award.

The foundation for Vyne is a highly flexible policy administration and billing system based on a market leading back-endsoftware and analytics solution from Guidewire Software. Leveraging the power of big data and strategic third-party sources,we have layered sophisticated data analytics and real-time integration on our quoting and broker management systems. Thisis intended to give us the ability to readily scale to customer demand.

Vyne enables rapid adaptation of underwriting rules and ratings to respond to changes in market conditions with greateragility, and further supports our customized risk selection and pricing. The platform also enhances our brokers’ experience, byintegrating with leading quoting vendors to allow for guaranteed quote accuracy at the point-of-sale, and with all major brokermanagement systems, to significantly improve efficiencies in customer policy management for brokers. Integration of theVyne system with third-party industry data providers minimizes broker input and processing, and shortens the time it takes forbrokers to quote and bind policies, including policy changes and document issuance. Brokers are able to make accountchanges in real-time through our enhanced billing menu, which allows brokers to provide customers with greater flexibility,reliability and efficiency. Through automation of administrative processes and the removal of process inefficiencies, our goalis to make it easier for our broker partners to do business with Economical.

Direct Distribution

In September 2016, we launched Sonnet, a fully digital P&C insurance offering in Canada that allows customers to obtain aquote and purchase insurance directly online. Sonnet currently offers customizable auto and property insurance solutionsdirectly to customers in Alberta, Ontario, Quebec, New Brunswick, Nova Scotia, and Prince Edward Island. In British Columbia,Sonnet offers property insurance only.

Sonnet was launched to expand Economical’s reach by meeting evolving customer expectations and providing access to thedirect market, which is a large portion of the Canadian market that Economical had not historically served.

Sonnet has reinforced the Company’s commitment to innovation in the Canadian P&C insurance industry. Sonnet is acustomer-centric brand that provides simplicity, speed, convenience, and choice. Sonnet has been recognized with a globalGuidewire Innovation Award (2016), the Insurance Canada Technology Award, and the People’s Choice Insurance CanadaTechnology Award, as well as several global Stevie awards for customer service excellence. Sonnet was also recognized inthe first-ever Enterprise Transformation category at the Canadian Start-up Awards.

Sonnet’s platform enables customers to generate a quote and purchase their insurance coverage online in five minutes orless. This is achieved through a combination of rating sophistication, third-party data enrichment, personalized pricing,simplified underwriting, intuitive customer interface, and automation of workflow from quote-to-issuance. Similar to Vyne,Sonnet leverages our modern big data technology platform with real-time analytics and quoting technology to deliver tailor-made recommendations, while enabling data enrichment and fraud control in a secure, reliable, and scalable infrastructure.Sonnet also leverages customer and third-party data to inform its in-house marketing and media teams to drive customerscale at optimized rates.

Petline also sells its products directly to customers. For almost thirty years, Petline has been a leader in the pet healthinsurance marketplace, offering coverage for dogs and cats of all breeds and ages. Petline offers comprehensive and cost-effective plans through our brands, Petsecure and Peppermint, and also underwrites for a number of white-label partners thatleverage the brand equity of some popular Canadian brands. Petline has a close distribution relationship with many breeders,shelters, and clinics. Community support is important to Petline’s success.

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Group Distribution

Group distribution of personal lines products includes group, affinity, white label, referral, and other affiliations. Theseproducts are distributed through our broker and direct channels, including Petline.

We work closely with brokers and directly with organizations across Canada to provide exclusive discounted rates on autoand home insurance for group members. We offer sophisticated pricing and group segment solutions, along with awardwinning marketing and sales support to our distribution partners. In 2015, we won the international Gold Quill Merit Awardfrom the International Association of Business Communicators for our ‘Select Sweepstakes’ campaign, which we coordinatedwith a group of brokers across Canada. Our co-operative marketing programs with brokers are structured in part through asales and service model which offers brokers three different distribution options with varying levels of sales and servicesupport. This allows brokers to be involved with multi-provincial groups where they may not have a license in all provinces,and we can support the customers who reside in a province where they are unlicensed.

Facility Association

We participate in facility associations in various provinces and territories in Canada. The facility association consists of poolingarrangements with industry participants and provides automobile insurance coverage to automobile owners and operatorsthat are otherwise unable to purchase coverage from private insurers. Industry participants share in the surpluses and deficitsof the facility association in accordance with their market share by jurisdiction and accident year.

Analytics

Economical is a data-driven organization, where sophisticated data analysis helps inform key business and strategicdecisions, and the pursuit of operational efficiencies across our business. Since the establishment of our Analytics Centre ofExpertise in 2011, close partnerships have been formed between our analytics team and key areas of our organization, whichhave led to the implementation of integrated analytics-based solutions. Areas of focus include enhancing underwriting andpricing sophistication, targeted marketing, fraud detection, weather trends, claims handling, and distribution strategy.

Our analytics team is a multi-disciplinary professional group with experience in statistics, machine learning, geospatialanalytics, operations research, and business analysis. We have strong internal expertise in applying predictive modelling andother data analytics to improve process efficiency and identify profitable growth opportunities. Our team is supported by amodern, scalable data analytics technology platform which allows for complex analytic execution on historical personal andcommercial insurance data. This internal data platform is supplemented with third-party datasets, which provide access toadditional information that enhances analysis for pricing, risk selection, and other purposes.

We make use of market-leading technology providers to visualize, analyze, and model data. This has enabled us to increaseour customer segmentation capabilities, make rapid product and rating adjustments, improve customer service and enhancefraud detection and monitoring. We also incorporate third-party data into predictive models to streamline the Sonnetunderwriting process by tailoring coverage for specific customer profiles. Geospatial analytics and statistical testing inform ourmarketing planning and distribution strategy.

Claims Management

We are dedicated to providing customer-centric claims management that leaves the customer satisfied with their claimsexperience. After filing a claim, 92% of our policyholders indicated that they are satisfied or very satisfied with the quality oftheir claims service experience.14

We typically handle more than 100,000 claims annually through a 24-hour, 7-day-a-week national claims handling team withfour regional claims contact centres. In excess of 600 claims personnel are located in 10 service locations across Canada.

Our claims handling process begins with the receipt of notice of loss, and includes verification of coverage, claim investigation(including special investigations if appropriate), damage assessment, vendor assignment or settlement discussions andpayment, salvage operations and recuperating under subrogation or reinsurance, where appropriate. Our claims managementprocess is supported by technical training programs, and a regional file review and annual regional audit process. Oursystems and processes ensure that there is ongoing monitoring, measurement and control of all aspects of the claimsresolution process. We also continue to invest in our analytics capabilities to align pricing and claims, which supports ourpredictive models to inform business decisions. We utilize training in combination with analytics to guide employees toidentify risk areas and have a channel to move their concern forward. Examples include internal fraud analytics processes thatautomatically refer suspicious claims to our special investigations unit, and subrogation models that identify opportunities torecover potentially substantial claims from responsible third parties.

In 2017, we handled 96% of our claims through internal claims personnel. In addition to our internal claims professionals, we havedeveloped partnerships with local, regional, and national vendors and both domestic and international independent adjusters toadminister claims outside of regular business hours and during high volume events. As part of our national catastrophe responsestrategy, we combine external partnerships with our regional call centres and staff from our service locations to manage the intake,triage, and assignment of claims. Catastrophe response teams are deployed to impacted areas while tactical support teams are in theregional claims call centres to manage the loss process and customer experience. Our collaborative approach to catastropheresponse and claims handling is designed to ensure that external stakeholders at all levels receive the support required.

14 Based on over 104,000 claimant survey responses from January 2007 to December 2017, in a survey conducted by Economical.



In addition to our claims professionals, we established an in-house claims litigation legal team in 2017. This team is dedicatedto handling civil litigation relating to claims made under insurance policies. We are involved in a large volume of claimslitigation as part of our insurance business, and the existence of this team provides a cost-effective alternative to relying onoutside legal counsel. Located in Ontario and Alberta, we continue to build this team and its capabilities.

Reinsurance

To manage our insurance risk arising from our underwriting activities, we have policies that set out our underwriting riskappetite and criteria, as well as specifying tolerances for maximum financial risk retention. We also use reinsurance to manageour exposure to insurance risks, in accordance with our risk appetite. Our reinsurance program limits the liability of theCompany for individual large losses and in the event of a series of claims arising out of a single occurrence. If a large loss orcatastrophe event occurs, reinsurance is utilized to recover excess costs over our retention levels. Senior managementreviews our reinsurance program on an annual basis with a view to ensuring that sufficient reinsurance protection is in placeat an appropriate cost. This is intended to ensure that adequate reinsurance coverage is obtained, which reflects our risktolerances, underwriting practices, and financial strength, and which complies with our reinsurance and capital riskmanagement policies.

Investment Management

We have significant investment management operations with approximately $4.0 billion in invested assets as at December 31,2017.

Investment Strategy

A key tenet of our investment philosophy is the preservation of capital through portfolio diversification and a strong focus onhigh quality assets. Managing market liquidity, capital optimization, and taxation effects are important considerations inmaximizing the risk/reward profile of our investment portfolio. The portfolio consists of two mandates: an active total returnportfolio and a liability driven portfolio that is structured to match our assets with our claims liabilities. The liability drivenportfolio, classified as Fair Value Through Profit and Loss (“FVTPL”), consists entirely of high quality fixed income instruments,while the total return portfolio, classified as available for sale (“AFS”), is allocated between fixed income securities, domesticand foreign equites, domestic preferred shares, and cash, with the objective of maximizing risk adjusted returns within theCompany’s risk parameters.

Fixed Income Securities

Our fixed income securities are managed by an experienced internal team and are split between two portfolio mandates:

1. FVTPL Bond Portfolio — the primary objective of the FVTPL portfolio is to offset interest rate risk on the discounting ofclaims liabilities. The FVTPL portfolio employs a quantum and duration match strategy to increase flexibility in assetallocation decisions and support an optimized portfolio.

2. AFS Bond Portfolio — the primary objective of the AFS bond portfolio is to outperform a blended custom benchmarkportfolio constructed with a high quality bias and lower duration to help minimize total portfolio volatility.

Domestic and Foreign Equities

Domestic equities are managed by an experienced internal team, while the foreign equity portfolio is managed externally.Both portfolios are part of the AFS portfolio and are managed against relevant benchmarks. Within the broad equity assetclass we employ a fundamental-based approach with an emphasis on investment quality to meet our primary objective ofpreserving the Company’s capital.

For more information about Economical’s Investment Management, please see “FINANCIAL POSITION FOR THE YEARSENDED DECEMBER 31, 2017, 2016 AND 2015 — INVESTMENTS” on page 68 and “FINANCIAL POSITION FOR THEQUARTER ENDED SEPTEMBER 30, 2018 — INVESTMENTS” on page 81.

Risk Management

Objectives

Our enterprise risk management framework is designed to provide reasonable assurance that (i) the outcomes of activitiesinvolving risk are understood from a risk perspective and are consistent with our governing objectives, risk managementcapabilities, risk-taking capacity, and risk appetite, and (ii) we maintain an appropriate risk and reward balance to protect usfrom events that have the potential to materially impair our financial strength or our achievement of business objectives. Ourenterprise 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.

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The key risks we manage include insurance, financial, operational, and strategic risks. It is possible that other risks anduncertainties may exist. If any of these risks or any other risks or uncertainties actually occur, it is possible that our businesscould be materially affected in an adverse manner. Our enterprise risk management framework cannot and is not designed toanticipate every risk in all environments, nor the timing or effect of every such risk.

Alignment

We align our risk appetite with our overall vision, mission, and business objectives by considering whether risks 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.

Our risk appetite is also aligned with our risk management capabilities. We actively seek profitable risk-taking opportunities inthose areas where we have established risk management capabilities, and seek to avoid risks that are beyond thosecapabilities.

Accountability

Our enterprise risk management framework defines responsibility and authority for risk-taking, governance, and control.

Risk management occurs at all levels of the organization and is the responsibility of every employee. Our Board is ultimatelyresponsible for enterprise risk management policies and practices and their operation. The Board reviews the developmentand maintenance of the own risk and solvency assessment (“ORSA”), and oversees the approval of risk management policies,the identification of major areas of risk facing us, the development of risk management strategies, and compliance with therisk management policies we implement. To assist in fulfilling the responsibility for ensuring that the key risks facing us areappropriately identified, challenged, and managed, the Board has delegated certain risk management functions to thefollowing standing committees:

‰ The Risk Review Committee, which is composed entirely of independent directors, is responsible for the oversight of theenterprise-wide risk management framework and the regulatory compliance management program. The Risk ReviewCommittee reviews the ORSA and the results of our regulatory compliance management program. They approve enterpriserisk management policies and articulation of risk appetite. They also monitor our key and emerging risks.

‰ The Investment Committee, which is composed of a majority of independent directors, is responsible for the oversight ofinvestment policies, practices, procedures, and controls related to the management of the investment portfolio, theperformance of the investment portfolio, and monitoring the investment performance of our pension plans.

‰ The Corporate Governance Committee, which is composed entirely of independent directors, is responsible for developingeffective corporate governance guidelines and processes; reviewing policies and processes to sustain ethical behaviour;assessing the effectiveness of the Board and its committees, as well as the contributions of individual directors; andidentifying and recommending for election as directors those individuals with appropriate competencies, skills, andexperience.

‰ The Audit Committee, which is composed entirely of independent directors, is responsible for overseeing the integrity of ourfinancial statements and related public disclosures; the qualifications, independence, appointment, and performance of ourinternal and external auditors; and the design, implementation, and evaluation of our internal controls over financialreporting and our disclosure controls.

‰ The Human Resources and Compensation Committee, which is composed entirely of independent directors, is responsiblefor supervising our human resources practices and policies. This includes reviewing our overall compensation philosophy,approving compensation to our senior executives, and reviewing retention, development, and succession plans.

‰ From time to time, the Board may also strike ad hoc committees to provide dedicated oversight to key strategic initiatives.We currently have two such committees: the Strategic Initiatives Committee and the Special Committee on Demutualization.

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).Primary accountability for enterprise risk management resides with our President and Chief Executive Officer, who furtherdelegates responsibilities throughout the Company under a framework of management authorities and responsibilities. Keycomponents of that framework include the following:

Risk Governance Model

First line of defence

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

‰ Employees within each functional and business area identify, take, and manage risk on a daily basis, adhering to riskappetite statements, and supporting policies and practices.



‰ Accountable executives within each functional and business area establish and perform ongoing monitoring and oversightof functions and controls to review employee compliance with our risk management policies and practices. Theseindividuals are supported by corporate legal, compliance, actuarial, and enterprise risk management resources.

Second line of defence

Our enterprise risk management and compliance functions provide risk policies, tools, methodologies, and oversight:

‰ The enterprise risk management function, headed by the Chief Risk Officer, establishes an effective risk managementframework to identify, measure, assess, report, monitor, and respond to risks inherent in our activities. The enterprise riskmanagement framework is comprised of risk policies, processes, methodologies, models, tools, and guidance.

‰ The enterprise risk management function performs independent monitoring and analysis of risk-taking and risk managementactivities by the first line of defence and, through the ORSA, internally assesses our risks and determines the level of capitalrequired to adequately support future solvency.

‰ The compliance function communicates internal and external compliance requirements to the first line of defence andprovides support to help the first line of defence ensure compliance with those requirements through our regulatorycompliance management program.

‰ The enterprise risk management and compliance functions’ own quality assurance and validation practices are applied toensure that policies, methodologies, practices, models, and other capabilities developed by them comply with applicablerequirements and quality standards, and are suitable for use within the Company. The Chief Risk Officer’s responsibilitiesinclude providing independent functional oversight of our enterprise risk management programs.

‰ Our Management Risk Committee is a cross-functional management committee composed of members of seniormanagement, including our President and Chief Executive Officer. It is led by the Chief Risk Officer, and oversees themanagement of major enterprise risk and control activities with a view to understanding existing and emerging risks, theirimpact on our risk profile, and related capital requirements, as well as monitoring that the magnitude of those risks remainswithin our risk appetite.

Third line of defence

Internal audit provides periodic independent assurance:

‰ Internal audit focuses on the adequacy and effectiveness of first line internal controls, as well as enterprise riskmanagement policies, the enterprise risk management framework, and related processes and practices. Internal audit alsoreviews compliance with policies, standards, and required practices, taking into account the relative risk in each area ofcoverage.

Internal audit has its own quality assurance and validation practices, and applies them to ensure that internal audits arecarried out in compliance with established audit policies, standards, and methodologies, and that audit findings andobservations are objective and appropriately supported.

Executive Management Team and Board

Economical has a diverse leadership team with a broad skill set and extensive experience to support the Company inachieving its objectives. The following tables set out for each of our directors and executive officers, their name, place ofresidence, respective position and office held within the Company, and relevant experience.

Executive Team

Name and place ofresidence

Present positionheld Relevant experience

Rowan SaundersOntario, Canada

President, ChiefExecutive Officer,and Director

President and Chief Executive Officer since November 2016.

Former President and Chief Executive Officer of the Canadiansubsidiary of RSA Insurance Group, a major international publicly-tradedP&C insurance company, from September 2003 to July 2016.

Paul MacDonaldOntario, Canada

Executive Vice-President, PersonalInsurance

Executive Vice-President, Personal Insurance since January 2018, withresponsibility for claims from March 2018 to November 2018.

Former Senior Vice-President and Chief Claims Officer of the Canadiansubsidiary of RSA Insurance Group, a major international publicly-tradedP&C insurance company, from October 2015 to December 2017. FormerVice-President, Operations (Canada) of SGI Canada (a Canadian P&Cinsurance company) from February 2013 to October 2015.

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Present positionheld Relevant experience

Philip MatherOntario, Canada

Executive Vice-President and ChiefFinancial Officer

Executive Vice-President and Chief Financial Officer since April 2017.President of Economical Financial (Economical’s broker financing arm).

Senior Vice-President and Chief Financial Officer from October 2011 toApril 2017. Former partner of PricewaterhouseCoopers LLP’s Audit andAssurance group, specializing in financial services (including P&Cinsurance).

Fabian RichenbergerOntario, Canada

Executive Vice-President,CommercialInsurance

Executive Vice-President, Commercial Insurance since May 2017.

Former Head of Financial Services for CarProof Corp. (the Canadianautomobile data subsidiary of an international publicly-traded dataanalytics company) from January 2015 to April 2017. President of theCanadian P&C insurance operations of Northbridge FinancialCorporation from September 2009 to August 2014.

Innes DeyOntario, Canada

Senior Vice-President, Legal,Risk, and Strategy,and Chief RiskOfficer

Senior Vice-President, Legal, Risk, and Strategy, and Chief Risk Officersince February 2018.

Senior Vice-President and Chief Strategy Officer from June 2015, withresponsibility for enterprise risk management from May 2017, toFebruary 2018. Senior Vice-President, Corporate & Legal Affairs fromOctober 2014 to June 2015. Senior Vice-President & Chief Legal Officerfrom September 2012 to October 2014.

Roger DunbarOntario, Canada

Senior Vice-President of Sonnet

Senior Vice-President of Sonnet since August 2017.

Former Vice-President, Marketing at TRADER Corporation (a digitalmarketing company) from April 2012 to April 2017.

Linda GossOntario, Canada

Senior Vice-President and ChiefActuary

Senior Vice-President and Chief Actuary since January 2005.

Alice KeungOntario, Canada

Senior Vice-President and ChiefTransformationOfficer

Chief Transformation Officer since May 2017.

Senior Vice-President and Chief Information Officer from January 2016to April 2017. Interim Chief Information Officer from November 2015 toJanuary 2016. Former Chief Operating Officer of eHealth Ontario (agovernment digital health records agency) from July 2011 to December2014.

Brigid PelinoOntario, Canada

Senior Vice-President and ChiefHuman ResourcesOfficer

Senior Vice-President and Chief Human Resources Officer sinceOctober 2018.

Former Chief Human Resources Officer for High Liner Foods (a publicly-traded seafood company) from November 2017 to October 2018. EVP,People and Culture for WestJet Airlines (a publicly-traded airline) fromJune 2013 to June 2015. EVP/SVP Human Resources for the TDL GroupCorp. from March 2008 to May 2013 (a former publicly-traded restaurantcompany).

Hans ReidlOntario, Canada

Senior Vice-President, Claims

Senior Vice-President, Claims since November 2018.

Vice-President, Finance from June 2014 to November 2018. FormerVice-President, Finance at ATS Automation Tooling Systems Inc. (apublicly-traded automated machinery and equipment company) fromMarch 2009 to June 2014.

Tom ReikmanOntario, Canada

Senior Vice-President and ChiefDistribution Officer

Senior Vice-President and Chief Distribution Officer since May 2017,with responsibility for corporate communications and corporatemarketing since November 2017.

Senior Vice-President and Chief Operating Officer from January 2014 toApril 2017.



Directors


Position withEconomical Relevant experience

John Bowey 3 ,6, 7

Ontario, CanadaBoard Chair sinceJanuary 2016, andDirector since May2011

Corporate director, including as a director and Chair of the AuditCommittee for Brick Brewing Co. Limited (a publicly-traded Canadianbeverage maker) from June 2010 to present, and as Chair of the Boardof Governors of Wilfrid Laurier University from July 2015 to June 2017.

Former partner of Deloitte LLP.

Elizabeth DelBianco 2, 3

Ontario, CanadaDirector sinceMarch 2013

Chief Legal and Administrative Officer, Celestica Inc. (an internationalpublicly-traded supply chain solutions company) from February 1998 topresent.

Dan Fortin 3, 5, 7

Ontario, CanadaDirector sinceOctober 2014

Corporate director, including as a director for an international fraternalfinancial services organization from June 2017 to present.

Former President, IBM Canada Ltd. (the Canadian subsidiary of aninternational publicly-traded IT service management company) fromJanuary 2005 to June 2014.

Barbara Fraser 3, 4, 7

Ontario, CanadaDirector sinceDecember 2013

Corporate director.

Former director of the life insurance company subsidiary of MDFinancial Holdings Inc. from September 2011 to October 2018, ManitobaTelecom Services from September 2014 to March 2017, and Gerber LifeInsurance Company (the juvenile life insurance subsidiary of aninternational publicly-traded food and drink company) from July 2008 toJanuary 2016. Former global executive of American Express Companyand Citigroup, publicly-traded financial institutions, based in New York.

Dick Freeborough 1, 2, 5, 6

Ontario, CanadaDirector sinceFebruary 2012

Corporate director, including as a director and Chair of the AuditCommittee for the Canadian life reinsurance subsidiary of ReinsuranceGroup of America, Incorporated (an international publicly-tradedreinsurance company) from April 2006 to present.

Former Board Chair and director of an international fraternal financialservices organization from June 2005 to June 2017. Former partner anddirector of KPMG Canada.

Micheál J. Kelly 1, 2, 7

Ontario, CanadaDirector sinceApril 2015

Dean, Lazaridis School of Business & Economics at Wilfrid LaurierUniversity from July 2012 to present.

Corporate director, including as Vice-Chair of the Board for WaterlooNorth Hydro Incorporated (a regional utilities company) from July 2016to present.

Susan Monteith 4, 5, 6

Ontario, CanadaDirector sinceJanuary 2018

Corporate director.

Former senior capital markets executive, including as EVP & ManagingDirector, Client Strategy & People Development from July 2013 toNovember 2016, and Managing Director & Head of Equity CapitalMarkets from August 2006 to July 2013, at National Bank Financial Inc.(a major Canadian publicly-traded financial institution).

Rowan Saunders 4

Ontario, CanadaPresident and ChiefExecutive Officer,and Director sinceNovember 2016

President and Chief Executive Officer since November 2016.

Director of Equitable Group Inc., (the publicly-traded parent company ofa Canadian Schedule 1 bank), and its bank subsidiary, from May 2013 topresent.

Former President and Chief Executive Officer of the Canadiansubsidiary of RSA Insurance Group (a major international publicly-tradedP&C insurance company) from September 2003 to July 2016.

48



Position withEconomical Relevant experience

Michael Stramaglia 1, 4, 5

Ontario, CanadaDirector sinceApril 2010

Corporate director, including as a director for an international fraternalfinancial services organization from 2013 to present, Equitable GroupInc. (the publicly-traded parent company of a Canadian Schedule 1bank) and its bank subsidiary from 2014 to present, and the CanadianP&C insurance company subsidiaries of Munich RE (a majorinternational publicly-traded reinsurance company) from 2016 topresent.

Former Co-Interim President and CEO for the above-mentionedinternational fraternal financial services organization from July 2017 toJanuary 2018. Former Executive Vice-President of a major internationalpublicly-traded life insurance company from 2002-2012, and Chief RiskOfficer from 2006-2012.

1 Member of the Audit Committee (Chair – Dick Freeborough).2 Member of the Corporate Governance Committee (Chair – Micheál Kelly).3 Member the Human Resources and Compensation Committee (Chair – Elizabeth DelBianco).4 Member of the Investment Committee (Chair – Barbara Fraser).5 Member of the Risk Review Committee (Chair – Michael Stramaglia).6 Member of the Special Committee (Chair – John Bowey).7 Member of the Strategic Initiatives Committee (Chair – Dan Fortin).

SELECTED FINANCIAL INFORMATION

The following selected financial data should be read in conjunction with our Financial Position for the Years EndedDecember 31, 2017 and 2016 and our Financial Position for the Quarter Ended September 30, 2018. The selected financialdata should also be read in conjunction with our audited consolidated financial statements and accompanying notes for theyear ended December 31, 2017 and our unaudited interim consolidated financial statements for the period endedSeptember 30, 2018. The above items are attached as APPENDIX “I” to this Circular on page I-1 and APPENDIX “J” to thisCircular on page J-1, respectively.

The selected financial data included in the following tables have been prepared using both generally accepted accountingprinciples as defined by IFRS, as issued by the IASB, which have been adopted as GAAP, and certain non-GAAP measures toassess performance. 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 Circular.See “NON-GAAP FINANCIAL MEASURES” in this Circular on page 88.



Statement of Comprehensive (Loss) Income Data

For the nine monthsended September 30 For the years ended December 31

(in $ thousands, unless otherwise stated) 2018 2017 2017 2016 2015

Gross written premiums15 1,811,284 1,745,469 2,286,855 2,084,120 2,008,387

Net written premiums15 1,758,443 1,696,473 2,218,087 2,010,952 1,935,352

Net earned premiums 1,661,788 1,609,898 2,165,821 1,955,603 1,905,655

Other underwriting revenues 11,771 12,709 16,558 25,070 26,659

Total underwriting revenues 1,673,559 1,622,607 2,182,379 1,980,673 1,932,314

Investment income 98,422 84,874 139,109 135,393 179,451

Net claims and adjustment expenses (undiscounted) 1,271,043 1,207,104 1,659,080 1,406,293 1,221,450

Net commissions 275,363 286,648 379,339 371,390 363,688

Operating expenses 280,971 266,923 361,984 312,070 231,638

Premium taxes 59,788 57,730 77,695 69,346 66,715

Total underwriting expenses (undiscounted) 1,887,165 1,818,405 2,478,098 2,159,099 1,883,491

Impact of discounting 28,827 26,842 37,218 13,616 (1,488)

Other expense (income) 2,528 12,786 19,529 10,569 (2,928)

Restructuring expenses 2,807 – – – –

(Loss) income before income taxes (91,692) (96,868) (138,921) (39,986) 229,714

Income tax (recovery) expense (32,124) (32,203) (46,243) (19,712) 53,760

Net (loss) income (59,568) (64,665) (92,678) (20,274) 175,954

Other comprehensive (loss) income (33,367) 11,222 19,974 44,371 (78,103)

Comprehensive (loss) income (92,935) (53,443) (72,704) 24,097 97,851

Balance Sheet Data

As atSeptember 30 As at December 31

(in $ thousands, unless otherwise stated) 2018 2017 2016 2015

Cash and cash equivalents 217,124 166,389 189,553 89,010

Investments 3,949,652 3,996,000 3,914,500 4,064,932

Premiums receivable 788,038 699,610 648,022 601,161

Total assets 5,744,223 5,621,917 5,480,617 5,345,056

Unearned premiums 1,226,439 1,131,366 1,077,303 1,022,339

Claim liabilities 2,652,849 2,527,673 2,399,254 2,309,265

Accounts payable and other liabilities 227,492 232,500 200,978 234,467

Total liabilities 4,106,780 3,891,539 3,677,535 3,566,071

Total equity 1,637,443 1,730,378 1,803,082 1,778,985

Selected Financial Ratios

For the nine monthsended September 30 For the years ended December 31

2018 2017 2017 2016 2015

Claims ratio15 76.5% 75.0% 76.6% 71.9% 64.1%

Expense ratio15 36.4% 37.2% 37.1% 37.2% 33.3%

Combined ratio15 112.9% 112.2% 113.7% 109.1% 97.4%

Impact of strategic investments on the combined ratio15,16 6.8 pts 7.1 pts 7.4 pts 6.0 pts 2.1 pts

Adjusted combined ratio15,16 106.1% 105.1% 106.3% 103.1% 95.3%

15 Refer to “NON-GAAP FINANCIAL MEASURES” on page 88. These non-GAAP measures are considered key performance indicators, and are measures that wemonitor regularly.

16 The impact of our strategic investments includes our continued investments in Sonnet, and the development and implementation of the VyneTM platform.

50


UNAUDITED PRO FORMA FINANCIAL STATEMENTS

Chief Financial Officer’s Report

I, Philip Mather, in my capacity as Executive Vice-President and Chief Financial Officer of Economical and not in my personalcapacity, make this report in accordance with section 14(3)(b) of the Mutual Property and Casualty Insurance Company withNon-mutual Policyholders Conversion Regulations (the “Regulations”). This report should be read in conjunction with theattached unaudited pro forma consolidated financial statements for Economical (the “Unaudited Pro Forma FinancialStatements”) prepared in accordance with section 14(2)(h) of the Regulations.

The Unaudited Pro Forma Financial Statements have not been audited but have been, in all material respects, prepared inaccordance with International Accounting Standards as issued by the International Accounting Standards Board, usingaccounting policies which are consistent with those used in Economical’s 2017 audited consolidated financial statements,including the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada.

PHILIP MATHER

Executive Vice-President and Chief Financial Officer,Economical Mutual Insurance Company

Waterloo, CanadaJanuary 31, 2019



Specified Procedures Report

To the Board of Directors of Economical Mutual Insurance Company

We have read the accompanying unaudited pro forma consolidated balance sheet of Economical Mutual Insurance Company(the “Company”) as at September 30, 2018 and unaudited condensed pro forma consolidated statements of comprehensiveloss for the nine months then ended and for the year ended December 31, 2017 (collectively the “unaudited pro formaconsolidated financial statements”), and have performed the following procedures.

1. Compared the figures in the column captioned “Economical Mutual Insurance Company” from the pro formaconsolidated balance sheet (unaudited) as at September 30, 2018 and the condensed pro forma consolidated statementof comprehensive loss (unaudited) for the nine months ended September 30, 2018 to the unaudited consolidatedfinancial statements of Economical Mutual Insurance Company as at September 30, 2018 and for the nine months thenended and found them to be in agreement.

2. Compared the figures in the column captioned “Economical Mutual Insurance Company” from the condensed pro formaconsolidated statement of comprehensive loss (unaudited) for the year ended December 31, 2017 to the auditedconsolidated statement of comprehensive loss of Economical Mutual Insurance Company for the year endedDecember 31, 2017 and found them to be in agreement.

3. Made enquiries of certain officials of the Company who have responsibility for financial and accounting matters about:

(a) the basis for determination of the unaudited pro forma consolidated adjustments in the unaudited pro formaconsolidated financial statements; and

(b) whether the unaudited pro forma consolidated financial statements comply as to form in all material respects withthe Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations aspublished by the Government of Canada.

The officials:

(a) described to us the basis for determination of the unaudited pro forma consolidated adjustments; and

(b) stated that the unaudited pro forma consolidated statements comply as to form in all material respects with theMutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations aspublished by the Government of Canada.

4. Read the notes to the unaudited pro forma consolidated financial statements, and found them to be consistent with thebasis described to us for determination of the unaudited pro forma consolidated adjustments.

5. Recalculated the application of the unaudited pro forma consolidated adjustments from the pro forma consolidatedbalance sheet (unaudited) as at September 30, 2018 and the condensed pro forma consolidated statement ofcomprehensive loss (unaudited) for the nine months ended September 30, 2018 to be the aggregate of the amounts inthe columns captioned “Economical Mutual Insurance Company”, “Holdco” and “Adjustments” as at September 30, 2018and for the nine months then ended and found the amounts in the column captioned “Holdco Pro Forma” to bearithmetically correct.

6. Recalculated the application of the unaudited pro forma consolidated adjustments from the condensed pro formaconsolidated statement of comprehensive loss (unaudited) for the year ended December 31, 2017 to be the aggregate ofthe amounts in the columns captioned “Economical Mutual Insurance Company”, “Holdco” and “Adjustments” and foundthe amounts in the column captioned “Holdco Pro Forma” to be arithmetically correct.

A pro forma financial statement is based on management assumptions and adjustments which are inherently subjective. Theforegoing procedures are substantially less than either an audit or a review, the objective of which is the expression ofassurance with respect to management’s assumptions, the pro forma adjustments, and the application of the adjustments tothe historical financial information. Accordingly, we express no such assurance. The foregoing procedures would notnecessarily reveal matters of significance to the pro forma financial statements and we therefore make no representationabout the sufficiency of the procedures for the purposes of a reader of such statements.

Chartered Professional AccountantsLicensed Public Accountants


52


Pro Forma Consolidated Balance Sheet (Unaudited)

As at September 30, 2018

(in thousands of Canadian dollars)

EconomicalMutual

InsuranceCompany Holdco Adjustments Notes

HoldcoPro Forma

ASSETS

Cash and cash equivalents 217,124 – 1,000,000 3a 181,624

57,000 3a

(35,500) 3b

(57,000) 3c

(1,000,000) 3d

Investments 3,949,652 3,949,652

Accrued investment income 16,746 16,746

Premiums receivable 788,038 788,038

Income taxes receivable 6,931 6,931

Reinsurance receivable and recoverable 64,404 64,404

Deferred policy acquisition expenses 234,606 234,606

Property and equipment 40,472 40,472

Deferred income tax assets 77,551 24,864 3b, 3c, 3e 102,415

Goodwill and intangible assets 239,497 239,497

Other assets 109,202 109,202

5,744,223 – (10,636) 5,733,587

LIABILITIES AND EQUITY

Unearned premiums 1,226,439 1,226,439

Claim liabilities 2,652,849 2,652,849

Accounts payable and other liabilities 227,492 227,492

4,106,780 4,106,780

EQUITY

Retained earnings 1,585,213 (1,585,213) 3f –

Accumulated other comprehensive income 52,230 (52,230) 3f –

Total equity 1,637,443 (1,637,443) –

SHAREHOLDERS’ EQUITY

Common shares – 1,057,000 3a 1,015,322

(41,678) 3c

Retained earnings 1,585,213 3f 559,255

(1,000,000) 3d, 3f

(25,958) 3b

Accumulated other comprehensive income 52,230 3f 52,230

Total shareholder’s equity – – 1,626,807 1,626,807

5,744,223 – (10,636) 5,733,587



Condensed Pro Forma Consolidated Statement of Comprehensive Loss (Unaudited)

For the year ended December 31, 2017


EconomicalMutual


HoldcoPro Forma

Net premiums earned 2,165,821 – – 2,165,821

Other underwriting revenues 16,558 – – 16,558

Total underwriting revenues 2,182,379 – – 2,182,379

Underwriting expenses 2,478,098 – – 2,478,098

(295,719) – – (295,719)

Impact of discounting 37,218 – – 37,218

Underwriting loss (258,501) – – (258,501)

Investment income 139,109 – – 139,109

Other expense 19,529 – – 19,529

Loss before income taxes (138,921) – – (138,921)

Income tax recovery (46,243) – – (46,243)

Net loss (92,678) – – (92,678)

Other comprehensive income 19,974 – – 19,974

Comprehensive loss (72,704) – – (72,704)

Pro forma basic loss per common share 4 (0.90)

Condensed Pro Forma Consolidated Statement of Comprehensive Loss (Unaudited)

For the nine months ended September 30, 2018


EconomicalMutual


HoldcoPro Forma

Net premiums earned 1,661,788 – – 1,661,788

Other underwriting revenues 11,771 – – 11,771

Total underwriting revenues 1,673,559 – – 1,673,559

Underwriting expenses 1,887,165 – – 1,887,165

(213,606) – – (213,606)

Impact of discounting 28,827 – – 28,827

Underwriting loss (184,779) – – (184,779)

Investment income 98,422 – – 98,422

Other expense 5,335 – – 5,335

Loss before income taxes (91,692) – – (91,692)

Income tax recovery (32,124) – – (32,124)

Net loss (59,568) – – (59,568)

Other comprehensive loss (33,367) – – (33,367)

Comprehensive loss (92,935) – – (92,935)

Pro forma basic loss per common share 4 (0.58)

54


Notes to the Unaudited Pro Forma Consolidated Financial Statements (in Canadian dollars)

1. DESCRIPTION OF THE DEMUTUALIZATION AND PLANNED TRANSACTIONS

Economical is a mutual insurance company which, along with its wholly owned subsidiaries, offers property and casualtyinsurance in Canada.

Demutualization is the process whereby a mutual company converts into a share company. On November 3, 2015, our Boardannounced its decision to proceed with demutualization within the federal demutualization regulatory framework. At the firstspecial meeting on demutualization held on December 14, 2015, our eligible mutual policyholders passed a special resolutionto authorize the start of negotiations of the allocation of demutualization benefits with eligible non-mutual policyholders.Court-appointed policyholder committees representing eligible mutual policyholders and eligible non-mutual policyholdershave negotiated the method of allocating the financial benefits resulting from demutualization, and the Company hasprepared a conversion plan that contains the agreed-upon Allocation, as well as other legal particulars to effectdemutualization.

The Company has submitted the conversion plan to our primary regulator, OSFI. OSFI will conduct a review of our submission,as well as all of the other information required by the demutualization regulations, and its authorization is required for theCompany to proceed with a series of policyholder votes. A successful outcome from both policyholder votes will put us in aposition to apply to the Minister of Finance for approval to demutualize.

As part of demutualization, a holding company, Holdco, will be incorporated to act as the parent company for the Company.Immediately after demutualization, Holdco will wholly own the Company. Persons eligible to receive benefits from ourdemutualization will receive either shares of Holdco or cash to be raised from the proposed offering of Holdco shares. Holdcointends to apply for a listing of its common shares on a recognized stock exchange in Canada.

2. BASIS OF PRESENTATION

The unaudited pro forma consolidated financial statements (the “Unaudited Pro Forma Financial Statements”) are preparedin the perspective of Holdco to reflect the impact of the completion of the demutualization, formation of Holdco,reorganization, and a subsequent IPO assuming they had occurred as at September 30, 2018 for purposes of the unauditedpro forma consolidated balance sheet and as at January 1, 2017 for purposes of the unaudited pro forma consolidatedstatements of comprehensive loss. The financial data in the Unaudited Pro Forma Financial Statements is derived from theaudited consolidated financial statements of the Company as at and for the year ended December 31, 2017 which areprepared under IFRS and the unaudited interim consolidated financial statements as at and for the nine-month period endedSeptember 30, 2018 which are prepared under International Accounting Standard 34 – Interim Financial Reporting.

The accounting policies used in the preparation of the unaudited pro forma consolidated balance sheet as at September 30,2018, the unaudited pro forma consolidated statements of comprehensive loss for the nine-months ended September 30,2018, and unaudited pro forma consolidated statement of comprehensive loss for the year ended December 31, 2017,incorporate the significant accounting policies used by the Company for the respective periods in the financial statements.The Unaudited Pro Forma Financial Statements include all adjustments necessary for the fair presentation of the UnauditedPro Forma Financial Statements in accordance with the recognition and measurement principles of IFRS as issued by theIASB.

As the reorganization is assessed to be a common control transaction, the Unaudited Pro Forma Financial Statements areprepared on a continuity-of-interest basis whereby the assets, liabilities and results of operations of the Company arereflected in the Unaudited Pro Forma Financial Statements as if Holdco had always wholly-owned the Company.

Pro forma adjustments reflected in the Unaudited Pro Forma Financial Statements are based on items that are reasonablyestimable, directly attributable to the demutualization and IPO, and are expected to have a continuing impact on theUnaudited Pro Forma Financial Statements for which complete financial effects are objectively determinable.

3. PRO FORMA ADJUSTMENTS

The Unaudited Pro Forma Financial Statements of the Company have been prepared for informational purposes only usingcurrently available information. The assumptions made could differ significantly from actual reported amounts.

(a) The estimated gross proceeds to Holdco from the sale of Holdco shares in the IPO are estimated to range from$800 million to $1.2 billion. For purposes of the Unaudited Pro Forma Financial Statements, it is assumed that the grossproceeds will equal $1.057 billion. $1.0 billion is raised to pay eligible policyholders electing a cash payment and eligiblepolicyholders and other recipients (as defined in the conversion plan) who are required to receive a cash payment. Afurther $57.0 million is raised to cover fees paid to the underwriters and other costs in conjunction with the IPO. It isassumed that the over-allotment option is not exercised by the underwriters and that remaining eligible policyholderswill receive shares of Holdco.

(b) The remaining pre-tax cost of the demutualization is estimated to be $35.5 million ($25.9 million net of tax). Forpurposes of the Unaudited Pro Forma Financial Statements, it is assumed that all of these costs will be expensed. An



adjustment to retained earnings is recognized in the pro forma consolidated balance sheet but no impact is recognizedin the pro forma consolidated statement of income, as the expenses will have no continuing impact on the Company.The tax recovery is estimated to be $9.6 million using the statutory rate of 26.9%.

(c) Fees paid to the underwriters and other costs in conjunction with the IPO are estimated to be $57.0 million pre-tax($41.7 million net of tax). The tax recovery is estimated to be $15.3 million using the statutory rate of 26.9%. For purposesof the Unaudited Pro Forma Financial Statements, these after-tax costs are netted against common shares inshareholders’ equity.

(d) For purposes of the Unaudited Pro Forma Financial Statements, it is estimated that $1.0 billion will be paid to eligiblepolicyholders electing a cash payment and eligible policyholders and other recipients who are required to receive acash payment.

(e) The $24.9 million increase in deferred income tax assets is due to tax recoveries on the estimated demutualization costsand fees paid to the underwriters and others costs in conjunction with the IPO as discussed in notes 3b and 3c. Asdemutualization costs and fees paid to underwriters are expensed gradually over time for tax purposes, this creates atemporary difference resulting in a deferred income tax asset.

(f) The equity in the Company is reclassified to shareholders’ equity in Holdco. Retained earnings in Holdco are reduced bythe estimated cash payments to eligible policyholders and other recipients. Accumulated other comprehensive incometransfers from equity in the Company to shareholders’ equity in Holdco at its carrying value at the time ofdemutualization.

(g) Ongoing costs of operating as a public company are estimated to be $5.0 million per year but have not been reflectedin the Unaudited Pro Forma Financial Statements.

4. PRO FORMA BASIC LOSS PER COMMON SHARE

The pro forma basic loss per common share is calculated by taking the net loss for the year ended December 31, 2017 and thenine-month period ended September 30, 2018 and dividing it by 102,600,000, the estimated number of outstanding commonshares at the end of each respective period.

FINANCIAL PERFORMANCE FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

2017 FINANCIAL HIGHLIGHTS:

‰ Increased gross written premiums by 9.7% compared to 2016, driven by growth in personal lines

‰ Commercial lines gross written premiums declined by 2.1% over 2016, as corrective actions continue to be implemented

‰ Reported a combined ratio of 113.7%, including an impact of 7.4 percentage points related to our strategic investments inSonnet, and the replacement of our policy administration system, primarily for our personal lines broker business

‰ Generated a net loss of $92.7 million in 2017

2016 FINANCIAL HIGHLIGHTS:

‰ Increased gross written premiums by 3.8% compared to 2015, driven by strong personal lines growth including the launchof our digital direct brand, Sonnet

‰ Incurred net catastrophe losses of $79.9 million inclusive of reinstatement premiums and the impact of the Fort McMurraywildfire

‰ Reported a combined ratio of 109.1%, including an impact of 6.0 percentage points related to the aforementioned strategicinvestments

‰ Generated a net loss of $20.3 million in 2016

56


RESULTS FROM OPERATIONS

Figure 1 shows the results from operations for the years ended December 31.

Figure 1 2017-2016 2016-2015

(in millions of dollars, except as otherwise noted) 2017 2016 2015 Change Change

Policies in force (thousands) 1,411.5 1,228.6 1,201.2 182.9 27.4

Gross written premiums1 $ 2,286.9 $ 2,084.1 $ 2,008.4 202.8 75.7

Net written premiums1 $ 2,218.1 $ 2,011.0 $ 1,935.4 207.1 75.6

Net earned premiums $ 2,165.8 $ 1,955.6 $ 1,905.7 210.2 49.9

Net claims and adjustment expenses, undiscounted 1,659.1 1,406.3 1,221.5 252.8 184.8

Other underwriting expenses2 802.4 727.7 635.4 74.7 92.3

Underwriting (loss) income1 (295.7) (178.4) 48.8 (117.3) (227.2)

Impact of discounting 37.2 13.6 (1.5) 23.6 15.1

Underwriting (loss) income including the impact of discounting (258.5) (164.8) 47.3 (93.7) (212.1)

Investment income 139.1 135.4 179.5 3.7 (44.1)

Other expense (income) 19.5 10.6 (2.9) 8.9 13.5

(Loss) income before income taxes (138.9) (40.0) 229.7 (98.9) (269.7)

Income tax (recovery) expense (46.2) (19.7) 53.7 (26.5) (73.4)

Net (loss) income $ (92.7) $ (20.3) $ 176.0 (72.4) (196.3)

Other comprehensive income (loss) 20.0 44.4 (78.1) (24.4) 122.5

Comprehensive (loss) income $ (72.7) $ 24.1 $ 97.9 (96.8) (73.8)

Claims ratio1 76.6% 71.9% 64.1% 4.7 pts 7.8 pts

Expense ratio1,2 37.1% 37.2% 33.3% (0.1) pts 3.9 pts

Combined ratio1,2 113.7% 109.1% 97.4% 4.6 pts 11.7 pts

Return on equity1 (5.4%) (1.2%) 10.5% (4.2) pts (11.7) pts

Minimum capital test (“MCT”)1 242.1% 276.1% 285.2% (34.0) pts (9.1) pts


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

GROSS WRITTEN PREMIUMS AND POLICIES IN FORCE

2017 vs 2016

We continue to generate overall growth in both GWP and policies in force (“PIF”). Of the 9.7% increase in GWP, 2.9percentage points arose from new business growth from our digital direct distribution channel, Sonnet, 2.8 percentage pointsfrom the acquisition of Western Financial Insurance Company (renamed Petline Insurance Company), which closed in the firstquarter of 2017, and the remainder from growth within the broker channel. Personal lines GWP grew by 16.6%, driven primarilyby increased auto and property policy volumes across most regions in Canada within the broker channel, new businessgrowth from Sonnet, and the acquisition of Petline. Commercial lines GWP declined by 2.1%, due to the implementation oftargeted pricing, enhanced underwriting and broker management actions, primarily in the second half of 2017. We expectcontinued downward pressure on the commercial lines GWP as our planned actions continue to be implemented over theupcoming year.

2016 vs 2015

We generated overall growth in both GWP and PIF. Personal lines GWP grew by 5.5%, driven primarily by increased autopolicy volumes across most regions in Canada within the broker channel and the digital direct contribution following thelaunch of Sonnet. Personal property GWP grew at a lower rate, as this line of business was impacted by the cancellation ofunprofitable business in British Columbia. This lower growth was partially offset by increased average premiums andincreased personal property policy volumes across most regions in Canada. Commercial lines GWP grew by 0.9%, drivenprimarily by increased fleet business, which more than offset a decline in commercial property and liability policy volumesresulting from targeted rate increases arising from the overhaul of our commercial property and liability pricing strategy.

Further details by line of business are provided in “FINANCIAL PERFORMANCE FOR THE YEARS ENDED DECEMBER 31,2017, 2016 and 2015 — RESULTS BY LINE OF BUSINESS” on page 62.

NET WRITTEN PREMIUMS AND NET EARNED PREMIUMS

2017 vs 2016

Net written premiums and net earned premiums grew relatively consistent with GWP growth.



2016 vs 2015

Net written premiums grew consistent with GWP growth. The lower level of growth in net earned premiums compared to GWPis due to lower levels of GWP growth in 2015 that earned through in 2016.

NET CLAIMS AND ADJUSTMENT EXPENSES

Figure 2 summarizes the composition of the claims ratio for the years ended December 31, illustrating the impact of accidentyear claims incurred, catastrophe losses, and prior year claims development.

Figure 2 2017 2016 20152017-2016

Change2016-2015

Change

(in millions of dollars,except as otherwisenoted) $ Ratio $ Ratio1 $ Ratio $ Ratio $ Ratio

Core accident year claims $ 1,568.5 72.4% $ 1,372.5 70.0% $ 1,272.8 66.8% 196.0 2.4 pts 99.7 3.2 pts

Catastrophe losses 58.0 2.7% 73.9 4.0% 21.8 1.1% (15.9) (1.3) pts 52.1 2.9 pts

Prior year adverse(favourable) claimsdevelopment 32.6 1.5% (40.1) (2.1%) (73.1) (3.8%) 72.7 3.6 pts 33.0 1.7 pts

Total $ 1,659.1 76.6% $ 1,406.3 71.9% $ 1,221.5 64.1% 252.8 4.7 pts 184.8 7.8 pts

1 The impact of the reinsurance reinstatement premiums on the claims ratio is fully reflected in catastrophe losses in 2016.

2017 vs 2016

The core accident year claims ratio, which excludes catastrophe losses and prior year claims development, increased in 2017due to continued challenges in our personal and commercial auto lines, primarily in Ontario, Alberta, and British Columbia.

Catastrophe losses decreased in 2017 as compared to 2016. In 2017, we were impacted by eleven catastrophe events,including flooding associated with a rainstorm in Windsor, Ontario, wind and rainstorms in Ontario and Quebec, wind andwildfires in Alberta and British Columbia, and a British Columbia snowstorm. Comparatively, in 2016, we were impacted bynine catastrophe events, including the Fort McMurray wildfire.

Prior year claims development was impacted by the continued challenges in the performance of our auto lines, which resultedin adverse prior year claims development overall in 2017. Refer to Figure 19, which shows the level of prior year claimsdevelopment over the past ten calendar years.

To address the significant performance challenges, a number of actions have been implemented in 2017 including enhancedbroker management, targeted rate increases, exiting unprofitable books of business and certain product offerings, andincreased underwriting discipline. These actions will take time to be reflected in our results. We also appointed newleadership for Sonnet and commercial lines and most recently, personal lines. Under this new leadership, further measureswill be implemented in 2018 across our book of business including pricing segmentation, targeted rate increases and aheightened focus on underwriting quality and discipline. In addition, we plan to roll out our new policy administration system,Vyne, in 2018 which we expect will improve operating efficiency, pricing, underwriting and ease of doing business with ourbroker partners in personal lines and a portion of our commercial auto line of business.

2016 vs 2015

The core accident year claims ratio increased in 2016 driven by deterioration in Ontario, British Columbia, and Alberta autoperformance, and an increase in net claims severity and frequency.

Catastrophe losses totalled $73.9 million in 2016, representing one of the largest amounts in our history. We also incurred$6.0 million in reinsurance reinstatement premiums associated with recoveries triggered due to the Fort McMurray wildfire.Along with the impact of the Fort McMurray wildfire, the most costly insured disaster in Canadian history, we were alsoimpacted by eight other weather-related events, including six separate wind and hail storms in Alberta, flooding associatedwith the rainstorm in Windsor, Ontario, and the effect of Hurricane Matthew in the Atlantic region. Comparatively, in 2015 wehad lower levels of catastrophe activity. We incurred losses as a result of five weather-related events, including lossesassociated with three separate wind and hail storms in Alberta, an Ontario deep freeze winter storm, and a British Columbialower mainland wind and water storm.

We continued to experience favourable prior year claims development overall in 2016. The continued deterioration in claimsactivity for Alberta and British Columbia auto resulted in the need for additional reserves related to prior years to be recorded.Comparatively, 2015 benefited from favourable prior year claims development that arose from the one-time Ontario autoregulatory reforms enacted in that year which reduced reserves for certain open claims, primarily related to prior accidentyears.

58


OTHER UNDERWRITING EXPENSES

Figure 3 shows the key components of our reported expense ratio for the years ended December 31.

Figure 3 2017 2016 20152017-2016

Change2016-2015

Change

(in millions of dollars, except asotherwise noted) $ Ratio $ Ratio $ Ratio $ Ratio $ Ratio

Net commissions $ 379.3 17.5% $ 371.4 19.0% $ 363.7 19.1% 7.9 (1.5) pts 7.7 (0.1) pts

Operating expenses(net of other underwriting

revenues)1

345.4 16.0% 287.0 14.7% 205.0 10.7% 58.4 1.3 pts 82.0 4.0 pts

Premium taxes 77.7 3.6% 69.3 3.5% 66.7 3.5% 8.4 0.1 pts 2.6 —

Total $ 802.4 37.1% $ 727.7 37.2% $ 635.4 33.3% 74.7 (0.1) pts 92.3 3.9 pts

1 Operating expenses are presented net of other underwriting revenues throughout this section.

2017 vs 2016

The net commissions ratio decreased significantly, due primarily to reduced broker underwriting profitability which resulted inlower contingent profit commissions, the addition of Petline’s results which has a lower commission ratio than our existingbroker business, and the impact of Sonnet which pays no commissions.

The operating expenses ratio increased as expected in 2017 due to a reduction in service fees (presented as an offset tooperating expenses) in Ontario personal auto driven by regulatory changes, and continued expenditures on strategicinvestments. We continue to make significant investments in Sonnet, and the replacement of the policy administration system,primarily for our personal lines broker business. We expect that these strategic investments will continue to impact ourunderwriting results during the ongoing implementation and start-up phases. In the longer term, these investments areexpected to drive profitable growth, productivity, and our ability to deliver products and services to the market in a timely,competitive, and efficient manner.

2016 vs 2015

The impact of net commissions on our expense ratio decreased slightly. The operating expenses ratio increased largely asexpected in 2016. Costs associated with the replacement of our personal lines policy administration system, and thedevelopment and launch of Sonnet, including building the supporting infrastructure, impacted the operating expenses ratio.

UNDERWRITING RESULTS

Figure 4 summarizes the composition of the undiscounted and discounted combined ratio for the years ended December 31.

Figure 4 2017 2016 20152017-2016

Change2016-2015

Change

(in millions of dollars, exceptas otherwise noted) $ Ratio $ Ratio $ Ratio $ Ratio $ Ratio

Net claims and adjustmentexpenses $ 1,659.1 76.6% $ 1,406.3 71.9% $ 1,221.5 64.1% 252.8 4.7 pts 184.8 7.8 pts

Other underwriting expenses 802.4 37.1% 727.7 37.2% 635.4 33.3% 74.7 (0.1) pts 92.3 3.9 pts

Combined ratio,undiscounted 2,461.5 113.7% 2,134.0 109.1% 1,856.9 97.4% 327.5 4.6 pts 277.1 11.7 pts

Impact of discounting (37.2) (1.7%) (13.6) (0.7%) 1.5 0.1% (23.6) (1.0) pts (15.1) (0.8) pts

Combined ratio, discounted $ 2,424.3 112.0% $ 2,120.4 108.4% $ 1,858.4 97.5% 303.9 3.6 pts 262.0 10.9 pts

2017 vs 2016

As outlined in Figures 2 and 3, our underwriting results were negatively impacted by continued challenges in personal autoand commercial auto, which experienced increases in claims severity and frequency and reserve strengthening. Ourunderwriting results were also impacted by increased investments and claims activity in Sonnet and the replacement of thepolicy administration system, primarily for our personal lines broker business. These strategic investments impacted ourcombined ratio by 7.4 percentage points, compared to 6.0 percentage points in 2016. Refer to “FINANCIAL PERFORMANCEFOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015 — RESULTS BY LINE OF BUSINESS” on page 62 foradditional details.

The discounting recovery in 2017 was driven by a significant increase in investment yields supporting the claim liabilities. Thisimpact was partially offset by recognized losses associated with the Fair Value Through Profit or Loss (“FVTPL”) investmentportfolio. Refer to Figure 5, which shows the composition of investment income.



2016 vs 2015

As outlined in Figures 2 and 3, our underwriting results were significantly impacted by a deterioration in personal auto andcommercial auto, which experienced increases in claims severity and frequency, and increased catastrophe losses (includingthe Fort McMurray wildfire). Our underwriting results were also impacted by increased investments in the replacement of ourpersonal lines policy administration system, and the development and launch of Sonnet, including building the supportinginfrastructure.

The discounting recovery in 2016 was driven by an increase in investment yields used to determine the discount rate, ascompared to a decline in yields in 2015. This impact was largely offset by recognized losses associated with the FVTPLinvestment portfolio.

INVESTMENT INCOME

Figure 5 shows the composition of investment income recorded in the consolidated statement of comprehensive (loss)income for the years ended December 31.

Figure 5 2017-2016 2016-2015


Interest income $ 59.4 $ 61.1 $ 67.7 (1.7) (6.6)

Dividend income 38.5 39.2 37.9 (0.7) 1.3

Total interest and dividend income 97.9 100.3 105.6 (2.4) (5.3)

Realized gains on Available for Sale (“AFS”) portfolio 79.6 54.1 65.9 25.5 (11.8)

Realized (losses) gains on FVTPL bonds (8.1) 14.3 36.7 (22.4) (22.4)

Unrealized losses on FVTPL bonds (18.9) (27.0) (9.0) 8.1 (18.0)

Net impairment losses on AFS portfolio (11.4) (6.3) (19.7) (5.1) 13.4

Total recognized gains on investments 41.2 35.1 73.9 6.1 (38.8)

Total investment income $ 139.1 $ 135.4 $ 179.5 3.7 (44.1)

2017 vs 2016

Total interest and dividend income declined slightly from 2016, due primarily to a decrease in interest income caused by ashift in bonds from the AFS portfolio to the lower yielding FVTPL portfolio to support claim liabilities. The FVTPL portfolio hasa shorter duration, resulting in lower yields than the AFS portfolio.

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 (loss) income. The designation of theFVTPL bond portfolio aims to reduce the accounting mismatch in net (loss) income that would otherwise be generated by thefluctuations in fair values of underlying claim liabilities due to changes in interest rates. We manage the FVTPL portfolio’squantum and duration so that the impact of changes in interest rates on claim liabilities and the FVTPL portfolio reasonablyoffset each other. As at December 31, 2017, the quantum of investments in the FVTPL portfolio represented 70.5% (2016:69.6%) of the underlying claim liabilities that these investments support, and the average duration of our FVTPL portfolio was4.41 years (2016: 4.49 years). The balance of the bond portfolio, along with the short-term investments and equity portfolios, isdesignated as AFS. Changes in the fair value of AFS instruments are included in other comprehensive income (loss) (“OCI”)unless the instrument is disposed of or considered to be impaired, in which case they are included in net (loss) income.

Realized gains on the AFS portfolio increased, as trading activity within strong equity markets produced higher realized gainson AFS investments in 2017, primarily on domestic and foreign common equities. The net realized and unrealized losses onthe FVTPL bond portfolio were recognized due to an increase in yields in 2017 and 2016. The investment impairment losses in2017 primarily pertained to our limited common equity holdings in materials and energy. Refer to “FINANCIAL POSITION FORTHE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015” on page 66 for additional details of our investment portfolio mix.

2016 vs 2015

During the year, we increased our investments in common stocks and higher yielding preferred stocks, while reducing ourweighting in bonds, in order to enhance diversification and optimize risk-adjusted returns. Interest income decreased, asbonds that matured were reinvested at lower rates or reinvested in common or preferred stocks. Dividend income increasedas a result of increasing common and preferred stock holdings throughout the year.

To further optimize the performance of the portfolio, a change in strategy with the FVTPL bonds began to be implemented inthe second quarter of 2015, reducing the quantum and increasing the average duration of the investments within the portfolio.This strategy is intended to continue to achieve the objective of reducing the accounting mismatch in net (loss) income whileallowing a larger portion of the portfolio to be invested in higher yielding assets that remain of a high quality. As atDecember 31, 2016, the quantum of investments in the FVTPL portfolio represented 69.6% (2015: 82.9%) of the underlyingclaim liabilities that these investments support, and the average duration of our FVTPL portfolio was 4.49 years (2015: 3.99years).

60


Realized gains on the AFS portfolio decreased, as trading activity within stronger equity and bond markets producedsignificant recognized gains in the first quarter of 2015. The net realized and unrealized (losses) gains on the FVTPL bondportfolio went from a gain of $27.7 million in 2015 to a loss of $12.7 million in 2016 due to an increase in yields in 2016,compared to a decrease in yields in 2015. The investment impairment losses in 2015 primarily pertained to our limitedcommon equity energy holdings. The energy sector rebounded strongly in 2016 along with a broad rally in equities, resultingin a decline in investment impairment losses.

OTHER EXPENSE (INCOME)

Other expense (income) includes investment expenses, costs incurred to prepare for our potential demutualization, the resultsfrom our investments in associates, and acquisition-related costs for the Petline acquisition.

2017 vs 2016

Increased expenses of $8.9 million over the prior year are primarily attributable to increased costs associated with ourpotential demutualization. Demutualization costs in 2017 totaled $13.4 million as compared to $7.0 million in 2016.

2016 vs 2015

Increased expenses of $13.5 million over 2015 are primarily attributable to costs incurred related to the acquisition of Petlineand increased costs associated with our potential demutualization. Demutualization costs in 2016 totaled $7.0 million ascompared to $3.3 million in 2015. In addition, 2015 included a gain from the sale of an investment in an associate.

INCOME TAX (RECOVERY) EXPENSE

2017 vs 2016

The effective tax rate for 2017 was a recovery of 33.3%, compared to a recovery of 49.3% in 2016. The effective tax rate ismore favourable than the statutory rate of 26.7% due primarily to the impact of non-taxable Canadian dividend income, whoseproportionate impact in 2016 was greater due to a lower net loss in that year.

2016 vs 2015

The effective tax rate for 2016 was a recovery of 49.3%, compared to an expense of 23.5% in 2015. The effective tax rate ismore favourable than the statutory rate of 26.7% due primarily to the impact of increased non-taxable Canadian dividendincome combined with our overall pre-tax income declining to a pre-tax loss.

NET (LOSS) INCOME

2017 vs 2016

Net loss increased due to weaker underwriting performance across both personal and commercial lines, and increased spendon our strategic initiatives, which were partially offset by a higher income tax recovery.

2016 vs 2015

Net income decreased from a profit of $176.0 million in 2015 to a loss of $20.3 million in 2016 due to a combination of weakerunderwriting performance, higher levels of catastrophe losses, increased spend on our strategic initiatives, and a decline ininvestment income, which were partially offset by a high effective tax rate recovery.

OTHER COMPREHENSIVE INCOME (LOSS)

2017 vs 2016

Other comprehensive income decreased in 2017, as compared to 2016, as a result of higher realized gains on AFSinvestments which are reclassed out of accumulated other comprehensive income to net (loss) income when sold. Refer toFigure 17, which outlines the unrealized gains (losses) on AFS securities by type of security. Other comprehensive income wasalso negatively impacted by our post-employment benefit obligation as a result of lower discount rates.

2016 vs 2015

Other comprehensive income (loss) shifted from a loss in 2015 to income in 2016, due primarily to an increase in unrealizedgains on our AFS investments. The rebound in the equity markets in the second half of the year resulted in increasedunrealized gains on common stocks, which was somewhat offset by unrealized losses on bonds as interest rates increased.



CAPITAL STRENGTH

2017 vs 2016

Total equity as of December 31, 2017 decreased by $72.7 million since December 31, 2016. The net loss for the year waspartially offset by recognized gains on AFS investments. The minimum capital test (“MCT”) ratio of 242.1% as at December 31,2017 (2016: 276.1%) continues to be well in excess of both minimum internal capital and external regulatory requirements. TheMCT ratio declined from December 31, 2016 due mainly to underwriting losses, the growth in required capital due to growth inpremiums and claim liabilities, and the ongoing deployment of capital for our strategic investments and for the acquisitions ofPetline and strategically aligned brokerages. We were also impacted by the inadmissibility of a portion of our deferred taxassets.

2016 vs 2015

Total equity as of December 31, 2016 increased by $24.1 million since December 31, 2015, due primarily to capital appreciationwithin the investment portfolio, which more than offset the net loss for the year. The MCT ratio was 276.1% as at December 31,2016 (2015: 285.2%). The MCT ratio was impacted by the strategic deployment of capital for our infrastructure and operationalinvestments, which receive no capital credit, and by the repositioning of our investment portfolio, with equity investmentsrequiring greater regulatory capital relative to bonds.

RESULTS BY LINE OF BUSINESS

We 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 in 2017 are pet insurance products.

The following charts illustrate our GWP mix on this basis for the fiscal years 2017, 2016, and 2015:

GWP by Line of Business

2017 2016 2015

43%

19%

13%

25%

Personal auto

Personal property

Commercial auto

Commercial property andliability

44%

19%

14%

23%

45%

22%

12%

21%

In 2017, our business mix shifted from commercial lines to personal lines due to our corrective actions in commercial lines andthe acquisition of Petline. Our business mix remained relatively stable in 2016 with a slight shift from commercial property andliability to personal auto and commercial auto.

GWP by Region

2017 2016 2015

58%15%

14%

7%6%

Ontario

British Columbia

Alberta & Prairies

Atlantic

Quebec

59%14%

14%

7%6%

60% 13%

14%

7%6%

In 2017, there was a slight shift in the regional mix from the British Columbia region, which was impacted by corrective actions,to the Ontario region, where we implemented rate increases. In 2016, there was a slight shift in the regional mix from theBritish Columbia and Alberta & Prairies regions to the Ontario region.

62


UNDERWRITING — PERSONAL LINES

Figure 6 presents selected results of operations of the personal lines of business for the years ended December 31.

Figure 6 2017-2016 2016-2015


Policies in force (thousands)

Auto 693.8 656.7 619.0 37.1 37.7

Property 547.6 402.4 407.8 145.2 (5.4)

Total 1,241.4 1,059.1 1,026.8 182.3 32.3

Gross written premiums

Auto $ 1,041.2 $ 920.2 $ 858.7 121.0 61.5

Property 495.7 397.6 390.3 98.1 7.3

Total $ 1,536.9 $ 1,317.8 $ 1,249.0 219.1 68.8

Net earned premiums

Auto $ 980.6 $ 876.7 $ 820.3 103.9 56.4

Property 449.6 367.9 357.7 81.7 10.2

Total $ 1,430.2 $ 1,244.6 $ 1,178.0 185.6 66.6

Underwriting (loss) income (undiscounted)

Auto $ (211.6) $ (34.3) $ 43.5 (177.3) (77.8)

Property 2.7 4.6 43.0 (1.9) (38.4)

Total $ (208.9) $ (29.7) $ 86.5 (179.2) (116.2)

In 2015 and 2016, the personal lines of business underwriting (loss) income excluded certain expenses associated with thedevelopment and launch of Sonnet, as it was in the pre-launch phase in 2015 and for the majority of 2016. In 2017, theunderwriting activity of Sonnet and our investment in a new personal lines policy administration system have been included inthe line of business performance, resulting in increased combined ratios. The collective impact of these strategic investmentson the 2017 combined ratios has been noted in Figure 7 below to depict the adjusted combined ratios excluding theseinvestments for comparative purposes.

Figure 7

2017Combined

ratio

2017Impact

of strategicinvestments

2017Adjusted

combinedratio1

2016Combined

ratio

2015Combined

ratio2017-2016

Change2016-2015

Change

Auto 121.5% 13.0 pts 108.5% 103.9% 94.7% 4.6 pts 9.2 pts

Property 99.4% 6.7 pts 92.7% 98.8% 88.0% (6.1) pts 10.8 pts

Total 114.6% 11.1 pts 103.5% 102.4% 92.7% 1.1 pts 9.7 pts

1 This item is a non-GAAP measure, which is defined on page 88.

PERSONAL AUTO RATIOS1 PERSONAL PROPERTY RATIOS1 TOTAL PERSONAL LINES RATIOS1

81.9

26.6

108.

5

77.2

26.7

103.

9

68.4

26.3

94.7

0

20

40

60

80

100

120

Claims Expense Combined

58.5

34.2

92.7

62.8

36.0

98.8

52.7

35.3

88.0

0

20

40

60

80

100

120


74.4

29.1

103.

5

73.0

29.4

102.

4

63.6

29.1

92.7

0

20

40

60

80

100

120


2017 2016 2015

1 These adjusted ratios exclude the impact of our strategic investments



Figure 8 summarizes the composition of the claims ratio for the years ended December 31 for our personal lines of business.

Figure 8 Auto Property

20171 2016 20152017-2016

Change2016-2015

Change 20171 20162 20152017-2016

Change2016-2015

Change

Core accident year claims 81.6% 81.8% 75.9% (0.2) pts 5.9 pts 53.3% 51.4% 51.7% 1.9 pts (0.3) pts

Catastrophe losses 0.2% 1.2% 0.5% (1.0) pts 0.7 pts 6.9% 12.0% 1.8% (5.1) pts 10.2 pts

Prior year adverse(favourable) claimsdevelopment 0.1% (5.8%) (8.0%) 5.9 pts 2.2 pts (1.7%) (0.6%) (0.8%) (1.1) pts 0.2 pts

Total 81.9% 77.2% 68.4% 4.7 pts 8.8 pts 58.5% 62.8% 52.7% (4.3) pts 10.1 pts

1 These adjusted ratios exclude the impact of our strategic investments2 The impact of the reinsurance reinstatement premiums on the claims ratio is fully reflected in catastrophe losses in 2016.

2017 vs 2016

Personal auto GWP grew in 2017, due primarily to increased auto policy volumes across most regions in Canada within ourbroker channel, and new business growth from our digital direct distribution channel, Sonnet. This line of business continuesto be challenged across the country, with a core accident year claims ratio that remains elevated and unsustainable. Personalauto was impacted by reserve strengthening, driven by the deterioration in Ontario and Alberta bodily injury claim costs, andBritish Columbia excess auto liability claims. Despite reforms to Ontario auto insurance, many insurers have filed orimplemented rate increases to address rate deficiencies in this line of business. To address the challenges in personal auto,targeted rate increases and a number of underwriting actions have been implemented, with further targeted rate increasesplanned in 2018.

Personal property GWP also grew in 2017, due primarily to increased personal property policy volumes across most regions inCanada within our broker channel, the digital direct contribution from Sonnet, and the acquisition of Petline. Of the 24.7%increase in personal property GWP in 2017, Petline contributed 14.6 percentage points. The adjusted personal propertycombined ratio in 2017 improved as compared to 2016, due primarily to lower levels of weather-related catastrophe losses,partially offset by an increase in claims frequency. The prior year was heavily impacted by the Fort McMurray wildfire.

During 2018, we will begin the roll out of our new policy administration system for personal lines, which we expect willimprove operating efficiency, pricing, underwriting and ease of doing business with our broker partners once fullyimplemented.

2016 vs 2015

Personal auto GWP grew in 2016, supported by increased auto policy volumes across most regions in Canada within ourbroker channel, and the launch of Sonnet. The personal auto combined ratio was impacted by an increase in claims severityand lower levels of favourable prior year claims development, due primarily to deterioration in Alberta and British Columbia. Incontrast, 2015 was positively impacted by the benefit from the one-time Ontario auto regulatory reforms enacted in that year,which reduced reserves for certain open claims.

Personal property PIF decreased due to the cancellation of unprofitable business in British Columbia. These lower policyvolumes were more than offset by increased average premiums and increased personal property policy volumes across mostregions in Canada, resulting in overall GWP growth. The personal property combined ratio was significantly impacted byincreased catastrophe losses, including the Fort McMurray wildfire. Catastrophe losses impacted the 2016 combined ratio by12.3 percentage points, compared to 1.8 percentage points in 2015. Despite these challenges, personal property produced anunderwriting profit.

64


UNDERWRITING — COMMERCIAL LINES

Figure 9 presents selected results of operations of the commercial lines of business for the years ended December 31.

Figure 9 2017-2016 2016-2015



Auto 52.0 50.6 50.4 1.4 0.2

Property and liability 118.1 118.9 124.0 (0.8) (5.1)

Total 170.1 169.5 174.4 0.6 (4.9)


Auto $ 281.2 $ 285.6 $ 264.8 (4.4) 20.8

Property and liability 468.8 480.7 494.6 (11.9) (13.9)

Total $ 750.0 $ 766.3 $ 759.4 (16.3) 6.9

Net earned premiums

Auto $ 287.0 $ 266.6 $ 258.3 20.4 8.3

Property and liability 448.6 444.4 469.4 4.2 (25.0)

Total $ 735.6 $ 711.0 $ 727.7 24.6 (16.7)

Underwriting (loss) income (undiscounted)

Auto $ (66.5) $ (4.6) $ 18.2 (61.9) (22.8)

Property and liability (20.3) (31.8) (16.7) 11.5 (15.1)

Total $ (86.8) $ (36.4) $ 1.5 (50.4) (37.9)

COMMERCIAL AUTO RATIOS COMMERCIAL PROPERTY ANDLIABILITY RATIOS

TOTAL COMMERCIAL LINES RATIOS

93.3

29.8

123.

1

72.9

28.8

101.

7

64.2

28.7

92.9

0

20

40

60

80

100

120


66.6

38.0

104.

6

68.0

39.2

107.

2

65.2

38.4

103.

6

0

20

40

60

80

100

120


77.1

34.7

111.

8

69.9

35.2

105.

1

64.9

35.0

99.9

0

20

40

60

80

100

120


2017 2016 2015

Figure 10 summarizes the composition of the claims ratio for the years ended December 31 for our commercial lines ofbusiness.

Figure 10 Auto Property and liability

2017-2016 2016-2015 2017-2016 2016-2015

2017 2016 2015 Change Change 2017 20161 2015 Change Change

Core accident year claims 82.6% 67.4% 65.2% 15.2 pts 2.2 pts 59.4% 63.4% 63.2% (4.0) pts 0.2 pts

Catastrophe losses 0.1% 0.4% 0.3% (0.3) pts 0.1 pts 5.4% 4.8% 2.2% 0.6 pts 2.6 pts

Prior year adverse (favourable)claims development 10.6% 5.1% (1.3%) 5.5 pts 6.4 pts 1.8% (0.2%) (0.2%) 2.0 pts 0.0 pts

Total 93.3% 72.9% 64.2% 20.4 pts 8.7 pts 66.6% 68.0% 65.2% (1.4) pts 2.8 pts

1 The impact of the reinsurance reinstatement premiums on the claims ratio is fully reflected in catastrophe losses in 2016.

2017 vs 2016

Commercial auto GWP decreased compared to 2016, driven primarily by targeted underwriting actions in our fleet andmanaging general agent business. The commercial auto combined ratio was impacted by a significant deterioration in bodilyinjury losses for Ontario fleets, increased claims severity and frequency, and strengthening of reserves to reflect these trends.



Commercial property and liability GWP decreased in 2017, driven primarily by targeted underwriting actions in this line ofbusiness. The commercial property and liability combined ratio improved due mainly to a decrease in large losses, partiallyoffset by an increase in claims frequency, and adverse prior year claims development.

In the second quarter of 2017, we initiated a comprehensive review of our commercial lines portfolio by region and producttype. This ongoing review has led to a number of actions in 2017, including enhanced broker management, targeted rateincreases, exiting unprofitable books of business and certain product offerings, and increased underwriting discipline. Theseactions, which will take time to be reflected in our results, have particularly impacted our commercial policy volumes and GWPin the second half of 2017. This trend is expected to continue as further actions are implemented from our review, includingpricing segmentation, targeted rate increases, and a heightened focus on underwriting quality. This should result in a morefavourable mix of commercial business and improve operating performance going forward.

2016 vs 2015

Commercial auto GWP increased compared to 2015 despite the impact of the overhaul of our commercial property andliability pricing strategy, which impacted certain associated commercial auto policy renewals. GWP grew at a significantlyhigher rate than PIF due to a shift from small commercial auto business to fleet business, which commands higher averagepremiums. The commercial auto combined ratio was impacted by higher claims severity and an increase in claims frequency,partially offset by lower large losses. In contrast, 2015 benefited from the one-time Ontario auto regulatory reforms enacted in2015, resulting in increased levels of favourable prior year claims development.

Commercial property and liability GWP decreased in 2016 due to the decline in PIF, driven by the overhaul of our pricingstrategy designed to improve the profitability of this line of business. This was somewhat offset by higher average premiumsresulting from our underwriting and pricing actions. The commercial property and liability combined ratio was impacted byincreased catastrophe losses, including the Fort McMurray wildfire, which had an incremental impact of 2.9 percentage points,whereas in 2015 we experienced lower levels of catastrophe activity. This was somewhat offset by the beneficial impact ofincreased rate resulting from our underwriting and pricing actions.

FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015

FINANCIAL HIGHLIGHTS FOR 2017:

‰ Total assets increased by $141.3 million (2.6%) to $5.6 billion‰ Gross claim liabilities increased by $128.4 million (5.4%) to $2.5 billion‰ Total equity decreased by $72.7 million (4.0%) to $1.7 billion

FINANCIAL HIGHLIGHTS FOR 2016:

‰ Total assets increased by $135.5 million (2.5%) to $5.5 billion‰ Gross claim liabilities increased by $90.0 million (3.9%) to $2.4 billion‰ Total equity increased by $24.1 million (1.4%) to $1.8 billion

Figure 11 shows the significant consolidated balance sheet line items as at December 31.

Figure 11 2017-2016 2016-2015


Cash and cash equivalents $ 166.4 $ 189.6 $ 89.0 (23.2) 100.6

Restricted cash — 43.5 — (43.5) 43.5

Investments 3,996.0 3,914.5 4,064.9 81.5 (150.4)

Premiums receivable 699.6 648.0 601.2 51.6 46.8

Reinsurance receivable and recoverable 59.1 104.7 81.7 (45.6) 23.0

Deferred policy acquisition expenses 221.2 216.7 207.8 4.5 8.9

Goodwill and intangible assets 229.2 167.1 131.6 62.1 35.5

Other assets 250.4 196.5 168.9 53.9 27.6

Total assets $ 5,621.9 $ 5,480.6 $ 5,345.1 141.3 135.5

Unearned premiums $ 1,131.4 $ 1,077.3 $ 1,022.3 54.1 55.0

Claim liabilities 2,527.7 2,399.3 2,309.3 128.4 90.0

Accounts payable and other liabilities 232.4 200.9 234.5 31.5 (33.6)

Total liabilities 3,891.5 3,677.5 3,566.1 214.0 111.4

Retained earnings 1,644.8 1,744.5 1,762.2 (99.7) (17.7)

Accumulated other comprehensive income 85.6 58.6 16.8 27.0 41.8

Total equity 1,730.4 1,803.1 1,779.0 (72.7) 24.1

Total liabilities and equity $ 5,621.9 $ 5,480.6 $ 5,345.1 141.3 135.5

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CASH AND INVESTMENTS

Figure 12 shows the composition of our cash and cash equivalents, and investments recorded on the consolidated balancesheet as at December 31.

Figure 12 2017 2016 2015

(in millions of dollars, except as otherwisenoted)

Carryingvalue

Percent ofcarrying value

Carryingvalue


Carryingvalue


Cash and cash equivalents $166.4 4.0% $189.6 4.6% $89.0 2.1%

Restricted cash — — 43.5 1.0% — —

Short-term investments 19.6 0.5% — — 27.0 0.7%

Bonds 2,687.1 64.6% 2,696.2 65.0% 2,969.9 71.5%

Preferred stocks 384.1 9.2% 377.9 9.1% 370.6 8.9%

Common stocks 701.2 16.8% 639.2 15.4% 558.2 13.4%

Pooled funds 107.8 2.6% 116.1 2.8% 114.2 2.8%

4,066.2 97.7% 4,062.5 97.9% 4,128.9 99.4%

Commercial loans 96.2 2.3% 85.1 2.1% 25.0 0.6%

Total cash and investments $ 4,162.4 100.0% $ 4,147.6 100.0% $ 4,153.9 100.0%

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 and regulatory guidelines, and reflects theexpected settlement pattern of claim liabilities.

2017 vs 2016

Our proportionate share of investments in fixed income securities, including cash and cash equivalents, and restricted cash,decreased slightly to 69.1% of the total portfolio compared with 70.6% as at December 31, 2016.

Investments increased due primarily to an increase in the market value of our investments, and the addition of Petline’sinvestments. Commercial loans increased $11.1 million compared to December 31, 2016, due primarily to the issuance of newloans to broker partners which exceeded loan repayments.

Refer to Note 2 –“Summary of significant accounting policies” of our audited consolidated financial statements which providesfurther details pertaining to the classification and measurement of our financial instruments.

2016 vs 2015

Our proportionate share of investments in fixed income securities, including cash and cash equivalents, and restricted cash,decreased to 70.6% of the total portfolio compared with 74.3% as at December 31, 2015, driven by a re-deployment tocommon stock holdings.

Investments decreased due primarily to cash requirements to fund our infrastructure and operational investments, and to fundour acquisition of Petline. Commercial loans increased $60.1 million compared to December 31, 2015, due primarily to theissuance of new loans to broker partners which exceeded loan repayments.



INVESTMENTS

Investment sector mix

Figure 13 summarizes our investments by sector as at December 31.

Figure 13 2017 2016 2015

(in millions of dollars, except as otherwisenoted)

Short-terminvestments

and bondsPreferred

stocksCommon

stocksPooled

funds Total Total Total

Government 59% – – – 40% 40% 46%

Financials 24% 67% 32% 14% 29% 34% 34%

Energy 3% 24% 20% 9% 9% 7% 5%

Telecommunications 2% 3% 4% 14% 3% 3% 2%

Industrials 1% – 8% 8% 3% 5% 4%

Utilities 5% 6% 3% 14% 4% 3% 1%

Consumer discretionary 1% – 7% 3% 2% 2% 2%

Materials – – 10% 3% 2% 1% 1%

Consumer staples 3% – 4% 14% 4% 2% 2%

Information technology 1% – 7% 5% 2% 2% 2%

Health care – – 5% 11% 1% 1% 1%

Real estate 1% – – 5% 1% – –

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

Total $ 2,706.7 $ 384.1 $ 701.2 $ 107.8 $ 3,899.8 $ 3,829.4 $ 4,039.9

This figure demonstrates the secure and highly liquid nature of our investment portfolio with a significant concentration in thegovernment and financial sectors.

Investment credit quality

Figure 14 and Figure 15 illustrate the strong credit quality of our fixed income securities and preferred stocks, respectively, asat December 31.

Credit rating1 — bonds

Figure 14 2017 2016 2015

(in millions of dollars, except asotherwise noted) Carrying value

Percent ofcarrying value Carrying value



AAA $1,532.1 57.0% $1,435.4 53.3% $1,642.6 55.3%

AA 175.4 6.5% 364.8 13.5% 468.1 15.8%

A 724.7 27.0% 688.6 25.5% 620.3 20.9%

BBB 254.9 9.5% 207.4 7.7% 214.5 7.2%

BB or not rated – – – – 24.4 0.8%

Total bonds $ 2,687.1 100.0% $ 2,696.2 100.0% $2,969.9 100.0%

1 Using the lowest of Standard & Poor’s and Dominion Bond Rating Service ratings.

Credit rating1 — preferred stocks

Figure 15 2017 2016 2015





P1 $3.3 0.9% $3.2 0.9% $3.7 1.0%

P2 302.1 78.6% 319.4 84.5% 322.6 87.1%

P3 or not rated 78.7 20.5% 55.3 14.6% 44.3 11.9%

Total preferred stocks $ 384.1 100.0% $ 377.9 100.0% $ 370.6 100.0%


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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. This resulted in 90.5% (2016: 92.3%, 2015: 92.0%) of our bonds being rated “A-” or betterand 79.5% (2016: 85.4%, 2015: 88.1%) 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

Figure 16 summarizes the region of issuer of our investment portfolio as at December 31.

Figure 16 2017 2016 2015





Canada $3,538.3 90.7% $3,334.1 87.1% $3,537.2 87.5%

United States 226.4 5.8% 300.3 7.8% 284.9 7.1%

Europe 85.5 2.2% 77.4 2.0% 71.8 1.8%

Other 49.6 1.3% 117.6 3.1% 146.0 3.6%

Total $ 3,899.8 100.0% $ 3,829.4 100.0% $ 4,039.9 100.0%

Our investment portfolio is mainly concentrated in Canada.

Unrealized gains on AFS securities

Figure 17 outlines the unrealized gains (losses) on AFS securities by type of security as at December 31.

Figure 17


Bonds $(6.5) $2.0 $15.8

Preferred stocks (8.1) (57.6) (63.0)

Common stocks 122.4 126.2 62.0

Pooled funds 5.0 2.3 0.3

Unrealized gains $ 112.8 $72.9 $15.1

2017 vs 2016

A majority of our preferred stock portfolio is comprised of securities whose dividend income is reset every five years based ona spread over the five-year Government of Canada bond yield. The valuation of these securities improved significantly asyields increased in 2017. We continue to view these investments as high quality preferred stocks, as they are issued by largewell-established companies and they generate attractive levels of dividend income. The improved valuation of thesesecurities was partially offset by unrealized losses on the bond portfolio due to an increase in yields.

2016 vs 2015

The unrealized gains on bonds decreased due primarily to an increase in yields since December 31, 2015 and a lowerweighting of bonds in our investment portfolio. The market value of our rate reset preferred stock portfolio increased in 2016,due mainly to an increase in yields. The rebound in the equity markets in the second half of the year, together with anincrease in our holdings, resulted in increased unrealized gains on common stocks.

PREMIUMS RECEIVABLE AND UNEARNED PREMIUMS

2017 vs 2016

Premiums receivable and the unearned premiums balance increased, primarily driven by the overall growth in GWP, whichincludes organic growth in the broker channel, as well as the addition of Petline and the impact of Sonnet.

2016 vs 2015

Premiums receivable and the unearned premiums balance increased, primarily driven by the overall growth in GWP.

REINSURANCE RECEIVABLE AND RECOVERABLE

2017 vs 2016

Reinsurance receivable and recoverable decreased as a result of payments received from reinsurers in 2017 with respect tothe Fort McMurray wildfire and certain large losses.



Consistent with industry practice, our reinsurance receivables and amounts recoverable from licensed Canadian reinsurers($43.0 million as at December 31, 2017, $79.7 million as at December 31, 2016, $53.4 million as at December 31, 2015) areusually unsecured. Canadian regulatory requirements, as set out by OSFI, require these reinsurers to maintain adequateassets 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 and marketable securities.

2016 vs 2015

Reinsurance receivable and recoverable increased as a result of higher recoveries arising from heightened catastrophe(including Fort McMurray) and large loss activity above net retention levels. Losses in excess of our net retention arerecovered through our reinsurance treaties, net of reinstatement premiums.

GOODWILL AND INTANGIBLE ASSETS

2017 vs 2016

Goodwill and intangible assets increased primarily related to the goodwill and intangible assets arising from the acquisition ofPetline, and capitalization of costs associated with the replacement of our personal lines policy administration system. Theseincreases were partially offset by the amortization of finite-lived intangible assets.

2016 vs 2015

Goodwill and intangible assets increased primarily related to the capitalization of costs associated with the replacement of ourpersonal lines policy administration system and the development of Sonnet, including building the supporting infrastructure.

OTHER ASSETS

2017 vs 2016

Other assets increased from December 31, 2016 due mainly to the purchase of ownership interests in strategically alignedbrokerages in 2017.

2016 vs 2015

Other assets increased from December 31, 2015 due mainly to income taxes receivable increasing by $29.8 million as a resultof instalment payments outpacing the income tax expense.

CLAIM LIABILITIES AND ADJUSTMENT EXPENSES

Figure 18 shows the change in our net unpaid claim liabilities as at December 31.

Figure 18


Net unpaid claim liabilities, beginning of year $ 2,301.0 $ 2,237.9 $ 2,276.9

Acquisition of Petline 3.3 – –

Current year claims incurred 1,626.5 1,446.4 1,294.6

Prior year adverse (favourable) claims development 32.6 (40.1) (73.1)

Claims and adjustment expenses 1,659.1 1,406.3 1,221.5

Impact of discounting (including PfAD) (37.2) (13.6) 1.5

Claims paid during the year (1,453.0) (1,329.5) (1,262.0)

Net unpaid claim liabilities, end of year $ 2,473.2 $ 2,301.1 $ 2,237.9

2017 vs 2016

The consolidated net discounted claim liabilities increased by 7.5% or $172.1 million in 2017 due to higher claims incurred in2017, primarily resulting from continued deterioration in auto performance, as well as growth in policy volumes. The maincomponents of the discounted claim liabilities are case reserves, undiscounted incurred but not reported (“IBNR”),undiscounted internal claims expense, and the discounting impact thereon. The deterioration in current and prior accidentyear performance led to an increase in the quantum of the case reserves, and a significant strengthening of the associatedIBNR provision for these lines, in order to provide additional coverage for the expected future claims payments on thesebooks of business.

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2016 vs 2015

The consolidated net discounted claim liabilities increased by 2.8% or $63.2 million in 2016. While the impact of the increasein the yields on the bond portfolio supporting the claim liabilities would normally have decreased the liabilities, this was morethan offset by an overall increase in the quantum of the case reserves and undiscounted IBNR. The increased case reservesand IBNR were attributable primarily to British Columbia auto liability and Alberta auto bodily injury. The deterioration incurrent and prior accident year performance led to significant strengthening of the associated IBNR provision for these lines,in order to provide additional coverage for the expected future claims payments on these books of business.

Figure 19 shows the level of prior year claims development as a percentage of opening net unpaid claim liabilities and theimpact on the claims ratio by fiscal year.

Figure 19

(in millions of dollars,except as otherwise noted) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Net unpaid claim liabilities,beginning of the year,undiscounted $ 2,199.7 $ 2,122.8 $ 2,163.3 $ 2,108.6 $ 2,052.1 $ 2,122.6 $ 2,220.0 $ 2,200.1 $ 2,155.0 $ 1,932.9

Adverse (favourable)development on prioryear claims,undiscounted $ 32.6 $ (40.1) $ (73.1) $ (2.9) $ (63.0) $ (57.4) $ (128.9) $ (71.8) $ (55.7) $ (1.1)

Adverse (favourable)development on prioryear closing claims,undiscounted 1.5% (1.9%) (3.4%) (0.1%) (3.1%) (2.7%) (5.8%) (3.3%) (2.6%) (0.1%)

Impact on claims ratio 1.5% (2.1%) (3.8%) (0.2%) (3.6%) (3.4%) (8.0%) (4.3%) (3.1%) (0.1%)

2010 – 2017 under IFRS, 2008-2009 under Canadian GAAP.

In 2017, prior year claims development was negatively impacted by the challenges in the performance of our auto lines. This,combined with reserve strengthening, resulted in overall adverse prior year claims development in 2017.

ACCOUNTS PAYABLE AND OTHER LIABILITIES

2017 vs 2016

Accounts payable and other liabilities increased due primarily to costs associated with the replacement of our personal linespolicy administration system. The balance of the change is due primarily to the timing of billing and payment of invoices.

2016 vs 2015

Accounts payable and other liabilities decreased due primarily to the timing of billing and payment of costs associated withour strategic initiatives.

TOTAL EQUITY

Figure 20 illustrates the change in our total equity over the prior year.

Figure 20


Retained earnings $1,644.8 $1,744.5 $1,762.2

Accumulated other comprehensive income 85.6 58.6 16.8

Total equity $1,730.4 $1,803.1 $1,779.0

Change in total equity $ (72.7) $ 24.1 $ 97.9

2017 vs 2016

Retained earnings decreased $99.7 million since December 31, 2016 due primarily to 2017 underwriting losses and ongoingspend on our strategic initiatives, which were only partially offset by investment income and an income tax recovery. Theincrease in accumulated other comprehensive income was due primarily to unrealized investment gains on the AFS portfolio.Overall, total equity decreased 4.0%, compared with a growth in equity in 2016 of $24.1 million.



2016 vs 2015

Retained earnings decreased $17.7 million since December 31, 2015 due primarily to 2016 underwriting losses and ongoingspend on our strategic initiatives, which were largely offset by investment income. The increase in accumulated othercomprehensive income was due primarily to the increase in unrealized investment gains on the AFS portfolio. Overall, totalequity increased 1.4%.

FINANCIAL PERFORMANCE FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017

FINANCIAL HIGHLIGHTS FOR THE QUARTER:

‰ Gross written premiums grew 12.5% over the third quarter 2017

‰ Combined ratio of 114.1% for the quarter, reflecting strategic investments, elevated catastrophe losses, and continued poorindustry-wide conditions

‰ Implementation of the Vyne platform progressing well with the launch of Ontario and Nova Scotia in the quarter

RESULTS FROM OPERATIONS

Figure 21 shows the results from operations for the three and nine-month periods ended September 30.

Figure 21 Three months ended Nine months ended

(in millions of dollars, except as otherwise noted) 2018 2017 Change 2018 2017 Change

Policies in force (thousands) 1,440.3 1,407.0 33.3 1,440.3 1,407.0 33.3

Gross written premiums1 $ 671.0 $ 596.3 74.7 $ 1,811.3 $ 1,745.5 65.8

Net written premiums1 $ 651.2 $ 579.3 71.9 $ 1,758.4 $ 1,696.5 61.9

Net earned premiums $ 563.1 $ 552.8 10.3 $ 1,661.8 $ 1,609.9 51.9

Net claims and adjustment expenses, undiscounted 441.0 440.1 0.9 1,271.0 1,207.1 63.9

Other underwriting expenses2 201.5 202.4 (0.9) 604.4 598.6 5.8

Underwriting loss1 (79.4) (89.7) 10.3 (213.6) (195.8) (17.8)

Impact of discounting 16.3 17.7 (1.4) 28.8 26.8 2.0

Underwriting loss including the impact of discounting (63.1) (72.0) 8.9 (184.8) (169.0) (15.8)

Investment income 15.9 1.0 14.9 98.4 84.9 13.5

Other expense 2.6 3.1 (0.5) 2.5 12.8 (10.3)

Restructuring expenses – – – 2.8 – 2.8

Loss before income taxes (49.8) (74.1) 24.3 (91.7) (96.9) 5.2

Income tax recovery (16.5) (22.6) 6.1 (32.1) (32.2) 0.1

Net loss $ (33.3) $ (51.5) 18.2 $ (59.6) $ (64.7) 5.1

Other comprehensive (loss) income (5.4) 6.5 (11.9) (33.3) 11.3 (44.6)

Comprehensive loss $ (38.7) $ (45.0) 6.3 $ (92.9) $ (53.4) (39.5)

Claims ratio1 78.3% 79.6% (1.3) pts 76.5% 75.0% 1.5 pts

Expense ratio1,2 35.8% 36.6% (0.8) pts 36.4% 37.2% (0.8) pts

Combined ratio1,2 114.1% 116.2% (2.1) pts 112.9% 112.2% 0.7 pts

Return on equity1 (rolling twelve months) (5.4%) (5.9%) 0.5 pts (5.4%) (5.9%) 0.5 pts


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

GROSS WRITTEN PREMIUMS AND POLICIES IN FORCE

GWP increased by 12.5% during the quarter, driven by growth in our personal lines of business. Personal lines GWP grew by19.4%, driven primarily by new business growth from our digital direct brand, Sonnet, increased personal property policyvolumes in our broker channel, and rate increases in personal auto across both our distribution channels. Commercial linesGWP declined by 3.8%, as we continue to implement underwriting actions designed to improve profitability. Throughout therest of the year, as our performance improvement actions continue to be implemented, we expect continued downwardpressure on the commercial lines GWP, although this downward pressure has slowed. These actions were necessary in orderto remediate the profitability challenges within our commercial lines book of business. Year-to-date, personal lines GWP grewby 11.6% due primarily to the growth in the third quarter, and commercial lines GWP declined by 12.3% due to the same factorsthat affected the third quarter.

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Further details by line of business are provided in “FINANCIAL PERFORMANCE FOR THE THREE AND NINE MONTHPERIODS ENDED SEPTEMBER 30, 2018 and 2017 – RESULTS BY LINE OF BUSINESS” on page 75.

NET WRITTEN PREMIUMS AND NET EARNED PREMIUMS

Net written premiums increased consistent with the increase in GWP. The lower level of growth in net earned premiums is dueto lower levels of GWP growth in the latter part of 2017 and in the first half of 2018. Year-to-date, net written premiums grewrelatively consistent with GWP growth. The increase in net earned premiums in 2018 is due primarily to the growth in grosswritten premiums in 2017.

NET CLAIMS AND ADJUSTMENT EXPENSES

Figure 22 summarizes the composition of the claims ratio for the three and nine-month periods ended September 30,illustrating the impact of accident year claims incurred, catastrophe losses, and prior year claims development.


(in millions of dollars,except as otherwise noted)

2018 2017 Change 2018 2017 Change

$ Ratio $ Ratio $ Ratio $ Ratio $ Ratio $ Ratio

Core accident year claims $ 406.3 72.1% $ 410.4 74.2% (4.1) (2.1) pts $ 1,214.2 73.1% $ 1,140.7 70.9% 73.5 2.2 pts

Catastrophe losses 37.5 6.7% 26.9 4.9% 10.6 1.8 pts 88.6 5.3% 48.9 3.0% 39.7 2.3 pts

Prior year (favourable) adverseclaims development (2.8) (0.5%) 2.8 0.5% (5.6) (1.0) pts (31.8) (1.9%) 17.5 1.1% (49.3) (3.0) pts

Total $ 441.0 78.3% $ 440.1 79.6% 0.9 (1.3) pts $ 1,271.0 76.5% $ 1,207.1 75.0% 63.9 1.5 pts

The core accident year claims ratio, which excludes catastrophe losses and prior year claims development, decreased ascompared to the third quarter of 2017 due primarily to a decrease in claims frequency in personal auto. Year-to-date, the coreaccident year claims ratio increased as the first quarter was impacted by unseasonably cold and frequent fluctuations intemperatures, which contributed to increased levels of property and auto losses.

Catastrophe losses increased as compared to the third quarter of 2017. In the third quarter of 2018, we were impacted bymultiple events including an Ontario and Quebec tornado, development on two British Columbia highway acid spills, and anOntario flood. Comparatively, in the third quarter of 2017 we incurred losses primarily as a result of flooding associated with anOntario rainstorm and the British Columbia wildfires. Year-to-date 2018 results were also impacted by Ontario and Quebecwind, ice, and rain storms, and flooding in New Brunswick. Combined with the unseasonably cold and volatile weather in thefirst quarter, 2018 has become one of the worst weather years we have experienced.

We experienced marginally favourable claims development in the third quarter of 2018 due primarily to continued favourabledevelopment in personal auto and improved claims development in commercial auto, particularly in Ontario, despite takingreserve strengthening actions in Alberta auto. Year-to-date, we had improved claims development in both personal andcommercial auto lines. The return to favourable from adverse claims development is consistent with our longer termexperience. Refer to Figure 40, which shows the level of prior year claims development year-to-date in 2018 and over the pastten calendar years.

To address our underwriting performance challenges, a number of actions continue to be implemented across our book ofbusiness, including targeted rate increases, pricing segmentation, exiting unprofitable books of business and certain productofferings, increased underwriting discipline, and enhanced broker management. These actions will take time to be reflected inour results. We recently launched Vyne, our new broker platform for personal lines and individually rated commercial auto inOntario, New Brunswick, Nova Scotia, and Prince Edward Island, and subsequent to the quarter launched in Alberta andQuebec. We are encouraged by early results and expect Vyne will improve operating efficiency, pricing, underwriting andease of doing business with our broker partners once fully implemented.

OTHER UNDERWRITING EXPENSES

Figure 23 shows the key components of our reported expense ratio for the three and nine-month periods ended September 30.



2018 2017 Change 2018 2017 Change


Net commissions $ 92.0 16.3% $ 96.9 17.5% (4.9) (1.2) pts $ 275.4 16.6% $ 286.6 17.8% (11.2) (1.2) pts

Operating expenses(net of other underwriting

revenues)1

89.2 15.9% 85.6 15.5% 3.6 0.4 pts 269.2 16.2% 254.3 15.8% 14.9 0.4 pts

Premium taxes 20.3 3.6% 19.9 3.6% 0.4 – 59.8 3.6% 57.7 3.6% 2.1 –

Total $201.5 35.8% $202.4 36.6% (0.9) (0.8) pts $ 604.4 36.4% $ 598.6 37.2% 5.8 (0.8) pts

1 Operating expenses are presented net of other underwriting revenues throughout this section.



The net commissions ratio decreased during the third quarter of 2018 and year-to-date, due primarily to reduced brokerunderwriting profitability, which resulted in lower contingent profit commissions, and the increased impact of Sonnet, whichpays no commissions.

The operating expenses ratio increased slightly in the third quarter of 2018 and year-to-date. We continue to make significantinvestments in Sonnet, and the development and implementation of the Vyne platform. We expect that the costs of thesestrategic investments will continue to negatively impact our underwriting results during the ongoing implementation andstart-up phases, but these costs are expected to decrease in 2019. In the longer term, these investments are expected todrive profitable growth, productivity, and our ability to deliver products and services to the market in a timely, competitive, andefficient manner. To improve long-term profitability, we are also implementing expense management and organizationalchanges to support our overall strategy and enable executional efficiency.

UNDERWRITING RESULTS

Figure 24 summarizes the composition of the undiscounted and discounted combined ratio for the three and nine-monthperiods ended September 30.



2018 2017 Change 2018 2017 Change


Net claims and adjustmentexpenses $ 441.0 78.3% $ 440.1 79.6% 0.9 (1.3) pts $ 1,271.0 76.5% $ 1,207.1 75.0% 63.9 1.5 pts

Other underwriting expenses 201.5 35.8% 202.4 36.6% (0.9) (0.8) pts 604.4 36.4% 598.6 37.2% 5.8 (0.8) pts

Combined ratio, undiscounted 642.5 114.1% 642.5 116.2% – (2.1) pts 1,875.4 112.9% 1,805.7 112.2% 69.7 0.7 pts

Impact of discounting (16.3) (2.9%) (17.7) (3.2%) 1.4 0.3 pts (28.8) (1.7%) (26.8) (1.7%) (2.0) –

Combined ratio, discounted $ 626.2 111.2% $ 624.8 113.0% 1.4 (1.8) pts $ 1,846.6 111.2% $ 1,778.9 110.5% 67.7 0.7 pts

As outlined in Figures 23 and 24, our third quarter underwriting results were impacted by an increase in catastrophe losses,primarily as a result of an Ontario and Quebec tornado, development on two British Columbia highway acid spills, and anOntario flood. Overall, we experienced a reduction of 3.1 percentage points in the claims ratio excluding catastrophe losses,arising from improvements in our personal lines and commercial auto line of business. Our commercial property and liabilityline of business continues to be challenged. Our underwriting results were also impacted by our investments in the Sonnetbusiness and the development of the Vyne platform. These strategic investments impacted our combined ratio by 5.7percentage points, compared to 8.1 percentage points in the third quarter of 2017. Year-to-date, our strategic investmentsimpacted the combined ratio by 6.8 percentage points in 2018 and 7.1 percentage points in 2017. Refer to “FINANCIALPERFORMANCE FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 and 2017 – RESULTS BYLINE OF BUSINESS” on page 75 for additional details.

The discounting recovery in the third quarter of 2018 and year-to-date was relatively consistent with the same periods in theprior year. The discounting recovery was largely offset by recognized losses associated with the fair value through profit orloss investment portfolio. Refer to Figure 25, which shows the composition of investment income.

INVESTMENT INCOME

Figure 25 shows the composition of investment income recorded in the interim consolidated statement of comprehensive lossfor the three and nine-month periods ended September 30.



Interest income $ 18.2 $ 14.4 3.8 $ 51.4 $ 44.2 7.2

Dividend income 7.8 9.2 (1.4) 26.8 28.3 (1.5)

Total interest and dividend income 26.0 23.6 2.4 78.2 72.5 5.7

Realized gains (losses) on Available for Sale (“AFS”) portfolio 7.4 (1.7) 9.1 49.4 51.1 (1.7)

Realized losses on Fair Value Through Profit or Loss (“FVTPL”)bonds (9.8) (6.4) (3.4) (18.1) (6.4) (11.7)

Unrealized losses on FVTPL bonds (4.9) (13.4) 8.5 (6.2) (21.5) 15.3

Net impairment losses on AFS portfolio (2.8) (1.1) (1.7) (4.9) (10.8) 5.9

Total recognized (losses) gains on investments (10.1) (22.6) 12.5 20.2 12.4 7.8

Total investment income $ 15.9 $ 1.0 14.9 $ 98.4 $ 84.9 13.5

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Interest income increased in the third quarter of 2018 and year-to-date as compared to the same periods in the prior year, dueto the rising interest rate environment. Dividend income declined due to lower holdings of dividend-paying common stocks.Realized gains on the AFS portfolio increased in the third quarter of 2018 due to higher gains on common and preferredstocks, and lower losses on bonds as the increase in yields during the quarter was lower than the increase in the samequarter a year ago. The net realized and unrealized losses on the FVTPL bond portfolio decreased during the quarter due tothe lower increase in yields. Year-to-date, recognized gains on investments increased due primarily to a decrease inimpairment losses on our AFS common stock portfolio. Investment impairment losses were minimal during the quarter andyear-to-date. Refer to “FINANCIAL POSITION FOR THE QUARTER ENDED SEPTEMBER 30, 2018” on page 79 for additionaldetails of our investment portfolio mix.

OTHER EXPENSE (INCOME)

Other expense includes investment expenses, costs incurred to prepare for our potential demutualization, and the resultsfrom our investments in associates. Other expenses decreased slightly during the quarter due primarily to a decrease indemutualization costs. Demutualization costs in the third quarter of 2018 totalled $2.6 million as compared to $3.6 million inthe third quarter of 2017. Year-to-date, other expenses decreased due primarily to the gain on sale of a brokerage in January,and decreased demutualization costs of $8.1 million in total as compared to $9.2 million in 2017.

RESTRUCTURING EXPENSES

Included in restructuring expenses are employee-related restructuring costs that reflect decisions and plans communicated asof September 30, 2018, which totalled $2.8 million year-to-date. Due to the phased approach, additional provisions will berecognized and payments will be made in future periods as restructuring plans are finalized.

INCOME TAX RECOVERY

The effective tax rate for the third quarter of 2018 was a recovery of 33.2%, compared to a recovery of 30.5% in the thirdquarter of 2017. The effective tax rate is more favourable than the statutory rate of 26.9% (2017: 26.7%) due primarily to theimpact of non-taxable Canadian dividend income. The year-to-date effective tax rate was a recovery of 35.0% compared to arecovery of 33.2% in 2017.

NET LOSS

Net loss decreased by $18.2 million over the same quarter a year ago, due primarily to lower underwriting losses and higherinvestment income. Year-to-date, net loss decreased by $5.1 million over 2017, due primarily to an increase in investmentincome and lower other expenses, partially offset by higher underwriting losses.

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive loss shifted from income of $6.5 million in the third quarter of 2017 to a loss of $5.4 million in the thirdquarter of 2018. This is due mainly to a decrease in unrealized gains on our common stocks in the third quarter of 2018, ascompared to the same period in the prior year where unrealized gains on our common stocks increased, and lower unrealizedlosses in our preferred stocks as compared to the same period in the prior year. Year-to-date, there was a shift from income of$11.3 million in 2017 to a loss of $33.4 million in 2018, due primarily to the prior year benefiting from a large decrease inunrealized losses on our preferred stocks, and due to lower unrealized gains on our common stocks in 2018. Refer to Figure39, which outlines the unrealized gains (losses) on AFS securities by type of security.

RESULTS BY LINE OF BUSINESS

We 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.



UNDERWRITING — PERSONAL LINES

Figure 26 presents selected results of operations of the personal lines of business for the three and nine-month periodsended September 30.




Auto 722.0 695.0 27.0 722.0 695.0 27.0

Property 563.6 539.2 24.4 563.6 539.2 24.4

Total 1,285.6 1,234.2 51.4 1,285.6 1,234.2 51.4


Auto $ 343.3 $ 280.1 63.2 $ 900.2 $ 799.7 100.5

Property 158.6 140.4 18.2 408.5 372.9 35.6

Total $ 501.9 $ 420.5 81.4 $1,308.7 $1,172.6 136.1

Net earned premiums

Auto $ 281.0 $ 253.3 27.7 $ 802.9 $ 723.6 79.3

Property 124.2 113.9 10.3 365.2 332.5 32.7

Total $ 405.2 $ 367.2 38.0 $1,168.1 $1,056.1 112.0

Underwriting loss (undiscounted)

Auto $ (37.2) $ (39.0) 1.8 $ (108.6) $ (118.1) 9.5

Property (7.2) (14.2) 7.0 (29.2) (12.5) (16.7)

Total $ (44.4) $ (53.2) 8.8 $ (137.8) $ (130.6) (7.2)

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 in Figure 27 below to show the combined ratios with and withoutthese investments.

Figure 27 Three months ended September 30 Nine months ended September 30

Combinedratio

Impact ofstrategic

investments

Adjustedcombined

ratio1

Combinedratio

Impact ofstrategic

investments

Adjustedcombined

ratio1

2018

Auto 113.2% 10.0 pts 103.2% 113.5% 11.4 pts 102.1%

Property 105.8% 3.9 pts 101.9% 108.0% 5.6 pts 102.4%

Total 111.0% 8.2 pts 102.8% 111.8% 9.6 pts 102.2%

2017

Auto 115.3% 14.5 pts 100.8% 116.3% 12.6 pts 103.7%

Property 112.5% 7.1 pts 105.4% 103.7% 6.5 pts 97.2%

Total 114.5% 12.3 pts 102.2% 112.4% 10.8 pts 101.6%

1 This item is a non-GAAP measure which is defined on page 88.

76


Q3 PERSONAL AUTORATIOS1

Q3 PERSONALPROPERTY RATIOS1

YTD PERSONALAUTO RATIOS1

YTD PERSONALPROPERTY RATIOS1

75.1

28.1

103.2

74.4

26.4

100.8

0

20

40

60

80

100

120

Expen

se

Combin

ed

Claims

66.0

35.9

101.9

70.3

35.1

105.4

0

20

40

60

80

100

120

Expen

se

Combin

ed

Claims

75.1

27.0

102.1

76.9

26.8

103.7

0

20

40

60

80

100

120

Expen

se

Combin

ed

Claims

67.7

34.7

102.4

62.1

35.1

97.2

0

20

40

60

80

100

120

Expen

se

Combin

ed

Claims

2018 2017Three and nine-month periods ended September 30

1 These adjusted ratios exclude the impact of our strategic investments

Figure 28 summarizes the composition of the adjusted personal auto claims ratio for the three and nine-month periods endedSeptember 30.


20181 20171 Change 20181 20171 Change

Core accident year claims 75.2% 79.3% (4.1) pts 79.1% 77.9% 1.2 pts

Catastrophe losses 4.1% 0.2% 3.9 pts 1.7% 0.2% 1.5 pts

Prior year favourable development (4.2%) (5.1%) 0.9 pts (5.7%) (1.2%) (4.5) pts

Total 75.1% 74.4% 0.7 pts 75.1% 76.9% (1.8) pts

1 These adjusted ratios exclude the impact of our strategic investments.

Personal auto GWP grew in the third quarter of 2018, due primarily to new business growth from our digital direct distributionchannel, Sonnet, rate increases in personal auto across the country, and increased auto policy volumes in most regions withinour broker channel. These were partially offset by a decline in GWP in British Columbia, due to reduced volumes arising fromour underwriting actions in this region focused on restoring profitability. The adjusted personal auto combined ratio for thethird quarter of 2018 increased compared to the same quarter a year ago. Catastrophe losses, mainly due to the highway acidspills in British Columbia, contributed 4.1 percentage points compared to just 0.2 percentage points in the same quarter a yearago. The increase in catastrophe losses was more than offset by a decrease in claims frequency. Year-to-date, the adjustedpersonal auto combined ratio decreased driven by an increase in favourable claims development. Despite this improvement,the core accident year claims ratios across our auto business remain elevated and unsustainable, as particularlydemonstrated in Alberta, whose ongoing poor performance led us to strengthen claims reserves during the quarter. Theongoing regulatory pricing limits in Alberta have led us to implement broker management actions in this province. To addressthe challenges in personal auto, targeted rate increases and a number of underwriting actions continue to be implementedacross the country, with further targeted rate increases and improvements to risk selection planned.

Figure 29 summarizes the composition of the adjusted personal property claims ratio for the three and nine-month periodsended September 30.


20181 20171 Change 20181 20171 Change

Core accident year claims 56.2% 58.1% (1.9) pts 55.8% 55.3% 0.5 pts

Catastrophe losses 10.7% 13.7% (3.0) pts 13.6% 8.5% 5.1 pts

Prior year favourable claims development (0.9%) (1.5%) 0.6 pts (1.7%) (1.7%) –

Total 66.0% 70.3% (4.3) pts 67.7% 62.1% 5.6 pts

1 These adjusted ratios exclude the impact of our strategic investments.

Personal property GWP also grew in the third quarter of 2018, due primarily to rate increases and increased personal propertypolicy volumes across most regions in Canada within our broker channel, and the digital direct contribution from Sonnet. Theadjusted personal property combined ratio in the third quarter of 2018 improved as compared to the third quarter of 2017 due



to an absence of large losses and a decrease in catastrophe losses, although catastrophe losses remain elevated. Year-to-date, the personal property combined ratio increased due to heightened catastrophe losses.

During the second quarter of 2018, we began the roll out of our Vyne platform for personal lines in New Brunswick and PrinceEdward Island. In the third quarter of 2018, we launched Vyne in Ontario and Nova Scotia, and subsequently launched Vyne inAlberta and Quebec in October. This is a significant milestone achievement for our personal lines business, which we expectwill improve operating efficiency, pricing, underwriting, and ease of doing business with our broker partners.

UNDERWRITING — COMMERCIAL LINES

Figure 30 presents selected results of operations of the commercial lines of business for the three and nine-month periodsended September 30.




Auto 50.9 52.1 (1.2) 50.9 52.1 (1.2)

Property and liability 103.8 120.7 (16.9) 103.8 120.7 (16.9)

Total 154.7 172.8 (18.1) 154.7 172.8 (18.1)


Auto $ 59.5 $ 60.5 (1.0) $ 185.8 $ 217.7 (31.9)


Total $ 169.1 $ 175.8 (6.7) $ 502.6 $ 572.9 (70.3)

Net earned premiums

Auto $ 61.8 $ 73.2 (11.4) $ 192.1 $ 216.3 (24.2)


Total $ 157.9 $ 185.6 (27.7) $ 493.7 $ 553.8 (60.1)

Underwriting loss (undiscounted)

Auto $ (8.2) $ (27.6) 19.4 $ (20.1) $ (48.7) 28.6

Property and liability (26.8) (8.9) (17.9) (55.7) (16.5) (39.2)

Total $ (35.0) $ (36.5) 1.5 $ (75.8) $ (65.2) (10.6)

Combined ratio

Auto 113.3% 137.8% (24.5) pts 110.5% 122.4% (11.9) pts

Property and liability 127.9% 107.9% 20.0 pts 118.5% 104.9% 13.6 pts

Total 122.2% 119.6% 2.6 pts 115.4% 111.8% 3.6 pts

Q3 COMMERCIAL AUTORATIOS

Q3 COMMERCIALPROPERTYAND LIABILITY RATIOS

YTD COMMERCIAL AUTORATIOS

YTD COMMERCIALPROPERTYAND LIABILITY RATIOS

83.6

29.7

113.3108.1

29.7

137.8

20

40

60

80

100

120

140

Expen

se

Combin

ed

Claims

87.5

40.4

127.9

69.5

38.4

107.9

0

20

40

60

80

100

120

140

Expen

se

Combin

ed

Claims

80.1

30.4

110.5

92.7

29.7

122.4

0

20

40

60

80

100

120

140

Expen

se

Combin

ed

Claims

78.6

39.9

118.5

66.8

38.1

104.9

0

20

40

60

80

100

120

140

Expen

se

Combin

ed

Claims

2018 2017Three and nine-month periods ended September 30

78


Figure 31 summarizes the composition of the commercial auto claims ratio for the three and nine-month periods endedSeptember 30.


2018 2017 Change 2018 2017 Change

Core accident year claims 81.7% 83.0% (1.3) pts 76.2% 78.4% (2.2) pts


Prior year adverse claims development 1.6% 25.0% (23.4) pts 3.7% 14.2% (10.5) pts

Total 83.6% 108.1% (24.5) pts 80.1% 92.7% (12.6) pts

Commercial auto GWP decreased slightly in the third quarter of 2018, driven primarily by targeted underwriting actions in ourfleet and managing general agent business. The commercial auto combined ratio improved during the quarter and year-to-date, due primarily to an improvement in claims development compared to the third quarter of 2017, although this line ofbusiness continues to be challenged.

Figure 32 summarizes the composition of the commercial property and liability claims ratio for the three and nine-monthperiods ended September 30.


2018 2017 Change 2018 2017 Change

Core accident year claims 66.8% 61.1% 5.7 pts 65.3% 61.0% 4.3 pts


Prior year adverse (favourable) claims development 7.6% (1.2%) 8.8 pts 5.2% 0.2% 5.0 pts

Total 87.5% 69.5% 18.0 pts 78.6% 66.8% 11.8 pts

Commercial property and liability GWP decreased in the third quarter of 2018, driven primarily by targeted underwritingactions which are necessary in order to remediate the performance of this book of business. The commercial property andliability combined ratio was impacted by an increase in catastrophe and large losses, and a shift from favourable to adverseclaims development due to reserve strengthening arising from worse than expected experience on the liability coverages.During the quarter, catastrophe losses impacted the combined ratio by 13.1 percentage points (2017: 9.6 percentage points),while large losses impacted the combined ratio by 11.2 percentage points (2017: 7.2 percentage points). The year-to-datecommercial property and liability claims ratio was impacted by an increase in catastrophe losses, an increase in propertylosses driven by the poor winter weather conditions experienced in the first quarter of 2018, and an increase in adverseclaims development.

To address the performance challenges in the commercial lines of business, a number of actions have already beenimplemented, including targeted rate increases, exiting unprofitable books of business and certain product offerings,increased underwriting discipline, and enhanced broker management, which are expected to improve our mix of business.These actions have impacted our commercial lines volume and GWP. We will continue to implement targeted pricing andunderwriting actions to improve our profitability, especially in underperforming commercial property and liability segments.We are focused on strengthening underwriting rigour, risk assessment and selection, market segmentation, pricing, andexpense management to achieve improved operating performance in commercial insurance.

FINANCIAL POSITION FOR THE QUARTER ENDED SEPTEMBER 30, 2018

FINANCIAL HIGHLIGHTS FOR THE PERIOD:

‰ Total assets increased by $122.3 million (2.2%)

‰ Gross claim liabilities increased by $125.1 million (4.9%)

‰ Total equity decreased by $93.0 million (5.4%)

‰ Strong financial position with MCT of 226% and total equity in excess of $1.6 billion



Figure 33 shows the significant interim consolidated balance sheet line items.

Figure 33 September 30, December 31,(in millions of dollars, except as otherwise noted) 2018 2017 Change

Cash and cash equivalents $ 217.1 $ 166.4 50.7

Investments 3,949.7 3,996.0 (46.3)

Premiums receivable 788.0 699.6 88.4

Reinsurance receivable and recoverable 64.4 59.1 5.3

Deferred policy acquisition expenses 234.6 221.2 13.4

Goodwill and intangible assets 239.5 229.2 10.3

Other assets 250.9 250.4 0.5

Total assets $ 5,744.2 $ 5,621.9 122.3

Unearned premiums $ 1,226.4 $ 1,131.4 95.0

Claim liabilities 2,652.8 2,527.7 125.1

Accounts payable and other liabilities 227.6 232.4 (4.8)

Total liabilities 4,106.8 3,891.5 215.3

Retained earnings 1,585.2 1,644.8 (59.6)

Accumulated other comprehensive income 52.2 85.6 (33.4)

Total equity 1,637.4 1,730.4 (93.0)

Total liabilities and equity $ 5,744.2 $ 5,621.9 122.3

CASH AND INVESTMENTS

Figure 34 shows the composition of our cash and cash equivalents, and investments recorded on the interim consolidatedbalance sheet.

Figure 34 September 30, 2018 December 31, 2017

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

Cash and cash equivalents $ 217.1 5.2% $ 166.4 4.0%

Short-term investments 146.8 3.5% 19.6 0.5%

Bonds 2,717.3 65.2% 2,687.1 64.6%

Preferred stocks 396.0 9.5% 384.1 9.2%

Common stocks 517.1 12.4% 701.2 16.8%

Pooled funds 69.5 1.7% 107.8 2.6%

4,063.8 97.5% 4,066.2 97.7%

Commercial loans 103.0 2.5% 96.2 2.3%

Total cash and investments $ 4,166.8 100.0% $ 4,162.4 100.0%

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 and 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 slightly to73.9% of the total portfolio as at September 30, 2018 compared with 69.1% as at December 31, 2017, due primarily to areduction in common stock holdings.

Investments decreased due primarily to a decrease in the market value of our investments, partially offset by investmentspurchased. Commercial loans increased $6.8 million compared to December 31, 2017, due to the issuance of new loans tobroker partners which exceeded loan repayments.

Refer to Note 2 — “Summary of significant accounting policies” of our audited consolidated financial statements for the yearended December 31, 2017 on page I-9, which provides further details pertaining to the classification and measurement of ourfinancial instruments.

80


INVESTMENTS

Investment sector mix

Figure 35 summarizes our investments by sector.

Figure 35 September 30,2018

December 31,2017

(in millions of dollars, except as otherwise noted)

Short-terminvestments

and bondsPreferred

stocksCommon

stocksPooled

funds Total Total

Government 56% — — — 42% 40%

Financials 28% 70% 29% 16% 33% 29%

Energy 4% 18% 19% 9% 8% 9%

Telecommunications 1% 2% 5% 12% 2% 3%

Industrials 1% — 9% 7% 2% 3%

Utilities 3% 8% 1% 15% 3% 4%

Consumer discretionary — — 9% 5% 1% 2%

Materials — — 9% 3% 1% 2%

Consumer staples 4% — 4% 12% 4% 4%

Information technology 1% — 9% 6% 2% 2%

Health care 1% — 6% 11% 1% 1%

Real estate 1% 2% — 4% 1% 1%

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

Total $ 2,864.1 $ 396.0 $ 517.1 $ 69.5 $ 3,846.7 $ 3,899.8

This figure demonstrates the secure and highly liquid nature of our investment portfolio with a significant concentration in thegovernment and financials sectors.

Investment credit quality

Figure 36 and Figure 37 illustrate the strong credit quality of our fixed income securities and preferred stocks, respectively.

Credit rating1 — bonds


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

carrying value Carrying valuePercent of

carrying value

AAA $ 1,546.4 56.9% $ 1,532.1 57.0%

AA 363.5 13.4% 175.4 6.5%

A 598.9 22.0% 724.7 27.0%

BBB 208.5 7.7% 254.9 9.5%

Total bonds $ 2,717.3 100.0% $ 2,687.1 100.0%


Credit rating1 — preferred stocks




carrying value

P1 $ 3.2 0.8% $ 3.3 0.9%

P2 326.1 82.4% 302.1 78.6%

P3 or not rated 66.7 16.8% 78.7 20.5%

Total preferred stocks $ 396.0 100.0% $ 384.1 100.0%


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 September 30, 2018, this resulted in 92.3% (December 31, 2017: 90.5%) of our bonds



being rated “A-” or better and 83.2% (December 31, 2017: 79.5%) of the preferred stocks being rated “P2” or better. “A-” and“P2” represent the ratings provided by two recognized rating services for high-grade bonds and preferred stocks,respectively, where both asset and earnings protection are well-assured.

Investment portfolio region of issuer

Figure 38 summarizes the region of issuer of our investment portfolio.




carrying value

Canada $ 3,595.0 93.5% $ 3,538.3 90.7%

United States 163.0 4.2% 226.4 5.8%

Europe 53.9 1.4% 85.5 2.2%

Other 34.8 0.9% 49.6 1.3%

Total $ 3,846.7 100.0% $ 3,899.8 100.0%

Our investment portfolio is mainly concentrated in Canada.

Unrealized gains on AFS securities

Figure 39 outlines the unrealized gains (losses) on AFS securities by type of security.

Figure 39

September 30, 2018 December 31, 2017(in millions of dollars, except as otherwise noted)

Bonds $ (14.2) $ (6.5)

Preferred stocks (8.4) (8.1)

Common stocks 86.1 122.4

Pooled funds 2.4 5.0

Unrealized gains $ 65.9 $ 112.8

Unrealized gains on our AFS portfolio decreased from December 31, 2017 primarily as a result of a decrease in the valuationof our common stock portfolio. The significant volatility of domestic and foreign equity markets, and the sale of equities duringthe year resulted in a reduction in unrealized gains.

PREMIUMS RECEIVABLE, DEFERRED POLICY ACQUISITION EXPENSES, AND UNEARNED PREMIUMS

The premiums receivable, deferred policy acquisition expenses, and unearned premiums balances increased, driven primarilyby the increase in GWP during the third quarter of 2018.

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets increased due primarily to the capitalization of costs associated with the development andimplementation of the Vyne platform. These increases were partially offset by the amortization of finite-lived intangible assets.

82


CLAIM LIABILITIES AND ADJUSTMENT EXPENSES

Gross unpaid claim liabilities (discounted) as at September 30, 2018 increased from December 31, 2017 due to higher claimsincurred, including increased catastrophe losses and reserve strengthening in personal auto. Figure 40 shows the level ofprior year claims development as a percentage of opening net unpaid claim liabilities and the impact on the claims ratio byfiscal year.

Figure 40

(in millions ofdollars, except asotherwise noted)

Q3 2018YTD 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Net unpaid claimliabilities,beginning of theyear,undiscounted $ 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 $ 2,155.0 $ 1,932.9

(Favourable)adversedevelopment onprior year claims,undiscounted $ (31.8) $ 32.6 $ (40.1) $ (73.1) $ (2.9) $ (63.0) $ (57.4) $ (128.9) $ (71.8) $ (55.7) $ (1.1)

(Favourable)adversedevelopment onprior year closingclaims,undiscounted (1.3%) 1.5% (1.9%) (3.4%) (0.1%) (3.1%) (2.7%) (5.8%) (3.3%) (2.6%) (0.1%)

Impact on claims ratio (1.9%) 1.5% (2.1%) (3.8%) (0.2%) (3.6%) (3.4%) (8.0%) (4.3%) (3.1%) (0.1%)

2010 – 2018 under IFRS, 2008-2009 under Canadian GAAP.

In 2017, prior year claims development was negatively impacted by the challenges in the performance of our auto lines. This,combined with reserve strengthening, resulted in overall adverse prior year claims development in 2017. In 2018, we havereturned to more normal levels of claims development overall.

TOTAL EQUITY

Figure 41 illustrates the change in our total equity during the nine-month period ended September 30.

Figure 41

September 30, 2018 December 31, 2017(in millions of dollars, except as otherwise noted)

Retained earnings $ 1,585.2 $ 1,644.8

Accumulated other comprehensive income 52.2 85.6

Total equity $ 1,637.4 $ 1,730.4

Change in total equity $ (93.0)

Retained earnings decreased $59.6 million since December 31, 2017 due primarily to underwriting losses and ongoing spendon our strategic initiatives, partially offset by investment income. The decrease in accumulated other comprehensive incomewas due primarily to the recognition of gains in net loss from the sale of AFS investments. Overall, total equity decreased5.4%.

BUSINESS DEVELOPMENTS AND OPERATING ENVIRONMENT AS OF SEPTEMBER 30, 2018

PERSONAL AUTO ENVIRONMENT

Ontario

Despite legislative changes implemented in June 2016, we continue to see deterioration in our Ontario personal auto resultsas the impact of these changes have not offset corresponding mandated rate reductions. Further reforms are needed toreduce fraud and claim costs in the system. Two separate private members’ bills to eliminate perceived inappropriatediscriminatory territory rating are before the legislature. These bills do not address any underlying issues driving the cost ofautomobile insurance; if either is enacted, it could create additional uncertainty in the marketplace.

The Ontario personal auto market is very dynamic from many perspectives — political, regulatory, and consumer. We continueto actively participate in industry and government consultation on potential reforms and to implement rate increases and othercorrective actions to the extent permitted by the provincial regulator.



Alberta

Insurers operating in Alberta continue to experience increases in claim costs relating to automobile bodily injury claims. As inOntario, persons injured in motor vehicle accidents in Alberta by a third party can only sue for damages for injuries that areconsidered non-minor. Recent court decisions have limited the scope of the Minor Injury definition, thereby increasing thenumber of claims reported under the bodily injury liability coverage and thereby increasing the claim costs for this coverageand greater occurrence of pain and suffering awards. In addition, as claims take longer to settle in the courts, there are higherawards for prejudgment interest. Product reform is needed to bring long-term stability to both consumers and the insuranceindustry. To date, the government has announced no measures to address increasing claim costs and has extended the capon rate increases, putting increased pressure on profitability and availability concerns in this line of business. We have takenrate increases to the maximum permissible level and are monitoring market conditions closely to address profitability issuesquickly by implementing other, non-rate related activities as needed.

British Columbia

For the past several years, we have seen deterioration in the British Columbia personal automobile environment. Insurersoperating in this province face strong competition from ICBC, which is a government controlled entity. Insurers, other thanICBC, are only permitted to offer optional automobile coverages, most notable of which is third-party liability coverage, whichprovides coverage in excess of the basic $200,000 coverage provided by ICBC.

British Columbia is a full tort legal environment, and claim costs in the province have been escalating due to a largerfrequency of liability claims and increasing court awards. The trends in loss costs are significant for ICBC who cover all liabilityclaims from the first dollar, but for insurers who cover losses in excess of the $200,000 minimum, the loss trends are evengreater as they pay the full increase of costs over the minimum limit on the policies that they write. The British Columbiagovernment is putting pressure on ICBC to cap premium increases; however, we believe the increase in claim costs must becontrolled in order to do so.

Early in 2018, the British Columbia government announced its intention to introduce legislation to implement a $5,500 cap ondamage awards for minor injuries that result from auto accidents, a doubling of accident benefits, and the creation of a newdispute resolution system for small claims.

We continue to implement corrective actions to address the deterioration on the auto excess liability product while monitoringand assessing the political pressures on this issue in the province.

SHIFTS IN DEMOGRAPHICS AND CUSTOMER PREFERENCE

Demographic shifts are significantly impacting our industry from the need for better pricing sophistication to omnichannelcustomer service to potentially disruptive business models. Changes in immigration patterns, cultural outlooks and theeconomy are increasing the number of multigenerational households that require new product offerings and different pricingmodels. The large population of aging and retiring baby boomers in North America means a higher concentration of wealth.This generation accounts for a higher percentage of auto and home purchases and significantly spend on insurance whichinfluences expectations on services and protection of those assets. Technology-savvy millennials, on the other hand, areinfluenced in their purchasing decisions by a unique array of influences and have their own perspectives on privacy andloyalty.

Consumer behavior continues to evolve giving rise to the always-connected consumer. They are increasingly demandingsimplicity, personalization, transparency and speed in their transactions with businesses. They want to research, shop andtransact seamlessly. They engage across multiple devices and channels — picking up and dropping off — expecting aconsistent experience from their smartphone to a website to a contact centre. Better understanding of customer segmentsand behaviours in a multidimensional view including lifestyle and social influence is required for companies to understandhow consumers live their lives and who and what influences them in order to deliver differentiated products and services.

As the number of customers who want self-service technologies to buy and manage their insurance grows, brokers and otherintermediaries must keep pace with customer expectations. The ability of our broker network to compete against otherdistributors and our ability to deliver responsive capabilities to our brokers is critical to our ongoing competitiveness. We arein the process of replacing our legacy personal lines policy administration and billing systems with the Vyne platform, whichutilizes Guidewire. We expect Vyne will increase speed to deliver our products to market and allow us to more efficientlyservice our customers.

We have built robust data and analytics capabilities to analyze risk and detect customer trends earlier, enabling us to addressquickly changing consumer behaviours. Our digital direct channel leverages those insights to deliver a transparent, simpleand understandable insurance experience, with new levels of customer ease and pricing customization that have beenrecognized internationally. By using a broad range of real-time third-party data sources, personalized, detailed quotes can beprovided to customers after answering only a few questions. Sonnet is currently the only solution in Canada that allowscustomers coast-to-coast to fully complete home and auto insurance purchases directly online.

DISRUPTIVE INNOVATIONS AND NEW TECHNOLOGIES

New technologies have an increasingly significant impact on consumer expectations and behavior. They introduce new waysto deliver services and products that can compete with or complement an existing offering. In some instances they give rise to

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fundamentally different operating models. Innovation can emerge from within or outside of the insurance industry. The paceof those changes will continue to accelerate and may lead to unconventional and/or unpredictable interactions andcombinations that can have a significant structural impact on our industry.

There are numerous potential disruptors in the industry and outside of it that could significantly change the size, dynamics,and profitability of addressable markets within the insurance landscape forcing insurers to rethink their business models.

For example, technological innovation in the automotive industry is introducing a broadening array of automated safetyfeatures that is expected to ultimately increase safety of vehicles and roads (decrease in loss frequency and severity),increase repair and replacement costs for vehicles and the apportionment of liability away from driver and toward equipmentmanufacturers and software providers. Autonomous vehicle technology exists today but will likely take 10+ years to emerge asa dominant standard of personal transportation in Canada, due primarily to infrastructure required in inclement climates, thedevelopment of regulation, maturation of consumer appetite, and turnover of active vehicle inventories.

We have a framework to develop and periodically re-evaluate perspectives on the impact of significant disruptive trends. Ourapproach to innovation seeks to integrate customer-centric insights, predictive analytics and leading technologies to shapethe experiences we offer and drive operational efficiency. Through our digital direct business, we’ve built an industry-leadingpersonal insurance customer experience, a key battleground for industry disruption. Elsewhere in our business, we arepreparing for more significant shifts by building new capabilities and diversifying our business to complement our historicalstrength, and associated concentration, in personal auto.

CLIMATE CHANGE

The impact of climate change is increasing the size and frequency of weather events across the country, creating achallenging environment for the entire P&C insurance industry. This was highlighted in 2016, when the P&C industry enduredthe largest insured loss in Canadian history as a result of the Fort McMurray wildfire in Alberta. In 2018, we have beenimpacted by ten catastrophe events to date, including a significant Ontario wind storm in May, an Ontario ice storm in April,and an Ontario and Quebec tornado in September. Although we were not significantly impacted by catastrophe losses in thefirst quarter of 2018, the extreme temperature swings in Ontario resulted in increased losses, which heavily impacted our coreaccident year claims ratio. Weather events are expected to continue to create increased volatility in results, particularly in ourproperty lines of business. We manage our catastrophe events exposure by managing the geographic concentration of policyexposures, purchasing reinsurance, the use of our policy deductibles, pricing in expected long-term costs, and monitoring theimpact on our capital position and overall risk tolerances.

INVESTMENT ENVIRONMENT

Steady global expansion continued in the third quarter of 2018, underpinned by above-trend US growth. However, rising USinterest rates and a stronger US dollar are tightening financial conditions globally, contributing to increased volatility. Equitiesgenerally performed well, although Canada was a laggard, as a result of weakness in materials and energy. The Canadiandollar generally underperformed the major currencies due to anticipated additional interest rate increases. Increased globaltrade protectionism is expected to continue to impact the volatility of the Canadian dollar and overall equity returns throughthe remainder of 2018.

We continue to manage the risk and volatility inherent in capital markets by focusing on long-term value creation throughinvesting in high quality fixed income and equity securities, while maintaining an optimal asset allocation aimed at maximizingreturns within acceptable risk parameters.

LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2018

CAPITAL 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 MCT, which measures available capital against required risk-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 September 30, 2018, our regulatory capital significantly exceeded thesupervisory minimum MCT requirement of 150% required by OSFI, as well as a higher and more stringent internal targetestablished in our capital 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 effect on capital before entering into any significant transactions to ensure that policyholders arenot put at unreasonable risk through the depletion of capital to unacceptable levels. The Board reviews the MCT on at least aquarterly basis.



Figure 42 shows our regulatory capital position. Capital available and capital required included in the figure below aredetermined in accordance with rules prescribed by OSFI.

Figure 42September 30,

2018December 31,

2017December 31,

2016December 31,

2015(in millions of dollars, except as otherwise noted)

Capital available $ 1,229.7 $ 1,406.5 $ 1,601.6 $ 1,617.0

Capital required $ 545.1 $ 581.1 $ 580.1 $ 567.1

MCT % 225.6% 242.1% 276.1% 285.2%

Excess capital at 175% $ 275.8 $ 389.7 $ 586.4 $ 624.7

Excess capital at 200% $ 139.5 $ 244.4 $ 441.4 $ 482.9

The MCT ratio continues to be well in excess of both minimum internal capital and external regulatory requirements. The MCTratio declined from December 31, 2017 due mainly to our underwriting losses, strategic investments, and the inadmissibility ofan increased portion of our deferred tax assets. These were partially offset by the sale of a brokerage and reduced commonstock holdings, driving lower required capital levels. The 2017 MCT ratio declined from 2016 due mainly to underwritinglosses, the growth in required capital due to growth in premiums and claim liabilities, and the ongoing deployment of capitalfor our strategic investments and for the acquisitions of Petline and strategically aligned brokerages. We were also impactedby the inadmissibility of a portion of our deferred tax assets. The 2016 MCT ratio declined from 2015 as it was impacted by thestrategic deployment of capital for our infrastructure and operational investments, which receive no capital credit, and by therepositioning of our investment portfolio, with equity investments requiring greater regulatory capital relative to bonds.

We continue to be adequately capitalized from a solvency standpoint. We regularly monitor our MCT ratio, our Own RiskSolvency Assessment ratio, the results of our annual dynamic capital adequacy stress testing, and periodic stress testing, toensure that an adequate regulatory capital position is maintained and take corrective actions as necessary. Reinsurance isalso used to protect our capital from large losses, including those of a catastrophic nature, which could have a detrimentalimpact on capital. We have formal policies that specify tolerance for financial risk retention. Once the retention limits arereached, reinsurance is utilized to cover the excess risk.

We also have intercompany reinsurance agreements (the “Reinsurance Agreements”) in place, which results in eachinsurance company subsidiary, excluding Petline Insurance Company, reporting the same combined ratio. The ReinsuranceAgreements are supported by documented agreements between each of the companies, and the cash flows resulting fromthe arrangement are settled on a monthly basis. The Reinsurance Agreements allow the impact of any insurance losses to bespread across each insurance company subsidiary, enabling each subsidiary to maintain a strong capital position without theneed to move capital via dividends or capital injections. Further supporting the Reinsurance Agreements, the insurancecompanies, excluding Petline, have pooled all of their invested assets into a partnership, The Economical Insurance GroupInvestment Partnership. The vast majority of invested assets of the companies are held in the partnership with each companyowning an interest in the partnership generally approximating to its participation in the Reinsurance 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 demonstrates how risk assessment and capital management are integratedinto our decision-making process and are monitored to maintain financial viability.

We integrate the ORSA with our enterprise risk management framework, enterprise risk management policies, riskassessment, management reporting, and decision-making processes. Our Board, Risk Review Committee, and ManagementRisk Committee provide oversight and review of the ORSA, challenging assumptions and results to ensure they areconsidered appropriate in the circumstances.

We develop the ORSA by reviewing our key risks and identifying key risk indicators, quantitative risk sensitivity and/or stresstests and analyses, which could help relate the key risks to capital requirements. This process includes thoroughly assessingOSFI’s methodology for relating risks to capital as presented in OSFI’s MCT guideline, and determining its appropriateness toour risk profile. As the regulatory method has been developed with consideration to the entire industry, some capital factorsare more suitable than others in addressing our risks. Depending on the risk, the regulatory approach is validated andaccepted, modified to our circumstances, or a new methodology is developed. The output of this effort is the relation of risksto ORSA capital requirements using both quantitative and qualitative methods in a deterministic capital model. Stress testingis then utilized to assess the resiliency of our capital under a range of adverse conditions, including extreme scenarios. TheORSA is integrated into the budgeting and planning process to determine our ability to meet internal and regulatory capitaltargets in the future, and to identify contingency plans and procedures should capital levels threaten to fall below warninglevels.

FINANCIAL STRENGTH RATING

On December 12, 2017, A.M. Best reaffirmed our A- (Excellent) financial strength rating and “a-” issuer credit rating. Byextension, Waterloo Insurance Company had these same ratings reaffirmed. The ratings of A- (Excellent) and “a-” respectivelyprovide further reinforcement of our financial strength. The outlook for all ratings is stable.

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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 September 30, 2018, we have $217.1 million (December 31, 2017: $166.4 million) of cash and cash equivalents. We alsohave a highly liquid investment portfolio comprising actively traded securities including: Canadian fixed income investmentsissued or guaranteed by domestic governments, investment-grade corporate bonds, publicly-traded Canadian and foreignequities, and a foreign equity pooled fund. We believe our internal resources will provide sufficient funds to fulfil cashrequirements during the next twelve months and to satisfy all regulatory capital requirements. Adherence to the liquiditypolicy seeks to ensure that we have sufficient cash and liquid resources to meet our financial obligations, to support ourfuture growth initiatives, and that excess cash is appropriately invested.

Figure 43 provides a summary of cash flows for the three and nine-month periods ended September 30.



Operating activities

Cash provided by operating activities $ 117.4 $ 65.4 52.0 $ 59.8 $ 55.4 4.4

Investing activities

Investments sold, net of investments purchased 21.1 (49.4) 70.5 20.2 31.6 (11.4)

Commercial loans advanced, net of commercial loans repaid (7.1) 2.3 (9.4) (6.8) (7.8) 1.0

Other assets purchased (13.0) (5.5) (7.5) (39.8) (29.3) (10.5)

Business dispositions (acquisitions) 0.4 – 0.4 17.3 (94.4) 111.7

Net increase (decrease) in cash and cash equivalents $ 118.8 $ 12.8 106.0 $ 50.7 $ (44.5) 95.2

Cash flows from operations increased as compared to the third quarter of 2017, due primarily to an increase in premiumscollected and income taxes received, partially offset by higher commissions and expenses paid. Cash provided by investingactivities increased due primarily to a decrease in net investments purchased in the third quarter of 2018, partially offset bycommercial loans advanced and continued expenditures on the Vyne platform. Year-to-date, cash flows increased as the prioryear cash flow was impacted by our acquisition of Petline in the first quarter of 2017 and the purchase of an ownershipinterest in a broker in January 2017. The disposition in 2018 pertained primarily to the sale of a brokerage in the first quarter of2018. These were partially offset by a decrease in investments sold and continued expenditures on the Vyne platform.

Figure 44 provides a summary of cash flows for the years ended December 31.

Figure 44 2017-2016 2016-2015


Operating activities

Cash provided by operating activities $ 71.4 $ 26.9 $119.2 44.5 (92.3)

Investing activities

Investments sold, net of investments purchased 14.0 285.4 (80.3) (271.4) 365.7

Commercial loans advanced, net of commercial loans repaid (11.1) (60.1) 7.6 49.0 (67.7)

Other assets purchased (47.7) (92.3) (45.3) 44.6 (47.0)

Business acquisitions (93.3) (15.9) (1.3) (77.4) (14.6)

Net (decrease) increase in cash and cash equivalents, and restricted cash $(66.7) $144.0 $ (0.1) (210.7) 144.1

2017 vs 2016

We generated positive cash flows from operations in 2017, due primarily to the increase in premiums written and lower taxespaid, which were partially offset by an increase in claims paid, and increased expenses to support our growth initiatives. Cashused in investing activities increased due to our acquisition of Petline in the first quarter of 2017, the purchase of ownershipinterests in strategically aligned brokerages, and an increase in investments purchased in 2017.

2016 vs 2015

We generated positive cash flows from operations, although they were lower than 2015, due primarily to an increase in claimspaid, costs associated with the replacement of our personal lines policy administration system, and the development andlaunch of Sonnet, including building the supporting infrastructure, and increased staff costs to support our growth initiatives.These were partially offset by an increase in premiums collected and lower income taxes paid. Cash flow provided by



investing activities was higher in 2016 due to investments sold to fund our infrastructure and operational investments, to issuecommercial loans to broker partners, and to purchase an ownership interest in a broker in January 2016.

NON-GAAP FINANCIAL MEASURES

In this section “INFORMATION ABOUT ECONOMICAL”, we use both generally accepted accounting principles as defined byIFRS, as issued by the IASB, which have been adopted as GAAP, and certain non-GAAP measures to assess performance. Wemeasure 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 ourconsolidated 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 less strategic investments.

Catastrophe loss A single event causing gross losses in excess of $2 million.

Claims ratio Claims and adjustment expenses (excluding the impact of discounting) during adefined period expressed as a percentage of net earned premiums for the sameperiod.

Combined ratio Claims and adjustment expenses (excluding the impact of discounting), commissions,operating expenses (net of other underwriting revenues), and premium taxes duringa defined period expressed as a percentage of net earned premiums for the sameperiod.

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

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

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

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

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 divided by theaverage retained earnings over the same 12-month period.

Strategic investments(when used in respect of their impacton the Company’s combined ratio)

1) Sonnet’s net earned premiums, net claims and adjustment expenses(undiscounted), net commissions, operating expenses, and premium taxes on theCompany’s consolidated statement of comprehensive loss/income; and

2) Implementation and development costs of the Vyne platform in operatingexpenses on the Company’s consolidated statement of comprehensive loss/income.

Underwriting income (loss) Net earned premiums for a defined period less the sum of claims and adjustmentexpenses (excluding the impact of discounting), net commissions, operatingexpenses (net of other underwriting revenues), and premium taxes during the sameperiod.

INTERESTED PERSONS

As of the date of this Circular, no person has a ‘”significant interest” (as defined in the Act) in Economical, and followingdemutualization no person is expected to have a significant interest in Economical.

COMPENSATION PLANS FOLLOWING DEMUTUALIZATION

Economical currently offers a comprehensive compensation program to recognize and reward valuable contributions by ouremployees. We believe that our program includes competitive pay that reflects employee performance and responsibility, aflexible benefits plan, a retirement savings program, and a Company match to the retirement savings program on employeepayroll contributions. This program aligns with our overall corporate goals and strategy.

After demutualization, Economical intends to enhance this alignment by offering plans that promote employee and directorshare ownership. We believe that share ownership will allow employees to participate and benefit from the growth andsuccess of the Company, and position Economical as a more desirable place for employees to work. As well, director share

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ownership will also foster alignment between director and Company interests. The specific details of these plans have not yetbeen determined; however, in accordance with the Regulations, Economical Holdings will not issue shares, share options, orthe right to acquire shares to any director, officer, or employee (other than any benefits they receive as an eligible recipient)for one year after our demutualization (the “waiting period”). After the waiting period, we anticipate that the maximum numberof shares that will be issuable under any such plans will be limited to a small percentage of Economical Holding’s outstandingCommon Shares.

Employee Share Purchase Plan

Economical intends to introduce a program before the end of the waiting period to help employees purchase Common Sharesfrom the open market. This employee share purchase plan will be administered by a third-party who will buy the shares on theopen market for the benefit of participating employees, with contributions coming from employee payroll deductionssupplemented by cash contributions from Economical.

Medium and Long-Term Incentive Plans

Economical offers medium-term incentive rewards to executives that help align them with the longer term success of theCompany. Currently, the value of these rewards is based on the growth in Economical Mutual’s book value. Followingdemutualization, the value of our medium-term incentive rewards will be determined in part based on the growth in themarket price of Common Shares. New medium-term incentive rewards that are offered after demutualization will be in theform of restricted and performance share units. After the units vest, we anticipate they will be settled in cash, with an optionfor Economical to settle in shares, either purchased on the open market or issued from treasury (which would only be issuedafter the waiting period ends).

Following demutualization, Economical also intends to offer deferred share units to senior executives and directors.Participants may receive deferred share units either as a grant, or upon their election, to defer a portion of their compensationinto these units. Units will be redeemable by the participant only after their employment or relationship with Economicalceases.

All of the restricted, performance and deferred share units described above are not shares of Economical Holdings but rathera right to receive a cash amount calculated by reference to the price of Common Shares (except as otherwise noted).

Stock Options

Following the waiting period, Economical intends to establish a stock option plan for senior executives. The stock option planwill be designed to provide incentives to senior executives through participation in the growth and success of Economical.Under the stock option plan, participants will be granted the right to purchase shares at a future date at a price set at the timeof issuance.

No Special Demutualization Compensation

Economical’s directors, officers, and employees will not receive any special compensation or consideration in relation toEconomical Mutual’s demutualization (other than any benefits they receive as an eligible recipient). They will only receive theirregular compensation for their work as a director, officer, or employee.

APPOINTED AUDITOR

The Appointed Auditors of the Company are currently, and after demutualization anticipated to be, Ernst & Young LLP, 515Riverbend Drive, Kitchener, Ontario, Canada, N2K 3S3.

TRANSFER AGENT, REGISTRAR, AND LOCATION OF SECURITIES REGISTERS

The proposed transfer agent and registrar for the Common Shares is anticipated to be Computershare Trust Company ofCanada with its principal office located at 100 University Avenue, 8th floor, Toronto, Ontario M5J 2Y1, Canada. The securitiesregisters are proposed to be maintained at this location.


GENERAL PROXY AND VOTING INFORMATIONSOLICITATION OF PROXIES

This Circular and the accompanying proxy form are provided in connection with the solicitation of proxies by the managementof Economical Mutual to be used at the Special Meeting of eligible mutual policyholders of Economical to be held at10:30 a.m. (Eastern Time) on March 20, 2019, at Marshall Hall at Bingemans Conference Centre, 425 Bingemans Centre Drive,Kitchener, Ontario, Canada, and at any adjournment or postponement thereof.

WHO IS SOLICITING THE PROXIES

Employees, officers, directors, and agents of Economical will solicit proxies on behalf of Economical Mutual. We have alsoretained Laurel Hill Advisory Group to assist with the solicitation of proxies. The solicitation of proxies will be done by mail,phone, fax, email, in person, or through one or more combinations of those methods. The solicitation of proxies by thisCircular is being made by or on behalf of Economical Mutual, and Economical Mutual will bear the total cost of thesolicitation.

WHO MAY VOTE

The Regulations provide that only eligible mutual policyholders are entitled to vote at this Special Meeting. A policyholder isan eligible mutual policyholder entitled to receive notice of, and vote at, the Special Meeting if they held a mutual policy onNovember 3, 2015 (which is the eligibility date for this demutualization process), and on December 14, 2015 (which was thedate of the first special meeting in connection with the demutualization process). Economical Mutual has 878 eligible mutualpolicyholders entitled to vote at the Special Meeting.

Each eligible mutual policyholder holding one or more individual mutual insurance policies is entitled to cast one (1) vote onthe By-Law Amendment Resolution.

If one or more mutual policies is issued in the joint names of two or more eligible mutual policyholders, one (and only one) ofthe joint holders may cast one (1) vote on the By-Law Amendment Resolution in respect of the joint policy or policies heldbetween them. The by-laws of Economical Mutual provide that any one of the joint holders present at the Special Meeting, orrepresented by duly appointed proxy, may vote in the absence of the other or others, but that if more than one of them ispresent at any meeting, either in person or by duly appointed proxy, only the person among them whose name first appearson the policy, or the duly appointed proxy of such first-named person, as the case may be, is entitled to vote.

VOTING IN PERSON

You can vote in person by attending the Special Meeting. Please bring your proxy form and government-issued identificationto register to vote.

VOTING BY PROXY

How to Appoint a Proxyholder

The proxy form authorizes a proxyholder to represent an eligible mutual policyholder and vote on his or her behalf inaccordance with the policyholder’s instructions at the Special Meeting. If your appointed proxyholder is attending the SpecialMeeting in person a piece of government-issued photo identification will be required to register.

The proxyholders designated in the enclosed proxy form are directors and/or officers of Economical Mutual. If an eligiblemutual policyholder wishes to appoint a proxyholder other than one of the persons designated on the proxy form, he orshe may strike out the names appearing on the proxy form and insert the name of such person in the blank spaceprovided. If the eligible mutual policyholder is a non-individual legal entity, an estate, or trust, the proxy form must be signedby a duly authorized representative of the eligible mutual policyholder and be accompanied by a certified resolution or otherinstrument confirming such authorization. A proxyholder does not have to be an eligible mutual policyholder of EconomicalMutual; however, in order for the vote to count, the appointed proxyholder must be present in person at the Special Meeting.

Completing Your Proxy Form

All properly executed proxies are to be voted for or withheld from voting by the proxyholder designated on the proxy form asinstructed by the eligible mutual policyholder giving the proxy. If no other instructions are given on the proxy form, thevoting rights attached to the mutual policy in question will be exercised by the designated proxyholder by voting asfollows:

FOR the By-Law Amendment Resolution

Once your proxy form is completed, signed, and dated, please return it:

‰ by mail in the postage-paid envelope provided, or by mailing it to Computershare Investor Services Inc., 100 UniversityAvenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1;

‰ in person to:

‰ Computershare Investor Services Inc., 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1, or

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GENERAL PROXY AND VOTING INFORMATION

‰ Economical Mutual Insurance Company (head office), 111 Westmount Road South, Waterloo, Ontario, Canada N2J 4S4,Attention: Corporate Secretary;

‰ by fax to Computershare Investor Services Inc., at 1-866-249-7775 (toll-free in North America) or 1-416-263-9524(international); or

‰ via courier by calling Economical’s proxy solicitation agent, Laurel Hill Advisory Group at 1-877-304-0211 (toll-free) to arrangepick up of your completed proxy form.

For any questions you may have regarding the proxy form, or if you require assistance with voting, please contact 1-866-302-6046 (toll-free in North America) or 1-544-982-8708 (international).

Voting Electronically

If you wish to vote by phone or internet please to go to webvotedirect.com or call 1-866-301-0994 (toll-free in North America)or 1-514-982-8712 (international) and follow the instructions provided.

Deadline for Submitting Your Proxy Form

In order to be counted, your proxy form must reach Computershare or Economical, in the manner noted above, or you musthave registered your vote online or by phone, by no later than 10:30 a.m. (Eastern Time) on March 10, 2019 or, if the SpecialMeeting is adjourned or postponed, no later than 10 days before the new date set for the Special Meeting.

How to Revoke a Proxy

Eligible mutual policyholders may revoke a proxy:

‰ by delivering a written notice to that effect signed by them or their duly authorized representative(s) to ComputershareInvestor Services Inc., at 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1, or to Economical MutualInsurance Company (head office) at 111 Westmount Road South, Waterloo, Ontario, Canada N2J 4S4, Attention: CorporateSecretary, in each case no later than 5:00 p.m. (Eastern Time) on March 19, 2019, or if the Special Meeting is postponed oradjourned, no later than 5:00 p.m. (Eastern Time) on the last business day before the postponed meeting or continuation ofthe Special Meeting after the adjournment;

‰ by delivering a written notice to that effect signed by them or their duly authorized representative(s) to an agent ofComputershare Investor Services Inc. at the Special Meeting or to the Chair of the Special Meeting, on the day of the SpecialMeeting or a continuation thereof after an adjournment, or if the Special Meeting is postponed, on the day of the postponedmeeting; or

‰ in any other manner permitted by law.

The notice must be signed by the eligible mutual policyholder or by an attorney duly authorized in writing to this effect; if theeligible mutual policyholder is a legal entity, the notice must be signed by a duly authorized officer or attorney of such legalentity. That authorization must be evidenced in writing by a certified resolution attached to the notice.

Discretionary Authority

If any changes are made to matters in the notice of Special Meeting or if any new matters properly come before it and aneligible mutual policyholder has appointed the Company’s nominee or another proxyholder to vote on their behalf, theproxyholder will have the discretion to vote on those matters in accordance with their best judgment, unless prohibited bylaw.

At the date of this Circular, the management of Economical Mutual knows of no such changes or other matters.


OTHER INFORMATIONPOLICYHOLDER COMMUNICATIONS

Economical Mutual encourages all eligible policyholders to vote. To help eligible mutual policyholders make an informeddecision at the Special Meeting, Economical Mutual has provided key information about the demutualization process, bothdirectly and indirectly, through the following channels:

a. A dedicated call centre was created to respond to policyholder questions about demutualization by phone (toll-free: 1-866-302-6046) or email ([email protected]).

b. A dedicated demutualization website (joininourfuture.com).

c. An electronic mailing list for interested parties to register to receive updates via email.

d. Our corporate website (economical.com) contains our annual and quarterly financial reports, as well as a link to ourdemutualization website.

e. News releases are circulated to media and posted on our websites as we reach certain milestones in our progress.

f. In May 2016, eligible policyholders were mailed a package that included our notice of intent to demutualize, aletter to inform them of their eligibility, and a postcard with instructions on how to register their demutualizationaccount on our website.

g. An information circular was mailed to eligible mutual policyholders prior to the first special meeting, and thisCircular was created and mailed before the Special Meeting, and is available for review on our demutualizationwebsite. An information circular for eligible policyholders will be created and mailed prior to the Third SpecialMeeting, and will be available for review on our demutualization website.

h. Four weeks before each special meeting, Economical Mutual publishes a notice of the meeting in select nationaland regional newspapers.

In addition, to encourage eligible mutual policyholders to vote at this Special Meeting and for all eligible policyholders to voteat the Third Special Meeting, Economical Mutual has hired Laurel Hill Advisory Group, a proxy solicitation agent.

CONTACTING US

Economical has set up a call centre to answer questions on demutualization. The call centre can be reached as follows:

‰ Toll-free: 1-866-302-6046

‰ International: 1-514-982-8708

‰ Email: [email protected]

WEBSITE

Economical has created a dedicated demutualization website which can be found at joininourfuture.com. All other corporateinformation can be found on the Company’s corporate website at economicalinsurance.com. Information contained in orotherwise accessible through these websites does not form a part of this document.

PRINTED MATERIAL

If you would like additional copies of this Circular, the documents accompanying it, or any other publicly disclosed documentof Economical, please contact 1-866-302-6046 (toll-free in North America) or 1-514-982-8708 (international) to request suchcopies, or visit our website.

EXPERT CONSENTS

Each expert whose report or opinion appears as an appendix to this Circular, or whose report or opinion is referred to in thisCircular, has given and has not withdrawn its written consent to the issue of this Circular with the inclusion of its report oropinion or reference to its name in this Circular, in the form and the context in which it is included.

APPROVAL OF THE BOARD

The Board has approved the contents of this Circular and the sending of this Circular to the eligible mutual policyholders ofEconomical Mutual.

Rowan SaundersPresident and CEO


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APPENDIX “A”: CONVERSION PLANECONOMICAL MUTUAL INSURANCE COMPANY

CONVERSION PLAN

UnderSection 237 of the Insurance Companies Act (Canada)

andSection 13 of the Mutual Property and Casualty Insurance Company with Non-mutual

Policyholders Conversion Regulations made thereunder.

TABLE OF CONTENTS

RECITALS A-2

ARTICLE 1 INTERPRETATION A-2

1.1 Definitions A-2

1.2 Interpretation A-5

ARTICLE 2 CREATION AND PROPOSED ACTIVITIES OF HOLDCO A-6

2.1 Creation of Holdco A-6

2.2 Activities of Holdco A-6

ARTICLE 3 THE DEMUTUALIZATION A-6

3.1 Demutualization A-6

3.2 Effect of Demutualization A-7

ARTICLE 4 RECIPIENTS OF DEMUTUALIZATION BENEFITS A-7

4.1 General A-7

4.2 Masterfile A-7

4.3 Eligible Policyholders A-7

4.4 Other Recipients A-8

ARTICLE 5 ALLOCATION A-8

5.1 Method of Allocation A-8

5.2 Allocations to Eligible Policyholders and Foundation A-8

5.3 Policyholder Committees’ Rationale for the Allocation A-9

ARTICLE 6 DISTRIBUTION OF DEMUTUALIZATION BENEFITS A-10

6.1 Demutualization Benefits A-10

6.2 Cash Recipients and Foundation A-11

6.3 Share Recipients A-11

6.4 Mixed Recipients A-11

6.5 Fractional Shares and Small Distributions A-11

6.6 Distribution of Cash Payments A-11

6.7 Distribution of Common Shares A-12

6.8 Adjustment if IPO is not Completed A-12

6.9 Market Stabilization Restrictions A-12

6.10 Restrictions on Distribution of Benefits – Lost Recipients A-13

6.11 Additional Restrictions on Distribution of Benefits A-14

ARTICLE 7 VALUATION AND INITIAL PUBLIC OFFERING A-14

7.1 Valuation of the Company A-14

7.2 Initial Public Offering A-14

7.3 Holdco Share Listing and Share Selling Service A-14

7.4 Effect of Additional Share Issuances on Access to Financial Markets A-14

7.5 Alternative Arrangements A-15

ARTICLE 8 DISPUTE RESOLUTION A-15

ARTICLE 9 ADDITIONAL PROVISIONS A-15

9.1 Notices A-15

9.2 Authority to Remedy Errors A-15

9.3 No Payment of Interest A-16

9.4 Governing Law A-16

9.5 Further Assurances A-16

Schedules:

Schedule 1 - CTS Allocation A-16

Schedule 2 - Historical Commitment Allocation A-17

Schedule 3 - Summary Description of Development of Masterfile A-17

Schedule 4 - Economical Insurance Company By-Law No. 2 A-20

Schedule 5 - Economical Holdings Corporation By-Law No. 2 A-23

Schedule 6 - Valuation Report A-29

2019 Special Meeting of Eligible Mutual Policyholders Information Circular A-1

APPENDIX “A”: CONVERSION PLAN

RECITALS:

1. On November 3, 2015, the Board passed a resolution recommending Demutualization.

2. At a special meeting of Eligible Mutual Policyholders held on December 14, 2015, the Eligible Mutual Policyholders votedby special resolution to commence negotiations of the Allocation with Eligible Non-Mutual Policyholders.

3. The Policyholder Committees were appointed by order of Justice Hainey of the Ontario Superior Court datedFebruary 22, 2017, as amended.

4. The Policyholder Committees negotiated the Allocation and determined the Other Recipients, and the Allocation andOther Recipients were unanimously approved by the members of each Policyholder Committee on June 11, 2018.

5. The Company has prepared this Conversion Plan in accordance with the Demutualization Regulations to effect theDemutualization and the distribution of Demutualization Benefits in accordance with the Allocation.

6. In connection with the Demutualization, the Company has incorporated a holding corporation, which will own all of theEIC Common Shares following the Effective Time.

This Conversion Plan provides as follows:

ARTICLE 1INTERPRETATION

1.1 Definitions

As used in this Conversion Plan, the following terms have the following meanings:

“Allocation” has the meaning set out in Section 5.1.

“Applicable In Force Date” means: (i) in the case of a current or former policy that was in force on or after the Eligibility Date,the earlier of December 14, 2015 and the last date on which the policy was in force; and (ii) in the case of a former policy thatwas in force only before the Eligibility Date, the last date on which the policy was in force.

“Appointed Actuary” means Linda Goss or such other person appointed as the company actuary for the Company.

“Authorized Person” has the meaning given in the order of Hainey J. dated February 22, 2017, as amended, for theprotection and maintenance of confidentiality of documents and information.

“Board” means the board of directors of the Company.

“Business Day” means any day other than a Saturday or Sunday or any other day that is a statutory holiday in the province ofOntario.

“Calculation Dispute” has the meaning set out in Article 8.

“Calculation Disputant” has the meaning set out in Article 8.

“Calculation Dispute Notice” has the meaning set out in Article 8.

“Cash Portion” has the meaning set out in Section 6.4.

“Common Shares” means the common shares of Holdco.

“Company” has the meaning set out in Section 1.2(1).

“Company Parties” means the Company, its affiliates, or any of their respective directors, officers, employees, financialadvisors, counsel, accountants or other advisors, agents, brokers or representatives.

“Conversion Plan” means this Conversion Plan (including all schedules), as amended from time to time in accordance withSection 9.2, being a conversion proposal as contemplated in Section 237 of the ICA.

“CTS Allocation” means the allocations provided for in Sections 5.2(1)(b) and 5.2(3)(b), as more fully described in Schedule 1.

“Default Election Policyholders” means Eligible Policyholders for whom the Company did not receive a duly completed andexecuted Election Form by the Election Deadline.

“Demutualization” means the conversion of the Company from a Property and Casualty Company that is a Mutual Companyinto a Property and Casualty Company with common shares pursuant to Section 237.1 of the ICA and this Conversion Plan.

“Demutualization Benefits” means Common Shares and/or cash to be distributed to Eligible Policyholders and OtherRecipients in connection with the Demutualization in accordance with this Conversion Plan.

“Demutualization Regulations” means the Mutual Property and Casualty Insurance Company with Non-Mutual PolicyholdersConversion Regulations, SOR/2015-168, enacted on July 1, 2015 and issued pursuant to Sections 237(2) to 237(3) andSection 1021 of the ICA.

“Depositary Agent” means the depositary agent appointed by the Company or Holdco from time to time, as the case may be.

“Disclaiming Person” means a Person who elects to disclaim their entitlement to Demutualization Benefits in a mannersatisfactory to the Company.

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“Economical Preferred Shares” means the preferred shares of the Company, prior to the Effective Time.

‘‘Effective Date” has the meaning set out in Section 3.1.

‘‘Effective Time” has the meaning set out in Section 3.1.

“EIC” means the Property and Casualty Company with common shares resulting from the Demutualization of the Company.

“EIC Common Shares” means the common shares of the Company, after the Effective Time.

“ElC Preferred Shares” means the preferred shares of the Company, after the Effective Time.

“Election Deadline” means the date and time chosen by the Company as the deadline for receipt of the Election Form.

“Election Form” has the meaning set out in Section 6.1(1).

“Eligibility Date” means November 3, 2015.

“Eligible Policyholder” means an Eligible Mutual Policyholder or an Eligible Non-Mutual Policyholder.

“Eligible Mutual Policyholder” means a Person recorded in the Masterfile as an eligible mutual policyholder, but does notinclude a Disclaiming Person.

“Eligible Non-Mutual Policyholder” means a Person recorded in the Masterfile as an eligible non-mutual policyholder, butdoes not include a Disclaiming Person.

“Family Insurance” means Family Insurance Solutions Inc., which is a body corporate wholly-owned by the Company thatdistributes insurance policies issued by the Company.

“Final Consideration Date” means a date which will be (i) on or shortly after the IPO Date, or (ii) the date on which theCompany, Holdco and the Underwriters determine that the IPO will not close.

“First Special Meeting” means the meeting of the Eligible Mutual Policyholders of the Company held on December 14, 2015in accordance with Section 5 of the Demutualization Regulations.

“Foreign Recipient” means an Eligible Policyholder, or any one Person who together with one or more other Personsconstitute a single Eligible Policyholder, pursuant to Section 4.3(1), who on the Election Deadline had any address listed in theMasterfile that is outside of Canada and did not certify on an Election Form or in some other manner acceptable to theCompany in its sole discretion prior to the Election Deadline that they are a Canadian resident for the purposes of the IncomeTax Act (Canada).

“Former Lost Recipient” has the meaning set out in Section 6.10(2).

“Foundation” means 10551635 Canada Foundation (to be renamed to Economical Insurance Heritage Foundation), acorporation incorporated under the Canada Not-for-profit Corporations Act with objects to receive and maintain a fund orfunds and to apply all or part of the principal and income therefrom, from time to time, to qualified donees as defined insubsection 149.1(1) of the Income Tax Act (Canada), whose mission is to honour the Company’s policyholders and employeespast and present by working to have the greatest impact on our communities.

“Fractional Share” has the meaning set out in Section 6.5.

“Government” means an Eligible Policyholder, or, in the case of two or more Eligible Policyholders who together constitute asingle Eligible Policyholder pursuant to Section 4.3(1), all such Eligible Policyholders, that is Her Majesty in right of Canada orof a province or an agent (as that term is defined under section 406.1 of the ICA) or agency of Her Majesty in either of thoserights, or the government of a foreign country or any political subdivision thereof, or any agent or agency thereof.

“Historical Commitment Allocation” means the allocations provided for in Section 5.2(1)(c), as more fully described inSchedule 2.

“Holdco” means a corporation incorporated under the ICA which will initially be wholly-owned by the Company and will,following the Effective Time and in accordance with this Conversion Plan, own all of the EIC Common Shares.

‘‘Holdco Board” means the board of directors of Holdco.

‘‘ICA’’ means the Insurance Companies Act (Canada), as amended.

“Inception Date” means the calculated inception date for a policy as recorded in the Masterfile.

“Independent Actuary” means William Weiland or such other person appointed as the independent actuary pursuant to theDemutualization Regulations for the Demutualization process initiated on the Eligibility Date.

“Initial Public Offering” or “IPO” means the initial public offering of Common Shares, as provided for in Article 7, butexcluding the exercise of any over-allotment option granted to the Underwriters in the Underwriting Agreement.

“IPO Date” has the meaning set out in Section 3.1.

“IPO Price” means the price per share at which Common Shares will be sold to the Underwriters pursuant to the UnderwritingAgreement and offered to the public in the Initial Public Offering (and for greater certainty, without regard to any fee orcommission payable to the Underwriters by Holdco or any other Person in respect of the IPO).

“Letters Patent of Conversion” means the letters patent of conversion to be issued by the Minister to effect this ConversionPlan pursuant to Section 237(1)(b) of the ICA.



“Lost Recipient” means an Eligible Policyholder whose current address is unknown to the Company. For this purpose, anEligible Policyholder’s current address is unknown if: (i) the Company mailed a notice or document required to be sent by theDemutualization Regulations to the Eligible Policyholder’s address or addresses in the Masterfile; (ii) such notice or documentwas returned from a postal or delivery service to the Company from all of the Eligible Policyholder’s addresses in theMasterfile at the relevant time; and (iii) the Company did not subsequently update the Eligible Policyholder’s address in theMasterfile.

“Lost Recipient Claim Deadline” means 11:59 p.m. (Toronto time) on the 35th month anniversary of the Effective Date.

“Market Stabilization Restrictions” has the meaning set out in Section 6.9(1).

“Market Stabilization Restrictions Exception” has the meaning set out in Section 6.9(4).

“Masterfile” means the database of Eligible Policyholder information that the Company prepared for the purposes of theDemutualization, which was derived by commercially reasonable efforts from the Company’s policyholder records fromvarious systems and which reflects the condition, sufficiency and reliability of historical policy and policyholder data. Schedule3 sets out a summary description of the development of the Masterfile.

“Minister” means the Minister of Finance (Canada).

“Minor” means an Eligible Policyholder, or, in the case of two or more Eligible Policyholders who together constitute a singleEligible Policyholder pursuant to Section 4.3(1), all such Eligible Policyholders, who submitted a duly completed and executedElection Form and confirmed that he or she would be less than the age of majority in the jurisdiction in which he or sheresides as of the Effective Date, or where the Company otherwise has knowledge that he or she is less than the age ofmajority in the jurisdiction in which he or she resides as of the Effective Date.

“Mutual Company” means a mutual company for the purposes of the ICA.

“Mutual Policy” means a policy, issued by a Mutual Company, which gives its holder the right to vote at all policyholdermeetings of a Mutual Company.

“Named Insured” means the Person recorded in the Masterfile as the named insured on a policy. For the purposes of thisConversion Plan, and unless a different date is specified, the named insured(s) for a Qualifying Policy is/are the namedinsured(s) for that Qualifying Policy on the Applicable In Force Date.

“Net IPO Proceeds” means net proceeds remaining from the proceeds to Holdco from the sale of the Common Shares in theInitial Public Offering (and concurrent private placement closing at or about the IPO Date, if any) after payment of expenses ofsuch offering(s) as provided in Section 7.2(1).

“Non-Mutual Policy” means a policy, other than a Mutual Policy, that is issued by a Mutual Company.

“OSFI” means the Office of the Superintendent of Financial Institutions.

“OSFI Ruling” means Ruling No. 2015-01 issued by OSFI entitled “Demutualization – Property and casualty companies –Eligible policyholders”.

“Other Recipient” means a Person listed in Section 4.4.

“Person” means an individual, corporation, joint venture, partnership, association, trust, trustee, unincorporated entity,organization or government or any department or agency thereof.

“Policyholder Committees” means the committee representing the Eligible Mutual Policyholders and the committeerepresenting the Eligible Non-Mutual Policyholders, the members of which were appointed by order of Hainey J. datedFebruary 22, 2017, as amended.

“Policyholder Committee Parties” means the members of the Policyholder Committees or any of their respective financialadvisors, counsel, accountants or other advisors, agents, brokers or representatives.

“Policyholder Rights” means the rights, interests and entitlements described in Sections 3.1(2)(b) and 3.2.

“Property and Casualty Company” means a company incorporated or continued under the ICA, or to which the ICA appliespursuant to Section 13(1)(b) of the ICA, that is not a life company or a marine company, as those terms are defined under theICA.

“Qualifying Mutual Policy” means a mutual insurance policy issued by the Company that was in force on the Eligibility Date,as recorded in the Masterfile.

“Qualifying Non-Mutual Policy” means a non-mutual insurance policy (including a surety bond) issued by the Company thatwas in force on the Eligibility Date, as recorded in the Masterfile.

“Qualifying Policy” means a Qualifying Mutual Policy or a Qualifying Non-Mutual Policy. For greater certainty, QualifyingPolicies include policies issued under the Western General brand or through Family Insurance, but do not include policiesissued by The Missisquoi Insurance Company, Perth Insurance Company, Waterloo Insurance Company, Federation InsuranceCompany of Canada, Sonnet Insurance Company or Petline Insurance Company.

“Resolving Accountant” means an accounting firm of recognized national standing in Canada as may be determined by theCompany.

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“Response to Calculation Dispute Notice” has the meaning set out in Article 8.

“Restricted Period” means the period beginning at the Effective Time and ending at 4:01 p.m. (Toronto time) on the day that isthe 180th calendar day following the later of (i) the Effective Date and (ii) the closing date of any initial public offering ofHoldco, subject to the right of Holdco to terminate the Restricted Period as provided in Section 6.9(2) and provided thatnotwithstanding the foregoing such Restricted Period shall terminate, at the latest, at 4:01 p.m. (Toronto time) on the one yearanniversary of the Effective Date.

“Restriction” means, in respect of the Demutualization Benefits that have been allocated to an Eligible Policyholder pursuantto this Conversion Plan, any of the following restrictions or any other restriction on the Eligible Policyholder’s title asdetermined by the Company or Holdco, as applicable, in either case in its sole good faith discretion:

(a) another Person, in addition to or in lieu of the Eligible Policyholder, who has an interest in or right to the DemutualizationBenefits, including without limitation a trustee in bankruptcy, and such interest or right has been established by a court,regulatory authority or agency with statutory authority;

(b) an Eligible Policyholder is subject to trust, fiduciary or other similar duties or obligations or is a nominee with respect tosuch Demutualization Benefits; or

(c) a court, regulatory authority or agency with statutory authority has imposed terms and conditions on the distribution ofthe Demutualization Benefits and the Company or Holdco has reasonable grounds to believe that the EligiblePolicyholder will not, may not, or does not intend to, comply with such duties, obligations, terms or conditions.

“Second Special Meeting” means the meeting of the Eligible Mutual Policyholders of the Company held in accordance withSection 14 of the Demutualization Regulations.

“Share Portion” has the meaning set out in Section 6.4.

“Share Selling Service” has the meaning set out in Section 7.3.

“Stock Exchange” means a recognized stock exchange in Canada.

“Subject Common Shares” has the meaning set out in Section 6.9(1)(a).

“Subject Shareholder” means each Person who receives a Common Share under this Conversion Plan and any permittedtransferee thereof pursuant to a Market Stabilization Restrictions Exception, including any subsequent permitted transferee ofa permitted transferee, and any of their respective successors, heirs, personal representatives and permitted assigns.

“Superintendent” means the Superintendent of Financial Institutions appointed to such office pursuant to the Office of theSuperintendent of Financial Institutions Act (Canada) or such governmental officer, body or authority as may succeed suchSuperintendent in such appointment.

“Target Number of Common Shares” has the meaning set out in Section 6.7(3).

“Third Special Meeting” means the meeting of all Eligible Policyholders of the Company held for the purposes of theDemutualization in accordance with Section 237(1.1) of the ICA.

“Transfer Agent” means the registrar and transfer agent for the Common Shares, or its successors or assigns.

“Underwriters” means the investment dealers who enter into the Underwriting Agreement in respect of the Initial PublicOffering.

“Underwriting Agreement” means the underwriting agreement to be entered into between the Company, Holdco and theUnderwriters in respect of the Initial Public Offering, as amended, from time to time.

“Units” has the meaning set out in Section 5.1.

“Unresolved Calculation Disputes” has the meaning set out in Article 8.

“Western General” means the Western General brand that is used to sell farm policies issued by the Company.

1.2 Interpretation

(1) Meaning of “Company”

Prior to the Effective Time, the Company was a Property and Casualty Company that was a Mutual Company, the EconomicalMutual Insurance Company (a “converting company” for the purposes of the Demutualization Regulations). With effect fromand after the Effective Time, the Company is a Property and Casualty Company with common shares resulting from theDemutualization. All references herein to the “Company” shall be construed accordingly.

(2) Headings and Table of Contents

The inclusion of headings and a table of contents in this Conversion Plan is for convenience of reference only and shall notaffect the construction or interpretation hereof.

(3) Gender and Number

In this Conversion Plan, unless the context otherwise requires, words importing the singular include the plural and vice versaand words importing gender include all genders.



(4) Currency

Except where otherwise expressly provided, all amounts in this Conversion Plan are stated in Canadian currency.

(5) Timing

Each action set out in this Conversion Plan is to take place on a Business Day and, if any such action would otherwise takeplace on a non-Business Day, it shall take place on the next-following Business Day.

(6) Statutory References

Any reference in this Conversion Plan to a statute includes all regulations made thereunder, all amendments to that statuteand the regulations made thereunder, and any statute or regulation that supplements or supersedes that statute and/or theregulations made thereunder.

ARTICLE 2CREATION AND PROPOSED ACTIVITIES OF HOLDCO

2.1 Creation of Holdco

Prior to the Effective Date, the Company incorporated Holdco under the ICA as a Property and Casualty Company. Holdco isauthorized to issue an unlimited number of Common Shares and an unlimited number of preferred shares, in different series.Upon incorporation, Holdco issued one Holdco Common Share to the Company. Pursuant to Section 3.1(2)(f), at the EffectiveTime, the Company is a wholly-owned subsidiary of Holdco.

2.2 Activities of Holdco

Holdco directly and/or indirectly holds all of the issued and outstanding EIC Common Shares as well as the shares of theCompany’s existing subsidiaries. Holdco may also raise capital, borrow money, and provide services to its subsidiaries.Holdco may carry on other activities as the Holdco Board may approve from time to time and as may be permitted pursuant tothe ICA or other applicable law. Holdco has no present intention to issue insurance policies or otherwise to directly insurerisks.

ARTICLE 3THE DEMUTUALIZATION

3.1 Demutualization

The following steps shall occur in connection with the Demutualization, in the following order:

(1) The effective date of the Conversion Plan shall be the effective date stated in the Letters Patent of Conversion (the“Effective Date”). The Conversion Plan shall be deemed to have become effective at 12:01 a.m. (Toronto time) on the EffectiveDate (the ‘‘Effective Time’’). The Conversion Plan shall be legally binding on the Company, its policyholders, the EligiblePolicyholders, the Other Recipients and Holdco as of the Effective Time.

(2) As of the Effective Time, the following shall occur simultaneously:

(a) the Company shall cease to be a Property and Casualty Company that is a Mutual Company and shall become aProperty and Casualty Company with common shares. The Company’s corporate existence as a Property andCasualty Company with common shares shall be a continuation of its existence as a Property and CasualtyCompany that is a Mutual Company;

(b) pursuant to Section 237.1(1)(b) of the ICA, all of the Company’s policyholders shall cease to have any rights withrespect to, or any interest in, the Company as a Mutual Company;

(c) amended and restated by-laws of the Company as a Property and Casualty Company with common shares shallcome into force, including a by-law authorizing the issuance of EIC Common Shares, the form of which is attachedhereto as Schedule 4, which remains subject to variations as may be approved by the Board of Directors of theCompany;

(d) the Company shall issue EIC Common Shares to Holdco in consideration for Holdco issuing Common Shares toEligible Policyholders;

(e) Holdco shall issue Common Shares in accordance with Article 6;

(f) Holdco shall redeem the issued and outstanding Common Share held by the Company; and

(g) if any Economical Preferred Shares are issued and outstanding such Economical Preferred Shares shall beconverted into ElC Preferred Shares or ElC Common Shares in accordance with the Economical Preferred Shareterms and conditions to the extent, if any, that such conversion is provided for therein.

(3) The IPO is expected to close as soon as reasonably practicable following the Effective Time (the “IPO Date”), subject to thesatisfaction of the conditions in the Underwriting Agreement.

(4) On or shortly after the Final Consideration Date, subject to Section 6.8, cash payments shall be initiated by the Company inaccordance with Article 6.

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3.2 Effect of Demutualization

(1) The allocation of Units and the entitlement to and distribution of Demutualization Benefits is conclusively determined bythis Conversion Plan. As of the Effective Time, this Conversion Plan releases any claim or causes of action and discharges anyduty or obligation of any nature whatsoever of Policyholder Committee Parties, Company Parties and any otherAuthorized Person to any Eligible Policyholder or Other Recipient arising from or in respect of the Demutualization and anymatter contemplated by this Conversion Plan, other than to execute each of their obligations hereunder. No claim or cause ofaction arises or may be maintained in respect of such matters, including in respect of any entitlement this Conversion Planmay provide.

(2) Following the Effective Time, an Eligible Policyholder may commence a Calculation Dispute in accordance with Article 8,but may not commence or assert any other challenge or claim in respect of the Demutualization.

(3) Following the Effective Time, no insurance policies issued or renewed by the Company shall be classified as “mutual” or“non-mutual”. With respect to Mutual Policies and Non-Mutual Policies that are in force on the Effective Date, such policies willcontinue in force after the Effective Time subject to and in accordance with their terms, but:

(a) Mutual Policies are no longer classified as “mutual” for any purpose, and such policies no longer give their holdersthe right to vote at meetings of policyholders or any other governance rights or benefits that were previouslyassociated with Mutual Policies; and

(b) Non-Mutual Policies are no longer classified as a “non-mutual” for any purpose.

ARTICLE 4RECIPIENTS OF DEMUTUALIZATION BENEFITS

4.1 General

Demutualization Benefits will be distributed only to:

(a) Eligible Policyholders; and

(b) the Other Recipients determined by the Policyholder Committees in accordance with the DemutualizationRegulations and listed in Section 4.4 below.

4.2 Masterfile

(1) The Company undertook to identify eligible policyholders in accordance with the Demutualization Regulations and theOSFI Ruling, and developed the Masterfile to record policy and policyholder information for Eligible Policyholders.

(2) The contents of the Masterfile are deemed for the purposes of the Conversion Plan to be a complete, true and accuraterepresentation of the information regarding all Eligible Policyholders. An Eligible Policyholder, as reflected in the Masterfile oras determined in good faith by the Company, is conclusively presumed to be the Eligible Policyholder, and the Company shallnot be required to examine or consider any other facts or circumstances which bear on a Person’s entitlement to receiveDemutualization Benefits otherwise than in accordance with the Allocation set out in Article 5.

(3) In dealing with an Eligible Policyholder that is represented by a person with purported authority to make decisions on theEligible Policyholder’s behalf, the Company is not obliged to inquire into or verify the existence, validity or scope of suchauthority and the Company may assume without inquiry that there is such authority until the Company receives written noticeto the contrary.

(4) Notwithstanding any other information that may appear in the Company’s policyholder records about the effective date ofa policy change, for the purposes of this Allocation, the applicable dates are deemed to be the dates as recorded in theMasterfile.

4.3 Eligible Policyholders

Allocation and the distribution of Demutualization Benefits to Eligible Policyholders is made on the basis of the relevantpolicyholder and policy attributes up to December 31, 2015 according to the contents of the Masterfile, subject to thefollowing:

(1) If there were two or more Eligible Policyholders identified in the Masterfile as eligible policyholders for the same QualifyingPolicies, they collectively constitute one Eligible Policyholder.

For example if A and B were both Named Insureds on a Qualifying Policy giving rise to eligibility, A & B are treatedcollectively as one Eligible Policyholder.

(2) Each unique combination of Eligible Policyholders identified in the Masterfile constitutes and is deemed to be a distinctEligible Policyholder. As a result, one Person may receive more than one allocation of Units.

For example, if A was the sole Named Insured on one Qualifying Policy and also a joint Named Insured with B on a separateQualifying Policy both of which gave rise to eligibility, A and A&B are treated as two distinct Eligible Policyholders, and Amay receive two allocations of Units: (i) one as A; and (ii) one together with B.

(3) An Eligible Policyholder may be identified in the Masterfile as both an Eligible Mutual Policyholder and Eligible Non-MutualPolicyholder. For the avoidance of doubt, in that circumstance, the Eligible Policyholder is both an Eligible Mutual Policyholderand Eligible Non-Mutual Policyholder.



4.4 Other Recipients

The Policyholder Committees approved the following as Other Recipients pursuant to Section 12(4) of the DemutualizationRegulations, and approve the allocation of Units to such Persons in accordance with Article 5:

(1) the Foundation; and

(2) for the avoidance of doubt, the Persons referenced in Section 3(3) of Schedule 3.

For the purposes of this Conversion Plan, any Other Recipient referred to in Section 4.4(2) above shall be deemed to be anEligible Mutual Policyholder or Eligible Non-Mutual Policyholder according to whether the Qualifying Policy or Qualifying Date-Adjusted Policy in question is a Mutual Policy or a Non-Mutual Policy, and all references to Eligible Policyholder, EligibleMutual Policyholder and Eligible Non-Mutual Policyholder in this Conversion Plan shall include such Other Recipient, asapplicable.

ARTICLE 5ALLOCATION

5.1 Method of Allocation

As required by the Demutualization Regulations, the Policyholder Committees have negotiated and approved the method ofallocating the value of the Company, which is set out in this Article 5 (the “Allocation”). This method provides for the allocationof an aggregate of 100,000,000 notional allocation units (the “Units”) to all Eligible Policyholders and Other Recipients for thepurposes of allocating the amount of Demutualization Benefits each Eligible Policyholder and Other Recipient is entitled toreceive under Article 6. The Units are being allocated only for the purpose of determining entitlement to DemutualizationBenefits. The Units are notional only and the allocation of Units does not represent a legal issuance of a share. The allocationof Units to an Eligible Policyholder or Other Recipient does not grant the Eligible Policyholder or Other Recipient any legalrights.

5.2 Allocations to Eligible Policyholders and Foundation

The Units are allocated in the following order, subject to Section 4.3:

(1) first, the Eligible Mutual Policyholders are allocated, in aggregate as a class, 20% of the Units, broken down as follows:

(a) first, 6% of the aggregate Units are allocated to Eligible Mutual Policyholders as a class, allocated in equalamounts to each Eligible Mutual Policyholder;

(b) second, each Eligible Mutual Policyholder is allocated a number of Units for each Qualifying Mutual Policy that isattributed to that Eligible Mutual Policyholder in the Masterfile as determined in accordance with the CTSAllocation described in Schedule 1;

(c) third, each Eligible Mutual Policyholder is allocated a number of Units as determined in accordance with theHistorical Commitment Allocation described in Schedule 2; and

(d) fourth, the balance of the aggregate allocation to Eligible Mutual Policyholders as a class is allocated in equalamounts to each Eligible Mutual Policyholder;

(2) second, the Foundation is allocated the number of Units that is $100,000,000 divided by the IPO Price; and

(3) third, the balance of the Units, being the total Units less the allocations provided in Sections 5.2(1) and (2), is allocated tothe Eligible Non-Mutual Policyholders, in aggregate as a class, broken down as follows:

(a) first, 6% of the aggregate Units are allocated to Eligible Non-Mutual Policyholders as a class, allocated in equalamounts to each Eligible Non-Mutual Policyholder;

(b) second, each Eligible Non-Mutual Policyholder is allocated a number of Units for each Qualifying Non-MutualPolicy that is attributed to that Eligible Non-Mutual Policyholder in the Masterfile as determined in accordance withthe CTS Allocation described in Schedule 1; and

(c) third, the balance of the aggregate allocation to Eligible Non-Mutual Policyholders as a class is allocated in equalamounts to each Eligible Non- Mutual Policyholder.

(4) Notwithstanding the foregoing, if there are insufficient Units to complete the Allocation as contemplated in any paragraphof any of subsection 5.2(1)-(3) above, then automatically and without any further action required on the part of any party:

(a) the aggregate Allocation in respect of the first paragraph in which the Units are insufficient shall be reduced to thevalue of the remaining Units, and the individual allocation in respect of that paragraph shall be reducedaccordingly on a pro rata basis; and

(b) the aggregate Allocation in respect of each following paragraph in the same subsection shall be reduced to zero.

For example, if there are insufficient Units to complete the Allocation as contemplated in paragraph 5.2(3)(b) (being the total ofall individual CTS Allocations as would have been calculated in respect of Qualifying Non-Mutual Policies in accordance withSchedule 1), then

(i) the aggregate Allocation in respect of paragraph 5.2(3)(b) shall be reduced to the number of Units that remainfollowing the completion of the Allocation contemplated in paragraph 5.2(3)(a),

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(ii) the individual Allocation in respect of paragraph 5.2(3)(b) shall be reduced pro rata from what it would otherwisehave been to the number of such remaining Units, and

(iii) the aggregate Allocation in respect of paragraph 5.2(3)(c) shall be reduced to zero Units.

5.3 Policyholder Committees’ Rationale for the Allocation

The Allocation was the result of a negotiation between the Policyholder Committees with the assistance of counsel for theeligible policyholder classes and consulting experts, and based on information provided by the Company, the AppointedActuary and the Independent Actuary. The following is the Policyholder Committees’ rationale for the Allocation.

(1) The allocation of the value of the Company is intended to:

(a) be fair and equitable to the Eligible Policyholders, having regard to the different classes and contributions ofEligible Policyholders, including unique rights of Eligible Mutual Policyholders and to the provisions of theDemutualization Regulations;

(b) take into account historical Canadian and international demutualizations and corporate transactions (whereapplicable and relevant);

(c) be based on objective, determinable criteria, which reflect the Company’s data limitations;

(d) be simple, rational and understandable;

(e) be negotiated with the best long term interests of the Company in mind, including its strategic goal ofdemutualization; and

(f) recognize the contribution to the success of the Company of policyholders past and present.

The CTS Allocations in Sections 5.2(1)(b) and 5.2(3)(b) are variable allocations and are based on the contribution of EligiblePolicyholders to the Company’s surplus, specifically the underwriting and investment profits from Qualifying Policies andLinked Similar Policies attributable to the Eligible Policyholders as calculated by the Appointed Actuary. This aggregateallocation is then subdivided by Policy Type with individual allocations made according to the Premium and Policy Duration foreach Qualifying Policy, all as more precisely set out in Schedule 1. These variable allocations reflect the factors described inSection 12(3) of the Demutualization Regulations.

This form of variable allocation takes into account and is similar to earlier demutualizations, including the demutualization ofCanadian life insurers in the late 1990s. It also recognizes that the Company’s profits varied depending on the line ofbusiness, acknowledges that premiums varied significantly among policyholders and recognizes policyholders who havebeen customers of the Company for many years. In general, a policyholder of many years should receive more than a short-term policyholder whose circumstances are otherwise similar.

Section 5.2(1) provides for a 20% aggregate allocation to Eligible Mutual Policyholders. This 20% allocation is divided asfollows:

‰ 6% is allocated for transactional consent rights in the Demutualization (i.e. 6% of total allocation and reflected inSection 5.2(1)(a)). These are the unique rights of Eligible Mutual Policyholders in the Demutualization Regulations tovote at (i) the First Special Meeting as to whether to negotiate with the Eligible Non-Mutual Policyholders the methodof allocating the value of the Company and to establish the list of Other Recipients, (ii) the Second Special Meeting asto whether to amend the Company’s by-laws to allow Eligible Non-Mutual Policyholders to vote for the purposes of theThird Special Meeting; and (iii) the Third Special Meeting to approve the Conversion Plan and to authorize theCompany to apply to the Minister for Demutualization;

‰ an allocation for the contribution of Qualifying Mutual Policies of Eligible Mutual Policyholders to the Company’ssurplus (described above and reflected in Section 5.2(1)(b));

‰ an allocation to reflect the historical commitment of Eligible Mutual Policyholders to the Company (as reflected inSection 5.2(1)(c)). This allocation varies based on how long an Eligible Mutual Policyholder has held a Qualifying MutualPolicy; and

‰ the balance is allocated to reflect the governance rights and benefits of Eligible Mutual Policyholders (as reflected inSection 5.2(1)(d)). These are the unique rights and benefits of mutual policyholders that apply outside ofDemutualization (e.g. in the Company’s by-laws), which the Appointed Actuary characterizes as the “inherent rights” ofEligible Mutual Policyholders. They include, among other things, a right to vote at annual general or special meetingsof the Company (such as election of directors and appointment of auditors), to put forward policyholder proposals andto approve fundamental changes. It also includes unique benefits of mutual policyholders, specifically, the opportunityto receive dividends from earnings (called premium rebates by the Company).

The allocations for rights and benefits as reflected in Sections 5.2(1)(a) and 5.2(1)(d) provides an equal base number of Units toeach Eligible Mutual Policyholder. No one Eligible Mutual Policyholder has more of these rights than others and anydifferences in benefits are immaterial – they are equal and thus it is appropriate to allocate the Units that are attributable tosuch rights and benefits equally.

The allocation in Section 5.2(2) is to the Foundation. Charitable allocation is permitted by the Demutualization Regulations andis contemplated in the federal government’s Regulatory Impact Analysis Statement that accompanied the Demutualization



Regulations. The Policyholder Committees recognized the unique opportunity to make a meaningful and lasting philanthropiccontribution. It is a legacy for policyholders past and present who have contributed to the Company’s past success over manyyears and respects its history as a community-minded mutual insurer. The Company has suggested allocating DemutualizationBenefits to the Foundation pursuant to Section 12(4) of the Demutualization Regulations.

After the allocations in Sections 5.2(1) and 5.2(2) (under Section 12(4) of the Demutualization Regulations), Section 5.2(3)provides that the balance of Units is allocated to Eligible Non-Mutual Policyholders as follows:

‰ 6% of total allocation is allocated for transactional consent rights in the Demutualization (as reflected inSection 5.2(3)(a)). While all Eligible Policyholders may vote at the Third Special Meeting to approve the ConversionPlan and to authorize the Company to apply to the Minister for Demutualization, this allocation recognizes that EligibleNon-Mutual Policyholders as a class hold an overwhelming majority of the voting rights for the meeting and thus mayeffectively control the outcome of the vote;

‰ an allocation for the contribution of Qualifying Non-Mutual Policies of Eligible Non-Mutual Policyholders to theCompany’s surplus (described above and reflected in Section 5.2(3)(b)); and

‰ the balance is allocated to otherwise recognize the participation of Eligible Non-Mutual Policyholders in theDemutualization process (as reflected in Section 5.2(3)).

The allocations in Sections 5.2(3)(a) and 5.2(3)(c) provide an equal base number of Units to each Eligible Non-MutualPolicyholder. Just as for the Eligible Mutual Policyholders, these allocations reflect rights and participation of EligibleNon-Mutual Policies that do not vary within their class.

For both Eligible Mutual and Non-Mutual Policyholders, the size of allocations for transactional consent rights and forparticipation are significant in order to recognize that they are receiving Demutualization Benefits because of their eligibilityunder the Demutualization Regulations, and not an entitlement built up over time as insurance customers.

The allocations in Sections 5.2(1)(a), 5.2(1)(c), and 5.2(1)(d), 5.2(3)(a) and 5.2(3)(c) do not vary based on whether there are jointor single policyholders. This recognizes that such rights or benefits do not vary based on the number of policyholders on aCompany policy or the number of policies held by the same policyholders. Accordingly, joint policyholders will collectivelyreceive the same as a single policyholder in corresponding circumstances. However, each unique combination of EligiblePolicyholders identified in the Masterfile constitutes and is deemed for the purposes of this Allocation to be a distinct EligiblePolicyholder. Accordingly, it is possible that one Person may receive more than one allocation of Units, for example if theyhold or held one policy solely and a different policy jointly.

ARTICLE 6DISTRIBUTION OF DEMUTUALIZATION BENEFITS

6.1 Demutualization Benefits

(1) After the Third Special Meeting, election forms (which may have been in different formats for different groups of EligiblePolicyholders) were mailed to Eligible Policyholders (each, an “Election Form”) that pertained to the Demutualization and theDemutualization Benefits. The Company determined, in its sole discretion, whether an Election Form was properly completedand executed, which determination is final and binding on all Persons.

(2) Subject to this Section 6.1 and Sections 6.5, 6.6, 6.7 and 6.8, Eligible Policyholders were entitled to elect through theElection Form to receive Demutualization Benefits in the form of cash (“Cash Recipients”), shares (“Share Recipients”) or acombination of cash and shares (“Mixed Recipients”). Demutualization Benefits will be issued in the form of:

(a) cash, in the case of a Cash Recipient;

(b) Common Shares, in the case of a Share Recipient; or

(c) some cash and some Common Shares, in the proportion elected by the Eligible Policyholder, in the case of aMixed Recipient,

as further described below.

(3) The proposed form of by-law of Holdco authorizing the issuance of Common Shares is attached as Schedule 5, whichremains subject to variations as may be approved by the Board of Directors of the Holdco.

(4) Default Election Policyholders are deemed to be Share Recipients for the purposes of this Conversion Plan.

(5) Foreign Recipients, Governments and Minors are deemed to be Cash Recipients for the purposes of this Conversion Plan,regardless of any election they may have made.

(6) Where an Eligible Policyholder who was not a Foreign Recipient submitted a duly completed and executed Election Formby the Election Deadline, electing to be a Share Recipient or a Mixed Recipient, and the Company becomes aware of aforeign address (or other information that, in the reasonable discretion of the Company, suggests that the Eligible Policyholderis not a resident of Canada) between the Election Deadline and the Effective Date, such Eligible Policyholder is treated as aForeign Recipient and is deemed to be a Cash Recipient for the purposes of this Conversion Plan, regardless of any electionthey may have made.

(7) Where the Company becomes aware that a Default Election Policyholder who received Common Shares under thisConversion Plan is a Government, Holdco shall, for no consideration, cancel all Common Shares issued to such DefaultElection Policyholder and all such Common Shares shall be deemed to have been surrendered to Holdco.

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6.2 Cash Recipients and Foundation

Subject to Sections 6.6 and 6.8:

(1) in consideration for the surrender of Policyholder Rights, each Cash Recipient will receive a cash payment equal to thenumber of Units allocated to the Cash Recipient pursuant to Article 5 multiplied by the IPO Price; and

(2) the Foundation will receive a cash payment of $100,000,000 in respect of the allocation set out in Section 5.2(2).

6.3 Share Recipients

Subject to Sections 6.5 and 6.7, in consideration for the surrender of Policyholder Rights, on the Effective Date each ShareRecipient will receive a number of Common Shares equal to the number of Units allocated to the Share Recipient pursuant toArticle 5.

6.4 Mixed Recipients

Mixed Recipients elected on their Election Form to receive a portion of their Demutualization Benefits in cash (the “CashPortion”) and a portion in common shares (the “Share Portion”), each expressed as percentages of the total amount of theirDemutualization Benefits.

In consideration for the surrender of Policyholder Rights, each Mixed Recipient will receive:

(1) subject to Sections 6.5 and 6.7, a number of Common Shares equal to the number of Units allocated to the Mixed Recipientpursuant to Article 5 that reflects the Share Portion; and

(2) subject to Sections 6.6 and 6.8, cash in an amount equal to the number of Units allocated to the Mixed Recipient pursuantto Article 5 that reflects the Cash Portion, multiplied by the IPO Price.

6.5 Fractional Shares and Small Distributions

(1) Holdco shall not issue a fraction of a Holdco Common Share (a “Fractional Share”), nor shall any Person hold a FractionalShare. If a distribution under this Article 6 would result in any Person receiving a Fractional Share, including as a result of anyadjustments made to distribution in accordance with Sections 6.6, 6.7(3), and 6.8, the distribution to such Person may beadjusted by the Company such that such Fractional Share is: (i) distributed in cash, or (ii) rounded up or down to a wholecommon share, with decimals of “.500” or higher being rounded up and decimals of “.499” or lower being rounded down.

(2) If a distribution under this Article 6 would result in any Person receiving fewer than 200 Common Shares, including as aresult of any adjustments made to distribution in accordance with Sections 6.6, 6.7(3), and 6.8, such Person is deemed to be aCash Recipient for the purposes of this Conversion Plan.

(3) If a distribution under this Article 6 would result in any Person receiving less than $20 in cash, including as a result of anyadjustments made to distribution in accordance with Sections 6.6 and 6.7(3), no cash will be distributed to such Person.

6.6 Distribution of Cash Payments

(1) The IPO Price will be determined at the time that the Underwriting Agreement is entered into, and at that time the amountof cash to be distributed to each Cash Recipient can be determined and will constitute an obligation of the Company to paysuch amounts.

(2) All cash payments will be paid by the Company out of the Net IPO Proceeds. Subject to Section 6.8, a cash payment will bemade to each of the following groups and such cash payments shall be initiated sequentially, on or after the FinalConsideration Date, in the following order:

(a) first, to the Foundation, pursuant to Section 6.2(2);

(b) second, to those deemed Cash Recipients who are Foreign Recipients, Governments or Minors, pursuant toSection 6.2(1);

(c) third, to those deemed Cash Recipients pursuant to Section 6.5(2);

(d) fourth, to Cash Recipients who elected to receive cash and who are not Foreign Recipients, Governments orMinors, pursuant to Section 6.2(1), and to Mixed Recipients (in respect of their Cash Portion), pursuant toSection 6.4(2); and

(e) last, to Share Recipients and Mixed Recipients (in respect of their Share Portion), pursuant to Section 6.7(3), ifapplicable.

(3) Notwithstanding the foregoing, if there are insufficient Net IPO Proceeds to fund the cash payments as contemplated inany of paragraphs (a)-(d) above, then automatically and without any further action required on the part of any party:

(a) the amount of cash to be distributed in respect of the first paragraph in which the Net IPO Proceeds are insufficientshall be reduced to the value of the remaining Net IPO Proceeds, the distribution of cash in respect of thatparagraph shall be reduced accordingly and the balance of any Demutualization Benefits to be distributed inrespect of that paragraph shall be distributed in the form of Common Shares, to be issued on or after the FinalConsideration Date. If the first paragraph in which the Net IPO Proceeds are insufficient is paragraph (c), thendistribution of cash is made in order of recipients with the smallest allocation in that group to the largest in thatgroup (and in the case where recipients have identical allocation, then in order from the earliest inception date tothe latest inception date). Otherwise, distribution for the first paragraph in which the Net IPO Proceeds areinsufficient shall be on a pro rata basis; and



(b) the Demutualization Benefits to be distributed in respect of each following paragraph shall be distributed in theform of Common Shares, to be issued on or after the Final Consideration Date.

6.7 Distribution of Common Shares

(1) All Common Shares distributed pursuant to this Article 6 will be issued and registered in the name of the applicable ShareRecipient or Mixed Recipient in the direct registration system maintained by the Transfer Agent of Holdco. Except as may berequired by law, the Company is not obligated to issue physical share certificates. The Company may, in its sole discretion,make commercially reasonable alternative arrangements in respect of the registration and holding of any shares to be issuedhereunder.

(2) As soon as reasonably practicable after the Final Consideration Date, Holdco will send, or cause to be sent, evidence ofownership of Common Shares distributed pursuant to this Article 6 to all Share Recipients and Mixed Recipients.

(3) The number of Common Shares (the “Target Number of Common Shares”) to be issued to Share Recipients and MixedRecipients in connection with the Demutualization is based on the completion of the Initial Public Offering (and concurrentprivate placement, if any) and the expected Net IPO Proceeds, which in turn are based on the IPO Price and the number ofCommon Shares to be sold in the IPO determined by negotiation between Holdco and the Underwriters and set out in theUnderwriting Agreement (and, if applicable, the number of Common Shares to be sold in, and the net proceeds of, anyconcurrent private placement). Consequently, based on the completed Election Forms received by the Company, if the totalnumber of Common Shares that would be issued to Share Recipients and Mixed Recipients (in respect of their Share Portion)is greater than the Target Number of Common Shares, then the number of Common Shares to be received by ShareRecipients and Mixed Recipients (in respect of their Share Portion) shall be reduced to the extent possible to eliminate suchexcess (pro rata among Share Recipients and Mixed Recipients, based on the number of Common Shares they otherwisewould have received absent proration) and Share Recipients and Mixed Recipients shall receive cash from the Company in anamount that corresponds to such reduction in Common Shares, in accordance with Section 6.6.

6.8 Adjustment if IPO is not Completed

In the event that the IPO is not completed (see Section 7.5 below), then:

(1) Eligible Policyholders (other than those who are Foreign Recipients, Governments or Minors) will not receiveDemutualization Benefits in the form of cash; and

(2) the Foundation will not receive Demutualization Benefits in the form of cash;

instead, all such Demutualization Benefits will be distributed in the form of Common Shares which will be issued on or afterthe Final Consideration Date, and the distribution of such Common Shares shall satisfy the Company’s obligations hereunderto pay Demutualization Benefits in the form of cash.

Eligible Policyholders who are Foreign Recipients, Governments or Minors will receive Demutualization Benefits in the form ofcash even if the IPO is not completed.

6.9 Market Stabilization Restrictions

(1) As a condition of the Demutualization, during the Restricted Period, subject to Section 6.9(4):

(a) each Common Share distributed to a Subject Shareholder under this Conversion Plan as a result of theDemutualization (such Common Shares, the “Subject Common Shares”) may not be transferred; and

(b) no Subject Shareholder shall, directly or indirectly: (i) sell, offer to sell, grant any option, warrant or other right topurchase or otherwise lend, secure, pledge, transfer, assign, dispose of or monetize any Subject Common Shares(including, without limitation, by way of a short sale, put option or call option), (ii) enter into any swap or any form ofagreement or arrangement the consequence of which is to transfer to another, in whole or in part, any of theeconomic consequences of ownership of any Subject Common Shares, whether any such swap, agreement orarrangement is to be settled by delivery of Subject Common Shares, in cash or otherwise, (iii) agree to or publiclyannounce any intention to do any of the foregoing, or (iv) act jointly or in concert with any third party with respectto any of the foregoing matters,

(such restrictions, the “Market Stabilization Restrictions”).

(2) Holdco may, in its sole discretion, terminate the Restricted Period at any time, provided that at least 10 days prior to theeffective date of such termination, Holdco shall disseminate a press release over a national wire service announcing theeffective date of the termination of the Restricted Period.

(3) Holdco and the Transfer Agent shall be entitled to take all necessary action to enforce the Market Stabilization Restrictions.Any transfer or purported transfer of a Subject Share in contravention of the Market Stabilization Restrictions shall be voidableby Holdco. In the event of a contravention or attempted contravention of the Market Stabilization Restrictions, Holdco shall beentitled to the remedy of specific performance and preliminary and permanent injunctive and other equitable relief in additionto any other remedy to which it may be entitled, at law or in equity.

(4) The Market Stabilization Restrictions shall not apply to any category of transfer as Holdco may determine from time to timein its sole discretion (each a “Market Stabilization Restrictions Exception”), provided that in the case of any transfer of

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Subject Common Shares pursuant to a Market Stabilization Restrictions Exception, unless waived by Holdco in its solediscretion, the transferor must, prior to such transfer, provide evidence satisfactory to Holdco or its designated agent, in formand substance satisfactory to Holdco in its sole discretion, that: (i) the Market Stabilization Restrictions Exception applies tothe proposed transfer; (ii) the transferee has agreed with Holdco to be bound by the Market Stabilization Restrictions as if itwas a Subject Shareholder; and (iii) the transfer complies with any applicable securities law requirements. Holdco may refuseto approve any transfer pursuant to a Market Stabilization Restrictions Exception at its sole discretion.

6.10 Restrictions on Distribution of Benefits—Lost Recipients

(1) Demutualization Benefits that have been allocated to Lost Recipients pursuant to Article 5 shall, on the Effective Date, beissued to and held by the Depositary Agent on behalf of the Lost Recipients and otherwise dealt with in the same manner asDefault Election Policyholders. The Depositary Agent will hold both Common Shares and cash for the benefit of the LostRecipients until the Lost Recipient Claim Deadline.

(2) A Lost Recipient may cease to be a Lost Recipient (a “Former Lost Recipient”) by taking one or more of the following stepsprior to the Lost Recipient Claim Deadline to confirm the current address at which the Former Lost Recipient may be reachedby mail, such confirmation to be to the satisfaction of the Company:

(a) responding to a letter from the Depositary Agent, the Company or Holdco requesting confirmation of the currentaddress;

(b) contacting the Depositary Agent, the Company or Holdco and confirming the current address;

(c) informing the Depositary Agent, the Company or Holdco of a change of address; or

(d) otherwise confirming the current address with the Depositary Agent, the Company or Holdco in a mannersatisfactory to the Company or Holdco, as applicable.

(3) A Former Lost Recipient may, to the extent permitted by law and this Section 6.10, claim the Former Lost Policyholder’sDemutualization Benefits at any time prior to the Lost Recipient Claim Deadline. In the case of a valid claim being made by aFormer Lost Recipient to the satisfaction of the Company, the Depositary Agent shall transfer the Demutualization Benefits tothe Former Lost Recipient as soon as reasonably practicable following the claim date (such transfers may take up to 30 daysto be processed). Former Lost Recipients entitled to Common Shares shall also be entitled to receive all accrued dividends orother distributions in respect of such Common Shares since the Effective Date up until the date of their claim but without anyinterest that may have accrued thereon and less any taxes and other expenses borne by the Depositary Agent in connectiontherewith. Former Lost Recipients entitled to cash (including as a result of dividends or as a result of any cash payment arisingas a result of transactions contemplated in Section 6.10(4)), shall be paid the cash amount by the Depositary Agent by chequeor bank transfer, net of any applicable withholding taxes and other applicable fees.

(4) The property transferred to a Former Lost Recipient pursuant to Section 6.10(3) shall reflect any subdivision, consolidation,reclassification or other similar change to the Common Shares which occurs prior to the claim date. If, prior to the claim date,any reorganization, amalgamation, arrangement, merger, statutory right to acquire or similar transaction has occurredinvolving Holdco or to which Holdco is a party and which results in the holders of Common Shares receiving securities, cashor other property in exchange for, in conversion of, or in respect of their Common Shares, then, upon a Former Lost Recipientmaking a valid claim for Common Shares, he or she shall be issued the securities, property or cash substituted for theCommon Shares that he or she was entitled to.

(5) If a Former Lost Recipient is confirmed pursuant to Section 6.10(2) to be a non-resident of Canada for the purposes of theIncome Tax Act (Canada), then to the extent that the Depositary Agent is holding Common Shares in trust for such FormerLost Recipient, the Depositary Agent shall sell such Common Shares and transfer the proceeds of such sale, together withaccrued dividends, net of brokerage fees, to the Former Lost Recipient. The Depositary Agent shall use its reasonablecommercial efforts to sell such Common Shares in the public market, but in doing so shall have discretion to sell the CommonShares on such stock exchange at such time and on such terms, including as to price, as the Depositary Agent shall determinefrom time to time.

(6) Following the Lost Recipient Claim Deadline, the entitlement of Lost Recipients to Demutualization Benefits will cease and:

(a) Holdco shall, for no consideration, cancel all Common Shares issued to Lost Policyholders and all such CommonShares shall be deemed to have been surrendered to Holdco, together with all entitlements to dividends anddistributions thereon, including any proceeds of dissolution pursuant to the ICA; and

(b) the Depositary Agent shall transfer any cash being held on behalf of Lost Recipients to Holdco, for the account ofHoldco.

(7) Notwithstanding the foregoing, following the Lost Recipient Claim Deadline, Holdco may, in its sole discretion, reissueCommon Shares and pay an amount in respect of dividends or issue securities or pay cash or other property to a Person, asthe case may be, whose Common Shares were cancelled in accordance with Section 6.10(6).

(8) If any Common Shares and/or cash to which a Lost Recipient is entitled were delivered or transferred by the DepositaryAgent to a government or governmental agency, authority or official pursuant to escheat or abandoned or unclaimed propertylegislation, none of the Company, Holdco or the Depositary Agent shall have any obligation to (a) issue Common Shares ormake a payment of cash to such Former Lost Recipient pursuant to this Section 6.10, or (b) recover for the benefit of suchFormer Lost Recipient any such Common Shares or cash from the government or governmental agency, authority or official.



6.11 Additional Restrictions on Distribution of Benefits

Notwithstanding anything in Article 5 or this Article 6, if the Company or Holdco becomes aware of or has knowledge that anEligible Policyholder, or any one Person who together with one or more other Persons, constitute a single EligiblePolicyholder pursuant to Section 4.3(1), is subject to a Restriction, the Demutualization Benefits that have been allocated tothat Eligible Policyholder shall, on the Effective Date, be issued to the Depositary Agent in accordance with Section 6.10 andshall be held and otherwise dealt with by the Depositary Agent in the manner set out in Section 6.10.

In such a case, when the Eligible Policyholder or another Person confirms, in a manner reasonably satisfactory to theCompany or Holdco, as applicable, that the Restriction has been removed or that the Eligible Policyholder will comply withsuch Restriction, as the case may be, the Demutualization Benefits shall be transferred to the Eligible Policyholder togetherwith accrued dividends but without interest, net of brokerage fees.

ARTICLE 7VALUATION AND INITIAL PUBLIC OFFERING

7.1 Valuation of the Company

The Company retained BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. to provide a range of estimated equitymarket values for Holdco in an initial public offering. The valuation report, which is attached as Schedule 6 sets out theestimated range of equity market values of the Company on the basis that it is the same as the range of estimated publicequity market values for Holdco set out therein, which is based solely on estimated prices at which the Common Shares couldhave been expected to be offered as of May 31, 2018 in an initial public offering conducted in a manner consistent with theInitial Public Offering described in this Article 7, as if the IPO Date was May 31, 2018.

The actual public equity market value of Holdco, and therefore the Company, at the Effective Time (and prior to thecompletion of the IPO) will be based on the IPO Price. All of that value will be distributed pursuant to this Conversion Plan asDemutualization Benefits.

7.2 Initial Public Offering

Holdco shall use its reasonable commercial efforts to close the Initial Public Offering on the basis, and within the period,provided for in the Underwriting Agreement. Notwithstanding the foregoing and any other provision of this Conversion Plan,Holdco shall have no obligation to close the Initial Public Offering in the event that the Underwriting Agreement is terminated.The IPO Price and the number of Common Shares to be sold in the IPO shall be determined by negotiation between Holdcoand the Underwriters. Holdco may proceed with the Initial Public Offering whether or not the IPO Price is within the range ofmarket values specified in the valuation report. The IPO may also include an over-allotment option granted to theUnderwriters in the Underwriting Agreement. At or about the time of the IPO Date, at the sole election of the Holdco Boardand on such terms as it may determine in its sole discretion, Holdco may offer for sale Common Shares on a privateplacement basis.

As soon as reasonably practicable after the IPO Date, the proceeds to Holdco from the sale of Common Shares in the IPOand, if applicable, any concurrent private placement:

(1) first will be used by Holdco to pay the expenses of the offering(s);

(2) second will be used by Holdco to subscribe for additional EIC Common Shares, in order to fund cash distributions by theCompany in accordance with Section 6.6; and

(3) otherwise may be retained by Holdco for general corporate purposes.

7.3 Holdco Share Listing and Share Selling Service

Holdco shall use its reasonable commercial efforts to arrange for the listing of the Common Shares on a Stock Exchange.Holdco shall use its reasonable commercial efforts to keep the Common Shares listed on a Stock Exchange for two years afterthe Effective Date. Such listing and efforts shall satisfy any duty the Company or Holdco may have to ensure that EligiblePolicyholders who receive Common Shares will be able to sell the shares on a public market.

Subject to receipt of satisfactory regulatory approvals and the feasibility of offering the service on a commercially reasonablebasis in each jurisdiction, as determined by Holdco, acting reasonably, Holdco shall arrange for the Transfer Agent to providea service (the “Share Selling Service”) to assist Eligible Policyholders to whom Common Shares are issued to sell theirCommon Shares. Holdco may decide that the Share Selling Service in certain jurisdictions will only be available to Personswho hold their shares through the Transfer Agent. The Share Selling Service shall be available from the 180th calendar dayafter the IPO Date, or from such other date as may be selected by Holdco, until two years after the IPO Date. The ShareSelling Service may only be terminated in any jurisdiction prior to such date upon 90 days’ written notice to the address onrecord with the Transfer Agent of all persons who are eligible to use the Share Selling Service in that jurisdiction. Under theShare Selling Service, an Eligible Policyholder may sell Common Shares by instructing the Transfer Agent to do so for a fee.The Transfer Agent will arrange for the sale of shares through a dealer on the Stock Exchange.

7.4 Effect of Additional Share Issuances on Access to Financial Markets

The measures referred to in Section 7.3 will not be affected by the issuance of additional Common Shares or any other sharesin the capital of Holdco during the two years following the Effective Date.

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7.5 Alternative Arrangements

Notwithstanding any other provision of this Conversion Plan, in the event that the IPO Date does not occur within the periodprovided for in the Underwriting Agreement (or by such later date as the Holdco Board may in its discretion agree to inaccordance with the Underwriting Agreement), then the following rules shall govern the manner of the distribution of theDemutualization Benefits:

(1) Holdco shall continue to use its reasonable commercial efforts to list, and keep listed and posted for trading, the CommonShares on a Stock Exchange in accordance with Section 7.3.

(2) Adjustments to the Demutualization Benefits shall be made in accordance with Section 6.8.

ARTICLE 8DISPUTE RESOLUTION

Following the distribution of Demutualization Benefits after the Final Consideration Date, if any Eligible Policyholder disputesany calculation made in respect of the allocation or distribution of Demutualization Benefits, including the policy orpolicyholder information in the Masterfile that formed the basis of that calculation (a “Calculation Dispute”), then the EligiblePolicyholder (the “Calculation Disputant”) may, within 60 days after the Final Consideration Date, deliver a written notice (a“Calculation Dispute Notice”) to the Company setting forth a detailed description of the Calculation Dispute and statement ofthe basis on which the calculation in question is being disputed.

Eligible Policyholders shall be deemed to have accepted all calculations made in connection with this Conversion Plan inrespect of which they do not deliver a Calculation Dispute Notice to the Company within such 60 day period.

Within 10 days of receipt of the Calculation Dispute Notice, the Company shall contact the Calculation Disputant in order todiscuss or obtain more details about the Calculation Dispute. The Calculation Disputant and the Company shall usecommercially reasonable efforts to promptly resolve any Calculation Dispute.

Within 45 days of the receipt of the Calculation Dispute Notice and any additional supporting documentation from theCalculation Disputant, the Company shall provide the Calculation Disputant with a written response (the “Response toCalculation Dispute Notice”) which shall provide the Company’s position in response to the Calculation Dispute Notice.

If the Calculation Disputant is dissatisfied after receiving the Response to the Calculation Dispute Notice, then within 30 daysof the date of the Response to Calculation Dispute Notice the Calculation Disputant may request that the Company retain theResolving Accountant to determine any unresolved matters set forth in the Calculation Dispute Notice (the “UnresolvedCalculation Disputes”).

The Company shall direct the Resolving Accountant to render a written determination with respect to the UnresolvedCalculation Disputes within 15 days of its retention. The Resolving Accountant shall consider only those items and amounts setforth in the Calculation Dispute Notice, the Response to Calculation Dispute Notice, and the terms of this Conversion Plan.

The Resolving Accountant shall determine only the quantum of the Demutualization Benefits to be paid to the CalculationDisputant, and such quantum shall be based on the Allocation, Schedules 1 and 3 and the IPO Price. Such DemutualizationBenefits shall be distributed to a Calculation Disputant in the same form in which the Calculation Disputant would havereceived had they been distributed in accordance with Article 6, and for the purposes of such distribution, the CalculationDisputant shall be treated like a Former Lost Recipient and in accordance with Section 6.10(3).

The determination of the Resolving Accountant with respect to the Unresolved Calculation Disputes shall be conclusive andbinding upon the Calculation Disputant and the Company. No appeal shall be permitted from the Resolving Accountant’sdecision including on questions of law. The Company shall bear its own costs of participating in the Calculation Disputeresolution and shall pay the fees and expenses of the Resolving Accountant. The Calculation Disputant shall bear his or herown costs.

The Calculation Dispute resolution shall be confidential. Unless required to do so by law, the Calculation Disputant and theResolving Accountant may not disclose to others the existence, content, or results of the Calculation Dispute resolutionprocess without the prior written consent of the Company.

The Company may engage and rely on a third-party service provider to act on its behalf in the above process.

ARTICLE 9ADDITIONAL PROVISIONS

9.1 Notices

If the Company or Holdco complies substantially and in good faith with the terms of this Conversion Plan in respect of thegiving of any required notice to any Person, the failure by the Company or Holdco (as the case may be) to give the notice toany Person entitled thereto shall not impair the validity of the actions and proceedings taken pursuant to this Conversion Planor entitle the Person to any injunctive or other equitable relief with respect thereto.

9.2 Authority to Remedy Errors

Subject to the terms of this Conversion Plan, the Company may issue additional EIC Common Shares, Holdco may issueadditional Common Shares and the Company or Holdco may take any other actions deemed appropriate to remedy errors ormiscalculations made in connection with this Conversion Plan, including errors or miscalculations in respect of the allocationor distribution of Demutualization Benefits.



Following prior written notice to the Superintendent, the Company or Holdco may make modifications to this Conversion Planof a formal, minor or technical nature or to correct or rectify any ambiguities, defective provisions or omissions provided that,in the opinion of the Board, the rights of Eligible Policyholders are not in the aggregate materially prejudiced thereby.

9.3 No Payment of Interest

All amounts paid to Eligible Policyholders pursuant to this Conversion Plan shall be paid without interest, unless otherwisespecified.

9.4 Governing Law

The terms of this Conversion Plan shall be governed by and construed in accordance with the laws of Ontario and the laws ofCanada applicable therein.

9.5 Further Assurances

The Company and Holdco shall promptly do, make, execute, deliver or cause to be done, made, executed or delivered, allsuch further acts, documents and things as may reasonably be required from time to time for the purpose of giving effect tothis Conversion Plan and shall use their reasonable commercial efforts and take all steps as may be reasonably within theirpower to implement to their full extent the provisions of this Conversion Plan.

IN WITNESS WHEREOF, Economical Mutual Insurance Company and Holdco have executed this Conversion Plan this [Š] dayof [Š], [Š].

ECONOMICAL MUTUAL INSURANCE COMPANY

ECONOMICAL HOLDINGS CORPORATION

SCHEDULE 1

This schedule forms an integral part of the Allocation set out in Article 5 of the Conversion Plan.

CTS ALLOCATION

1. Definitions

The following terms are used in this Schedule 1. Capitalized terms used in this Schedule 1 and not defined here are defined inSection 1.1 of the Conversion Plan.

“Adj Duration” equals Policy Duration x (1 + 0.05 x (Policy Duration -1))

“Adj Premium” equals

If Policy Type is personal auto policy, the sum of(1 x the lesser of Premium and $400) +If Premium > $400, (0.2 x the lesser of (Premium – $400) and $1,500) +If Premium > $1,900, (0.02 x (Premium – $1,900))

If Policy Type is personal property policy, the sum of(1 x the lesser of Premium and $300) +If Premium > $300, (0.2 x the lesser of (Premium – $300) and $400) +If Premium > $700, (0.02 x (Premium – $700))

If Policy Type is commercial auto policy, the sum of(1 x the lesser of Premium and $1,300) +If Premium > $1,300, (0.5 x the lesser of (Premium – $1,300) and $8,500) +If Premium > $9,800, (0.1 x (Premium – $9,800))

If Policy Type is commercial property policy, the sum of(1 x the lesser of Premium and $1,500) +If Premium > $1,500, (0.2 x the lesser of (Premium – $1,500) and $800) +If Premium > $2,300, (0.05 x the lesser of (Premium – $2,300) and $4,900) +If Premium > $7,200, (0.01 x (Premium – $7,200))

If Policy Type is mutual policy, the sum of(1 x the lesser of Premium and $300) +If Premium > $300, (0.2 x the lesser of (Premium – $300) and $400) +If Premium > $700, (0.02 x (Premium – $700))

“Linked Similar Policy” means a policy issued by the Company that was not in force on the Eligibility Date, but which isnevertheless recorded in the Masterfile and used for the purposes of establishing eligibility in accordance with theNovember 3 Resolution (as described under the heading “Policy linking” in Section 8 of Schedule 3 to this Conversion Plan).These policies are a subset of Similar Policies.

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“Policy Duration” means for a Qualifying Policy, the period of time in years ending on the Eligibility Date (rounded to thenearest one-hundredth) from and including the Inception Date of the Qualifying Policy or, if there is a Linked Similar Policyassociated with the Qualifying Policy, the Inception Date of the Linked Similar Policy, up to a maximum of 23 years.

“Policy Type” means for a Qualifying Non-Mutual Policy, whether it is a personal property policy, personal auto policy,commercial property policy or commercial auto policy as recorded in the Masterfile, and for a Qualifying Mutual Policy, thePolicy Type is a mutual policy.

“Policy Type CTS” equals, subject to Section 5.2(4) of the Conversion Plan, the number of Units that is:

$490,041,000 divided by the IPO Price if the Policy Type is personal auto policy$133,669,000 divided by the IPO Price if the Policy Type is personal property policy$191,414,000 divided by the IPO Price if the Policy Type is commercial auto policy$121,488,000 divided by the IPO Price if the Policy Type is commercial property policy$2,018,000 divided by the IPO Price if the Policy Type is mutual policy

“Premium” means the average annual premium for a Qualifying Policy and any Linked Similar Policy as recorded in theMasterfile rounded to the nearest dollar, subject to a minimum of $0.

“Similar Policy” has the meaning provided for in Section 3 of Schedule 3 to this Conversion Plan.

2. CTS ALLOCATION FOR A QUALIFYING POLICY

CTS Allocation for a Qualifying Policy is a number of Units calculated as follows:

CTS Allocation for a Qualifying Policy

= Policy Type CTS x (Adj Premium x Adj Duration) for the Qualifying Policy

Sum of (Adj Premium x Adj Duration) for Qualifying Policies of Eligible Policyholders of that Policy Type

SCHEDULE 2


HISTORICAL COMMITMENT ALLOCATION

1. Definitions

The following terms are used in this Schedule 2. Capitalized terms used in this Schedule 2 and not defined here are defined inSchedule 1 to the Conversion Plan.

“HC Allotment” equals, subject to Section 5.2(4) of the Conversion Plan, the number of Units that is $2,000,000 divided bythe IPO Price.

“Mutual Policyholder Duration” means the period of time in years ending on the Eligibility Date (rounded to the nearestone-hundredth) from and including the earliest Inception Date for a Qualifying Mutual Policy attributed to an Eligible MutualPolicyholder.

2. HISTORICAL COMMITMENT ALLOCATION FOR A QUALIFYING MUTUAL POLICY

The Historical Commitment Allocation of an Eligible Mutual Policyholder is a number of Units calculated as follows:

Historical Committment Allocation for an Eligible Mutual Policyholder

= HC Allotment x (Mutual Policyholder Duration) for the Eligible Mutual Policyholder

Sum of (Mutual Policyholder Duration) for all Eligible Mutual Policyholders

SCHEDULE 3


SUMMARY DESCRIPTION OF DEVELOPMENT OF MASTERFILE

The Masterfile contains policyholder and policy attributes up to December 31, 2015. The following is a summary description ofthe development of the Masterfile.

1. Definitions

The following terms are used in this Schedule 3. Capitalized terms used in this Schedule 3 and not defined here are defined inSchedule 1 or Section 1.1 of the Conversion Plan.

“Fronting Policy” means a policy issued by the Company pursuant to an arrangement between the Company and a thirdparty whereby the Company has agreed to issue such policy on the condition that it is 100% reinsured by the third party. Thethird party is typically an insurer in another jurisdiction that is not licensed to sell insurance in the particular jurisdiction wherethe policy was issued. The Company is technically the insurer, but the third party administers the policy and pays any claims.



“Master-Certificate Policies” means policies that have been issued to related groups of insureds under umbrellaarrangements, for example where a franchisor (notionally referred to as the “master”) has arranged with a broker for a numberof franchisees (notionally referred to as “certificate holders”) to use the same insurer. Each “certificate holder” holds its ownseparate insurance policy.

“November 3 Resolution” means the resolution of the Board passed on the Eligibility Date recommending Demutualization.

“Qualifying Date-Adjusted Policy” means a Qualifying Policy that the Named Insured cancelled with notice received by theCompany on or after December 14, 2015 where the effective date of cancellation was recorded as a date prior toDecember 14, 2015.

“Subscription Policy” means a policy where the Company is one among several insurers on risk. The Company’s exposure islimited to a certain percentage of the risk insured, with other insurers bearing the remaining risk insured.

2. Masterfile

(1) The Masterfile is a secure database of policy and policyholder information for Eligible Policyholders. It was created usinginformation from various Company policy administration systems and the Company’s corporate data warehouse.

(2) Adjustments were made to this information to reflect the sufficiency and reliability of historical policy and policyholder data,the OSFI Ruling and the manner in which an Eligible Non-Mutual Policyholder may have been qualified as an eligiblenon-mutual policyholder pursuant to Section 3(b) of the Demutualization Regulations and the November 3 Resolution. ThisSchedule 3 seeks to outline and explain the material adjustments.

(3) The Company has not made any changes to the Masterfile since the date that the Allocation was approved by thePolicyholder Committees, except to correct clerical or calculation errors subsequently discovered before the Effective Time.

3. Eligible policyholders

(1) An Eligible Mutual Policyholder is a Named Insured for a Qualifying Mutual Policy that was in force until December 14, 2015.

(2) An Eligible Non-Mutual Policyholder is a Named Insured for a Qualifying Non-Mutual Policy

(a) who was a Named Insured for the Qualifying Non-Mutual Policy or Similar Policy on December 14, 2015; and

(b) who was a Named Insured for the Qualifying Non-Mutual Policy and any Similar Policies, which, when takentogether, were in force for the period from the Eligibility Date to December 14, 2015 (inclusive of both dates) withno gap in coverage between the policies greater than 30 days; and

(c) for which, either or both

(i) the Inception Date for the Qualifying Non-Mutual Policy was on or before November 4, 2014; or

(ii) the Named Insured was a Named Insured for Similar Policies and, when taken together, the QualifyingNon-Mutual Policy and the Similar Policies were in force for the period from November 4, 2014 to theEligibility Date (inclusive of both dates) with no gap in coverage between such policies greater than 30 days.

For these purposes, “Similar Policy” means, with reference to a Qualifying Non-Mutual Policy, a different mutual ornon-mutual insurance policy of the Company that is Similar to that Qualifying Non-Mutual Policy. A policy issued by theCompany is “Similar” to another policy issued by the Company if both policies are personal property policies, both policies areauto policies or both policies are commercial property policies, regardless of whether one of the policies is a mutual policy.

(3) A Person falling into any of the following categories and who is recorded as an eligible policyholder in the Masterfile,regardless of purported errors in the identification of eligible policyholders in the Masterfile or in respect of conformity withthe definition of “eligible policyholder” in the Demutualization Regulations, is treated as an Eligible Policyholder for thepurposes of the Demutualization:

(a) the named principal on the Eligibility Date on a surety bond that is a Qualifying Policy;

(b) the Named Insured on a Qualifying Date-Adjusted Policy;

(c) the named or notional “certificate holder” on the Eligibility Date on a Master- Certificate Policy that is a QualifyingPolicy;

(d) the Named Insured on a Fronting Policy that is a Qualifying Policy;

(e) the Named Insured on a Subscription Policy that is a Qualifying Policy; and

(f) any Named Insured on a Qualifying Policy that is no longer in force, but who meets the definition of “eligiblepolicyholder” in the Demutualization Regulations as interpreted by OSFI in the OSFI Ruling.

4. Determination of Named insured

The named insured field in the Masterfile was based on any persons that the Company treats as named insureds for thepurposes of its policies, including principals on surety bonds and the Person named on a Master-Certificate Policy as thecertificate holder.

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5. Qualifying Policies

The Masterfile records information for policies issued by the Company. This includes:

(a) policies issued by the Company under the Western General brand or through Family Insurance;

(b) Subscription Policies; and

(c) Fronting Policies.

These kinds of policies may not necessarily have the Company’s branding, but the policy states that the Company is theinsurer, or is one of several insurers for Subscription Policies. The Company bears liability as an insurer. This is in contrast topolicies issued by The Missisquoi Insurance Company, Perth Insurance Company, Waterloo Insurance Company, FederationInsurance Company of Canada, Sonnet Insurance Company or Petline Insurance Company, which are policies issued byseparate legal entities and not by the Company.

6. Transaction Date Adjustments

In the normal course of its insurance business, the Company will occasionally adjust the effective date of transactions in itssystems to reflect the events that triggered the transactions. For example, it is common for policyholders to sell their house(effectively leaving nothing to be insured), but only inform the Company a few weeks later that they are canceling their homepolicy. In this circumstance, the effective date of cancellation would be the date of the sale and the Company would refundany premiums applicable to the time after the sale. However, for the purposes of the Demutualization, the policy would still infact have been in force until the Company was informed of the policy change. Accordingly, for Qualifying Date-AdjustedPolicies, the Company used the dates on which its systems indicated there was notice of the policy change received by theCompany rather than the adjusted effective date.

7. Calculated Inception Date

Calculated inception date for a policy was based on the effective date that the Company recorded in its systems as when itfirst issued the policy with one modification. The November 3 Resolution allowed for gaps in coverage of no more than 30days. To implement this requirement, the calculated inception date was adjusted if there were any gaps of more than 30 daysso that it would be the first date of coverage after the gap.

8. Policy Linking

(1) The November 3 Resolution provided that a policyholder could be eligible if a combination of “Similar” policies, whenviewed as one, provided coverage for the 12-month period before the Eligibility Date. For example, if a policyholder movedfrom Alberta to Ontario partway through the 12-month period, there would be two policy numbers (one for their home inAlberta and a new one for their home in Ontario) even though the policyholder continued to insure their home with theCompany.

(2) While the calculated inception date would still be policy-specific, policy “linking” was used for Similar Policies to determineeligibility, as well as premium and duration for the purposes of CTS Allocation.

9. Premium

(1) Premium reflects the average annual premium of a policy payable to the Company for the time when coverage was in effectin the period from January 1, 2006 to December 31, 2015 (inclusive of both dates). It incorporated premiums payable withrespect to the Qualifying Policy and any Linked Similar Policies, based on the ratio of the time passed on the policies.

(2) There were also certain unique policy situations where the Appointed Actuary determined it was appropriate to adjust thepremium:

(a) Fronting Policies: Under a Fronting Policy, the Company will only face exposure in the unlikely event the third partybecomes insolvent. There were several of these policies, but there was one such policy where the documentationis clear that there is a third party involved and the premiums were disproportionately large when compared toother Eligible Non-Mutual Policyholders. As a result, for that particular policy, premium was set at $0.

(b) Subscription Policies: Premium for Subscription Policies was set at the proportion of premium attributable to theCompany, and not the total premium in respect of all of the insurers.

(c) If there was a refund of premium on a Qualifying Date-Adjusted Policy, the refunded amount was not included inpremium.

(d) Where there was policy linking (a Qualifying Policy was linked to a Similar Policy to give rise to eligibility), thepremium for the Similar Policy (after any applicable adjustments) was divided equally among the named insuredsfor the Similar Policy and then their respective components were added to the Qualifying Policies of those namedinsureds.

10. Disclaimer of Participation and Benefits

(1) The Company has received a nominal number of requests from Eligible Policyholders who do not wish to participate inDemutualization. The reasons given for these requests vary based on individual circumstances. An example is where oneEligible Policyholder has died and his or her estate representatives do not want to re-open the estate and deal with the



administrative costs and challenges it creates. These Eligible Policyholders (or their personal representative) signed anEligible Policyholder Disclaimer & Release form and as a result they were removed from the Masterfile. They are notaccounted for in the Allocation and will not receive Demutualization Benefits. There may be other Eligible Policyholders whowish to disclaim their Demutualization Benefits, and may do so in a form acceptable to the Company.

(2) Certain members of the Policyholder Committee representing the Eligible Mutual Policyholders (the “Mutual PolicyholderCommittee”) who were both an Eligible Mutual Policyholder and an Eligible Non-Mutual Policyholder disclaimed their rights toDemutualization Benefits as an Eligible Non-Mutual Policyholder, in a form that was acceptable to the Company, as acondition of their appointment to the Mutual Policyholder Committee so as to avoid any perception of any potential conflict ofinterest. As a result, they are not accounted for in the Allocation and will not receive Demutualization Benefits as EligibleNon-Mutual Policyholders. For the avoidance of doubt, their data in the Masterfile, allocation and entitlement toDemutualization Benefits as an Eligible Mutual Policyholder is not affected by this disclaimer.

11. Trusts, Estate, and Third Parties with Potential Interests in Policies

(1) In general, the identity of an Eligible Policyholder was determined without giving effect to any interest of any other Personin a policy. This includes circumstances where there may have been an assignment or pledge of rights or benefits under apolicy to secure a debt or other obligations. While those circumstances may affect payout of insurance claims under thepolicy, for Demutualization, the Named Insured on relevant policies are Eligible Policyholders.

(2) In the case of a trust or deceased policyholder, the Company’s records typically record the trustee or estate of thedeceased as the named insured and thus they are the Named Insured in the Masterfile.

SCHEDULE 4

ECONOMICAL INSURANCE COMPANY

BY-LAW NO. 2

A by-law creating classes of shares of Economical Insurance Company

WHEREAS in connection with the conversion of the Company pursuant to the Conversion Plan (as defined herein) into acompany with common shares in accordance with the provisions of the Mutual Property and Casualty Insurance Companywith Non-mutual Policyholders Conversion Regulations under the Act (as defined herein), it is necessary to create authorizedclasses of shares in the Company.

AND WHEREAS concurrently at the time this By-law comes into force, By-law No. 1 of the Company shall come into force torepeal and replace By-law No. A.1 of the Company, as amended by By-law No. A.3, By-law No. A.4, By-law No. A.5 and By-lawNo. A.6;

NOW THEREFORE, BE IT ENACTED as a by-law of the Company as follows:

SECTION 1INTERPRETATION

1.1 Definitions

In this By-law No. 2:

(a) “Act” means the Insurance Companies Act (Canada), enacted by the Parliament of Canada, as amended from timeto time, and every statute that may be substituted therefor;

(b) “Board” means the Board of Directors of the Company;

(c) “Common Shares” means the common shares in the capital of the Company, without nominal or par value, nowexisting or hereafter created;

(d) “Conversion Plan” means the conversion proposal of Economical Mutual Insurance Company as approved by theMinister which constitutes a conversion proposal as contemplated by the Act;

(e) “Company” means Economical Insurance Company;

(f) “Effective Date” means the effective date specified in the Letters Patent of Conversion;

(g) “Letters Patent of Conversion” has the meaning ascribed thereto in the Conversion Plan;

(h) “Preferred Shares” means the preferred shares in the capital of the Company, without nominal or par value, nowexisting or hereafter created;

1.2 Interpretation

In this By-law No. 2, all terms which are not defined herein shall have the meanings ascribed to those terms in the Act.

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SECTION 2AUTHORIZED CAPITAL

2.1 Authorized Capital

The authorized capital of the Company consists of:

(a) an unlimited number of Common Shares; and

(b) an unlimited number of Preferred Shares issuable in series.

SECTION 3COMMON SHARES

The Common Shares shall have attached thereto the following rights, privileges, restrictions and conditions:

3.1 Dividends

Subject to the prior rights of the holders of any series of Preferred Shares and any other shares ranking senior to the CommonShares with respect to priority in payment of dividends, the holders of Common Shares shall be entitled to receive dividendsif, as and when declared by the Board out of monies properly applicable to the payment of dividends, in such amounts and insuch forms as the Board may from time to time determine, and all dividends which the Board may declare on the CommonShares shall be declared and paid in equal amounts per share, net of any applicable withholding taxes, on all Common Sharesoutstanding at the time.

3.2 Participation upon Liquidation, Dissolution or Winding-up

In the event of the liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, or any otherdistribution of the assets of the Company among its shareholders for the specific purpose of winding up its affairs, subject tothe prior rights of the holders of any series of Preferred Shares and any other shares ranking senior to the Common Shareswith respect to priority in the distribution of assets in the event of the liquidation, dissolution or winding up of the Company,the holders of the Common Shares shall be entitled to receive the remaining property of the Company that pertains toshareholders, in equal amounts per share, without preference or priority of one share over another.

3.3 Voting Rights

The holders of Common Shares shall be entitled to receive notice of and to attend all meetings of the shareholders of theCompany and shall have one vote for each Common Share held at all meetings of the shareholders of the Company, exceptfor meetings at which only holders of another specified class or series of shares of the Company are entitled to voteseparately as a class or series.

3.4 Amendment with Approval of Holders of Common Shares

The rights, privileges, restrictions and conditions attached to the Common Shares as a class may be added to, changed orremoved but only with the approval of the holders of the Common Shares given as hereinafter specified.

3.5 Approval of Holders of Common Shares

The approval of the holders of the Common Shares to add to, change or remove any right, privilege, restriction or conditionattaching to the Common Shares as a class may be given in such manner as may then be required by law, subject to aminimum requirement that such approval be given by resolution signed by all the holders of the Common Shares or passedby the affirmative vote of at least two-thirds (2/3) of the votes cast at a meeting of the holders of the Common Shares dulycalled for that purpose.

The formalities to be observed with respect to the giving of notice of any such meeting or any adjourned meeting, the quorumrequired therefor and the conduct thereof shall be those from time to time required by the Act as in force at the time of themeeting and those, if any, prescribed by the by-laws or the administrative resolutions of the Company with respect tomeetings of shareholders. On every poll taken at every meeting of the holders of the Common Shares as a class, each holderof Common Shares entitled to vote thereat shall have one vote in respect of each Common Share held.

3.6 Notice to the Holders of the Common Shares

Any notice, document or other communication from the Company provided for herein or by the Act shall be sent to theholders of the Common Shares:

(i) by mail, postage prepaid at their respective addresses appearing on the securities register of the Company or, inthe event of the address of any such holder not so appearing, then at the last address of such holder known to theCompany; or

(ii) by any other method permitted (or not prohibited) by the Act and other applicable law from time to time, includingby electronic means.

Accidental failure to give any such notice, document, or other communication to one or more holders of Common Shares shallnot affect the validity thereof, but, upon such failure being discovered, a copy of the notice, document or other



communication, as the case may be, shall be sent or delivered forthwith to such holder or holders. Unless otherwise providedherein or by the Act, any notice, request, certificate or other communication from a holder of Common Shares herein or by theAct provided for shall be either sent to the Company by mail, postage prepaid, or delivered by hand to the Company at itshead office, or sent or delivered by any other means acceptable to the Company.

SECTION 4PREFERRED SHARES

The Preferred Shares, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions:

4.1 One or More Series

The Preferred Shares may at any time and from time to time be issued in one or more series.

4.2 Terms of Each Series

Subject to the Act, the directors may fix, before the issue thereof, the number of Preferred Shares of each series, thedesignation, rights, privileges, restrictions and conditions attaching to the Preferred Shares of each series, including, withoutlimitation, any voting rights, any right to receive dividends (which may be cumulative or non-cumulative and variable or fixed)or the means of determining such dividends, the dates of payment thereof, any terms and conditions of redemption orpurchase, any conversion rights, and any rights on the liquidation, dissolution or winding-up of the Company, any sinking fundor other provisions, the whole to be subject to the issue of a certificate of amendment setting forth the designation, rights,privileges, restrictions and conditions attaching to the Preferred Shares of the series.

4.3 Ranking of the Preferred Shares

The Preferred Shares shall be entitled to a preference over the Common Shares and any other shares ranking junior to thePreferred Shares with respect to priority in payment of dividends and in the distribution of assets in the event of theliquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assetsof the Company among its shareholders for the specific purpose of winding up its affairs.

If the Board exercises its powers referred to in Section 4.2 hereof, Preferred Shares of each series shall rank on a parity withthe Preferred Shares of every other series with respect to priority in payment of dividends and in the distribution of assets inthe event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distributionof the assets of the Company among its shareholders for the specific purposes of winding up its affairs.

If any cumulative dividends, whether or not declared, or declared non-cumulative dividends or amounts payable on return ofcapital are not paid in full in respect of any series of Preferred Shares, then the Preferred Shares of all series participaterateably in respect of such dividends in accordance with the sums that would be payable on such shares if all such dividendswere declared and paid in full, and in respect of such return of capital in accordance with the sums that would be payable onsuch return of capital if all sums so payable were paid in full; provided, however, that if there are insufficient assets to satisfy infull all such claims as aforesaid, the claims of the holders of the Preferred Shares with respect to return of capital shall be paidand satisfied first and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims inrespect of dividends. The Preferred Shares of any series may also be given such other preferences not inconsistent with therights, privileges, restrictions and conditions attached to the Preferred Shares as a class over the Common Shares and anyother shares ranking junior to the Preferred Shares as may be determined in the case of such series of Preferred Shares.

4.4 Voting Rights

Except as hereinafter referred to or as required by law or as specified in the rights, privileges, restrictions and conditionsattached from time to time to any series of Preferred Shares, the holders of the Preferred Shares as a class are not entitled assuch to receive notice of, to attend or to vote at any meeting of the shareholders of the Company.

4.5 Amendment with Approval of Holders of Preferred Shares

The rights, privileges, restrictions, and conditions attached to the Preferred Shares as a class may be added to, changed orremoved but only with the approval of the holders of the Preferred Shares given as hereinafter specified.

4.6 Approval of the Holders of the Preferred Shares

The approval of the holders of the Preferred Shares to add to, change, or remove any right, privilege, restriction, or conditionattaching to the Preferred Shares as a class or series or in respect of any other matter requiring the consent of the holders ofthe Preferred Shares as a class or series may be given in such manner as may then be required by law, subject to a minimumrequirement that such approval be given by resolution signed by all the holders of the Preferred Shares as a class or series orpassed by the affirmative vote of at least two-thirds (2/3) of the votes cast at a meeting of the holders of the class or seriesduly called for that purpose. Except as hereinafter referred to or as required by law or as specified in the rights, privileges,restrictions and conditions attached from time to time to any series of Preferred Shares, notwithstanding anything else in thisSection 4, the approval of the holders of a series of Preferred Shares, voting separately as a class or series, is not required ona proposal to amend the by-laws of the Company to:

(a) increase or decrease the maximum number of authorized Preferred Shares or such series, or increase themaximum number of authorized shares of a class or series of shares having rights or privileges equal or superior tothe Preferred Shares;

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(b) effect the exchange, reclassification or cancellation of all or any part of the Preferred Shares or any series thereof;or

(c) create a new class or series of shares equal to or superior to the Preferred Shares or any series thereof.

The formalities to be observed with respect to the giving of notice of any such meeting or any continuation of an adjournedmeeting, the quorum required therefor and the conduct thereof shall be those from time to time required by the Act as in forceat the time of the meeting and those, if any, prescribed by the by-laws or the administrative resolutions of the Company withrespect to meetings of shareholders. On every poll taken at every meeting of the holders of the Preferred Shares as a class orseries, or at any joint meeting of the holders of two or more series of Preferred Shares, each holder of Preferred Sharesentitled to vote thereat shall have one vote in respect of each Preferred Share held.

4.7 Notice to Holders of Preferred Shares

Any notice, document, notice of redemption or other communication from the Company provided for herein or by the Act shallbe sent to the holders of the Preferred Shares:

(i) by mail, postage prepaid at their respective addresses appearing on the securities register of the Company or, inthe event of the address of any such holder not so appearing, then at the last address of such holder known to theCompany; or


Accidental failure to give any such notice, document, notice of redemption or other communication to one or more holders ofPreferred Shares shall not affect the validity thereof, but, upon such failure being discovered, a copy of the notice, document,notice of redemption or other communication, as the case may be, shall be sent or delivered forthwith to such holder orholders. Unless otherwise provided herein or by the Act, any notice, request, certificate or other communication from a holderof Preferred Shares herein or by the Act provided for shall be sent to the Company by mail, postage prepaid, or delivered byhand to the Company at its head office, or sent or delivered by any other means acceptable to the Company.

SECTION 5EFFECTIVE DATE

By-law No. 2 shall come into force on the Effective Date in accordance with the terms of the Conversion Plan.

SCHEDULE 5

ECONOMICAL HOLDINGS CORPORATION

BY-LAW NO. 2

A by-law creating classes of shares of Economical Holdings Corporation

SECTION 1INTERPRETATION

1.1 Definitions

In this By-law No. 2:

(a) “Act” means the Insurance Companies Act (Canada), enacted by the Parliament of Canada, as amended from timeto time, and every statute that may be substituted therefor;

(b) “Board” means the Board of Directors of the Corporation;

(c) “Cancellation Time” means 11:59 p.m. Toronto time on the 35th month anniversary of the Effective Date;

(d) “Common Shares” means the common shares in the capital of the Corporation, without nominal or par value, nowexisting or hereafter created;

(e) “Conversion Plan” means the conversion proposal of Economical Mutual Insurance Company as approved by theMinister which constitutes a conversion proposal as contemplated by the Act;

(f) “Corporation” means Economical Holdings Corporation;

(g) “EIC” means the share corporation that resulted from the conversion of Economical Mutual Insurance Companywith effect from the Effective Date;

(h) “Effective Date” means the effective date specified in the Letters Patent of Conversion;

(i) “Letters Patent of Conversion” has the meaning ascribed thereto in the Conversion Plan;

(j) “Lost Policyholder” has the meaning ascribed thereto in the Conversion Plan;

(k) “Preferred Shares” means the preferred shares in the capital of the Corporation, without nominal or par value, nowexisting or hereafter created;

(l) “Regulations” means the regulations made under the Act, as amended or replaced from time to time; and



(m) “Share Constraint Regime” means the provisions of the Act and the Regulations, if any, which establish rulesrestricting the purchase or other acquisition, issue, transfer and voting of shares of the Corporation, as thoseprovisions may be amended from time to time.

1.2 Interpretation

In this By-law No. 2, the terms “control”, “entity”, “person”, and “significant interest” and all other terms which are not definedherein shall have the meanings ascribed to those terms in the Act.

SECTION 2AUTHORIZED CAPITAL

2.1 Authorized Capital

The authorized capital of the Corporation consists of:

(a) an unlimited number of Common Shares; and

(b) an unlimited number of Preferred Shares issuable in series.

SECTION 3COMMON SHARES

The Common Shares shall have attached thereto the following rights, privileges, restrictions, and conditions:

3.1 Dividends

(a) Subject to the prior rights of the holders of any series of Preferred Shares and any other shares ranking senior tothe Common Shares with respect to priority in payment of dividends, the holders of Common Shares shall beentitled to receive dividends if, as and when declared by the Board out of monies properly applicable to thepayment of dividends, in such amounts and in such forms as the Board may from time to time determine, and alldividends which the Board may declare on the Common Shares shall be declared and paid in equal amounts pershare, net of any applicable withholding taxes, on all Common Shares outstanding at the time.

(b) Any dividend (other than a stock dividend) unclaimed after a period of thirty-five months from the date on whichthe same has been declared to be payable shall be forfeited and shall revert to the Corporation.

3.2 Participation upon Liquidation, Dissolution, or Winding-up

In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or any otherdistribution of the assets of the Corporation among its shareholders for the specific purpose of winding up its affairs, subjectto the prior rights of the holders of any series of Preferred Shares and any other shares ranking senior to the Common Shareswith respect to priority in the distribution of assets in the event of the liquidation, dissolution or winding up of the Corporation,the holders of the Common Shares shall be entitled to receive the remaining property of the Corporation that pertains toshareholders, in equal amounts per share, without preference or priority of one share over another.

3.3 Voting Rights

The holders of Common Shares shall be entitled to receive notice of and to attend all meetings of the shareholders of theCorporation and shall have one vote for each Common Share held at all meetings of the shareholders of the Corporation,except for meetings at which only holders of another specified class or series of shares of the Corporation are entitled to voteseparately as a class or series.

Approval of (i) a special resolution of the Corporation or (i) any amendment to the quorum requirement for meetings of holdersof Common Shares shall require the affirmative vote of not less than [75]% of the votes cast at a meeting of the holders of theCommon Shares of the Corporation; provided that the foregoing approval thresholds must be reconfirmed by specialresolution at the [fourth] annual meeting following the Effective Date and following any such reconfirmation, if applicable, atevery [second] annual meeting thereafter; and provided further that if the foregoing approval thresholds are not soreconfirmed or are not presented for reconfirmation at an annual meeting at which they are required to be so presented, theapproval thresholds shall revert to those specified by the Act.

3.4 Constrained Shares

(a) On and after the date upon which the Corporation becomes the holding body corporate of a company that hasconverted from a mutual company into a company with common shares, the Corporation shall not issue or allotany Common Shares to any person, or any entity controlled by a person, the Corporation shall refuse to allow theentry in the securities register of the Corporation of an issue or transfer of any Common Shares to any person, orany entity controlled by a person, and no person, or any entity controlled by a person, shall purchase or otherwiseacquire any Common Shares, if such issue, transfer or purchase or other acquisition (i) would cause the person to

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have a significant interest in the Common Shares or (ii) where the person has a significant interest in the CommonShares, would increase the significant interest of the person in the Common Shares. No person who has asignificant interest in any class of shares of the Corporation, or entity controlled by a person who has a significantinterest in any class of shares of the Corporation, shall, in person or by proxy, exercise any voting rights attachedto Common Shares beneficially owned by, or that are subject to agreement pertaining to the exercise of votingrights entered into by, that person, or entity. In accordance with the authority granted to the Board under the Actand the Regulations, the Board is hereby authorized to make such arrangements as the Board deems necessary tocarry out the intent of the acquisition, issue, transfer and voting restrictions contained in the Act, the Regulationsand the by-laws.

(b) If the purchase or other acquisition, issue, transfer, or voting of any Common Shares would be permitted under theAct and the Regulations, notwithstanding the provisions of subsection 3.4(a), the Board is hereby authorized, in itsdiscretion, to permit by resolution of the Board, any such purchase or other acquisition, issue, transfer, or exerciseof voting rights with respect to such Common Shares.

(c) Subject to subsection 3.4(d), if, after the date of incorporation of the Corporation, the Share Constraint Regime isamended, replaced or deleted, such that the provisions of subsection 3.4(a) are inconsistent with the ShareConstraint Regime resulting from such amendment, replacement or deletion, then the Board is hereby authorizedto amend, replace or delete subsection 3.4(a) such that it will be consistent with the Share Constraint Regime thenin effect. The action of the Board to amend, replace or delete subsection 3.4(a) shall be by resolution of the Boardand such amendment, replacement or deletion of subsection 3.4(a) shall be effective without the approval of theholders of any of the Preferred Shares or the Common Shares. Promptly following any amendment, replacement ordeletion of subsection 3.4(a) by the Board, the Corporation shall give notice to the holders of the Common Sharesof the amendment, replacement or deletion thereto.

(d) If, after the date of incorporation of the Corporation, the Share Constraint Regime is amended or replaced and theShare Constraint Regime then in effect allows the Corporation to determine the application to it and itsshareholders of all or any part of such Share Constraint Regime then the provisions of subsection 3.4(a) may onlybe amended or replaced with approval of the holders of the Preferred Shares and the Common Shares asprovided in the Act.

3.5 Amendment with Approval of Holders of Common Shares

The rights, privileges, restrictions and conditions attached to the Common Shares as a class may be added to, changed orremoved but only with the approval of the holders of the Common Shares given as hereinafter specified.

3.6 Approval of Holders of Common Shares

The approval of the holders of the Common Shares to add to, change or remove any right, privilege, restriction or conditionattaching to the Common Shares as a class may be given in such manner as may then be required by law, subject to aminimum requirement that such approval be given by resolution signed by all the holders of the Common Shares or passedby the affirmative vote of at least two-thirds (2/3) of the votes cast at a meeting of the holders of the Common Shares dulycalled for that purpose.

The formalities to be observed with respect to the giving of notice of any such meeting or any adjourned meeting, the quorumrequired therefor and the conduct thereof shall be those from time to time required by the Act as in force at the time of themeeting and those, if any, prescribed by the by-laws or the administrative resolutions of the Corporation with respect tomeetings of shareholders. On every poll taken at every meeting of the holders of the Common Shares as a class, each holderof Common Shares entitled to vote thereat shall have one vote in respect of each Common Share held.

3.7 Notice to the Holders of the Common Shares

Any notice, document or other communication from the Corporation provided for herein or by the Act shall be sent to theholders of the Common Shares:

(i) by mail, postage prepaid at their respective addresses appearing on the securities register of the Corporation or,in the event of the address of any such holder not so appearing, then at the last address of such holder known tothe Corporation; or


Accidental failure to give any such notice, document or other communication to one or more holders of Common Shares shallnot affect the validity thereof, but, upon such failure being discovered, a copy of the notice, document or othercommunication, as the case may be, shall be sent or delivered forthwith to such holder or holders. Unless otherwise providedherein or by the Act, any notice, request, certificate or other communication from a holder of Common Shares herein or by theAct provided for shall be either sent to the Corporation by mail, postage prepaid, or delivered by hand to the Corporation atits head office, or sent or delivered by any other means acceptable to the Corporation.



SECTION 4PREFERRED SHARES

The Preferred Shares, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions:

4.1 One or More Series

The Preferred Shares may at any time and from time to time be issued in one or more series.

4.2 Terms of Each Series

Subject to the Act, the directors may fix, before the issue thereof, the number of Preferred Shares of each series, thedesignation, rights, privileges, restrictions and conditions attaching to the Preferred Shares of each series, including, withoutlimitation, any voting rights, any right to receive dividends (which may be cumulative or non-cumulative and variable or fixed)or the means of determining such dividends, the dates of payment thereof, any terms and conditions of redemption orpurchase, any conversion rights, and any rights on the liquidation, dissolution or winding-up of the Corporation, any sinkingfund or other provisions, the whole to be subject to the issue of a certificate of amendment setting forth the designation,rights, privileges, restrictions and conditions attaching to the Preferred Shares of the series.

4.3 Ranking of the Preferred Shares

The Preferred Shares shall be entitled to a preference over the Common Shares and any other shares ranking junior to thePreferred Shares with respect to priority in payment of dividends and in the distribution of assets in the event of theliquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of theassets of the Corporation among its shareholders for the specific purpose of winding up its affairs.

If the Board exercises its powers referred to in Section 4.2 hereof, Preferred Shares of each series shall rank on a parity withthe Preferred Shares of every other series with respect to priority in payment of dividends and in the distribution of assets inthe event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any otherdistribution of the assets of the Corporation among its shareholders for the specific purposes of winding up its affairs.

If any cumulative dividends, whether or not declared, or declared non-cumulative dividends or amounts payable on return ofcapital are not paid in full in respect of any series of Preferred Shares, then the Preferred Shares of all series participaterateably in respect of such dividends in accordance with the sums that would be payable on such shares if all such dividendswere declared and paid in full, and in respect of such return of capital in accordance with the sums that would be payable onsuch return of capital if all sums so payable were paid in full; provided, however, that if there are insufficient assets to satisfy infull all such claims as aforesaid, the claims of the holders of the Preferred Shares with respect to return of capital shall be paidand satisfied first and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims inrespect of dividends. The Preferred Shares of any series may also be given such other preferences not inconsistent with therights, privileges, restrictions and conditions attached to the Preferred Shares as a class over the Common Shares and anyother shares ranking junior to the Preferred Shares as may be determined in the case of such series of Preferred Shares.

4.4 Voting Rights

Except as hereinafter referred to or as required by law or as specified in the rights, privileges, restrictions and conditionsattached from time to time to any series of Preferred Shares, the holders of the Preferred Shares as a class are not entitled assuch to receive notice of, to attend or to vote at any meeting of the shareholders of the Corporation.

4.5 Constrained Shares

(a) On and after the date upon which the Corporation becomes the holding body corporate of a company that hasconverted from a mutual company into a company with common shares, the Corporation shall not issue or allotany Preferred Shares to any person, or any entity controlled by a person, the Corporation shall refuse to allow theentry in the securities register of the Corporation of an issue or transfer of any Preferred Shares to any person, orany entity controlled by a person, and no person, or any entity controlled by a person, shall purchase or otherwiseacquire any Preferred Shares, if such issue, transfer or purchase or other acquisition (i) would cause the person tohave a significant interest in the Preferred Shares or (ii) where the person has a significant interest in the PreferredShares, would increase the significant interest of the person in the Preferred Shares. No person who has asignificant interest in any class of shares of the Corporation, or entity controlled by a person who has a significantinterest in any class of shares of the Corporation, shall, in person or by proxy, exercise any voting rights attachedto Preferred Shares beneficially owned by, or that are subject to agreement pertaining to the exercise of votingrights entered into by, that person, or entity. In accordance with the authority granted to the Board under the Actand the Regulations, the Board is hereby authorized to make such arrangements as the Board deems necessary tocarry out the intent of the acquisition, issue, transfer and voting restrictions contained in the Act, the Regulationsand the by-laws.

(b) If the purchase or other acquisition, issue, transfer, or voting of any Preferred Shares would be permitted under theAct and the Regulations, notwithstanding the provisions of subsection 4.5(a), the Board is hereby authorized, in itsdiscretion, to permit by resolution of the Board, any such purchase or other acquisition, issue, transfer, or exerciseof voting rights with respect to such Preferred Shares.

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(c) Subject to subsection 4.5(d), if, after the date of incorporation of the Corporation, the Share Constraint Regime isamended, replaced or deleted, such that the provisions of subsection 4.5(a) are inconsistent with the ShareConstraint Regime resulting from such amendment, replacement or deletion, then the Board is hereby authorizedto amend, replace or delete subsection 4.5(a) such that it will be consistent with the Share Constraint Regime thenin effect. The action of the Board to amend, replace or delete subsection 4.5(a) shall be by resolution of the Boardand such amendment, replacement or deletion of subsection 4.5(a) shall be effective without the approval of theholders of any of the Preferred Shares or the Common Shares. Promptly following any amendment, replacement ordeletion of subsection 4.5(a) by the Board, the Corporation shall give notice to the holders of the Preferred Sharesof the amendment, replacement or deletion thereto.

(d) If, after the date of incorporation of the Corporation, the Share Constraint Regime is amended or replaced and theShare Constraint Regime then in effect allows the Corporation to determine the application to it and its shareholdersof all or any part of such Share Constraint Regime then the provisions of subsection 4.5(a) may only be amended orreplaced with approval of the holders of the Preferred Shares and the Common Shares as provided in the Act.

4.6 Amendment with Approval of Holders of Preferred Shares

The rights, privileges, restrictions and conditions attached to the Preferred Shares as a class may be added to, changed orremoved but only with the approval of the holders of the Preferred Shares given as hereinafter specified.

4.7 Approval of the Holders of the Preferred Shares

The approval of the holders of the Preferred Shares to add to, change or remove any right, privilege, restriction or conditionattaching to the Preferred Shares as a class or series or in respect of any other matter requiring the consent of the holders ofthe Preferred Shares as a class or series may be given in such manner as may then be required by law, subject to a minimumrequirement that such approval be given by resolution signed by all the holders of the Preferred Shares as a class or series orpassed by the affirmative vote of at least two-thirds (2/3) of the votes cast at a meeting of the holders of the class or seriesduly called for that purpose. Except as hereinafter referred to or as required by law or as specified in the rights, privileges,restrictions and conditions attached from time to time to any series of Preferred Shares, notwithstanding anything else in thisSection 4, the approval of the holders of a series of Preferred Shares, voting separately as a class or series, is not required ona proposal to amend the by-laws of the Corporation to:

(a) increase or decrease the maximum number of authorized Preferred Shares or such series, or increase themaximum number of authorized shares of a class or series of shares having rights or privileges equal or superior tothe Preferred Shares;

(b) effect the exchange, reclassification or cancellation of all or any part of the Preferred Shares or any series thereof; or

(c) create a new class or series of shares equal to or superior to the Preferred Shares or any series thereof.

The formalities to be observed with respect to the giving of notice of any such meeting or any continuation of an adjournedmeeting, the quorum required therefor and the conduct thereof shall be those from time to time required by the Act as in forceat the time of the meeting and those, if any, prescribed by the by-laws or the administrative resolutions of the Corporation withrespect to meetings of shareholders. On every poll taken at every meeting of the holders of the Preferred Shares as a class orseries, or at any joint meeting of the holders of two or more series of Preferred Shares, each holder of Preferred Sharesentitled to vote thereat shall have one vote in respect of each Preferred Share held.

4.8 Notice to Holders of Preferred Shares

Any notice, document, notice of redemption or other communication from the Corporation provided for herein or by the Actshall be sent to the holders of the Preferred Shares:

(i) by mail, postage prepaid at their respective addresses appearing on the securities register of the Corporation or,in the event of the address of any such holder not so appearing, then at the last address of such holder known tothe Corporation; or


Accidental failure to give any such notice, document, notice of redemption or other communication to one or more holders ofPreferred Shares shall not affect the validity thereof, but, upon such failure being discovered, a copy of the notice, document,notice of redemption or other communication, as the case may be, shall be sent or delivered forthwith to such holder orholders. Unless otherwise provided herein or by the Act, any notice, request, certificate or other communication from a holderof Preferred Shares herein or by the Act provided for shall be sent to the Corporation by mail, postage prepaid, or deliveredby hand to the Corporation at its head office, or sent or delivered by any other means acceptable to the Corporation.

SECTION 5LOST POLICYHOLDERS

5.1 Restriction on Voting Rights

(a) Subject to Subsection 5.1(b), no Lost Policyholder shall, in person or by proxy, exercise any voting rights that areattached to the Common Shares issued to such Lost Policyholder.



(b) Subsection 5.1(a) shall cease to apply in respect of a Lost Policyholder once such Lost Policyholder ceases to be aLost Policyholder in accordance with Section 5.2.

5.2 Confirmation Criteria

A Lost Policyholder shall cease to be a Lost Policyholder at any time from the Effective Date up to and including theCancellation Time if at such time such Lost Policyholder confirms the current address at which such Lost Policyholder may bereached by mail by: (i) responding to a letter from the Corporation, the Corporation’s depositary agent or EIC requestingconfirmation of the current address; (ii) contacting the Corporation, the Corporation’s depositary agent or EIC and confirmingthe current address; (iii) informing the Corporation, the Corporation’s depositary agent or EIC of a change of address; or(iv) otherwise confirming the current address with the Corporation, the Corporation’s depositary agent or EIC, in a mannersatisfactory to the Corporation.

5.3 Securities Register

From the Effective Date up to and including the Cancellation Time, the Corporation shall record in its securities register thestatus of a person as a Lost Policyholder. If a Lost Policyholder ceases to be a Lost Policyholder in accordance withSection 5.2, the Corporation shall amend its securities register accordingly.

5.4 Dividends and Distributions

No payments in respect of dividends or distributions declared by the Corporation in respect of the Common Shares issuedpursuant to the Conversion Plan shall be made in respect of Common Shares issued to a Lost Policyholder. However, theCorporation shall pay to a person who ceases to be a Lost Policyholder, in accordance with Section 5.2, all dividends ordistributions, without interest and net of any applicable withholding taxes, to which such person was otherwise entitled as ashareholder of record of the Corporation, while such person was a Lost Policyholder. The payment of such dividends ordistributions shall be in accordance with the other provisions of this By-law No.2.

5.5 Cancellation of Shares and Dividends and Subsequent Reissuance

Upon the Cancellation Time, the Corporation shall, for no consideration, cancel all Common Shares issued to LostPolicyholders who remain as such at the Cancellation Time, and all such Common Shares shall be deemed to have beensurrendered to the Corporation, together with all entitlements to dividends and distributions thereon, including any proceedsof dissolution pursuant to the Act. Notwithstanding the foregoing, the Corporation may, from time to time in accordance withthe Conversion Plan, subsequent to the Cancellation Time reissue Common Shares and pay an amount in respect ofdividends or issue securities or pay cash or other property to a person, as the case may be, whose Common Shares werecancelled in accordance with this Section 5.5.

No amount shall be deducted from, or added to, the stated capital account maintained for Common Shares in respect of theCommon Shares cancelled or reissued, respectively, pursuant to this Section 5.5.

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SCHEDULE 6Valuation Report

June 18, 2018

The Board of Directors of Economical Mutual Insurance Company111 Westmount Road SouthP.O. Box 2000Waterloo, OntarioN2J 4S4

To the Board of Directors:

I. Valuation Overview

BMO Nesbitt Burns Inc. (“BMO Capital Markets”) and RBC Dominion Securities Inc. (“RBC Capital Markets”) (collectively, “we”or “us”) understand that Economical Mutual Insurance Company (the “Company”) intends to submit to the Office of theSuperintendent of Financial Institutions (“OSFI”) a conversion proposal required under the Mutual Property and CasualtyInsurance Company with Non-mutual Policyholders Conversion Regulations (the “Demutualization Regulations”) made underthe Insurance Companies Act (the “ICA”) (“Conversion Plan”). Under the Conversion Plan, as of the Effective Time, theCompany will convert from a mutual property and casualty insurance company into a property and casualty insurancecompany with common shares (the “Demutualization”) and will become a direct, wholly-owned subsidiary of a holdingcompany that is newly incorporated under the ICA (“Holdco”). Unless the context indicates otherwise, references to“Economical” herein refer to Holdco and its subsidiaries, including the Company, on a consolidated basis and as proposed tobe effective following Demutualization. Other capitalized terms used but not defined herein shall have the meanings ascribedto them in the Conversion Plan. The Conversion Plan also provides, among other things, that: (i) all Eligible Policyholders andOther Recipients will receive Demutualization Benefits in the form of (x) common shares of Holdco (“Common Shares”), (y)cash proceeds or (z) some cash and some Common Shares; and (ii) Holdco will offer Common Shares pursuant to or inconnection with an initial public offering of the Common Shares, as provided for in the Conversion Plan (the “Initial PublicOffering”).

In connection with the Company’s obligation to deliver a report under section 13(1)(a) of the Demutualization Regulationssetting out an estimated value of the Company, this valuation report (the “Report”) sets out the estimated range of equitymarket values of Holdco that we refer to as the IPO Valuation Range (as defined below). While the IPO Valuation Range hasbeen estimated with respect to Holdco, we have assumed that the IPO Valuation Range is the same as the range of estimatedequity market values of the Company. This Report will form a part of the Conversion Plan that will be included in (i) thesubmission to OSFI pursuant to section 14(2) of the Demutualization Regulations, (ii) the policyholder information circular to besent to the Eligible Mutual Policyholders in respect of the Second Special Meeting under section 15 of the DemutualizationRegulations (the “Second Meeting Circular”), (iii) the policyholder information circular to be sent to all Eligible Policyholders inrespect of the Third Special Meeting under section 17 of the Demutualization Regulations (the “Third Meeting Circular”), and(iv) the application to the Minister of Finance (Canada) pursuant to section 20 of the Demutualization Regulations. This Reportcontains our estimate of the IPO Valuation Range and a description of how it was determined including the methodology usedand the underlying assumptions made in estimating the IPO Valuation Range. For purposes of this Report, the term “IPOValuation Range” means a range of estimated equity market values for Holdco based solely on estimated prices at which theCommon Shares could have been expected to be offered as of May 31, 2018 (the “Valuation Date”) in an Initial Public Offeringof the Common Shares conducted in a manner consistent with the terms of the Conversion Plan, as if the IPO Date was theValuation Date. The views expressed in this Report are based on market, economic and other conditions as they exist and canbe evaluated, and the information made available to us, as of the Valuation Date.

The Report represents the opinion of BMO Capital Markets and RBC Capital Markets, the form and content of which havebeen approved for release by a committee of officers of BMO Capital Markets and a committee of officers of RBC CapitalMarkets, respectively, who are collectively experienced in merger and acquisition, divestiture, restructuring, valuation, fairnessopinion and capital markets matters. An opinion is an expression of professional judgment on the issues explicitly addressed.By rendering a professional opinion, we do not become an insurer or guarantor of the expression of professional judgmentcontained in this Report or of any transaction involving, or any future performance of, Economical. In particular, an opinion isnot a prediction of future events and the rendering of this opinion does not guarantee the outcome of the matters opinedupon or any other matter addressed in this Report.

II. Valuation Assumptions and Limitations on Methods

The estimation of the IPO Valuation Range is a complex process involving professional judgment as to the most appropriateand relevant methods of financial analyses, and the application of those methods to Economical’s particular circumstances.This Report employs a variety of financial and comparative analyses but does not purport to be a complete description of theanalyses underlying the IPO Valuation Range.

In estimating the IPO Valuation Range, professional judgment was applied to the significance and relevance of each analysisand factor considered. Accordingly, this Report should be considered as a whole and considering portions of the Report inisolation could create a misleading or incomplete view of the basis upon which the IPO Valuation Range has beendetermined. Quantitative and qualitative judgments and estimations were made with respect to Economical’s business,



industry performance, economic factors, market factors and other financial considerations, many of which are beyond thecontrol of Economical. No company used in such analyses as a comparison is identical to Economical or its businesses andthe evaluation of the results of such analyses is not entirely mathematical; rather, it involves complex considerations andjudgments, both quantitative and qualitative, concerning financial and operating characteristics and other factors that couldaffect the public equity market values of the companies. The estimates contained in such analyses and the range of estimatedpublic equity market values resulting from any particular analysis are not necessarily indicative of actual values or predictive offuture results or values, which may be significantly more or less favourable than those suggested by such analyses. Inaddition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices atwhich businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject tosubstantial uncertainty.

The IPO Valuation Range has been estimated based on the following assumptions:

1. the proceeds of the Initial Public Offering and, if applicable, any concurrent private placement, are to be distributed toEligible Policyholders and Other Recipients who are to receive cash proceeds in accordance with the Conversion Planafter paying the underwriting fee and other expenses of the Initial Public Offering (and any such private placement);there will be no other treasury equity capital raised by Economical in connection with the sale of Common Shares in theInitial Public Offering, except Common Shares, if any, issued from treasury on exercise of an over-allotment option;

2. the dividend yield on the Common Shares will be comparable to the dividend yield of other North American publiclytraded property and casualty insurance and financial services companies;

3. Economical’s financial performance will be consistent with Economical’s financial projections;

4. No legal, tax or regulatory changes occur after the Valuation Date that will have a material impact upon the business,operations, financial condition or prospects of Economical;

5. the Common Shares sold in the Initial Public Offering (excluding any Common Shares issued from treasury to satisfy theassociated over-allotment option) will be a minimum of 10% of the total market capitalization of Economical and theUnderwriters will be granted a customary over-allotment option;

6. the Initial Public Offering will not be so large as to negatively impact the IPO Price;

7. the distribution and redistribution of the Common Shares on and following the Initial Public Offering will result in areasonable level of market liquidity in the Common Shares;

8. no person will have a “significant interest” (as defined in the ICA) in the Common Shares following the Initial PublicOffering;

9. immediately following the Effective Time, Holdco’s consolidated assets will be equivalent to the consolidated assets ofthe Company immediately prior to the Effective Time, and, as of the Effective Time and the IPO Date, Holdco will (on aconsolidated basis) not have assets or liabilities additional to the assets and liabilities of the Company;

10. the closing of the Initial Public Offering will occur approximately five business days after the Effective Date and inaccordance with the Conversion Plan; and

11. other than trading restrictions to impose lock-up terms as set out in the Conversion Plan and any seasoning periodimposed by applicable securities laws, there will be no restrictions on the sale of Common Shares following the InitialPublic Offering by Eligible Policyholders who elect to receive Common Shares.

The Initial Public Offering, if it occurs, will occur at least six months from the date of this Report. Changes in economic andmarket conditions and other changes in circumstances, including but not limited to legal, tax and regulatory changes, changesin Economical’s operating performance, and changes in other factors described throughout this Report, may have a materialeffect on Economical’s business, operations, financial condition and prospects, and therefore on the prices at which theCommon Shares may initially be offered and sold to the public and otherwise trade. We assume no obligation to update,revise, reaffirm or withdraw this Report as a result of any subsequent events or developments or otherwise and disclaim anyundertaking or obligation to advise any person of any change in any fact or matter affecting this Report that may come or bebrought to our attention.

The assumptions and methodologies used in the estimation of the IPO Valuation Range are limited by the following:

1. Supply-demand factors are unknown: (i) it cannot be determined how many of the Company’s Eligible Policyholders willelect to receive cash proceeds rather than retain their Common Shares at the time of the Initial Public Offering;(ii) institutional investors may have greater demand for shares available in large blocks if there is assurance of liquidity;(iii) Eligible Policyholders may elect to sell their Common Shares post-Initial Public Offering upon the expiration of thelock-up period set out in the Conversion Plan, thereby creating excess supply of Common Shares; and (iv) anticipation ofexcess supply, excess demand or lack of availability may impact the IPO Price.

2. Lack of companies that are directly comparable to Economical: (i) although a number of companies which share variouscharacteristics with Economical were included in our analysis (“Comparable Companies”), no company, including thefew other publicly traded Canadian property and casualty insurance companies, is directly comparable to Economical;(ii) other Canadian financial institutions that may be considered to be comparable to Economical have substantiallydifferent businesses and business compositions than those of Economical; and (iii) computations and analysis of thefinancial performance of Comparable Companies that are U.S. property and casualty insurers are based on U.S. GAAP(as defined below), while such computations and analysis for Economical are based on IFRS (as defined below).

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3. IFRS vs. U.S. GAAP: the Company currently prepares, and, following the Demutualization, Holdco will prepare, itsconsolidated financial statements under International Financial Reporting Standards (“IFRS”), which differs from U.S.generally accepted accounting principles (“U.S. GAAP”); certain investors may value Economical based on U.S. GAAP orcompare Economical’s financial results to companies that report in U.S. GAAP, and therefore determine a materiallydifferent value for Economical.

4. Historical volatility: (i) shares of North American publicly traded Comparable Companies have shown considerable pricevolatility over time; and (ii) this volatility underscores the fact that the IPO Valuation Range is estimated at a particularpoint in time and the public equity market value of Economical may vary significantly over time.

5. Other Considerations: (i) the Company has recently made significant investments in its digital direct distribution businessand the replacement of its broker policy administration system for personal lines and individually rated commercialautomobile insurance products, which have impacted the Company’s historical financial performance and are expectedto impact Economical’s future financial performance; (ii) Economical’s ability to introduce debt to its capital structure isconstrained by the Borrowing (Property and Casualty Companies and Marine Companies) Regulations of the ICA as aconverted company; (iii) section 25 of the Demutualization Regulations prevents a shareholder from owning more than20% of any class of voting shares, or 30% of any class of non-voting shares, of Holdco during the first two yearsfollowing the Demutualization; (iv) section 24 of the Demutualization Regulations prevents Holdco or the Company fromissuing or providing shares, share options or rights to acquire shares to present or past directors, officers or employeesof Holdco or the Company, other than shares issued to Eligible Policyholders as a result of the Demutualization, for aperiod of one year after the listing of the Common Shares on a recognized stock exchange in Canada, and the markettends to view companies where the interest of management are clearly aligned with the company as represented byequity ownership in the company more favourably; and (v) circumstances in the future may dictate that it would beappropriate to apply different valuation methodologies for all or a portion of Economical’s operations.

We have relied upon and assumed the completeness, accuracy and fair presentation of all financial and other information,data, advice, opinions, representations and other material obtained by us from public sources or provided to us by or onbehalf of Economical or otherwise obtained by us in connection with our engagement. The Report is conditional upon suchcompleteness, accuracy and fair presentation. We have not been requested to, and have not assumed any obligation to,independently verify the completeness, accuracy or fair presentation of any of the foregoing. We have assumed thatforecasts, projections, estimates and budgets provided to us and used in our analyses were reasonably prepared on basesreflecting the best, in the reasonable belief of management of the Company, available assumptions, estimates and judgmentsof management of the Company, having regard to Economical’s business, plans, financial condition and prospects as of thedate that such forecasts, projections, estimates and budgets were prepared.

Senior officers of the Company have represented to BMO Capital Markets and RBC Capital Markets in a letter ofrepresentation delivered as of the date hereof, among other things, that:

1. the financial and other information, data, advice, opinions, representations and other material provided to us, includingthe Conversion Plan and related documents, orally by, or in the presence of, an officer or employee of the Company, orin writing by the Company or any of its subsidiaries (as defined in the ICA) in connection with our engagement(collectively, the “Company Information”), was at the date the Company Information was provided to us, and is as of theValuation Date and the date hereof, complete, true and correct in all material respects, and did not and does not containany untrue statement of a material fact or omit to state any material fact necessary to make such Company Informationnot misleading in light of the circumstances in which such Company Information was provided to us, provided that norepresentation was made or is made that the results of any forecasts, projections, estimates, budgets or plans willactually be achieved; and

2. since the dates on which the Company Information was provided to us, except as disclosed in writing to us, there hasbeen no material change, financial or otherwise, in the financial condition, assets, liabilities (contingent or otherwise),business, operations or prospects of the Company or any of its subsidiaries, and no change has occurred in theCompany Information or any part thereof which would have or which could reasonably be expected to have a materialeffect on the Report.

In preparing the Report, we have assumed that documents prepared by the Company and its advisors as part of itssubmission to OSFI and to the Eligible Policyholders, including the Conversion Plan and related documents, will not differ inany material respect from the drafts that we reviewed, and that the Demutualization will be consummated in accordance withthe terms and conditions of the Conversion Plan without waiver of, or amendment to, any term or condition that is in any waymaterial to our analyses.

We understand that, as required by Section 14(2)(b) of the Demutualization Regulations, the Independent Actuary and theAppointed Actuary have each provided an opinion to the Board of Directors. We are not actuaries and our services did notinclude any actuarial determination or evaluations or any attempt to evaluate actuarial assumptions. In addition, we are notlegal advisors, accountants or tax experts and our services did not include any legal, accounting or tax determination orevaluation or any attempt to evaluate legal, accounting or tax assumptions. We have relied upon, without independentverification, the assessment by the Company and its advisors as to such matters.



III. Scope of Review and Valuation Methodology

In connection with rendering this Report, we have reviewed, or carried out, among other things, the following:

1. Audited consolidated financial statements of the Company as at and for the years ended December 31, 2015, 2016 and2017, including the Appointed Actuary’s Report thereon;

2. Unaudited interim consolidated financial statements of the Company as at March 31, 2018 and for the three monthsended March 31, 2018 and 2017;

3. Draft pro forma consolidated financial statements of Holdco giving effect to the Demutualization as at and for the yearended December 31, 2017;

4. Draft Conversion Plan dated June 8, 2018 and the schedules thereto;

5. Business plan and consolidated financial projections prepared by management of the Company in respect of theCompany for the year ending December 31, 2018, and in respect of Economical for the years ending December 31, 2019and 2020, dated December 6, 2017, and an update for the year ending December 31, 2018 after the three monthsended March 31, 2018 provided May 25, 2018;

6. Certain internal financial reports or analysis prepared by management of the Company;

7. Information obtained from discussions with members of senior management regarding the Company’s operations,financial condition and Economical’s future prospects;

8. Market prices and other financial information for Comparable Companies based on publicly available information;

9. Results of operations for the most recent fiscal periods for Comparable Companies based on publicly availableinformation;

10. Selected historical initial public offerings and demutualization transactions for Canadian life insurance companies basedon publicly available information; and

11. Such other financial studies and analyses as we deemed necessary, including our assessment of general economic,market and monetary conditions.

No historical information in respect of periods or dates after the Valuation Date was taken into account in preparing thisReport.

In estimating the IPO Valuation Range, we used primarily the comparable company valuation methodology to estimate therange of expected fully distributed trading values for Economical. This methodology involves comparing Economical topublicly traded Comparable Companies with reference to a number of factors, including but not limited to return on equity,earnings growth, capitalization levels, investment portfolio composition, geographic diversification, product diversification,market share and ranking, distribution channels and business strategy. In reviewing the trading performance of ComparableCompanies, the Canadian and U.S. property and casualty insurers were considered as they provide the most comparableinvestment opportunities to prospective investors in Economical, though none of these companies is considered directlycomparable to Economical. The principal valuation multiples and ratios used in our analysis included price-to-book,price-to-earnings multiples, and dividend yields, and we also performed a regression analysis based on price-to-bookmultiples vs. return on equity for Comparable Companies. To arrive at the IPO Valuation Range, we then applied an InitialPublic Offering Discount (as defined below) to the estimated range of expected fully distributed trading values.

IV. IPO Valuation Range versus IPO Price

The IPO Valuation Range is not necessarily the same as the valuation of Economical which will result from the actual InitialPublic Offering process. In the actual Initial Public Offering process, important market information, including the number ofCommon Shares to be offered and the number of Common Shares retained by Eligible Policyholders and information relatingto demand and pricing levels, will be solicited and received by the underwriters from prospective investors. This informationmay be material to the determination of the IPO Price. Such information also may lead to revision of the IPO Price during themarketing period. For the purposes of this Report it has not been possible to undertake a conventional IPO marketing processwith respect to the Common Shares and such information is therefore not available. While the IPO Price will be determinedthrough negotiations involving the Board of Directors of Economical and the underwriters, and no such negotiations havebeen undertaken as of yet, we note that the Board of Directors of Economical will approve the IPO Price for the purposes ofthe issuance and sale of the Common Shares in the Initial Public Offering at the time of the Initial Public Offering.

Furthermore, our experience with large distributions of equity securities, such as the proposed Initial Public Offering, leads usto believe that the proposed offering would require a discount from the expected range of fully distributed trading values forCommon Shares (the “Initial Public Offering Discount”). In pricing the Initial Public Offering, the following factors, amongothers, could cause the IPO Price to differ from the expected fully distributed trading value: (i) the lack of a public markettrading record; (ii) the lack of equity investors’ familiarity with Economical; (iii) the amount of Common Shares owned byEligible Policyholders who elect to receive Common Shares and the extent to which that “overhang” of supply may impact theIPO Price; (iv) the absolute size of the offering; (v) the size of the offering relative to the overall capitalization of Economical;(vi) the expectations as to Economical’s performance; (vii) marketing considerations; (viii) timing considerations; and(ix) prevailing market conditions in the overall market, as well as the new issue market, at the time of the Initial Public Offering.

The actual price at which the Common Shares will trade in the public market may be higher or lower than the IPO ValuationRange per Common Share set forth in Section VI of this Report. In the course of actual trading of the Common Shares

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following the Initial Public Offering, other factors may influence the actual public equity market value of Economical including,among others: (i) certain financial information and data of Economical; (ii) the history of, and the prospects for, Economical andthe industry in which it competes; (iii) an assessment of Economical’s management, management compensation and otherincentives; (iv) Economical’s past and present operations; (v) Economical’s investment policies and the quality of its assets;(vi) the prospects for, and timing of, future revenues and earnings of Economical; (vii) Economical’s reserving practices andreserve development; (viii) the impact of any acquisitions or divestitures by Economical; (ix) the geographic focus of itsoperations; (x) its product and services mix; (xi) its channels of distribution for such products and services; (xii) its dividend rateand yield; (xiii) its return on equity and earnings growth rates; (xiv) prevailing industry, economic, and equity and debt marketconditions and expectations with respect thereto, including the number and size of the equity financings and initial publicofferings that may be completed around the time of the Initial Public Offering; (xv) regulatory changes impacting the businesssegments that Economical operates in; (xvi) the amount of Common Shares owned by Eligible Policyholders who elect toreceive Common Shares; and (xvii) the length of time which Eligible Policyholders who elect to receive Common Shares retainsuch Common Shares, and the other matters referred to in Sections II, III and IV above relating to factors relevant to thevaluation of Economical. The valuation of non-publicly traded securities, and the estimation of the IPO Valuation Range forEconomical, is inherently imprecise and subject to numerous uncertainties and contingencies, all of which are difficult topredict. Accordingly, the actual public equity market values for Economical from time to time after the Initial Public Offeringcould differ substantially from the IPO Valuation Range.

V. Relationship with BMO Capital Markets and RBC Capital Markets

The Company has retained us to provide investment banking and other financial advice in respect of the Demutualization andthe Initial Public Offering for which we will receive a fee, will be reimbursed for our reasonable out-of-pocket expenses andwill be indemnified by the Company in certain circumstances. In addition, we and our affiliates have in the past performed, andmay continue in the future to perform, other investment banking, financial advisory or other financial services for the Companyand certain of its affiliated entities and have received, and may in the future receive, compensation for the rendering of suchservices. In this regard, each of BMO Capital Markets and RBC Capital Markets have an affiliate which has been and continuesto be a lender to the Company. In the ordinary course of our business as a broker/dealer, we may from time to time purchasesecurities and interests in loans from, and sell securities and interests in loans to, the Company and its subsidiaries, as amarket-maker or otherwise. We may from time to time in the future have a long or a short position in, and buy or sell,securities of Economical for our own account and for the account of our customers. In this regard, in connection with the InitialPublic Offering, we, as underwriters, expect to enter into an underwriting agreement providing for, upon the terms and subjectto the conditions set forth therein, the sale by Holdco, and the purchase by us, as underwriters, of Common Shares pursuantto which we, as underwriters, will receive an underwriting fee, which fee is contingent upon the closing of the Initial PublicOffering.

VI. IPO Valuation Range

We have not been asked for and we express no opinion or recommendation, and this Report should not be relied upon, as tothe following:

1. The IPO Price;

2. The price at which the Common Shares issued in connection with the Conversion Plan or pursuant to the Initial PublicOffering will trade;

3. The fairness of the IPO Price;

4. The fair market value of any of the Common Shares to be issued in connection with the Conversion Plan or pursuant tothe Initial Public Offering;

5. The adequacy or sufficiency of the Second Meeting Circular, Third Meeting Circular or any other document to be sent ordisclosure to be made to Eligible Policyholders in connection with the Demutualization;

6. Which of Economical’s policyholders are appropriately included among the Eligible Policyholders;

7. The fairness of the Conversion Plan including its fairness to any individual Eligible Policyholder or Other Recipient or toany class of Eligible Policyholders or the fairness of any provisions of the Conversion Plan relating to which EligiblePolicyholders and Other Recipients receive any particular form of the Demutualization Benefits or other provisions of theConversion Plan which distinguish among Eligible Policyholders and Other Recipients;

8. Any matters relating to the reorganization of Economical described in the Second Meeting Circular or the Third MeetingCircular;

9. The likelihood of consummation of the Demutualization or any other aspect of the Conversion Plan;

10. The appropriateness of the Demutualization relative to any other transaction the Company could undertake; or

11. How Eligible Policyholders should vote in connection with the Conversion Plan or whether or not they should elect toreceive Demutualization Benefits in the form of cash or Common Shares or a combination of cash and Common Sharesor buy or sell Common Shares.



We note the following:

‰ we do not know the circumstances of any Eligible Policyholders or Other Recipients and therefore are not in a position toadvise any Eligible Policyholders or Other Recipients; and

‰ the opinions expressed herein are subject to the assumptions, qualifications, limitations and uncertainties described herein.

Based upon and subject to the methods, assumptions, qualifications and limitations discussed herein, in our opinion asinvestment bankers, the estimated IPO Valuation Range as of the Valuation Date is approximately C$1.3 billion to C$1.9 billionand, assuming that 100 million Common Shares are outstanding at the time of the Initial Public Offering, approximately C$13 toC$19 per Common Share.

This Report is provided solely for the exclusive use of the Board of Directors of the Company in connection with theConversion Plan and cannot be used or relied upon for any other purpose or by any other person and, without our priorwritten consent, this Report is not to be quoted, summarized, paraphrased, excerpted or referred to, in whole or in part, in anyprospectus, registration statement, policyholder information circular or proxy statement, or in any other report, document,filing, release or other written or oral communication prepared, issued or transmitted by Economical, except that this Reportmay be included in its entirety in the Conversion Plan pursuant to section 13(1)(a) of the Demutualization Regulations, theSecond Meeting Circular and the Third Meeting Circular to be sent to Eligible Policyholders, submissions to OSFI in respect ofthe foregoing and the application to the Minister of Finance (Canada) pursuant to section 20 of the DemutualizationRegulations.

Yours truly,

BMO Nesbitt Burns Inc. RBC Dominion Securities Inc.

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APPENDIX “B”: BY-LAW AMENDMENTBY-LAW NO. A.6

AMENDMENT TO BY-LAW NO. A.1OF

ECONOMICAL MUTUAL INSURANCE COMPANY(the “Company”)

WHEREAS in connection with the proposed conversion of the Company into a company with common shares (the“Demutualization”) in accordance with the provisions of the Mutual Property and Casualty Insurance Company withNon-mutual Policyholders Conversion Regulations (the “Demutualization Regulations”) under the Insurance Companies Act(the “Act”), as described in the Company’s notice of special meeting dated January 31, 2019, and the Conversion Plan (asdefined herein), it is necessary to amend By-law No. A.1 of the Company, as amended by By-law No. A.3, By-law No. A.4 andBy-law No. A.5, as set out below;

AND WHEREAS as contemplated in the Demutualization Regulations, the eligible mutual policyholders (as defined in theConversion Plan) may approve by special resolution an amendment to the Company’s by-laws to permit all eligible non-mutualpolicyholders (as defined in the Conversion Plan) to vote on the Conversion Plan for the Demutualization and on theauthorization referred to in paragraph 237(1.1)(c) of the Act;

NOW THEREFORE, BE IT ENACTED as a by-law of the Company as follows:

1. Section 1.01 of By-law No. A.1, as amended, is hereby amended by adding the following after paragraph (e):

Further, in connection with the amendments made to this By-law No. A.1 by By-law No. A.6,

(f) “Conversion Plan” means the conversion plan prepared by the Company and referred to in the Company’s noticeof special meeting dated January 31, 2019;

(g) “Demutualization” means the proposed conversion of the Company into a company with common shares inaccordance with the provisions of the Act, in accordance with the terms of the Conversion Plan and as describedin the Company’s notice of special meeting dated January 31, 2019;

(h) “Demutualization Meeting” means the special meeting of eligible policyholders under Section 237(1.1) of the Act inconnection with the Demutualization, and any adjournment or postponement thereof;

(i) “Demutualization Regulations” means the Mutual Property and Casualty Insurance Company with Non-mutualPolicyholders Conversion Regulations under the Act;

(j) “eligible mutual policyholder” has the meaning ascribed thereto in the Conversion Plan;

(k) “eligible non-mutual policyholder” has the meaning ascribed thereto in the Conversion Plan;

(l) “eligible policyholder” has the meaning ascribed thereto in the Conversion Plan;

(m) “mutual policy” has the meaning ascribed thereto under the Demutualization Regulations; and

(n) “non-mutual policy” has the meaning ascribed thereto under the Demutualization Regulations.

2. Section 3.01 of By-law No A.1, as amended, is hereby amended by adding the following sentence after the currentSection 3.01:

For the purposes of the Demutualization Meeting, the references to “any meeting of members” and “the meeting” in theforegoing portion of this Section 3.01 shall be read as “the Demutualization Meeting”.

3. Section 5.05 of By-law No. A.1, as amended, is hereby amended by adding the following sentence following the currentSection 5.05:

Notwithstanding the foregoing sentence, at the Demutualization Meeting, subject to Section 5.07, each eligiblepolicyholder shall be entitled to one vote, and one vote only, regardless of the number of individual mutual policies ornon-mutual policies an eligible policyholder holds or has held, on the resolution to approve the Conversion Plan for theDemutualization and the authorization referred to in paragraph 237(1.1)(c) of the Act.

4. Section 5.06 of By-law No. A.1, as amended, is hereby amended by adding the following sentence after the currentSection 5.06:

For the purposes of the Demutualization Meeting, the reference to “member” in the foregoing portion of thisSection 5.06 shall be read as “eligible policyholder” and the references to “a meeting of policyholders”, “the meeting”and “such meeting” shall be read as “the Demutualization Meeting”.

5. Section 5.07 of By-law No. A.1, as amended, is hereby amended by adding the following sentence after the currentSection 5.07:

For the purposes of the Demutualization Meeting, the reference to “any policy on the mutual system shall be issued” inthe foregoing sentence of this Section 5.07 shall be read as “any mutual policy or non-mutual policy has been issued”and the references to “a meeting” and “any meeting” shall be read as “the Demutualization Meeting”.

6. Effective Date: By-law No. A.6 shall come into force on the date it is confirmed by the members of the Company.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular B-1

APPENDIX “C”: DEMUTUALIZATION OVERVIEW

Final conversion plan(Requires OSFI approval)

Policyholder committees negotiate and approve method for allocating demutualization benefits

Non-mutual policyholder committee

Mutual policyholder committee

Amend voting by-law

Complete demutualization

Approve conversion plan and authorizedemutualization application

Court-appointed committees(Following appointment of counsel for each committee)

Authorize negotiations with eligiblenon-mutual policyholders

Vote 1(Eligible mutual policyholders)

Vote 2(Eligible mutual policyholders)

Ministerial approval

Vote 3(Eligible mutual policyholders andeligible non-mutual policyholders)

Deadline(Economical must submit to OSFI within 12 months of Committee appointment date)*

Committeeappointment date

*The Office of the Superintendent of Financial Institutions (“OSFI”) extended the 12 month deadline for submitting the conversion plan and required actuarial opinions from February 22, 2018 to June 30, 2018.

The following is an overview of each step that must be undertaken to complete a demutualization of Economical MutualInsurance Company (referred to in this appendix as “Economical Mutual”) under the Act and the Mutual Property andCasualty Insurance Company with Non-Mutual Policyholders Conversion Regulations (the “Regulations”) developed by thefederal government.

PHASE 1: INITIATION OF THE CONVERSION PROCESS

a. On November 3, 2015, the Board passed a resolution recommending that Economical Mutual demutualize (the“Initiating Board Resolution”). This date is the eligibility date for determining which mutual and non-mutualpolicyholders will be eligible policyholders (along with other eligibility requirements) in accordance with the Regulations.The Initiating Board Resolution also identified other groups of non-mutual policyholders who qualify as eligible non-mutual policyholders.

This step is complete.

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APPENDIX “C”: DEMUTUALIZATION OVERVIEW

PHASE 2: FIRST SPECIAL MEETING (ELIGIBLE MUTUAL POLICYHOLDERS) – APPROVAL TO NEGOTIATE

a. At the first special meeting for demutualization held on December 14, 2015, eligible mutual policyholders voted on aspecial resolution whether to negotiate the allocation of demutualization benefits with eligible non-mutual policyholders(the “Negotiation Resolution”). The Negotiation Resolution had to be passed by at least two-thirds of the eligible mutualpolicyholders voting at the Special Meeting.

b. After the Negotiation Resolution was passed, in January 2016 Economical Mutual sought OSFI’s authorization to send anotice of intent to negotiate to all eligible policyholders, which informed them that the Negotiation Resolution waspassed by eligible mutual policyholders and contained other prescribed information.

c. Economical Mutual sent the notice of intent to negotiate to all eligible mutual and eligible non-mutual policyholders inMay 2016.


PHASE 3: COURT PROCESS AND DEVELOPMENT OF CONVERSION PLAN

a. On July 15, 2016, Economical Mutual filed an application with the Ontario Superior Court of Justice for an order toestablish the procedure for the appointment of legal counsel to represent each class of eligible policyholders (mutualand non-mutual) and for the appointment of members of two policyholder committees representing the eligible mutualand eligible non-mutual policyholders, respectively.

b. On September 22, 2016, the Court appointed McCarthy Tétrault LLP as legal counsel for the eligible mutualpolicyholders, and Thornton Grout Finnigan LLP as legal counsel for the eligible non-mutual policyholders.

c. On February 22, 2017, the Court appointed the members of each policyholder committee.

i. Once the Policyholder Committees were appointed, with the aid of appointed legal counsel and each of their ownactuarial and financial experts, they negotiated with the goal of agreeing on whether any recipients, other thaneligible policyholders, will be eligible to receive demutualization benefits, and the method of allocatingdemutualization benefits to all eligible recipients.

d. OSFI extended the deadline for submitting the conversion plan and required actuarial opinions from February 22, 2018to June 30, 2018.

e. On June 11, 2018, each policyholder committee unanimously approved the method of allocating demutualization benefitsand the allocation of demutualization benefits to the Foundation. These terms formed part of the conversion plan thatwas submitted to OSFI on June 26, 2018, along with the required actuarial opinions. From June to January 2019,Economical continued to engage with OSFI and provide the materials and information required and to support itsreview. This Circular, which includes the conversion plan and other prescribed requirements, was approved by OSFI formailing to eligible mutual policyholders on January 31, 2019.

f. Upon mailing of this Circular and accompanying materials to eligible mutual policyholders, the Policyholder Committeeswere automatically disbanded pursuant to the Regulations.


PHASE 4(A): SECOND SPECIAL MEETING (ELIGIBLE MUTUAL POLICYHOLDERS) – AMENDING BY-LAWS

a. After OSFI has completed its review and provided authorization, there will be a second special meeting where eligiblemutual policyholders must vote by special resolution on whether to amend the by-laws of Economical Mutual to extendthe right to vote on demutualization to eligible non-mutual policyholders (the “By-Law Amendment Resolution”). If theBy-Law Amendment Resolution is not passed by at least two-thirds of the eligible mutual policyholders voting at thesecond special meeting, the demutualization will not proceed.

This step is the purpose of this Circular and the Special Meeting.

PHASE 4(B): THIRD SPECIAL MEETING (ALL ELIGIBLE POLICYHOLDERS) – APPROVAL OF CONVERSION PLAN ANDAPPLICATION

a. If the By-Law Amendment Resolution is passed, Economical Mutual will hold the Third Special Meeting, after OSFIreview and authorization. At this meeting, all eligible policyholders (mutual and non-mutual) must vote by specialresolution on whether to approve the conversion plan and whether to authorize Economical Mutual to apply to theMinister of Finance to demutualize (the “Conversion Approval Resolutions”). If the Conversion Approval Resolutions arenot passed by at least two-thirds of the eligible policyholders voting at the Third Special Meeting, the demutualizationwill not proceed.

b. If the Conversion Approval Resolutions are passed, Economical Mutual must send a notice to all policyholders informingthem of the eligible policyholders’ approval of the conversion plan and the Company’s intention to apply to demutualize.

Phase 4(C): Application to demutualize

a. If the Conversion Approval Resolutions are passed, Economical Mutual must apply to the Minister of Finance todemutualize, and if approved, the Minister of Finance issues Letters Patent of Conversion, converting Economical Mutualfrom a mutual company into a company with common shares.

After receiving Letters Patent of Conversion from the Minister of Finance, Economical can proceed with the Offering.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular C-2

APPENDIX “D”: APPOINTED ACTUARY’SOPINION AND SUMMARY REPORT

To: The Board of Directors of Economical Mutual Insurance Company

I, Linda Goss, am the appointed actuary of Economical Mutual Insurance Company (“Economical” or the “company”) and I ama Fellow in good standing of the Canadian Institute of Actuaries (“FCIA”) and the Casualty Actuarial Society (“FCAS”).

I have reviewed the Conversion Plan (the “Plan”) of Economical pursuant to which Economical intends to convert from amutual property & casualty insurance company into a property & casualty company with common shares (the“Demutualization” or “Conversion”). Among other content, the Plan contains a detailed description of the benefits to beprovided to Eligible Policyholders and Other Recipients in respect of Demutualization (the “Demutualization Benefits”) and adetailed description of the method approved of allocating the value of Economical among them (the “Allocation”). Wordsbeginning with capital letters that are not otherwise defined in this report have the meaning given to them in the Plan and theappendices attached thereto.

The following pages summarize my opinion on (a) the fairness and equity to Eligible Policyholders of the Allocation (the“Fairness Assessment”), where this Allocation was established by the negotiation process between two court-appointedcommittees of different classes of Eligible Policyholders (the “Policyholder Committees”); and (b) the effect of Conversion onthe financial strength and vitality of Economical and on the security of its policyholders with respect to the continuation of theirpolicies (the “FFC Assessment”). This opinion is required by paragraph 14(2)(b) of the Mutual Property and Casualty InsuranceCompany with Non-mutual Policyholders Conversion Regulations, SOR/2015-168 (“Demutualization Regulations”).

In my opinion:

(i) The Demutualization Benefits to be provided to Eligible Policyholders and Other Recipients and the method of allocatingthe value of Economical as described in detail in the Plan are fair and equitable to the Eligible Policyholders, and

(ii) The financial strength and vitality of Economical and the security of its policyholders with respect to the continuation oftheir policies will not be materially adversely affected by the Conversion.

The two Policyholder Committees first negotiated the Allocation at an aggregate level, as between the Eligible MutualPolicyholders, the Eligible Non-Mutual Policyholders, and certain Other Recipients. During that phase of negotiations, myinteraction with the Policyholder Committees focused on providing information as relates to my guiding principles of fairness,the calculation of the contribution to surplus of the Eligible Policyholders, and certain matters requested by the respectivecommittees. Subsequent to the negotiations being complete at an aggregate level, in response to a request from bothcommittees, I also provided my guidance on a fair allocation of the various components down to the individual policyholderlevel.

While I provide this opinion in my capacity as appointed actuary for Economical, I note that I and my spouse are joint EligibleMutual Policyholders and I expect we will receive shares or other form of Demutualization Benefits as Eligible Policyholdersupon Demutualization. I believe this interest does not impair my ability to make a fair and unbiased assessment of theAllocation. I have carried out my work objectively, in accordance with accepted actuarial practice in Canada and withoutregard for any potential personal gain as a result of my ownership of a Qualifying Mutual Policy.

I disclosed my interest in Demutualization to OSFI at the outset of the process and to the Policyholder Committees and theircounsel soon after their respective appointments. Following consultation with OSFI and the Policyholder Committees, it wasdetermined by the company that an additional opinion would be obtained from an independent peer reviewer to furthersupport the process as an additional safeguard. Jim Christie, FCIA, FCAS, from Collins Barrow Toronto (now RSM Canada),was engaged to undertake the peer review. Mr. Christie reviewed my allocation work and the Fairness Assessment in thisopinion and confirmed that in his view it is free from bias. In addition, Mr. Christie has stated that the individual assumptionsunderlying my opinion are reasonable, and those individual assumptions, in the aggregate, have resulted in a FairnessAssessment that is itself reasonable.

This report is limited to actuarial matters and does not address legal, accounting, tax, share valuation, commercial or otheraspects of the Conversion Plan which lie outside the scope of actuarial practice.

Respectfully,

Linda Goss, FCIA, FCASAppointed Actuary

January 25, 2019Waterloo, Ontario

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APPENDIX “D”: APPOINTED ACTUARY’S OPINION AND SUMMARY REPORT

SCOPE OF REPORTThe purpose of this report is to summarize the full Appointed Actuary’s report prepared in accordance with theDemutualization Regulations in which I assessed the Plan and provided my opinion on two aspects of the Conversion: theFairness Assessment and the FFC Assessment. As described previously, the Fairness Assessment required me to considerwhether the Allocation and Demutualization Benefits are fair and equitable to Eligible Policyholders, both on a group andindividual policyholder basis.

The FFC Assessment was a consideration of the effect of Conversion on the financial strength and vitality of Economical andon the security of all policyholders of Economical with respect to the continuation of their policies. For this assessment, Iconsidered whether, upon Demutualization, Economical could continue to operate at satisfactory capital levels in both a basecase as well as under various plausible adverse scenarios and whether the Conversion had any materially adverse impact onthe base case or adverse scenarios.

PURPOSEThis summary report and the opinions and conclusions contained herein were prepared for the review of Economical and itsBoard of Directors, the Eligible Policyholders, the Superintendent and the Minister (each as defined in the InsuranceCompanies Act), in respect of their consideration of whether to support or approve, as the case may be, aspects of theConversion covered by the scope of this report. This report may not be used by any other person or entity for any purpose.

RELIANCE ON THE VALUATION EXPERTSchedule 5 of the Plan, states that the value of Economical as of May 31, 2018 was estimated to be between $1.3 billion and$1.9 billion (the “IPO Valuation Range”). This IPO Market Valuation Range was based on a valuation of the company preparedby BMO Nesbit Burns Inc. and RBC Dominion Securities Inc. for Economical. Any ranges for individual policyholder benefitsthat I cite in this report are based on the minimum and maximum of the IPO Market Valuation Range and act as the estimatedvalue of Economical.

The IPO Valuation Range was subject to the review of Origin Merchant Partners (“Origin”), the independent valuation andfinancial market expert. Origin’s report expresses their view on (a) (i) whether the IPO Market Valuation Range reasonablyreflects prevailing market conditions as of May 31, 2018 and (ii) the appropriateness of the methods and assumptions used toestimate the IPO Market Valuation Range; (b) whether the cash payments to be made to certain Eligible Policyholders andOther Recipients pursuant to the Plan are appropriate substitutes for the Common Shares which such Eligible Policyholdersand Other Recipients would otherwise receive on Conversion and (c) an opinion as to whether the measures to be taken bythe Company, as described in the Plan, are likely to assist the Eligible Policyholders & Other Recipients who receive CommonShares on Conversion to sell such Common Shares on a public market and to address any potential imbalances that mayarise. My opinion relies on Origin’s report.

FEATURES OF PLAN TO DEMUTUALIZEAt demutualization, certain steps will occur including:‰ Economical will cease to be a Mutual Company and will become a company with common shares (“EIC”), wholly owned by a

holding company (“Holdco”).‰ The full value of Economical will be allocated to the Eligible Policyholders and Other Recipients based on the Allocation. For

convenience, given that the form of the benefits received by any recipient might be shares of Holdco or cash, it is useful torefer in this report to the value of Economical as comprising 100 million units (the “Units”).

‰ There will no longer be Mutual Policyholders and there will cease to be a distinction between mutual and non-mutualpolicies. Upon Conversion, voting rights of mutual policyholders will be eliminated. Those Eligible Policyholders whoultimately receive their benefits in the form of shares of Holdco will have shareholder rights in accordance with applicablelaw and Holdco’s by-laws.

‰ The expenses in connection with Demutualization will decrease Holdco’s capital, but that expense is not material whencompared with Holdco’s total capital, and will be considered in the share price set for the Holdco shares.

‰ There is no other decrease in Holdco’s capital as a result of Demutualization. Certain assets not material to the operations ofthe Economical’s insurance business are expected to be transferred to Holdco on or about the Effective Date of theConversion.

GUIDING PRINCIPLES FOR THE FAIRNESS ASSESSMENTIn order to conclude the Allocation is fair and equitable, I considered the Demutualization Regulations, actuarial standards ofpractice, the basic axioms of insurance and the following guiding principles:

1. Simple and understandable to policyholdersThe Allocation is simple if Eligible Policyholders can determine their Demutualization Benefits given a range of the valueof the company provided in the Plan. It is understandable if Eligible Policyholders are able to make an informed decisionto vote on whether to approve the Plan and Demutualization at the Second Special Meeting and Third Special Meeting.Allocating the value of Economical is a complex matter, so it is desirable to achieve a balance between simplicity toEligible Policyholders with that of the needed complexity of the method to arrive at a fair and equitable allocation.

2. Consider demutualization precedents, where relevantWhile Economical is the first Canadian Property and Casualty Company that is a Mutual Company to demutualize underthe Demutualization Regulations, other insurance companies have demutualized, both globally and in Canada. Certain

2019 Special Meeting of Eligible Mutual Policyholders Information Circular D-2


aspects of precedent demutualizations may be different than Economical’s demutualization and hence are notapplicable. Examples of differences include differing insurance products, jurisdiction, and regulatory structure.Nevertheless, there are similarities and other facets of benefit allocation that may be relevant. I therefore consideredprior demutualizations to the extent that they were applicable to Economical’s circumstances. Examples of relevantaspects include how changes to voting rights were valued, how contribution to surplus was utilized, and whatcomponents of the allocation methodology were fixed and equal amounts for each recipient of Demutualization Benefitsversus a variable allocation.

3. Recognize attributable and excess components

The third principle recognizes that the value of Economical has generally been built up over time and that there are twocomponents to that value: a portion that is attributable to Eligible Policyholders and a portion which is excess. Theattributable component reflects contributions that can be ascribed to the Eligible Policyholders through the profits andinvestment returns from the premiums they paid over time. I also include in the attributable component the portion ofvalue that reflects the unique governance rights of Eligible Mutual Policyholders. The excess component is the portionof Economical’s value that is not attributable to Eligible Policyholders. It includes contributions of ineligible and priorEconomical policyholders, current and former policyholders of subsidiaries of Economical and non-insurance relatedinvestments.

4. Rational connection between the method of allocating benefits and the contributions or rights that gave rise to theallocation

The fourth principle emphasizes that there be a rational connection between the methods of allocating benefits and thecontributions or rights that gave rise to those benefits. For example, in general, contributions or rights that vary bypolicyholder attributes should be allocated in a variable manner, while those that do not differ by policyholder should beallocated in a fixed or equal way. The following categories of contributions and rights are components of value to beconsidered in the allocation:

‰ Eligible Mutual Policyholders have voting and other rights in the governance of the company that will change as aresult of Conversion.

‰ All Eligible Policyholders have voting rights specifically for the Demutualization transaction, at the First SpecialMeeting and Second Special Meeting required by the Demutualization Regulations for Eligible Mutual Policyholdersand at the Third Special Meeting required by the Demutualization Regulations for both Eligible Mutual and EligibleNon-Mutual Policyholders.

‰ A portion of the Company’s surplus was contributed by Eligible Policyholder profits and investments on those profitsover time. Conversely, the remaining surplus was contributed by ineligible policyholders, policies no longer in forceor investments that cannot be attributed to Eligible Policyholders.

5. Practical to implement and calculated using objective, determinable criteria

Wherever possible, individual policyholder Demutualization Benefits should be determined at a policy or policyholderlevel. However, it is not uncommon that companies have some limitations on the availability, quality or accuracy of data.The Allocation should recognize such data limitations to the extent that the cost of retrieval or validation is not practicalor reasonable to implement. This may necessitate the use of limits or constraints in the Allocation or grouping of policieswith similar policy attributes.

THE ALLOCATION METHODOLOGY IN SUMMARY

In summary, the Allocation as described in Article 5 of the Plan provides that upon Conversion the full value of Economical willbe allocated as follows:

1. Eligible Mutual Policyholders are allocated 20% of the Units,

2. The Foundation is allocated Units having a value of $100 million,

3. Eligible Non-Mutual Policyholders are allocated the remaining Units.

i) There are 878 Eligible Mutual Policyholders. The allocation among the Eligible Mutual Policyholders is as follows:

a. A fixed component equaling 6% of the Units, allocated on an equal basis, which represents the rights in thisDemutualization process (i.e. unique voting rights in the Second Special Meeting that in effect approves a by-lawamendment to permit the third, final vote of all Eligible Policyholders to occur, as well as their rights to vote in theThird Special Meeting to approve the Conversion Plan);

b. A variable component of Units which represents their $2.018 million contribution to Economical’s surplus allocatedbased on Policy Duration and Premium of each Qualifying Mutual Policy of Eligible Mutual Policyholders in force asof the Eligibility Date;

c. Another variable component of Units having a value of $2 million for their historical commitment to Economicalallocated based on the Mutual Policyholder Duration of each Eligible Mutual Policyholder;

d. Another fixed component comprising the remainder of the 20% of the Units, allocated on an equal basis, whichrepresents the inherent governance rights that Mutual Policyholders are losing upon Conversion.

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ii) There are approximately 630,0001 Eligible Non-Mutual Policyholders. The allocation among the Eligible Non-MutualPolicyholders is as follows:

a. A fixed component equaling 6% of the Units, allocated on an equal basis, which represents their rights in thisDemutualization process (i.e. they collectively hold the vast majority of voting rights for the Third Special Meetingto approve the Conversion Plan);

b. A variable component of Units which represents their $936.612 million contribution to Economical’s surplus,allocated based on Policy Duration and Premium of each Qualifying Non-Mutual Policy held by the EligibleNon-Mutual Policyholder that was a policy contributing to establishing eligibility;

c. Another fixed component comprising the remainder of the allocation of the Units, allocated on an equal basis,which represents their right to participate in the overall Demutualization negotiation and Policyholder Committeeprocess.

The Allocation is structured such that certain allocations are made in priority over others. The allocations to Eligible MutualPolicyholders are the highest priority, followed by the allocation to the Foundation and then to the Eligible Non-MutualPolicyholders. Within each of the Eligible Mutual Policyholder and Eligible Non-Mutual Policyholder allocations, the allocationsfor transactional consent rights are first, followed by components for contribution to Economical’s surplus, then historicalcommitment (Eligible Mutual Policyholders only) and lastly the residual allocation for each class. If there are insufficient Unitsremaining for any particular component of the allocation, that allocation will be made on a prorated basis within that particularallocation component and no further allocation will be made to any component that follows.This priority structure in the Allocation has no effect on the priority of the distribution or form of the Demutualization Benefits(in either cash or Common Shares), which is outlined in Article 6 of the Plan.

ASSESSMENT OF ALLOCATION METHODOLOGY FOR FAIRNESS AND EQUITYA) Overall Allocation MethodologyIn my view, the methodology as a whole is fair and equitable to the Eligible Policyholders. The methodology is consistent withthe guiding principles (described above).The allocation methodology and each of its component parts is sufficiently clear and understandable for Eligible Policyholdersto determine the range of values for each component of Demutualization Benefits at the aggregate level, given the IPOMarket Valuation Range. The allocation methodology aligns with general concepts from demutualization precedentsregarding use of the contribution to surplus methodology and valuation of voting rights.The key value components of inherent rights, transactional rights and contribution to surplus are adequately reflected in theallocation components. The allocation methodology also aligns to the principle that some parts of the value of the companycan reasonably be attributed to Eligible Policyholders while others are excess. Within each component of the aggregatemethodology there is a rational connection between the source of the value and its method of allocation on either a fixed orvariable basis.The Policyholder Committees, with the assistance of their counsel, entered into negotiations to establish the method ofallocation as required in Section 12 of the Demutualization Regulations. The committee negotiations were initiated by a courtand were a procedurally neutral process whereby the two committees held comprehensive discussions on this matter toreach an agreement that satisfies both committees. This process resulted in the allocation methodology approved by the twocommittees, which is evidence that they consider the methodology reasonable overall.Details of the assessment of fairness and equity for each component are described in the following sections.B) Major Components1) 20% to Eligible Mutual PolicyholdersThe allocation to the Eligible Mutual Policyholders is predominantly for the value of their voting rights, both those being lostupon Conversion (i.e. inherent rights), as well as those votes created as a result of the demutualization transaction (i.e.,transactional rights). The inherent rights of the Eligible Mutual Policyholders, specifically their rights to vote at generalmeetings and for any material transactions, will cease upon Conversion. In addition, the Eligible Mutual Policyholders, as aclass, are the only Eligible Policyholders permitted to vote (i) at the First Special Meeting required under the DemutualizationRegulations to initiate the Demutualization process, and (ii) at the Second Special Meeting required under the DemutualizationRegulations to consent to amend the company’s by-laws to allow the Eligible Non-Mutual Policyholders the right to vote onthe Conversion at the Third Special Meeting.These allocations to Eligible Mutual Policyholders are similar to the fixed allocations provided in Canadian life insurerdemutualizations that took place in the late 1990s. The fixed component of allocation in those earlier demutualizations rangedfrom approximately 10% to 25%, which largely represented the voting policyholders’ voting rights being lost or diluted uponconversion, as well as their rights to vote in the transaction. The 20% allocation for Eligible Mutual Policyholders falls withinthat range and is deemed fair and equitable as such. Accordingly, I conclude there is a strong rationale and documentedprecedents for the allocations in respect of inherent rights and transactional rights to Eligible Mutual Policyholders.

2) FoundationThe allocation to a Foundation in the amount of $100 million is rationally connected to the excess portion of benefits in that itreflects that a large portion of the surplus was built up over time from the contribution of former policyholders or policyholders

1 Number of policyholders is subject to change due to individual record updates that may amend the exact figure.



who are otherwise not eligible to participate in the Demutualization. Giving back to the community reflects the mutual roots ofEconomical and is also contemplated in the Regulatory Impact Analysis Statement accompanying the DemutualizationRegulations. As such, and given the strong support of the Policyholder Committees for this charitable giving, I consider thisallocation fair and equitable.

3) Remaining to Eligible Non-Mutual PolicyholdersGiven the IPO Market Valuation Range as outlined in the Plan, the range of value remaining for the Eligible Non-MutualPolicyholder class is estimated to be approximately 72%-75% of the Allocation. As will be described in more detail in thefollowing sections, the contribution to surplus of the company was a significant component of allocation attributable to theEligible Non-Mutual Policyholders. The Eligible Non-Mutual Policyholder class was the main contributor to the surplus of thecompany and it is appropriate that this aspect of their contribution would be allocated a large remaining portion of theAllocation. Eligible Non-Mutual Policyholders also receive fixed portions of the Allocation to reflect their right to vote in theDemutualization, namely at the Third Special Meeting required under the Demutualization Regulations and the InsuranceCompanies Act to approve the Conversion Plan. As the allocation methodology recognizes components that are attributableto contributions to surplus and rights in respect of the Demutualization, I consider the allocations to Eligible Non-MutualPolicyholders to be fair and equitable.

C) Subcomponents1) Transactional Consent Rights in Respect of the DemutualizationAs described above, the allocation methodology provides for a 6% aggregate allocation to each Eligible Policyholder class inrespect of transactional rights, which is a key value component to be reflected in the allocation methodology. This isreasonable because, regardless of the number of Eligible Policyholders in the classes, each class as a collective is able tocontrol each of the two upcoming policyholder votes necessary to complete the transaction:‰ The Eligible Mutual Policyholders control the vote at the Second Special Meeting (“Vote 2”) where they will approve an

amendment to the bylaws to allow Eligible Non-Mutual Policyholders to also vote on Demutualization;‰ Eligible Non-Mutual Policyholders are able to control the vote at the Third Special Meeting (“Vote 3”) because they will hold

the overwhelming majority of potential votes. Specifically, their approximately 630,000 potential votes are far greater thanthe 878 votes held by Eligible Mutual Policyholders.

The value of the transactional rights was a negotiated term between the two Policyholder Committees and was determinedindependent of any advice or counsel from the Appointed Actuary at the aggregate level. Votes 2 and 3 are each significantand meaningful votes in the Demutualization transaction. I have reviewed various capital market studies where the value of animportant shareholder vote was measured and 6% falls within the range of values seen in those transactions.

2) Contribution to SurplusBased on my guiding principles 2, 3 and 4, it is my view that it is fair and equitable to have an allocation component reflectiveof the Eligible Policyholders’ contribution to Economical’s surplus (the CTS Allocation). As such, I undertook an assessment ofthe contribution of Eligible Policyholders as a group, to the overall growth of the surplus of Economical. This growth in surpluswas achieved through aggregate year-over-year contributions to Economical’s surplus in the form of retained earningsgenerated from Eligible Policyholder premiums. The Contribution to Surplus or “CTS“ is therefore defined as a best estimateof company profits that can be attributed to the Qualifying Policies held by the Eligible Policyholders, for both the term ineffect as of the Eligibility Date, as well as prior applicable policy terms back to 1993, which is the oldest year that sufficientlycredible data is available to perform the calculation. The CTS Allocation is attributable to the Eligible Policyholders in that itreflects the profits and investment returns achieved from premiums paid by Eligible Policyholders.

3) Historical CommitmentThe Policyholder Committees agreed on an allocation equivalent to $2 million in Demutualization Benefits to the EligibleMutual Policyholders to reflect their historical commitment to the company (the Historical Commitment Allocation). It reflectsthat each of the Eligible Mutual Policyholders have been members of the Company with governance rights for differentperiods of time. It essentially recognizes the loyalty of each to the Company, which is consistent with a consideration ofduration listed in the Demutualization Regulations. It is also consistent with my guiding principle 3 in that it reflects the uniquehistorical governance rights of Eligible Mutual Policyholders which are separate from their financial contributions to thesurplus of Economical. This component is considered to be a sufficiently small part of the overall negotiated 20% aggregate tothe Eligible Mutual Policyholders and not considered unfair or inequitable.

4) Inherent Rights of the Eligible Mutual PolicyholdersUnder Economical’s by-laws and under the Insurance Companies Act, Mutual Policyholders are granted certain governancerights such as a right to vote on electing directors or appointing the external auditor. Additionally, Mutual Policyholders hadthe opportunity to receive discretionary premium rebates and in fact received such rebates over the years. Further, MutualPolicyholders may have had entitlement to excess surplus if an insolvent wind-up occurred, though the value of this potentialbenefit is very low given how unlikely it is that there would be any such excess available in insolvency.I refer to these rights and benefits of Mutual Policyholders that existed outside of the Demutualization process as “inherentrights”. The remainder of the Eligible Mutual Policyholder allocation benefits represents the loss of these inherent rights atConversion. The committees negotiated this aggregate allocation independently of the appointed actuary. This value isconsistent with ranges seen in prior demutualizations and there is a rational connection of this component of their benefit tothe rights being lost on Conversion. In my opinion, it is fair and equitable on that basis.

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5) Other Component for Eligible Non-Mutual PolicyholdersThe value of Economical has generally been built up over time in two ways — from contributions that can be clearly attributedto the Eligible Policyholders directly and another excess component that cannot be ascribed to Eligible Policyholders withoutconsideration of their rights in the Demutualization transaction. The CTS Allocation for Eligible Non-Mutual Policyholdersaccounts for the financial contributions to Economical’s surplus and transactional consent rights account for the value oftransactional rights. This other allocation for Eligible Non-Mutual Policyholders is an excess component that is not directlyattributable to them. This other allocation essentially reflects the right of Eligible Non-Mutual Policyholders to participate in theDemutualization process and can be considered another form of transactional rights so is fair and equitable.

D) Individual AllocationAllocations to individual Eligible Policyholders can be broadly categorized as having a fixed component and a variablecomponent. The fixed component provides an equal payment to each Eligible Policyholder within the respective EligibleMutual or Non-Mutual Policyholder classes. The variable component uses specific policy level attributes to determine theamount of the benefit allocation. For the allocations to Eligible Mutual Policyholders, the individual allocation is allocatedamong 878 persons. For the allocation to Eligible Non- Mutual Policyholders, the individual allocation is allocated amongapproximately 630,000 persons.

1) Fixed Allocation ComponentsIn reviewing the opinions of the appointed actuaries of the Canadian life demutualizations, it was a common feature that afixed and equal number of shares were allocated to reflect the loss of or change of voting control the voting policyholderwould be losing on Conversion. In all cases, a fixed number of shares were allocated to each voting policyholder, regardlessof the number, size, location or type of the policies owned.This reasoning and approach readily applies to Economical given the nature of the voting rights held, which similarly did notvary by the policyholder attributes. For instance, and as described in more detail below, Economical’s by-laws state thatMutual Policyholders are entitled to one vote and one vote only, regardless of the number of policies they hold. By implicationall votes are the same regardless of the size of the policy or the length of time the policyholder has held their policy. Similarvoting rules are provided for policyholder votes in the Insurance Companies Act.Additionally, recapitalization transactions of various companies in the US and Canada were assessed to consider both a fairvalue for the voting rights in these transactions, as well as to consider the method of allocating that benefit. Theserecapitalizations provided for shareholders in a dual class structure to be compensated for their loss of rights in moving theirshares to a single class structure, treating each class as a single group. Each shareholder in the various classes was the same,without distinction based on individual shareholder attributes, and the value was allocated per voting share, consistent withcapital market voting requirements.Accordingly, Canadian life demutualizations, Economical’s by-laws, the Insurance Companies Act and recapitalizationtransactions all support allocations that relate to voting or governance rights to be on a fixed and equal basis to eachpolicyholder within each class. Three components of the Allocation all relate to voting rights of some sort. These are the(i) transactional rights for all Eligible Policyholders, (ii) the inherent rights for Eligible Mutual Policyholders and (iii) the othercomponents for Eligible Non-Mutual Policyholders described in sections C-1, C-4 and C-5 respectively. Therefore it is fair andequitable that they be allocated on an equal basis among the policyholders within each class.For transactional rights, at the individual level, these allocations are divided equally within their respective classes —essentially every Eligible Policyholder receives a fixed amount equal to 6% of the Units divided by the number of EligiblePolicyholders in their respective Eligible Policyholder class. This is consistent with the fact that each policyholder has one voteand one vote only in any particular vote (no more or less than others in their class). It also provides for an equal and fixedcomponent for which all Eligible Policyholders of that type receive at least that minimum.

2) Variable Allocation ComponentsIn my view, the other two components (i.e. CTS Allocation and Historical Commitment Allocation referred to in sections C-2,C-3) should be applied in a variable way based on their policy attributes.The CTS Allocation varies in order to recognize that each class and each line of business has its own risk attributes, expensesand profit levels resulting in different contributions to Economical’s surplus. This is consistent with demutualizationprecedents. In some of the demutualizations of Canadian life insurers, CTS was used at a group level (country and line ofbusiness) to ensure that each group in total received at least their contributions in the form of benefits. The CTS Allocation isfollowing a similar concept in allocating CTS first by class and line of business, which follows the way in which Economicalmanages its business operations. There is therefore a strong rationale for allocating this component on a variable basis, usingpolicy attributes where possible and within practical limits.Within each class and line of business combination, CTS is apportioned policy by policy in a variable way through theapplication of policy level characteristics of Premium and Policy Duration. Policy Duration is adjusted to reflect that the longerduration for a policy represents a higher return on investment for Economical and that for each additional year of duration therate of contribution increases accordingly. Policy Duration is capped at 23 years which coincides with data limitations in boththe CTS calculation and policy inception data for Qualifying Non-Mutual Policies. The Premium is also adjusted in the CTSAllocation and reflects the fact that although premium contributes to profit, it does not assume that the rate of contributionremains the same the larger the premium grows. In pricing insurance products, premiums charged to policyholders reflect theexpected level of risk exposure and higher risk exposure correlates to higher premiums. Higher premiums do not necessarilycorrelate with higher profits. The CTS Allocation sufficiently reflects this diminishing return on the premium dollar.



Similarly, prior demutualizations have generally included a variable component and the use of policy metrics to determine theallocated benefit. Most historical methodologies included a component that varied with the policyholders’ policy attributes ofnumber of years with the company, premiums, or some other measure of the value of the contract (such as face amounts inlife insurance, and ambulatory limits in health insurance). The CTS Allocation, which uses policy attributes of Premium andPolicy Duration, is similar to components of earlier demutualization allocation methodologies.

The aggregate CTS Allocations as between Eligible Mutual and Eligible Non-Mutual Policyholders are different to reflect theirdifferent contributions as a group to surplus. The CTS of Eligible Policyholders’ Qualifying Mutual Policies was calculated to be$2.018 million. The CTS of Eligible Policyholders’ Qualifying Non-Mutual Policies was calculated to be $936.612 million. Theseaggregate amounts were calculated under my supervision and shared with the Policyholder Committees during theirnegotiations.

The CTS was calculated by grouping policies based on class and line of business. This is consistent with axioms of insuranceand the principle of grouping policies to calculate risk in pricing insurance policies. Having a method that uses individualpolicyholder by policyholder claim and premium information to determine the benefit of the individual policyholder wouldtherefore have been inappropriate. The CTS Allocation in the final Allocation is applied only down to the risk type and line ofbusiness level of each Qualifying Policy and is therefore considered fair. Various methods of using premium and duration todetermine individual CTS Allocation were considered. I presented my recommendations and supporting information to thePolicyholder Committees along with their consulting actuaries. The Policyholder Committees accepted my recommendationand it forms the CTS Allocation as described in detail in the Schedule 1 of the Plan.

I consider the CTS component of the Allocation to be fair and equitable as it is attributable to the financial contribution ofEligible Policyholders and is consistent with demutualization precedents. It recognizes that profits varied significantly by classand line of business, that premiums varied substantially among Eligible Policyholders and that Eligible Policyholders havebeen customers of Economical for various lengths of time.

Historical Commitment Allocation varies among the Eligible Mutual Policyholders based only on the maximum duration of theirQualifying Mutual Policies as of the Eligibility Date. The duration is not adjusted to reflect any financial improvements incontribution as that is already reflected in the CTS Allocation outlined above. In my view, this allocation is fair and equitableand consistent with my guiding principles, particularly principle 4. It is rationally connected to their governance rights in thecompany (i.e. their inherent rights). It recognizes that some Eligible Mutual Policyholders have demonstrated commitment toEconomical as a Mutual Company for longer periods than others.

E) Waterfall Mechanism

As described above, the Allocation is structured such that certain components are made in priority over others. This prioritystructure is used to allocate Demutualization Benefits but does not necessarily reflect the form of such benefits. The form ofbenefits to be distributed, specifically the priorities applicable to distributing cash proceeds versus share benefits is based onits own set of priority rules.

The allocations to Eligible Mutual Policyholders are the highest priority, followed by the allocation to the Foundation and thento the Eligible Non-Mutual Policyholders. If there are insufficient amounts remaining for any particular subcomponent of theAllocation, the allocation within that subcomponent will be made on a prorated basis and no further allocations will be madeto any subcomponent that follows.

The final Demutualization Benefits can only be determined when the IPO value of the company is known at Conversion, so theAllocation must be flexible to accommodate components that are stated as specific dollar amounts. The mechanism of priorityas described above enables Demutualization Benefits to be determined in a practical way that is understood by EligiblePolicyholders. The method recognizes the sequence of the votes, the value of Vote 2 on Demutualization occurring prior toVote 3 and therefore allocating to the Mutual Policyholders first. It recognizes the importance of the Foundation to bothPolicyholder Committees and ensures that it receives the value as negotiated. It also allocates the transactional consent rightscomponent first, within each Eligible Policyholder class individual allocation, ensuring a minimum amount is issued to eachEligible Policyholder within that class.

Given the IPO Market Valuation Range as outlined in the Plan and if Demutualization is completed, I expect that an Allocationwill occur in full or be prorated appropriately in some component(s) of the Allocation, so I consider this waterfall mechanismfair and equitable.

F) Summary

Based on my assessment as outlined previously, in whole and for each component and subcomponent, in my opinion, theAllocation is fair and equitable to the Eligible Policyholders.

FORM OF DEMUTUALIZATION BENEFITS

The full value of Economical will be allocated to the individual Eligible Policyholders and Other Recipients based on theAllocation. For convenience, the Allocation has been determined in terms of Units. Distribution of these Units will take theform of Common Shares (on the Effective Date) or the form of cash. The independent valuation expert is of the opinion thatthe cash payments to be made in accordance with the Plan are appropriate substitutes for Common Shares. Relying on thisopinion, I am satisfied that the Demutualization Benefits to be provided to Eligible Policyholders and Other Recipients are fairand equitable to the Eligible Policyholders.

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FINANCIAL STRENGTH AND VITALITY

As of December 31, 2017, the financial statements for the consolidated entity of the Economical Mutual Insurance Companyshow a surplus of over $1.7 billion. Economical’s Minimum Capital Test (“MCT”) ratio, a measure of the adequacy ofEconomical’s capital, at the December 31, 2017 was 242%, significantly higher than the supervisory target established by theSuperintendent.

Upon Conversion, Economical will become a Property & Casualty Company with common shares (EIC), wholly owned byHoldco. EIC would continue to be regulated by OSFI according to the Insurance Companies Act (ICA). Holdco will be thepublic share-issuing entity and will have access to the public trading markets to raise additional capital. Economical hasindicated its intention to apply to operate Holdco under the Canada Business Corporations Act (CBCA) after conversion. Thiswould enhance Holdco’s options for raising capital for future strategic endeavors. Any future dividends from EIC to Holdco willbe subject to the usual standards for vigilant management of a Property & Casualty Company as well as limitations imposedby the ICA. EIC would be the entity issuing insurance contracts to policyholders and, as such, I am satisfied that the security ofpolicyholders will not be adversely impacted by the change to a CBCA Holdco.

There are costs associated with the Conversion and the IPO, as well as an expectation of dividends paid to Holdcoshareholders, once converted. Future shareholder dividends will be subject to the usual standards for prudent managementof a publicly traded company as well as limitations imposed by the CBCA and should not impact the capital position of theconverted company.

To form my opinion, I have reviewed Economical’s business plan for the period up to Conversion and for 3 years postConversion to December 31, 2021, including any material transaction contemplated in that timeframe. The company’s businessplan reflected the direct costs of the Demutualization process, net of taxes, as well as underwriting fees for the IPO. Plannedchanges in capital structure with the creation of the Holdco and EIC were also reflected.

I assessed three base scenarios as follows:

1. Conversion does not occur — assessment of impacts to Economical as a Mutual Property and Casualty Company

2. Conversion occurs — assessment of impacts from a Holdco perspective

3. Conversion occurs — assessment of impacts from an EIC perspective

In the base scenarios where conversion occurs, Economical is expected to have a satisfactory financial condition afterConversion, for both the insurance company as well as the converted entity including Holdco. The demutualization costs, IPOunderwriting fee, potential future dividends and the change in capital structure do not materially impact the financial strengthof Economical, the converting company.

In addition, I have estimated the company’s capital and MCT ratios under a variety of adverse business scenarios, such asclaims experience and development, interest rates and inflation, investment market performance, and severe catastrophicloss experience. Conversion does not materially worsen the impact of any of these adverse scenarios.

The results of the analysis of the scenarios where Conversion occurs conclude that Economical has a satisfactory financialcondition over the projection period of 2019 to 2021 and enough surplus to withstand the expected changes in capitalstructure and the estimated impact of the plausible adverse scenarios as assessed in this report. It confirms that theConversion of Economical to a public company does not adversely impact the solvency of the Company and is adequate forthe protection of its policyholders.

In my opinion, the financial strength and vitality of Economical and the security of its policyholders with respect to thecontinuation of their policies will not be materially adversely affected by the Conversion.


APPENDIX “E”: INDEPENDENT ACTUARY’SOPINION AND SUMMARY REPORTTo the Board of Directors of Economical Mutual Insurance Company:

This is a summary of my report which the Insurance Companies Act requires from an independent actuary pursuant toparagraphs 14(2)(b)(i) and (ii) of the Mutual Property and Casualty Company with Non-Mutual Policyholders Regulations. It isaddressed to the Board and is also provided for the benefit of Eligible Policyholders.

In my opinion:

(i) the Demutualization Benefits to be provided to Eligible Policyholders and Other Recipients, and the method of allocatingthe value of Economical, as described in detail in the Conversion Plan, are fair and equitable to the EligiblePolicyholders; and

(ii) the financial strength and vitality of Economical, and the security of its policyholders with respect to the continuation oftheir policies, will not be materially adversely affected by the Conversion.

This summary report of the Independent Actuary is provided to the Board and the Eligible Policyholders as an appendix to thePolicyholder Information Circular.

Respectfully submitted,

William T. WeilandFellow, Canadian Institute of [email protected] | 416-696-3011

Toronto, OntarioJanuary 25, 2019

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APPENDIX “E”: INDEPENDENT ACTUARY’S OPINION AND SUMMARY REPORT

DEFINITIONS

Capitalized expressions in this opinion, other than those defined below, have their meaning defined in the Conversion Planset out in Appendix A of the Policyholder Information Circular.

“Allocation Resolution” means the Joint Allocation Resolution that records the method of allocating the value of Economical,as negotiated and approved by the Policyholder Committees.

“Conversion” has the same meaning as “Demutualization”.

“Economical” means, the Company (as defined in the Conversion Plan).

“Insurance Subsidiaries” means fully-owned insurance company subsidiaries of Economical as at December 31, 2016, namelythe Perth Insurance Company, the Waterloo Insurance Company, the Missisquoi Insurance Company and the SonnetInsurance Company of Canada.

“Line of Business” means one of Economical’s major lines of business, such as auto insurance, property insurance,commercial auto insurance or commercial property insurance.

“Negotiated Allocation” means the method of allocating Value that has been negotiated and approved by the PolicyholderCommittees as described and reproduced in Article 5.2 of the Conversion Plan.

“Policyholder Information Circular” means the circular that will be distributed by Economical to all Eligible Policyholders inaccordance with sections 15 and 17 of the Demutualization Regulations.

“Private Placement” means the offer for sale by Holdco of Common Shares on a private placement basis, at or about the timeof the IPO Date, at the sole election of the Holdco Board and on such terms as it may determine at its sole discretion, asdescribed in Article 7.2 of the Conversion Plan.

“Regulations” has the same meaning as “Demutualization Regulations” (defined in the Conversion Plan).

“Unit” means the notional allocation unit used as the basis for allocating the amount of Demutualization Benefits each EligiblePolicyholder and Other Recipient is entitled to receive under the Conversion Plan. The Negotiated Allocation provides for theallocation of an aggregate of 100,000,000 Units to all Eligible Policyholders and Other Recipients for that purpose.

“Value” means the value of Economical, as defined in section 1 of the Regulations.

“Vote 1” means the vote by special resolution, at the First Special Meeting, of the Eligible Mutual Policyholders onDecember 14, 2015 to negotiate with the Non-Mutual Policyholders “… to establish the method of allocating the value of theconverting company…” as set out in section 12 of the Regulations.

“Vote 2” means the vote by special resolution, at the Second Special Meeting, of the Eligible Mutual Policyholders onwhether to amend the Company’s by-laws to permit all Eligible Non-Mutual Policyholders to vote on the Conversion Plan.

“Vote 3” means the vote by special resolution, at the Third Special Meeting, of the Eligible Policyholders on the ConversionPlan, as set out in section 16 of the Regulations, pursuant to subsection 273(1.1) of the Insurance Companies Act.

1 SCOPE AND QUALIFICATIONS

1.1 The report

This is a summary of my report as Independent Actuary (“IA”) pursuant to paragraph 14(2)(b) of the Regulations.

1.2 The author

I, William T. Weiland, am a Fellow of the Canadian Institute of Actuaries, and a Fellow of the Casualty Actuarial Society. I havebeen qualified as an actuary since 1982 and I have been employed by Eckler Ltd. since 1991. My principal consulting activityhas always been with respect to property and casualty insurance.

I am independent of Economical Mutual Insurance Company.

I have carried out my work objectively, in accordance with accepted actuarial practice in Canada and without regard forpotential gain other than compensation for the work undertaken. For the preparation of this report, I acknowledge with thanksthe assistance of colleagues at Eckler Ltd.

As the author of this report, I am available to answer questions about it, and may be contacted at:

Eckler Ltd.110 Sheppard Avenue East, Suite 900

Toronto, ON — M2N 7A3(416) 696-3011

Email: [email protected]

1.3 Intended users

The intended users of this report are the Eligible Policyholders, the Board, the Company, its professional advisors in regard tothe Company’s demutualization, and OSFI (including the Superintendent).

2019 Special Meeting of Eligible Mutual Policyholders Information Circular E-2


1.4 Intended use

This report is written for inclusion in the Policyholder Information Circular. It is intended to assist users in assessing theConversion Plan. It should be read in its entirety with the rest of the Policyholder Information Circular, which includes theConversion Plan. This report is not intended, nor is it necessarily suitable, for any other purpose.

1.5 Use of Economical’s data

In doing my work, I had full access to the management of Economical (including its Appointed Actuary, Ms. Linda Goss), totheir files and records, and limited access to their legal counsel, investment bankers and independent valuation expert (whichI did not consider to be essential for the purposes of preparing this Report). The data which I used for my work consists ofinformation, oral and written (including electronic), which management communicated to me and my colleagues during thecourse of my work and of the calculations and records supplied to me. I satisfied myself, after reasonable due diligence, that Icould use and rely upon that data.

Formulation and implementation of the Conversion Plan requires extensive research and calculations for the particularpurposes of demutualization. Notable examples are:

‰ the calculation of the Contributions to Surplus of the Lines of Business, and

‰ the assessment of the future financial condition and vitality of Economical post-conversion.

Much of the above are based on data which is regularly used in financial reporting, policy and investment administration, andwhich is subject to audit committee review, external audit and regulatory review, and which have stood the test of time. In thecase of the calculation of Contributions to Surplus, however, extensive additional data and other information and researchwas required, and was developed by Economical for the purpose of preparing the Conversion Plan.

I can report that the access that I had to data and other information was sufficient in order to enable me to prepare thisReport. As to the data’s reliability, I can report that my colleagues and I reviewed the data, the research and calculations. Inthe case of the Contributions to Surplus, I devoted particular attention to the calculations and required research. My work inthis regard is described under Principle 8 in Section 5.3 of this report.

I satisfied myself that I could use this data and information, but I did not verify it (except to the extent set out under Principle 8in Section 5.3). I can, however, report that my colleagues and I noticed no meaningful errors or deficiencies in it, and I have noreason to suspect any meaningful errors or deficiencies. I can also report my opinion that the resources, skill, and care whichmanagement of Economical dedicated to the research and calculations were reasonable and appropriate.

2 PROCESS OF DEMUTUALIZATION

The process for converting Economical, a company with both mutual and non-mutual policyholders, into a company withcommon shares is prescribed in the Regulations.

This process is unprecedented, both in Canada and elsewhere, in that it requires a decision by vote of the Eligible MutualPolicyholders to negotiate with the Eligible Non-Mutual Policyholders “… to establish the method of allocating the value of theconverting company…”. That vote took place on December 14, 2015 and resulted in an affirmative decision. The vote wastaken based on a resolution of the Board, adopted on November 3, 2015, unanimously recommending that:

‰ the Company convert from a Mutual Company to a company with common shares, and

‰ Eligible Mutual Policyholders vote in favour of the “Negotiation Resolution” (as defined in the Board resolution) at a specialmeeting of Eligible Mutual Policyholders. A vote in favour of the Negotiation Resolution confirms the agreement of theEligible Mutual Policyholders to negotiate the allocation of the benefits arising from the Demutualization.

The process of negotiation is court supervised, and is governed by the Regulations.

The next section of my report summarizes the results of the negotiations of the Policyholder Committees.

3 APPROVAL OF OTHER RECIPIENTS AND NEGOTIATED ALLOCATION

The Policyholder Committees arrived at an agreement with respect to:

‰ the Other Recipients to whom Demutualization Benefits are to be allocated; and

‰ the method of allocating Value among Eligible Policyholders and Other Recipients.

Their agreement is recorded in the Allocation Resolution, the relevant terms of which were incorporated into the ConversionPlan. It was approved by vote of each of the Policyholder Committees, as required by the Regulations, and is referred to in thisreport as the “Negotiated Allocation”.

Sections 3.1 and 3.2 below summarize the key provisions of the Negotiated Allocation:

3.1 Other recipients

The Policyholder Committees approved the Foundation as an “Other Recipient”.

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The Policyholders Committees also approved the recommendation of Economical to recognize as Eligible Policyholders thesix categories of policyholders listed in 3 (refer to 3.3 of that Schedule) of the Conversion Plan, to avoid any doubt as towhether those policyholders were Eligible Policyholders under the Regulations.

3.2 Method of allocation

The Negotiated Allocation defines the allocation in terms of Units for the purposes of allocating the amount ofDemutualization Benefits each Eligible Policyholder and Other Recipient is entitled to receive on Demutualization.

The Negotiated Allocation allocates Units in the following order (where the allocation is in terms of shares the intent is toallocate one common share of Holdco per allocated Unit; where a dollar amount is allocated, the intent is to allocate a numberof Units whose value equals the allocated dollar amount divided by the IPO Price):

1. The Eligible Mutual Policyholders are allocated, in aggregate as a class, 20% of the Units, as follows:

a) 6% of aggregate Units are allocated in equal amounts among the Eligible Mutual Policyholders, then

b) The CTS of Eligible Mutual Policyholders, in an amount and allocated among them as described under Principle 8in Section 5.3, then

c) The Historical Commitment Allocation of $2,000,000 in aggregate, allocated among Eligible Mutual Policyholdersin proportion to the continuous period of time in years (rounded to the nearest one-hundredth) they were mutualpolicyholders, then

d) The balance of the aggregate allocation to Eligible Mutual Policyholders is allocated in equal amounts among theEligible Mutual Policyholders, then

2. The Foundation is allocated the number of Units having a value of $100,000,000, then

3. The Eligible Non-Mutual Policyholders are allocated, in aggregate as a class, the remaining balance of the Units, asfollows:

a) 6% of aggregate Units are allocated in equal amounts among the Eligible Non-Mutual Policyholders, then

b) The CTS of Eligible Non-Mutual Policyholders, in an amount and allocated among them as described underPrinciple 8 in Section 5.3, then

c) The balance of the aggregate allocation to Eligible Non-Mutual Policyholders is allocated in equal amounts amongthe Eligible Non-Mutual Policyholders.

The Negotiated Allocation is structured such that certain allocations are made in priority over others, in the order shownabove. If at any stage along the order of allocation insufficient Units remain to complete the allocations at that stage, then theindividual allocations at that stage are reduced proportionately so as to allocate in aggregate the remaining Units and theallocation at all following stages is reduced to nil. To appreciate the impact of this ordering provision, I observe that, so longas the value of Holdco at the time of the IPO exceeds $1.401 billion, the value of Units will be sufficient for all stages above,except stage 3c), to receive their full allocation, and the allocation to stage 3c) will depend on the excess of that value over$1.401 billion.

The priority structure in the Negotiated Allocation has no effect on the priority of the distribution or form of theDemutualization Benefits (in either cash or shares), which is outlined in the Conversion Plan.

4 OPINION

In my capacity as Independent Actuary I relied on the Eckler P&C Allocation Principles to govern my judgement and opinionsin this report. The Principles were developed by Eckler to govern judgement and opinions provided in any Eckler assignmentrelating to P&C insurance company demutualizations, and they are presented in Section 5.2. So long as the NegotiatedAllocation complies in all material respects with those Principles I am able to accept that Negotiated Allocation as fair andequitable.

I can report that after careful review of the Negotiated Allocation, it is my view that it does comply with those Principles.

I have also reviewed the recent financial statements, tests of capital adequacy, future financial condition reports, businessplans, pro forma post-conversion financial statements and other relevant documentation of Economical.

In my opinion:

(i) the Demutualization Benefits to be provided to Eligible Policyholders and Other Recipients and the method of allocatingthe value of Economical, as described in detail in the Conversion Plan, are fair and equitable to the EligiblePolicyholders; and

(ii) the financial strength and vitality of Economical, and the security of its policyholders with respect to the continuation oftheir policies, will not be materially adversely affected by the Conversion.

The balance of this report presents and explains my reasons for having arrived at the opinions set out above.



5 ALLOCATION OF DEMUTUALIZATION BENEFITS

Allocation of Demutualization Benefits — which determines how many Units each Eligible Polilcyholder and Other Recipient isallocated (whether actually distributed as Common Shares or the cash equivalent) — is the most difficult actuarial aspect ofdemutualization. Demutualization Benefits are an unanticipated benefit to the Eligible Policyholders as, absent the Board’sdecision to recommend demutualization, no policyholder (mutual or non-mutual) could have any reasonable expectation ofbenefits other than in the ordinary course of business under their policies.

In my capacity as Independent Actuary, I relied on the Eckler P&C Allocation Principles to govern my judgement in testing thefairness and equity of the proposed allocation methods. The Principles were developed by Eckler to govern judgement andopinions provided in any Eckler assignment relating to P&C insurance company demutualizations, and they are presented inSection 5.2 of this report. So long as the Negotiated Allocation complies in all material respects with them, I am able to acceptthat Negotiated Allocation as fair and equitable.

In Section 5.3, I explain the Principles and give my opinion on how the Conversion Plan conforms to them.

Economical identified eligible policyholders in accordance with the Regulations, OSFI’s related guidelines and OSFI’s Ruling2015-01. The Policyholder Committees determined the method of allocation of Demutualization Benefits among EligiblePolicyholders and those Other Recipients that the Policyholder Committees determined should be provided DemutualizationBenefits. My report considers only the allocation among them. I have, however, considered the process for identifying theEligible Policyholders and Other Recipients.

From discussions with Economical’s personnel, I satisfied myself that the process for identifying the Qualifying Policies andEligible Policyholders was appropriate and I am not aware of any deficiencies in its application. I also note Economicalengaged external reviewers to review their work in this regard.

My report does not consider the tax treatment of Demutualization Benefits. That falls neither within my mandate, nor within myexpertise.

5.1 Development of the principles of allocation

Eckler’s P&C Principles were developed:

‰ to provide insight into our views on fairness and what we might view as unfair, and

‰ to recognize that there should be unrestricted and free negotiation by the Policyholder Committees.

5.2 List of principles

The following are the Principles by which I tested the fairness and equity of the Negotiated Allocation. These Principles,together with the preamble, were provided to both Policyholder Committees and their respective Counsel on April 13, 2017.

In the context of these principles, and throughout this report, the term “precedents” is used in its normal sense, to refer to anearlier occurrence of something similar that provides useful context. It is not intended to refer to a legal precedent.

Eckler P&C allocation principlesApplicable where some policyholders are non-mutual policyholders

Eckler’s work will be in accordance with the Mutual Property and Casualty Insurance Company with Non-MutualPolicyholders Conversion Regulations and comply with accepted actuarial practice in Canada. The following eightprinciples will guide our judgement regarding the fairness and equitableness to the eligible policyholders of the benefits tobe provided to those eligible policyholders, and the method of calculating the converting company’s value.

(1) The method of allocation should be based on information supplied by the converting company, and which has beendeveloped with due skill, care, fairness and objectivity by the converting company.

(2) The allocation should be of the converting company’s entire value.

(3) The allocation should fairly compensate for what the mutual policyholder class loses in the demutualization; namely,voting control of the converting company, and the right to receive dividends if those rights are lost as a result of theconversion. As a corollary, the allocation need not provide compensation for what policyholders do not lose in thedemutualization; namely, their reasonable expectations as policyholders with respect to the coverage that they havebeen provided.

(4) The method of allocation should take into reasonable account, subject to the availability of reliable and statisticallycredible data, the converting company’s established practices, if any, for:

(a) management of its operations by business unit and by jurisdiction, as applicable,

(b) attribution of income earned and capital required among those business units,

(c) recognition of contribution to surplus made by those business units, and

(d) determination of policyholder rebates, dividends, and any other analogous rights and obligations.

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(5) The allocation should take appropriate account of similarities and differences among policies and their policyholders,subject to the availability of reliable and statistically credible data. As a corollary, the allocation should not unfairlydiscriminate among policies or policyholders.

(6) The allocation should take account of Canadian and international precedents, including life insurance companydemutualizations.

(7) The method of allocation should be as simple and as uniform by business unit and by jurisdiction as is practical.(8) If the converting company’s value is much greater than what those receiving an allocation have contributed to it, then

the following conditions are desirable, subject to the availability of reliable and statistically credible data for thepolicyholder classes or groups in question:(a) the allocation in respect of a particular policyholder class (i.e. eligible mutual policyholders and eligible

non-mutual policyholders), should at least equal what that policyholder class has contributed to surplus and(b) the allocation in respect of a particular group of similar policies should at least equal what that group has

contributed to surplus.

5.3 Application of the principle

(1) The method of allocation should be based on information supplied by the converting company, and which hasbeen developed with due skill, care, fairness and objectivity by the converting company.

Pursuant to the Regulations, Economical engaged me on October 13, 2016. Subsequently, both Policyholder Committeesconfirmed their agreement to my being appointed as Independent Actuary.Throughout the process my colleagues and I communicated with Economical’s team responsible for developing the datarequired to calculate the contribution to surplus of Eligible Policyholders, and other information requested by the PolicyholderCommittees, including eligibility related information. I was able to observe the degree of skill and care devoted to that workand, while I did not audit the data and other information, it is my view that the work was resourced adequately and performedcarefully and objectively. Moreover, in several significant instances my colleagues and I have performed key calculationsindependently of Economical and produced results substantially in agreement with Economical’s own results. This appliesparticularly to the contribution to surplus calculations (please see comments under Principle 8 below) and to the futurefinancial condition of Economical (set out in Section 6 of this report).Where I considered it appropriate, I asked for and received supporting data, information and explanations.The information supplied by Economical to the Policyholder Committees (and to me and my colleagues) has been developedwith reasonable skill, care, fairness and objectivity, thus satisfying Principle 1.

(2) The allocation should be of the converting company’s entire value.

Upon Demutualization, Holdco will become the owner of all of the shares issued by Economical. As a result, the allocation toEligible Policyholders and Other Recipients will be defined in terms of Units, representing Common Shares of Holdco or anappropriate cash equivalent (as set out in Section 3.2), not shares of Economical.As described in Article 7.2 of the Conversion Plan, Holdco may offer for sale by Holdco of Common Shares on a privateplacement basis, at or about the time of the IPO Date, at the sole election of the Holdco Board and on such terms as it maydetermine at its sole discretion.Principle 2 is satisfied if the following criteria are satisfied:a) Units are allocated only to Eligible Policyholders and Other Recipients,b) the issue, if any, of Common Shares to investors does not materially dilute the value of Units allocated to Eligible

Policyholders and Other Recipients, andc) the cash substitute is appropriate for those to whom Common Shares are not issued.The Conversion Plan allocates Units to all Eligible Policyholders and Other Recipients and only to them, thus satisfyingcriterion a). The issue and sale of Common Shares from treasury to pay for the expenses of the IPO and Private Placement(together referred to as “the Offering”), constitutes a cost of the Demutualization. Hence, it does not invalidate the assertionthat the entire Value is being distributed to Eligible Policyholders and Other Recipients.The satisfaction of criterion b) with respect to no material dilution, and of criterion c) with respect to the appropriateness of asubstitute for issue of Common Shares, are considered below.For a relatively small proportion of Eligible Policyholders and Other Recipients, the actual issue of Common Shares wouldviolate securities laws in other jurisdictions. They will therefore receive the appropriate cash substitute.Except as referred to in the previous paragraph, the Eligible Policyholders and Other Recipients may indicate their preferencefor Common Shares and the appropriate substitute in cash, or partly Common Shares and partly cash. It is expected that the



needed cash will be available from the Offering, but that is not assured. If the needed cash is not fully available, then theavailable cash will be distributed among them in accordance with the Conversion Plan, and may result in Common Sharesbeing issued to them for the balance of their allocation.

The Conversion Plan provides that the substitute in cash of a Common Share will be at the IPO Price.

The Conversion Plan therefore distributes value to Eligible Policyholders and Other Recipients in the form of either CommonShares or cash in an amount that is an appropriate substitute for those shares. When cash is distributed, it will be in an amountequivalent to the IPO Price multiplied by the Common Shares which would otherwise have been issued.

If a Private Placement were to be at the IPO Price or greater, no dilution of value would occur. If the Private Placement were tobe at a price per share that is below the IPO Price, then dilution of value would result, the extent of which depends on the sizeof the Private Placement. In this context, I would not consider a dilution of less than 10% of Value to be material.

The Conversion Plan thus allocates the entire value of Economical to the Eligible Policyholders and Other Recipients,satisfying Principle 2, assuming that no material dilution of value results from a Private Placement.

(3) The allocation should fairly compensate for what the mutual policyholder class loses in the demutualization;namely, voting control of the converting company, and the right to receive dividends if those rights are lost as aresult of the conversion. As a corollary, the allocation need not provide compensation for what policyholders donot lose in the demutualization; namely, their reasonable expectations as policyholders with respect to thecoverage that they have been provided.

The Eligible Mutual Policyholders may (in the ordinary course of business)

‰ nominate candidates for election to the Board,‰ vote in the election of the Board,‰ vote at all annual and special general meetings of Economical,‰ propose resolution(s) to be considered at such general meetings, and‰ receive dividends (premium rebates) on their policies if, as and when declared by the Board.

Each mutual policyholder has one vote, regardless of how many policies that mutual policyholder owns. Prior todemutualization, the mutual policyholders control Economical through the exercise of those powers. Hence those are realpowers and it is appropriate to compensate mutual policyholders for their loss. Economical has not issued mutual policiessince 2010 so there will be no mutual policyholders with in-force policies on the Eligibility Date who will not be Eligible MutualPolicyholders.

I am not aware of any precedent for the wind-up of a solvent mutual P&C insurance company. Moreover, the ICA does notpermit the wind-up a solvent mutual insurer (ICA section 378).

It follows that mutual policyholders are not entitled to compensation for what they do not lose on Demutualization, namely anyrights to residual value on wind-up.

Following Demutualization, all of the then in-force mutual policies of Economical remain in force without change in theirinsurance terms and conditions, or in the coverage provided by them. As a result, there is no change in their reasonableexpectations as policyholders. The sole exception to this statement is that, as noted above, mutual policyholders lose theirright to receive dividends (premium rebates), so they are entitled to compensation for that loss.

In summary, Eligible Mutual Policyholders lose the rights recited above that allow them to control Economical in the ordinarycourse of business, and to receive premium rebates. These rights are collectively referred to below as “Unique Rights”, andthe Eligible Mutual Policyholders should be compensated for their loss.

The method of allocation negotiated and agreed to by the two Policyholder Committees ascribes, in aggregate, 20% of Valueexclusively to Eligible Mutual Policyholders. Other than the portions attributable to their CTS and Historical Commitment, Iregard that aggregate allocation to be compensation for loss of Unique Rights, including the right to consent (or not) to thegranting of the vote to the Eligible Non-Mutual Policyholders.

Is that aggregate allocation appropriate and reasonable? Past Canadian and, to a lesser extent, international demutualizationsprovide some guidance. There have been no Canadian P&C insurance company demutualizations, but in past Canadian lifeinsurance company demutualizations, the range of allocation for loss of voting control — analogous to Unique Rights — hasbeen between 10% and 25% of the total value to be allocated. Having considered the similarities and differences between thesituation of Economical’s mutual policyholders and those in the relevant precedents, I concluded that the component of theNegotiated Allocation for Unique Rights falls within a range that I consider to be reasonable.

Allocation of the aggregate component for Unique Rights among Eligible Mutual Policyholders is dealt with in conjunction withPrinciple 5, below.

The component of the Negotiated Allocation for what the Eligible Mutual Policyholders lose in the Demutualization, namelytheir Unique Rights, satisfies Principle 3.

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(4) The method of allocation should take into reasonable account, subject to the availability of reliable andstatistically credible data, the converting company’s established practices, if any, for(a) management of its operations by business unit and by jurisdiction, as applicable,(b) attribution of income earned and capital required among those business units,(c) recognition of contribution to surplus made by those business units, and(d) determination of policyholder rebates, dividends, and any other analogous rights and obligations.

The established practices of a converting company have met the test of time and define the expectations of its post-demutualization business practices.Jurisdiction, as that term is used in this Principle, means international jurisdiction. Given that Economical conducts businessexclusively in Canada, jurisdiction is not relevant to its situation.Economical manages its operation by Line of Business (analogous to a business unit). Those Lines of Business are:‰ Personal auto‰ Commercial auto‰ Personal property, and‰ Commercial property, including commercial liability.Each Line of Business is managed, underwritten and priced separately from the other ones, and its underwriting results aretracked separately.Investment of the Company’s assets is managed on a pooled basis, so the portfolio rate of return is the same for all Lines ofBusiness. The portfolio assets (investments) include cash, fixed income securities, common and preferred shares.As of December 31, 2016, Economical owns the Insurance Subsidiaries1 and an investment subsidiary.The investment portfolios of the Insurance Subsidiaries are managed together with those of Economical’s and theirunderwriting results are also shared amongst Economical and its Insurance Subsidiaries through quota share reinsurancetreaties (a pooling arrangement). Those subsidiaries are nonetheless not considered to be investments supporting theliabilities and required surplus of the lines. Only investment portfolio assets are allocated to support them.The subsidiaries are corporate investments, made using excess surplus that is not necessary in order to meet policyobligations. Therefore, subsidiaries are included in Value, but are disregarded in calculating the contribution to surplus (CTS)generated by the Eligible Policyholders of each line (please see discussion under Principle 8).Only mutual policyholders are entitled to receive premium rebates from Economical. It is Economical’s normal practice togrant such rebates in the ordinary course of business. Eligible Mutual Policyholders are being compensated for loss of thatright as part of their compensation for loss of Unique Rights (please see discussion under Principle 3), because it will beterminated on conversion. There are no other policyholder rights to distribution of rebates, dividends or any other analogousrights.In the past, mutual policyholders also had an obligation under the By-laws of the Company, if the Board decided to assessthem, for premium note assessments of up to 150% of their current average annual premium for the most recent three-yearperiod. The Board has never exercised that right and the applicable by-law was revoked in 2008. Therefore, the establishedpractice of Economical was to not exercise the right to make assessments under premium notes.For purposes of assessing the fairness of the allocation of Demutualization Benefits, value was determined as ofDecember 31, 2016. That is an appropriate date, because it was an annual financial reporting date, so that the key financialinformation relied on to determine that Value was based on statutory financial returns. That value was $1.803 billion, whichwas the book value of Economical on that date. For consistency, the CTS calculations were as of the same date (please seediscussion under Principle 8 below).Value is not a unique concept; there are various measures of value, such as:‰ public market value, but that value will not be known until the demutualization takes place and the shares of the converted

company start trading on a stock exchange,‰ value estimated by the independent valuation expert engaged by Economical; actually, a range of values into which they

expect the value to fall had the IPO taken place at May 31, 2018,‰ book value of Economical, which was $1,803 million at December 31, 2016.For the determination of value for purposes of allocation, it was necessary to select a date that is sufficiently in advance of thedistribution of information to Eligible Mutual Policyholders (for purposes of Vote 2), and subsequently to Eligible Policyholders(for purposes of Vote 3), to allow the requisite policyholder data to be compiled, and the needed calculations and otherpreparatory work to be performed. Only the book value of Economical satisfied that criterion, because it was the only valueavailable with certainty on December 31, 2016 (the most recent annual reporting date at that time).

1 A further P&C insurance subsidiary, Petline Insurance Company, was acquired as of January 1, 2017, but is not relevant in the present context because it wasacquired after the date of determination of the allocations. It is taken into account in the assessment of the security and vitality of the Company going forward.



Each component of the Negotiated Allocation was expressed either as a proportion of Value or as an absolute dollar amount.Those absolute dollar amounts were based on the book value of Economical as of December 31, 2016, except the amountallocated to the Foundation which is fixed at $100,000,000. The actual value to be received by each Eligible Policyholder andOther Recipient will be determined by the IPO Price and, for policyholders who retain their allocated shares, by thesubsequent price of those shares on the relevant stock exchange.

The Negotiated Allocation method and, in particular, the calculation of the component of the Negotiated Allocation pertainingto CTS, its allocation among Lines of Business, and its allocation among Qualifying Policies within Lines of Business, satisfiesPrinciple 4.

(5) The allocation should take appropriate account of similarities and differences among policies and theirpolicyholders, subject to the availability of reliable and statistically credible data. As a corollary, the allocationshould not unfairly discriminate among policies or policyholders.

Eligible Mutual Policyholders and Eligible Non-Mutual Policyholders constitute different classes and, therefore, receivedifferently allocated Demutualization Benefits from the portion of aggregate Units allocated to their class by the NegotiatedAllocation. It is therefore appropriate for me to consider the allocation of the share of each class separately; they are notcomparable (except for the CTS component, which is dealt with under Principle 8).

Allocation to Eligible Mutual Policyholders

The Negotiated Allocation allocates a total of 20% of aggregate Units to the Eligible Mutual Policyholders. That total is thenallocated among them, in the following order, as described in Section 3.2 of this report:

1. The Eligible Mutual Policyholders are allocated, in aggregate, 20% of aggregate Units, as follows:

a) 6% of aggregate Units are allocated in equal amounts among the Eligible Mutual Policyholders, then

b) The CTS of Eligible Mutual Policyholders of $2,018,000, allocated among them in respect of their QualifyingMutual Policies, in the manner described under Principle 8, then

c) The Historical Commitment Allocation of $2,000,000 in aggregate, allocated among Eligible Mutual Policyholdersin proportion to the continuous period of time in years (rounded to the nearest one-hundredth) they were mutualpolicyholders, then

d) The balance of the aggregate allocation to Eligible Mutual Policyholders is allocated in equal amounts among theEligible Mutual Policyholders.

Component b) above (the CTS), is allocated among them as presented and explained under Principle 8 below. TheCTS Allocation to individual policyholders is based on a formula that takes into account certain characteristics oftheir policies, namely Line of Business, premiums, and duration. Accordingly, it properly takes into account thesimilarities and differences among Eligible Mutual Policyholders.

Component c) above is intended to reflect the historical commitment of Eligible Mutual Policyholders toEconomical. It is therefore fair and equitable to allocate that component based on duration only, since commitmentto mutual form of governance and the right to vote are independent of policy size.

20% of Value is to be allocated to Eligible Mutual Policyholders. Components b) and c) each account for about$2 million. As a result, it is certain that the vast bulk of the 20% allocation to Eligible Mutual Policyholders will fallinto components a) and d), and will be distributed among them in equal amounts.

The Allocation Resolution asserts that both component a) and component d) relate to voting rights:

‰ component a) for “transactional consent rights in Demutualization”, that is, the right “to vote at the SecondSpecial Meeting [Vote 2] to allow Eligible Non-Mutual Policyholders to vote for the purposes of the Third SpecialMeeting” [Vote 3]; and

‰ component d) “to reflect the governance rights and benefits of Eligible Mutual Policyholders“ in the normalcourse of conduct of Economical’s business.

It is clear that both of those components are directly linked to the voting rights of Eligible Mutual Policyholders.None of those policyholders have different voting rights from any other ones. It is therefore fair and reasonable toallocate both of components a) and d) equally among them.

2. The Eligible Non-Mutual Policyholders are allocated, in aggregate, 80% of aggregate Units, less that portion ofaggregate Units allocated to the Foundation (which is worth $100 million at the IPO Price), as follows:

a) 6% of aggregate Units are allocated in equal amounts among the Eligible Non-Mutual Policyholders, then

b) The CTS of Eligible Non-Mutual Policyholders of $936,612,000, allocated among them in respect of theirQualifying Non-Mutual Policies, as described under Principle 8, then

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c) The balance of the aggregate allocation to Eligible Non-Mutual Policyholders is allocated in equal amounts amongthe Eligible Non-Mutual Policyholders.Component b) above (the CTS), is allocated among them as presented and explained under Principle 8 below. TheCTS Allocation to individual policyholders is based on a formula that takes into account certain characteristics oftheir policies, namely Line of Business, premiums, and duration.Components a) and c) of the aggregate allocation to Eligible Non-Mutual Policyholders are both allocated amongthem in equal amounts. The Allocation Resolution asserts that:‰ Component a) is for “transactional consent rights in Demutualization”, that is, the right to vote at the Third

Special Meeting” [Vote 3] “to authorize Economical to apply to the Minister of Finance (Canada) forDemutualization”.

‰ Component c) “is allocated to otherwise recognize the participation of Eligible Non-Mutual Policyholders in theDemutualization process.”

It is clear that both of those components are directly linked to the voting rights of Eligible Non-Mutual Policyholders. None ofthose policyholders have different voting rights from any other ones. It is therefore fair and reasonable to allocate both ofcomponents a) and d) equally among themThe Negotiated Allocation satisfies Principle 5.

(6) The allocation should take account of Canadian and international precedents, including life insurance companydemutualizations.

Precedents are relevant to the extent elements of them are consistent with or similar to Economical’s circumstances, and tothe extent that past successful demutualizations frame regulatory and perhaps policyholder expectations.As noted in Section 2, the process for demutualizing a mutual P&C insurance company with non-mutual policyholders isunprecedented in Canada. Indeed, to the best of my knowledge it is unprecedented anywhere (barring a very few specializedhealth mutuals in Australia, not relevant to Economical). Hence, precedents are not relevant in terms of the process.Precedents are, however, relevant to components of the Negotiated Allocation. To elaborate:‰ As noted in connection with Principle 3, in past Canadian life insurance company demutualizations and, to a lesser extent,

international ones, a component of allocation was identified as being for loss of voting control. Since the loss of UniqueRights by Eligible Mutual Policyholders is essentially loss of voting control (the loss of right to premium rebates isinsignificant compared to loss of voting control), I consider those precedents relevant and have taken them into account insetting the range into which in my opinion compensation for Unique Rights should fall (as set out under Principle 3 above).

‰ Those precedents also uniformly followed the one-policyholder-one-vote approach in allocating the aggregatecompensation for voting control among eligible policyholders, and were generally referred to as a “fixed allocation”. In allpast demutualizations, however, there was only one class of eligible policyholders, while in the case of Economical there aretwo:‰ Eligible Mutual Policyholders, who share in the compensation for Unique Rights and their CTS, and‰ Eligible Non-Mutual Policyholders, who share in the remainder (net of the allocation to the Foundation).I find it reasonable to apply the one vote approach separately to each of those two classes, because Eligible Policyholdersof each class have one vote regardless of the number of policies they hold, but they are entitled to share in differentcomponents of the overall allocation.In the case of Eligible Mutual Policyholders, that approach is adopted for the Negotiated Allocation, since the entirecomponent for Unique Rights is allocated equally among those policyholders, except for the small component attributable toHistorical Commitment. The CTS component for the Eligible Mutual Policyholders forms part of the 20% allocation to them,but it is not part of Unique Rights since all Eligible Policyholders are entitled to an allocation in respect of their CTS.In the case of Eligible Policyholders (mutual and non-mutual), the one-vote approach is applicable because they each haveone vote in Vote 3, regardless of the number of policies they hold. The Negotiated Allocation for Vote 3 conforms to thatapproach.

‰ Canadian and international life insurance demutualizations also offer guidance with respect to variable allocations. Thoseallocations, other than in the case of U.S. life insurance companies, followed the “policy metrics” or “policy characteristics”approach, under which the variable allocation is proportional to policy metrics. The formulae could and did vary by line ofline of business (business unit). That is the approach followed by Economical as well.“Policy metrics” measure the policyholder’s reliance on the Company as a provider of insurance and related services, aswell as the policyholder’s attachment over time to the insurance company as a customer. The “policy metrics” used in theNegotiated Allocation are simple, accessible policy attributes like Line of Business, premiums, and duration. Allocation of theCTS and Historical Commitment components by policy metrics is a logical choice when the insurer’s Value is significantlylarger than the contribution thereto by Eligible Policyholders. That is expected to be the case for Economical (as describedunder Principle 8 below). The Negotiated Allocation automatically adjusts (proportionately reduces) the CTS componentshould that expectation not be fully realized, as described under Principle 5.



A further advantage of employing policy metrics is found in the ability of policyholders to verify the allocation to theirpolicies.In my view, Canadian and in general international precedents are relevant to Economical’s demutualization.

The Negotiated Allocation and resulting allocation to Eligible Policyholders satisfy Principle 6.

(7) The method of allocation should be as simple and as uniform by business unit and by jurisdiction as is practical.

As noted earlier, the term “jurisdiction” is used in the Eckler Principles to mean international jurisdiction. Given thatEconomical conducts business exclusively in Canada, jurisdiction is not relevant to its situation.An allocation formula need not be simple or uniform to be fair and equitable, but simplicity and uniformity help policyholdersto understand the allocation and to form a perception of its fairness and equity.The negotiated fixed allocations apply to all but the following:‰ the CTS component for Eligible Mutual Policyholders,‰ the Historical Commitment component for Eligible Mutual Policyholders, and‰ the CTS component for Eligible Non-Mutual Policyholders.The negotiated fixed allocations are uniform among Eligible Mutual Policyholders, and uniform among Eligible Non-MutualPolicyholders. As such, they will be seen to conform to the one-policyholder-one-vote approach, and they are inherentlysimple.The negotiated variable allocation method for the CTS component within each class reflects three policy metrics, namely Lineof Business, premiums, and duration. In my view, the method reflects an appropriate balance between simplicity andresponsiveness to individual policyholder metrics. The allocation of the Historical Commitment component of Eligible MutualPolicyholders is even simpler, as it takes account of a single policy metric, namely duration. Given the nature and purpose ofthat component, basing it on duration only is appropriate.The Negotiated Allocation is as simple and as uniform as considerations of fairness and equity permit, and so satisfiesPrinciple 7.

(8) If the converting company’s value is much greater than what those receiving an allocation have contributed to it,then the following conditions are desirable, subject to the availability of reliable and statistically credible data forthe policyholder classes or groups in question:(a) the allocation in respect of a particular policyholder class (i.e. eligible mutual policyholders and eligible

non-mutual policyholders), should at least equal what that policyholder class has contributed to surplus and(b) the allocation in respect of a particular group of similar policies should at least equal what that group has

contributed to surplus.

Definition of contribution to surplus (CTS) for purposes of allocationSince for purposes of CTS allocation formulae the value was determined as its book value as of December 31, 2016 (asdescribed under Principle 4 above), it is consistent to define what those receiving allocation of Demutualization Benefits havecontributed to that value as the cumulative total surplus (“total equity”) their policies have generated as of the same date.CTS is defined as the contribution to surplus, calculated as of the beginning of each accident year from the Inception Date ofQualifying Policies, to the end of the 2015 accident year, and the portion of accident year 2016 pertaining to policies in forceat December 14, 2015.For purposes of assessing whether Principle 8 is satisfied the Company’s aggregate book value as of December 31, 2016 iscompared to the “contribution to surplus” of all Eligible Policyholders. If the first is much greater than the second, then eachcomponent of that aggregate by class (or by group of similar policies within a class) can be compared to the totalDemutualization Benefits proposed to be allocated to such class or group of policies under the Negotiated Allocation, toassess whether (8)(a) and (8)(b) are also satisfied. Note that for this purpose, I interpret “group” in (8)(b) to mean a Line ofBusiness.The Negotiated Allocation automatically and proportionately reduces the CTS Allocation, should Value not suffice to fullycover the CTS. It therefore functions to ensure that Principle 8 is respected in aggregate. Further, as set out under Principle 5,CTS has been calculated by class (as required by (8)(a)) and within class by Line of Business (as required by (8)(b)).As I noted in Section 1.2, in doing my work I have followed accepted actuarial practice and, in particular, complied with theStandards of Practice of the Canadian Institute of Actuaries. Of particular relevance are the General Standards in Part 1000 ofthe Standards of Practice because, given the purpose of the CTS determination, assumptions should be established on a“best estimate” basis. Best estimate is defined under the General Standards as being “without bias.”Use of best estimate assumptions is required because allocation of value is by definition a zero-sum exercise: if one class orgroup receives more, due to use of other than best estimate assumptions, of necessity another class or group must receiveless. To use other than best estimate assumptions would favour one class/group over another, hence it would not be fair orequitable.

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The Appointed Actuary has reported having derived CTS — in aggregate and by class/group — on the basis of best estimates.I have paid particular attention to that aspect of the Appointed Actuary’s work, and I concur with her assessment in thisregard.Finally, I observe that Principle 8 is applied at a high level: in aggregate, by class and by group. For this purpose, theAppointed Actuary selected Line of Business as “group”, a selection with which I concur. Economical manages its business byline. Each line constitutes a Line of Business, as explained under Principle 4. It is therefore logical to allocate to the QualifyingPolicies in each Line of Business the accumulated total CTS of that Line of Business. The Negotiated Allocation and resultingallocation respect that objective in total and by Line of Business. The allocation of CTS is thus fair and equitable in aggregateand by class and Line of Business.The allocation to individual Qualifying Policies within each Line of Business is more complicated from a fairness perspective.Fairness and simplicity can be, and often are, conflicting objectives, because striving for strict fairness may require morerefinement of formulae and greater granularity, resulting in a good deal of volatility (by inception year, size of premium etc.)and producing detail difficult to explain. The balance between fairness and simplicity is thus a matter of judgement but I amsatisfied that the Negotiated Allocation strikes a reasonable balance.

Interpretation of Principle 8 key conceptsPrinciple 8 is of necessity general, and only partially quantitative. As a result, it needs interpretation in its application toparticular cases. Here is my analysis of them:‰ “If the converting company’s value is much greater than what those receiving allocations have contributed to it…”

If the converting company’s value is “much greater” than what those receiving allocations have contributed to it (i.e., theaggregate CTS), then individual CTS allocations would not have to be reduced in order to provide for reasonable andappropriate amounts in respect of other components of the aggregate allocation. “Much greater” is a quantitative concept,but it requires judgement to apply.

In Economical’s case, the Negotiated Allocation allocates Units in a specific order, as described in Section 3.2. As long asthe value of Holdco at the time of the IPO exceeds $1.401 billion, the value of Units will be sufficient for all stages exceptstage 3c) (the balance of the aggregate allocation to Eligible Non-Mutual Policyholders) to receive their full allocation. Inparticular, the value of Units would be sufficient for the Eligible Mutual Policyholders to receive their full CTS allocation of$2 million, and for Eligible Non-Mutual Policyholders to receive their full CTS allocation of $937 million. Therefore, if thevalue of Holdco at the time of the IPO exceeds $1.401 billion, the requirements in (8)(a) and (8)(b) are met through theapplication of the Negotiated Allocation described in Section 3.2.

If Value is below $1.401 billion, the Negotiated Allocation ensures that the CTS allocation to Eligible Mutual Policyholders isreasonable, and the CTS allocation to Eligible Non-Mutual Policyholders is reasonable, hence the condition is satisfied.

‰ “…the following conditions are desirable, subject to reliable and statistically credible information...”I interpret this concept to refer to Line of Business and policy level information and it is, in my view, virtually self-evident.Without such information, it would not be possible to develop a fair CTS Allocation formula for Eligible Policyholders. Aspresented and explained in connection with Principle 5 above, I am satisfied that reliable and statistically credibleinformation is available for enough years of past history to give me confidence in the calculation of CTS in aggregate, and byclass and Line of Business being reliable, and that the allocation of those amounts among Eligible Policyholders is thereforeappropriate.

‰ “(b)…a particular group of similar policies…”

I interpret a particular group of similar policies to mean policies within a Line of Business, unless a specific Line of Businesscontains substantially different policy types that tend to develop substantially different CTS levels. In that case, in theinterest of fairness it is reasonable to subdivide that Line of Business into subgroups, provided the CTS of those subgroupscan also be reliably determined. Such subdivision of a Line of Business turned out to be unnecessary. Fair and equitableCTS formulae were able to be developed for each Line of Business that could be applied uniformly within each such Line ofBusiness.

Data, estimates and assumptionsHow the data was developed is described in documents prepared by the Appointed Actuary, and in certain supplementarydocuments. I have carefully examined the details of those documents and concluded the data was compiled as accuratelyand carefully as was possible under the circumstances. I have independently developed estimates and assumptions andcompared them with those of the Appointed Actuary. I am satisfied that the final estimates and assumptions are appropriatefor purposes of calculation of CTS by Line of Business.

The allocation formula for CTSThe Negotiated Allocation as it pertains to CTS is set out in in Schedule 1 of the Conversion Plan (please refer to Appendix Aof the Policyholder Information Circular). As noted above, CTS has been calculated in aggregate by class, and within class bygroup (Line of Business).



Mutual policies constitute one class and, within that class, are considered to constitute one Line of Business, because allmutual policies were and are either personal property policies or, in a very few cases, the primary residence of farm policies.The latter are technically commercial property policies but were generally managed similarly to personal property policies.The class of non-mutual policies consists of four Lines of Business: personal auto, personal property, commercial auto andcommercial property.

My work with respect to CTS

Detailed auditing of policy level data was beyond the scope of my assignment but, as explained under Principle 1, I observedthe skill, care and diligence applied by the Company to the development and verification of data required, including inparticular for the calculation of CTS. In addition, I did apply such tests of reasonableness as were available to me. Based onthe work that I did and my observations, I can report that I have seen no material errors or deficiencies in the work done byEconomical to compile the data, nor do I have reason to believe that any such material errors or deficiencies exist.

Data grouped by company and Line of Business was derived by me from statutory financial returns and supportingdocumentation. I did so independently of Economical’s work, and the information I assembled was consistent with thatprepared by Economical.

It was impractical to review and validate the calculations used in the Appointed Actuary’s model. In order to satisfy myself ofthe accuracy of her calculations, therefore, I developed my own tools to produce CTS estimates in aggregate and by Line ofBusiness for Qualifying Policies. My estimates of the CTS in aggregate, and by Line of Business, were consistent with theAppointed Actuary’s estimates.

Finally, I reviewed the CTS component of the Negotiated Allocation within Lines of Business with a view to evaluating them forbalance between fairness and equity on the one hand, and ease of explanation and simplicity on the other.

The Negotiated Allocation formulae for CTS satisfy Principle 8.

5.4 Conclusion

In my opinion the Negotiated Allocation, as reflected in the Conversion Plan, satisfies all eight Principles set forth inSection 5.2. In my opinion, the Negotiated Allocation provides for Demutualization Benefits and a method to allocate Valuewhich are fair and equitable to all Eligible Policyholders.

6 FINANCIAL STRENGTH AND VITALITY, AND SECURITY OF POLICYHOLDERS

The Regulations require that I opine as to whether the financial strength and vitality of the converting company and thesecurity of its policyholders with respect to the continuation of their policies will be materially adversely affected by theconversion.

I consider the financial condition of the converting company to be the primary measure of its financial strength and vitality.

It is generally understood that the financial position of an entity is its financial state as reflected by the amount, nature, andcomposition of its assets, liabilities and equity, all at a particular point in time. By contrast, the financial condition of an entity isits prospective ability to meet its future obligations, especially obligations to policyholders and to those to whom it owesbenefits. Evaluation of an entity’s financial condition involves forecasting its financial position under a variety of scenarios. Anentity’s financial condition is considered satisfactory (or unsatisfactory) depending on the results of that scenario testing.

The converting company is Economical, so my opinion must address the financial strength and vitality of Economical. It isimportant for me to take notice, nonetheless, of the creation of Holdco, which post-conversion is intended to be a publiclylisted entity, and which will own 100% of Economical’s shares. Consequently, I reviewed both the financial condition of Holdco(consolidated) as well as the financial condition of Economical post-conversion.

As part of the Demutualization process, Economical will be required to pay a portion of Demutualization Benefits in the form ofcash to Eligible Policyholders and Other Recipients (in particular the Foundation) who may only receive such benefits in cashpursuant to the Conversion Plan, and those who had the right to and elected to do so. Holdco is obligated to provide the cashrequired to pay those benefits by means of purchasing Economical shares in exchange for cash.

Economical will be required to pay cash only to the extent it is available, so the payment of cash benefits will leave thefinancial condition of Economical unimpaired at the time of conversion.

The expenses related to the IPO will be paid by Holdco in cash, raised through the issue from treasury of Common Shares,and so will not impact the financial position of either Holdco or Economical. Other expenses incurred by Economical inpreparation for the Demutualization decrease its surplus (total equity), but they were not, and are not expected to be, materialcompared to that surplus (total equity). If the IPO of Holdco is completed, as is expected, then the cash raised by the IPO willcover Economical’s obligations, as noted above.

It is the intention of Economical to separate its insurance underwriting operations from its non-insurance operations, bytransferring the non-insurance operations to be held directly by Holdco. This transfer will result in a reduction in the surplus ofthe insurance entity by about 9%. To assess the impact of this, I have examined financial condition under three alternatives:

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1. Economical continuing as a Mutual Company, if there is no demutualization,

2. Holdco, the public consolidated entity, post-conversion, and

3. Economical as a Property & Casualty Company with common shares, post-conversion, wholly owned by Holdco, andwith the non-insurance operations removed.

In each of the above, my examination was based on a projection of the financial position for the relevant entity’s operations toDecember 31, 2021, under a “base scenario” that follows that entity’s business plan, and under several adverse scenarios theestimated probability of occurrence of each being about 1%.

I have analyzed the forecasted financial positions and financial conditions under the three alternatives described above, forthe forecast period ending December 31, 2021 (the third year after conversion). My conclusions are as follows:

1. Economical would continue to be in satisfactory financial condition if it did not demutualize.

2. Holdco would be in satisfactory financial condition. Moreover, Holdco’s financial strength would likely be superior toEconomical’s as a Mutual Company, because it will have a wider range of options for raising and managing capital.

3. Economical’s total equity as a P&C company with common shares, and with the non-insurance operations removed, willbe reduced by about 9% compared to its pre-conversion surplus, thereby reducing Economical’s financial strength andvitality to that extent. Nonetheless, it would be in a satisfactory financial condition. This reduction is expected to becounterbalanced by the support, if needed, of its parent company, Holdco, which will have access to the capital markets.

As required by the Regulations, Holdco will be incorporated under the ICA, and hence subject to supervision by OSFI.Economical indicated to us its intention to apply to continue Holdco under the Canada Business Corporations Act (“CBCA”)after demutualization, primarily to enhance its range of options for raising capital. While a CBCA corporation would not besubject to OSFI supervision, such a change would require the approval of the Minister of Finance, who may impose any termsor conditions or require any undertakings before granting his or her approval. On that basis, I am satisfied that the security ofpolicyholders will not be adversely impacted by the change to a CBCA holdco.

Both Holdco and Economical may declare dividends after Demutualization. However, the payment of such dividends wouldbe subject to the normal standards for prudent management of capital.

In my opinion, the security of Economical’s policyholders will not be materially adversely affected by the proposed conversion.It will still be a strong company, and it will further benefit from the potential support of Holdco, its parent company. While itsfinancial strength and vitality will be affected through the reduction of about 9% of its pre-conversion surplus, such effect willnot be material, due to the mitigating circumstances of the ability of Holdco to access capital markets, and in turn to providefinancial support to Economical.

Consequently, in my opinion, the financial strength and vitality of the converting company and the security of its policyholderswith respect to the continuation of their policies will not be materially adversely affected by the conversion.


APPENDIX “F”: VALUATION OPINION

OPINION AS TO THE IPO VALUATION RANGE

The Board of Directors of Economical Mutual Insurance Company111 Westmount Road SouthPO Box 2000Waterloo, ONN2J 4S4

June 18, 2018

Members of the Board:

Origin Merchant Partners (“Origin Merchant”, “we”, “us” or “our”) understands that Economical Mutual Insurance Company(the “Company”) intends to submit to the Office of the Superintendent of Financial Institutions (“OSFI”) a conversion proposal(the “Conversion Plan”), pursuant to the Mutual Property and Casualty Insurance Company with Non-mutual PolicyholdersConversion Regulations (the “Demutualization Regulations”) under the Insurance Companies Act (Canada). Pursuant to theConversion Plan, the Company will be converted from a mutual property and casualty insurance company into a property andcasualty insurance company with common shares (the “Demutualization”), following which the Company will be wholly-owned by its parent company (“Holdco”) and the common shares of Holdco (“Common Shares”) will be publicly listed on arecognized stock exchange in Canada. Under the terms of the Conversion Plan, Eligible Policyholders and Other Recipientswill receive Common Shares or cash, or in certain specific circumstances a combination of Common Shares and cash. Theterms and conditions of the Demutualization are set forth in the Conversion Plan. Unless the context indicates otherwise,references to “Economical” herein refer to Holdco and its subsidiaries, including the Company, on a consolidated basis andas proposed to be effective following Demutualization. Other capitalized terms used and not defined herein shall have themeanings ascribed to them in the Conversion Plan.

Pursuant to the Demutualization Regulations, we have been retained to provide our opinions as to (i) whether the IPOValuation Range (as defined in the Valuation Report described below) reasonably reflects prevailing market conditions as ofMay 31, 2018, being the valuation date, and (ii) the appropriateness of the method and assumptions used to estimate the IPOValuation Range.

An opinion is an expression of professional judgment on the issues explicitly addressed. By rendering a professional opinion,we do not become an insurer or guarantor of the expression of professional judgment, of any transaction or of any futureperformance. In particular, an opinion is not a prediction of future events and the rendering of this opinion does not guaranteethe outcome of the matters opined upon or any other matter addressed in this opinion.

In considering our opinion, Origin Merchant has reviewed, analyzed and considered (without attempting to independentlyverify the completeness or accuracy thereof) or carried out, among other things, the following:

1. a draft of the Conversion Plan dated June 8, 2018 and the schedules thereto;

2. the Valuation Report prepared by BMO Nesbitt Burns Inc. (“BMO Capital Markets”) and RBC Dominion Securities Inc.(“RBC Securities”);

3. audited consolidated financial statements of the Company as at and for the years ended December 31, 2015, 2016 and2017;

4. unaudited interim consolidated financial statements of the Company for the quarter ended March 31, 2018 and for thequarter ended March 31, 2017;

5. draft pro-forma consolidated financial statements of Holdco giving effect to the Demutualization as at and for the yearended December 31, 2017;

6. business plan and consolidated financial projections prepared by management of the Company in respect of theCompany for the year ending December 31, 2018, and in respect of Economical for the years ending December 31, 2019and 2020, dated December 6, 2017, and an update for the year ending December 31, 2018 after the three monthsended March 31, 2018 provided May 25, 2018;

7. certain internal financial reports or analysis prepared by management of the Company;

8. information obtained from discussions with members of senior management regarding the Company’s operations,financial condition and Economical’s future prospects;

9. discussions with BMO Capital Markets and RBC Securities, in their capacity as co-financial advisors in respect of theDemutualization;

10. public information relating to the business, operations, financial performance and stock trading history of selected publiccompanies considered by Origin Merchant to be relevant;

F-1

11. public information with respect to comparable transactions considered by Origin Merchant to be relevant; and

12. such other corporate, industry and financial market information, investigations and analyses as considered necessary orappropriate by us in the circumstances.

In considering our opinion, Origin Merchant has received and relied upon a representation letter of even date herewithprovided to Origin Merchant by senior management of the Company as to the completeness and accuracy of the informationupon which this opinion is based and certain other matters.

The opinions expressed in this letter are based on market, economic and other conditions as they exist and can be evaluated,and the information made available to us, as of the date of this letter.

Origin Merchant has not been denied access by the Company to any information requested by Origin Merchant.

In preparing this opinion, we have assumed that documents prepared by the Company and its advisors as part of itssubmission to OSFI and to the Eligible Policyholders, including the Conversion Plan and related documents, will not differ inany material respect from the versions that we reviewed, and that the Demutualization will be consummated in accordancewith the terms and conditions of the Conversion Plan without waiver of, or amendment to, any term or condition that is in anyway material to our analyses.

Origin Merchant did not meet with the auditor of the Company and has assumed the accuracy, completeness and fairpresentation of the audited consolidated financial statements of the Company and the reports of the auditor thereon.

For purposes of this opinion, we have assumed and relied on the accuracy and completeness of all information supplied orotherwise made available to us, discussed with or reviewed by or for us, or publicly available, and we have not assumed anyresponsibility for independently verifying such information. With respect to information relating to the prospects ofEconomical, we have assumed that such information reflects the best currently available estimates and judgments ofmanagement of the Company as to the likely future financial performance of Economical. We have not made an independentappraisal of the assets and liabilities of the Company or any of its subsidiaries and we have not been furnished with any suchappraisal. We are not tax or legal experts and our services did not include any legal, accounting or tax determination orevaluation or any attempt to evaluate legal, accounting or tax assumptions. We have relied on the Company with respect tocertain tax and legal matters, including certain tax and legal consequences of the Demutualization for Economical. We are notactuaries and our services did not include any actuarial determinations or evaluations, nor did we make any attempt toevaluate actuarial assumptions.

The valuation of non-publicly traded securities, and the preliminary estimation of initial public offering price ranges for suchsecurities, is inherently imprecise and subject to numerous uncertainties and contingencies, all of which are difficult to predictand beyond our control. We express no view and make no representation or warranty as to the price at which CommonShares will be actually offered or sold in the IPO or will trade at any time in the secondary market following such offering. Wenote that the actual IPO Price could materially differ from the IPO Valuation Range. Furthermore, we express no view as to thefairness of the IPO Valuation Range or any price at which the Common Shares may eventually be offered or any eventualpublic market or other trading value of Common Shares that may be issued by Economical in connection with the ConversionPlan or pursuant to any offering.

We have received a valuation report dated June 18, 2018 prepared by the Company’s co-financial advisors, BMO CapitalMarkets and RBC Securities (the “Valuation Report”) which sets out the IPO Valuation Range (as defined in the ValuationReport) of Holdco, which we assume is the same as the range of estimated equity market values of the Company. The IPOValuation Range provides a range of estimated equity market values for Holdco based solely on estimated prices at which theCommon Shares could be expected to be offered as of May 31, 2018. In preparing this letter, we have reviewed the ValuationReport and have relied on the documentation and other information discussed in the Valuation Report in providing theopinion set out below.

The IPO, if it occurs, will occur on a date after the date of this letter. Subsequent changes in economic and market conditionsand other events and developments, including but not limited to changes in the factors discussed in the Valuation Report,may have a material effect on the prices at which the Common Shares may initially be offered and sold to the public andsubsequently trade. We assume no obligation to update, revise, reaffirm or withdraw the views expressed herein as a result ofany such subsequent events or developments or otherwise.

We have assumed that the Demutualization will meet all applicable legal and regulatory requirements and that all necessaryaction will have been duly and validly taken to comply with all applicable laws and requirements, including the receipt of allrequired approvals by policyholders, regulators and otherwise. We have also assumed that, as of the date hereof, theDemutualization and the IPO will be completed on the basis described in the Conversion Plan.


(i) we do not express any view or recommendation as to how Eligible Policyholders should vote in connection with theConversion Plan or whether or not Eligible Policyholders or Other Recipients should elect to retain any Common Sharesthey receive under the Conversion Plan or sell their Common Shares, whether through the Share Selling Service orotherwise;

(ii) we do not know the circumstances of Eligible Policyholders or Other Recipients and therefore are not in a position toadvise any Eligible Policyholders or Other Recipients; and

(iii) it would be inappropriate for any Eligible Policyholder to conclude, on the basis of the views set forth in this letter orwithout consulting its own advisors, whether the Eligible Policyholder should elect to receive cash, Common Shares or a

2019 Special Meeting of Eligible Mutual Policyholders Information Circular F-2


combination thereof, to retain its Common Shares or sell its Common Shares, whether through the Share Selling Serviceor otherwise, and Eligible Policyholders and Other Recipients should not rely on this opinion in making anydeterminations in respect thereto.

You have not asked for and we do not express any view, opinion or recommendation as to and this opinion should not berelied upon as to:

(i) the fairness of the Demutualization to any policyholders of the Company or to the Company;

(ii) which of the Company’s policyholders are appropriately included among the Eligible Policyholders and OtherRecipients;

(iii) the fairness of the Demutualization to any individual Eligible Policyholder or Other Recipient or to any class of EligiblePolicyholders, including any provision of the Conversion Plan relating to which Eligible Policyholders and OtherRecipients receive Common Shares or cash, or any other provisions of the Conversion Plan that distinguish amongEligible Policyholders and Other Recipients;

(iv) the adequacy or sufficiency of the Conversion Plan;

(v) the IPO Price or the fairness of the IPO Price;

(vi) the price at which the Common Shares to be issued in connection with the Conversion Plan or pursuant to the IPO willtrade;

(vii) the fair market value of any of the Common Shares to be issued in connection with the Conversion Plan or pursuant tothe IPO;

(viii) the likelihood of consummation of the Conversion Plan or any aspect of the Conversion Plan; or

(ix) the appropriateness of the Demutualization relative to any other transaction the Company could undertake.

Origin Merchant is an independent investment bank, providing a full range of corporate finance, merger and acquisition,financial restructuring and merchant banking services. This opinion represents the opinion of Origin Merchant and the formand content herein has been approved for release by a committee of its principals, each of whom is experienced in merger,acquisition, divestiture and fairness opinion matters.

This opinion is provided to the Board of Directors of the Company in connection with the Conversion Plan solely for its benefit.Without our prior written consent, such opinion may not be quoted, summarized, paraphrased, excerpted or referred to, inwhole or in part, in any registration statement, prospectus, policyholder guide or proxy statement, or in any other report,document, filing, release or other written or oral communication prepared, issued or transmitted by any person, including theCompany, provided that a copy of this opinion and a summary thereof approved by us may be included with the ConversionPlan and in the notice(s) to be sent to policyholders, submitted to OSFI and the Minister of Finance (Canada), as required bythe Demutualization Regulations. The opinion expressed herein should be read in light of all the information provided in theConversion Plan and such notice(s).

Based upon and subject to the foregoing and based upon such other matters as we consider relevant, it is our opinion that asat the date hereof (i) the IPO Valuation Range set out in the Valuation Report reasonably reflects prevailing market conditionsas of May 31, 2018, and (ii) the method and assumptions used to estimate the IPO Valuation Range are appropriate.

Yours very truly,

ORIGIN MERCHANT PARTNERS


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APPENDIX “G”: CASH IN LIEU OF SHARESOPINION

OPINION AS TO CASH IN LIEU OF COMMON SHARES


June 18, 2018


Origin Merchant Partners (“Origin Merchant”, “we”, “us” or “our”) understands that Economical Mutual Insurance Company(the “Company”) intends to submit to the Office of the Superintendent of Financial Institutions (“OSFI”) a conversion proposal(the “Conversion Plan”), pursuant to the Mutual Property and Casualty Insurance Company with Non-mutual PolicyholdersConversion Regulations (the “Demutualization Regulations”) under the Insurance Companies Act (Canada) (the “ICA”).Pursuant to the Conversion Plan, the Company will be converted from a mutual property and casualty insurance company intoa property and casualty insurance company with common shares (the “Demutualization”), following which the Company willbe wholly-owned by its parent company (“Holdco”) and the common shares of Holdco (“Common Shares”) will be publiclylisted on a recognized stock exchange in Canada. Under the terms of the Conversion Plan, Eligible Policyholders and OtherRecipients will receive Common Shares or cash, or in certain specific circumstances a combination of Common Shares andcash. The terms and conditions of the Demutualization are set forth in the Conversion Plan. Unless the context indicatesotherwise, references to “Economical” herein refer to Holdco and its subsidiaries, including the Company, on a consolidatedbasis and as proposed to be effective following Demutualization. Other capitalized terms used and not defined herein shallhave the meanings ascribed to them in the Conversion Plan.

You have asked us to express our opinion as to whether the cash payments to be made to certain Eligible Policyholders andOther Recipients pursuant to the Conversion Plan are appropriate substitutes for the Common Shares which such EligiblePolicyholders and Other Recipients would otherwise receive on the Demutualization. Under the terms of the Conversion Plan,we understand that cash payments will be made to certain Eligible Policyholders and Other Recipients in connection with:Fractional Shares, if so determined by the Company, and small distributions in accordance with Section 6.5 of the ConversionPlan; Foreign Recipients and Minors; and Other Recipients; and those electing to receive their Demutualization Benefits, all orin part, in the form of cash (collectively, the “Cash Recipients” for purposes of this opinion).

The Conversion Plan provides that the amount of the cash payments to each Cash Recipient will equal the number of Unitsallocated to such Cash Recipient pursuant to Article 5 of the Conversion Plan, multiplied by the IPO Price. We express noopinion as to whether the cash payments to be received by any Cash Recipient will be sufficient to enable that Cash Recipientto purchase Common Shares in the market at any time after closing of the IPO.









2019 Special Meeting of Eligible Mutual Policyholders Information Circular G-1

APPENDIX “G”: CASH IN LIEU OF SHARES OPINION





11. public information with respect to comparable transactions considered by Origin Merchant to be relevant; and

12. such other corporate, industry and financial market information, investigations and analyses as considered necessary orappropriate by us in the circumstances.







The term ‘‘appropriate substitutes’’ is not defined in the ICA or the Demutualization Regulations made pursuant to the ICA, norare we aware of any established meaning for such term in a securities context. Accordingly, after discussions with you, wehave used the following definition of ‘‘appropriate substitutes’’ for the purposes of this opinion: ‘‘appropriate substitutes’’means that the cash payments to be made to Cash Recipients under the Conversion Plan are equal, at the time of thedetermination of the IPO Price in respect of the Common Shares, to the cash value of such Common Shares, determinedsolely by reference to the IPO Price. We note that neither this definition nor our opinion accounts for, and we express no viewconcerning and we specifically disclaim consideration of, the possibility that the Common Shares may trade in the secondarymarkets on or after the closing of the IPO at prices which are greater or less than the IPO Price and that this increase ordecrease in price may be material.





(iii) it would be inappropriate for any Eligible Policyholder to conclude, on the basis of the views set forth in this letter orwithout consulting its own advisors, whether the Eligible Policyholder should elect to receive cash, Common Shares or acombination thereof, to retain its Common Shares or sell its Common Shares, whether through the Share Selling Serviceor otherwise, and Eligible Policyholders and Other Recipients should not rely on this opinion in making anydeterminations in respect thereto.

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APPENDIX “G”: CASH IN LIEU OF SHARES OPINION

For greater certainty, we do not express any view or recommendation as to whether or not Eligible Policyholders should electto receive Common Shares or cash payments.









(viii) the likelihood of consummation of the Conversion Plan or any aspect of the Conversion Plan; or

(ix) the appropriateness of the Demutualization relative to any other transaction the Company could undertake.

After our discussions with you, in providing the views set forth in this letter, we have not accounted for, nor taken intoconsideration, any tax or other consequences to Eligible Policyholders or Other Recipients arising from the distribution of cashor Common Shares under the Conversion Plan, in any manner whatsoever. Furthermore, we express no view concerning, nordoes our opinion take into account, the extent (which may be material) that the secondary market price for the CommonShares may increase or decrease from the IPO Price and we note that customarily in initial public offerings, the initial publicoffering price of common shares reflects a discount (which may be material) from the fully distributed trading value of suchshares.

We express no opinion on the relative cost or convenience of the various alternatives available to Eligible Policyholdersseeking to sell their Common Shares. We also note that Cash Recipients will not receive any dividends or other distributionspaid on the Common Shares that they would otherwise have received.



Based upon and subject to the foregoing and based upon such other matters as we consider relevant, as the cash paymentsto be made to the Cash Recipients under the Conversion Plan calculated on the IPO Date in lieu of Common Shares will beequal to the IPO Price per Common Share as established in accordance with the Conversion Plan, it is our opinion, as of thedate hereof, that such cash payments are appropriate substitutes for such Common Shares as of May 31, 2018.

Yours very truly,


2019 Special Meeting of Eligible Mutual Policyholders Information Circular G-3

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APPENDIX “H”: LIQUIDITY OPINION

LIQUIDITY OPINION


June 18, 2018


Origin Merchant Partners (“Origin Merchant”, “we”, “us” or “our”) understands that Economical Mutual Insurance Company(the “Company”) intends to submit to the Office of the Superintendent of Financial Institutions (“OSFI”) a conversion proposal(the “Conversion Plan”), pursuant to the Mutual Property and Casualty Insurance Company with Non-mutual PolicyholdersConversion Regulations (the “Demutualization Regulations”) under the Insurance Companies Act (Canada). Pursuant to theConversion Plan, the Company will be converted from a mutual property and casualty insurance company into a property andcasualty insurance company with common shares (the “Demutualization”), following which the Company will be wholly-owned by its parent company (“Holdco”) and the common shares of Holdco (“Common Shares”) will be publicly listed on arecognized stock exchange in Canada. Under the terms of the Conversion Plan, Eligible Policyholders and Other Recipientswill receive Common Shares or cash, or in certain specific circumstances a combination of Common Shares and cash. Theterms and conditions of the Demutualization are set forth in the Conversion Plan. Unless the context indicates otherwise,references to “Economical” herein refer to Holdco and its subsidiaries, including the Company, on a consolidated basis andas proposed to be effective following Demutualization. Other capitalized terms used and not defined herein shall have themeanings ascribed to them in the Conversion Plan.

The Demutualization Regulations require that the Conversion Plan include a description of the measures to be taken byEconomical, in the two years following the Effective Date, to assist the Eligible Policyholders and Other Recipients whoreceive Common Shares to sell those Common Shares on a public market and to address any potential imbalances that mayarise between the volume of shares offered for sale by them and the volume of shares sought for purchase by public marketparticipants. The Demutualization Regulations also require an opinion from a financial market expert that the measures to betaken by Economical, as described in the Conversion Plan, are likely to assist the Eligible Policyholders and Other Recipientswho receive Common Shares to sell those shares on a public market and to address any potential imbalances that may arisebetween the volume of shares offered for sale by them and the volume of shares sought for purchase by public marketparticipants. You have asked us to express our opinion, as investment bankers, as to whether the measures to be taken byEconomical, as described in the Conversion Plan, are likely to assist the Eligible Policyholders and Other Recipients whoreceive Common Shares on the Demutualization to sell such Common Shares on a public market and to address any potentialimbalances that may arise between the volume of Common Shares offered for sale by them and the volume of CommonShares sought for purchase by public market participants.














11. public information with respect to comparable transactions considered by Origin Merchant to be relevant;

12. a summary of allocation distribution prepared by the Company; and

13. such other corporate, industry and financial market information, investigations and analyses as considered necessary orappropriate in the circumstances.







Under the terms of the Conversion Plan, Economical will arrange for an IPO of the Common Shares in order to fund thedistribution of Demutualization Benefits in the form of cash to those Eligible Policyholders and Other Recipients who receivecash mandatorily or by election, among other purposes. The IPO is intended to create a liquid and orderly public market forthe Common Shares. The Conversion Plan provides that the IPO will be accomplished by an issue of Common Shares fromtreasury through underwriters selected by Economical’s Board of Directors and that the IPO Price and the number of CommonShares to be sold in the IPO shall be determined by negotiation between Economical and the underwriters. We understandthat the intention of the Company is to complete the IPO as soon as reasonably practicable following the Effective Time.


We have assumed for purposes of this opinion that Economical will apply for listing on the Toronto Stock Exchange and thatthe Common Shares will be listed and posted for trading on the Toronto Stock Exchange no later than the IPO Date. We havealso assumed that there will be an IPO on the IPO Date and that the IPO will be sufficiently large relative to the total number ofCommon Shares outstanding following the Demutualization to provide adequate trading volume on a daily basis, thatEconomical will meet the initial and continuing listing requirements of the Toronto Stock Exchange and the Common Shareswill remain listed and eligible for trading on the Toronto Stock Exchange for at least two years following the IPO Date. Wehave also assumed that Economical will arrange with the Transfer Agent to provide a service to assist Eligible Policyholdersand Other Recipients to whom Common Shares are issued to sell their Common Shares for a period starting from theexpiration of the lock-up arrangement as set out in the Conversion Plan, or from such other earlier date as may be selected byEconomical, until two years after the IPO Date. We have further assumed that no new equity capital will be raised byEconomical in the IPO and, if applicable, any concurrent private placement, in excess of the cash proceeds to be distributed toEligible Policyholders and Other Recipients who are to receive cash, except for capital raised (i) to pay the underwriting fee

2019 Special Meeting of Eligible Mutual Policyholders Information Circular H-2


and other expenses of the IPO (and any such private placement) and (ii) through the exercise of any over-allotment option bythe Underwriters. We also assume that Economical’s and the Company’s financial performance on a consolidated basis will bein accordance with the projections thereof which the Company has previously provided to us.

We assume that Eligible Policyholders and Other Recipients will be able to sell their Common Shares on the Toronto StockExchange through dealers in Canada or through the Share Selling Service after the end of the lock-up period specified in theConversion Plan. We express no opinion on the relative cost or convenience of the various alternatives available to EligiblePolicyholders or Other Recipients seeking to sell their Common Shares and have not considered these in rendering ouropinion.




(iii) it would be inappropriate for any Eligible Policyholder to conclude, on the basis of the views set forth in this letter orwithout consulting its own advisors, whether the Eligible Policyholder should elect to receive cash, Common Shares or acombination thereof, to retain its Common Shares or sell its Common Shares, whether through the Share Selling Serviceor otherwise, and Eligible Policyholders and Other Recipients should not rely on this opinion in making anydeterminations in respect thereto.









(viii) the likelihood of consummation of the Conversion Plan or any aspect of the Conversion Plan;

(ix) the appropriateness of the Demutualization relative to any other transaction the Company could undertake;

(x) the appropriateness of the lock-up as described in the Conversion Plan;

(xi) whether the Common Shares will be listed on the Toronto Stock Exchange or will be, or remain, freely-tradable for thepurposes of applicable securities laws; or

(xii) whether any Eligible Policyholder or Other Recipient or group of Eligible Policyholders or Other Recipients will be legallypermitted or otherwise capable of selling Common Shares on any public market.



H-3


Based upon and subject to the foregoing and based upon such other matters as we consider relevant, it is our opinion thatthe measures to be taken by Economical as set out in the Conversion Plan, in the two years following the Effective Date, arelikely to assist the Eligible Policyholders and Other Recipients who receive Common Shares on the Demutualization to sellsuch Common Shares on a public market and to address any potential imbalances that may arise between the volume ofCommon Shares offered for sale by them and the volume of Common Shares sought for purchase by public marketparticipants. We are not, however, expressing any view as to the price that an Eligible Policyholder or Other Recipient mightreceive in respect of the sale of Common Shares on a public market.

Yours very truly,


2019 Special Meeting of Eligible Mutual Policyholders Information Circular H-4

APPENDIX “I”: AUDITED ANNUALCONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017

REPORT OF MANAGEMENT’S ACCOUNTABILITY

The 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. Economical’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 the balancesheet date to meet all policyholder obligations of the Company. Examination of supporting data for accuracy andcompleteness 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 review significantaccounting, reporting and internal control matters. Both the internal and external auditors and the appointed actuary haveunrestricted access to the Audit Committee. Following its review of the consolidated financial statements and the report of theexternal auditor, the Audit Committee submits its report to the Board of Directors for formal approval of the consolidatedfinancial statements.

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

Waterloo, CanadaFebruary 20, 2018

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APPENDIX “I”: AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS

APPOINTED ACTUARY’S REPORT

To 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, 2017 and their changes in the consolidated statement of comprehensive (loss) income 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

Waterloo, CanadaFebruary 20, 2018

2019 Special Meeting of Eligible Mutual Policyholders Information Circular I-2


INDEPENDENT AUDITORS’ REPORT

To the Members of Economical Mutual Insurance Company

We have audited the accompanying consolidated financial statements of Economical Mutual Insurance Company, whichcomprise the consolidated balance sheet as at December 31, 2017 and the consolidated statements of comprehensiveincome, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and otherexplanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordancewith International Financial Reporting Standards, and for such internal control as management determines is necessary toenable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud orerror.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted ouraudit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply withethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financialstatements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidatedfinancial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks ofmaterial misstatement of the consolidated financial statements, whether due to fraud or error. In making those riskassessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of theconsolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as wellas evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position ofEconomical Mutual Insurance Company as at December 31, 2017 and its financial performance and its cash flows for the yearthen ended in accordance with International Financial Reporting Standards.


Kitchener, CanadaFebruary 20, 2018

A member firm of Ernst & Young Global Limited

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ECONOMICAL MUTUAL INSURANCE COMPANYCONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET I-5

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME I-6

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY I-7

CONSOLIDATED STATEMENT OF CASH FLOWS I-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS I-9

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES I-9

3. STANDARDS ISSUED BUT NOT YET EFFECTIVE I-16

4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS I-17

5. INVESTMENTS I-18

6. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS I-22

7. POLICY LIABILITIES I-25

8. NATURE AND EXTENT OF RISKS ARISING FROM INSURANCE CONTRACTS I-28

9. REINSURANCE CONTRACTS I-31

10. PROPERTY AND EQUIPMENT I-32

11. INCOME TAXES I-33

12. GOODWILL AND INTANGIBLE ASSETS I-34

13. OTHER ASSETS I-35

14. INVESTMENTS IN ASSOCIATES I-36

15. ACCOUNTS PAYABLE AND OTHER LIABILITIES I-36

16. PREMIUMS I-36

17. POST-EMPLOYMENT BENEFITS I-36

18. CAPITAL MANAGEMENT I-40

19. RATE REGULATION I-40

20. BUSINESS COMBINATION I-40

21. ACQUISITIONS I-41

22. COMMITMENTS AND CONTINGENCIES I-42

23. DEMUTUALIZATION I-42

24. RELATED PARTY TRANSACTIONS I-42

25. MEDIUM-TERM INCENTIVE PLAN I-43

26. OPERATING SEGMENTS I-45



CONSOLIDATED BALANCE SHEET

As at December 31

(in thousands of dollars) Notes 2017 2016

ASSETS

Cash and cash equivalents $ 166,389 $ 189,553

Restricted cash 20 – 43,500

Investments 5 3,996,000 3,914,500




Reinsurance receivable and recoverable 7,9 59,057 104,691

Deferred policy acquisition expenses 7 221,172 216,700

Property and equipment 10 41,190 39,083

Deferred income tax assets 11 33,410 27,349

Goodwill and intangible assets 12 229,166 167,080

Other assets 13 114,913 69,629

$ 5,621,917 $ 5,480,617


Unearned premiums 7 $ 1,131,366 $ 1,077,303

Claim liabilities 7,8 2,527,673 2,399,254

Accounts payable and other liabilities 15 232,500 200,978

3,891,539 3,677,535

EQUITY

Retained earnings 1,644,781 1,744,539

Accumulated other comprehensive income 85,597 58,543

Total equity 18 1,730,378 1,803,082

$ 5,621,917 $ 5,480,617

Commitments and contingencies 22

See accompanying notes.

On behalf of the Board:

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

I-5


CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

For the year ended December 31


Gross written premiums 16 $ 2,286,855 $ 2,084,120

Net written premiums 9,16 $ 2,218,087 $ 2,010,952

Net earned premiums 16 $ 2,165,821 $ 1,955,603

Other underwriting revenues 16,558 25,070

Total underwriting revenues 2,182,379 1,980,673

Underwriting expenses:

Net claims and adjustment expenses, undiscounted 7,9 1,659,080 1,406,293

Net commissions 9 379,339 371,390

Operating expenses 361,984 312,070

Premium taxes 77,695 69,346

2,478,098 2,159,099

Underwriting loss before the impact of discounting (295,719) (178,426)

Impact of discounting 7 37,218 13,616

Underwriting loss (258,501) (164,810)

Investment income:

Interest 5 59,453 61,143

Dividends 5 38,480 39,177

Recognized gains on investments 5 41,176 35,073

139,109 135,393

Other expense 23 19,529 10,569

Loss before income taxes (138,921) (39,986)

Income tax recovery 11 (46,243) (19,712)

Net loss $ (92,678) $ (20,274)

Items that may be reclassified subsequently to net loss:

Net unrealized gains on AFS investments 108,006 105,577

Reclassification to net loss of net recognized gains on AFS investments 5 (68,133) (47,730)

Foreign exchange loss on investments in associates (1,686) (800)

Income tax expense 11 11,133 15,284

27,054 41,763

Items that will not be reclassified subsequently to net loss:

Post-employment benefit obligation (loss) gain 17 (9,662) 2,725

Income tax (recovery) expense 11 (2,582) 117

(7,080) 2,608

Other comprehensive income 19,974 44,371

Comprehensive (loss) income $ (72,704) $ 24,097




CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


(in thousands of dollars) 2017 2016

Retainedearnings

Accumulatedother

comprehensiveincome

Totalequity

Retainedearnings

Accumulatedother

comprehensiveincome

Totalequity

Balance, beginning of the year $ 1,744,539 $ 58,543 $ 1,803,082 $ 1,762,205 $ 16,780 $ 1,778,985

Net loss (92,678) – (92,678) (20,274) – (20,274)

Other comprehensive income (7,080)1 27,054 19,974 2,6081 41,763 44,371

Total comprehensive (loss)income (99,758) 27,054 (72,704) (17,666) 41,763 24,097

Balance, end of the year $ 1,644,781 $ 85,5972 $ 1,730,378 $ 1,744,539 $ 58,5432 $ 1,803,082

1 Actuarial (losses) gains for the defined benefit plan recognized in retained earnings (net of income tax recovery of $2,582 (2016: $117 income tax expense)).2 Included in accumulated other comprehensive income is $3,382 (2016: $5,068) related to the cumulative foreign exchange gain on investments in associates.


I-7


CONSOLIDATED STATEMENT OF CASH FLOWS



Operating activities:

Receipts:

Premiums collected (net of reinsurance ceded) $ 2,167,562 $ 1,964,243

Interest received 73,903 80,741

Dividends received 38,053 38,988

2,279,518 2,083,972

Payments:

Claims paid 7 1,453,043 1,329,476

Commissions and expenses paid 707,498 646,181

Premium taxes paid 76,029 69,557

Income taxes (recovered) paid (28,442) 11,869

2,208,128 2,057,083

Net cash provided by operating activities 71,390 26,889

Investing activities:

Investments purchased (4,877,250) (2,460,994)

Investments sold, redeemed or matured 4,891,209 2,746,398

Commercial loans advanced (24,856) (65,938)

Commercial loans repaid 13,734 5,871

Other assets purchased (47,583) (92,267)

Business acquisitions 20, 21 (93,308) (15,916)

Net cash (used in) provided by investing activities (138,054) 117,154

Cash and cash equivalents, including restricted cash:

Net (decrease) increase during the year (66,664) 144,043

Balance, beginning of the year 233,053 89,010

Balance, end of the year $ 166,389 $ 233,053

Cash $ 166,159 $ 188,821

Cash equivalents 230 732

Restricted cash – 43,500

Total cash and cash equivalents, including restricted cash $ 166,389 $ 233,053




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 20171. 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 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 20, 2018.

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 instrumentsthat have been measured at fair value and claim liabilities which are valued on a discounted basis in accordance withaccepted 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. Allsignificant inter-company transactions and balances have been eliminated on consolidation to the extent of the interest in theassociate.All amounts in the notes are shown in thousands 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 (loss) income 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 adjustment expenses.Measurement uncertainty in these estimates exists due to internal and external factors that can substantially impact theultimate settlement costs. Consequently, the Company reviews and re-evaluates claims and reserves on a regular basis andany resulting adjustments are included in “Net claims and adjustment expenses” in the consolidated statement ofcomprehensive (loss) income in the period the adjustment is made. Claims and adjustment expenses are reported net ofreinsurance. The claim liabilities are valued on a discounted basis using a rate that is derived from the fair value yield of thebonds that have been identified as supporting the claim liabilities and adding in a provision for adverse deviation (“PfAD”).The effect of discounting plus PfAD is included in “Impact of discounting” in the consolidated statement of comprehensive(loss) income. The claim liabilities are extinguished when the obligation to pay a claim expires, is discharged or is cancelled.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Insurance contracts (continued)

Deferred policy acquisition expenses

The amount of deferred policy acquisition expenses (“DPAE”) represents the brokers’ commission, premium taxes and directexpenses in respect of the Company’s digital direct business, which are associated with the unearned portion of thepremiums written during the year to the extent they are considered recoverable. The costs are expensed in the year in whichthe related premiums are recognized as income. To the extent deferred commissions and premium taxes are considerednon-recoverable, they are expensed as incurred in the consolidated statement of comprehensive (loss) income. The maximumdeferrable 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 (loss) income. 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.

Structured settlements

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 6 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 fair value through profit or loss (“FVTPL”)‰ loans and receivables‰ other financial liabilities

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 initial




(d) Financial instruments including investments (continued)

recognition. 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 rights 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” (“OCI”) in the consolidated statement ofcomprehensive (loss) income 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”(“AOCI”) to “Recognized gains on investments” in the consolidated statement of comprehensive (loss) income. 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 (loss) income 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. The Company has no other FVTPL financial assets.Changes in fair values as well as gains and losses on disposal of FVTPL financial instruments are recorded in “Recognizedgains on investments” in the consolidated statement of comprehensive (loss) income with the related tax impact included in“Income tax recovery”. Gains and losses on the sale of FVTPL financial instruments are calculated on an average cost basis.As changes in the fair value of FVTPL financial instruments are reflected directly within net income (loss) in the consolidatedstatement of comprehensive (loss) income, it is not necessary to record an impairment loss when there has been a significantor prolonged decline in the fair value of 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.

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 (loss) income.

I-11



(d) Financial instruments including investments (continued)

Loans and receivables/Other financial liabilities (continued)

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 as follows:

Basis Rates

Buildings — structure Straight-line 50 years

Buildings — infrastructure Straight-line 25 years

Buildings — fixtures Straight-line 15 years

Computer equipment Straight-line 4 years

Furniture and equipment Straight-line 5 years

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 (loss) income. Fully depreciatedproperty and equipment are retained in cost and accumulated depreciation accounts until such assets are removed fromservice.

(f) Leases

Leases of property and equipment where the Company is not exposed to substantially all of the risks and rewards ofownership are classified as operating leases. Incentives received from the lessor on such leases are deferred and amortizedon a straight-line basis over the term of the lease in the consolidated statement of comprehensive (loss) income. Wheresubstantially all of the risks and rewards have been transferred to the Company, the lease is classified as a finance lease. Inthese cases, an obligation and an asset are recognized based on the present value of the future minimum lease paymentsand balances are amortized over the shorter of the lease term or useful life of the asset, as applicable.

(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.




(g) Basis of consolidation (continued)

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 other intangible assets when the criteria specified in IAS 38 –Intangible Assets (“IAS 38”) are met. Capitalized costs include employee costs for staff directly involved in softwaredevelopment and other direct expenditures related to the project. Other development expenditures that do not meet thecapitalization criteria under IAS 38 are recognized as an expense as incurred. Following the initial recognition, intangibleassets 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 (loss) income. 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.

Intangible assets are amortized as follows:

Basis Rates

Brand Indefinite life Not amortized

Distribution network Straight-line 11 years

Customer relationships Straight-line 8 years

Software Straight-line 1 – 5 years

Other intangible assets Straight-line 4 – 10 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 and, therefore, must beassessed as part of a cash-generating unit (“CGU”).

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 (loss) income.

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. The Companyhas defined the CGUs to be each insurance company and each broker or managing general agent subsidiary.

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

I-13



(i) Impairment of assets (continued)

Goodwill (continued)

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 theyear that such an impairment becomes evident. Previously recorded impairment losses for goodwill are not reversed in futureyears if the recoverable amount increases.

Investments in associates

After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss ofthe Company’s investments in associates. The Company determines at each balance sheet date whether there is anyobjective evidence that the investments in associates are impaired. If this is the case, the Company calculates the amount ofimpairment as being the difference between the fair value of the associate and the carrying value, and recognizes this amountin the consolidated statement of comprehensive (loss) income in “Other expense”.

(j) Income taxes

Income tax recovery is comprised of current and deferred income tax. Income tax is recognized in net income (loss) except tothe 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 (loss) income.

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.

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 (loss) income 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 (loss) income 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 they are due. The Company has no further payment obligations once the company contributions andapplicable administration fees have been paid.




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

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 (loss) income in the year during which services are rendered andare actuarially determined using the projected unit credit valuation method prorated 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 (loss)income 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 (loss) income.

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 by the Company before the normal retirement date, orwhenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes terminationbenefits at the earlier of the following dates: (a) when the Company can no longer withdraw the offer of those benefits; and(b) when the Company recognizes costs for a restructuring that is within the scope of IAS 37 – Provisions, ContingentLiabilities and Contingent Assets and involves the payment of termination benefits. In the case of an offer made to encouragevoluntary redundancy, the termination benefits are measured based on the number of employees expected to accept theoffer. Benefits falling due more than 12 months after the end of the reporting period are discounted to their present value.

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 orPerformance Units) are granted annually to executive management, with a unit value based on the book value of theCompany. The value of the Restricted Units (“RUs”), which comprise 40% of the units granted, will fluctuate based solely onthe book value of the Company. The remaining 60% of the units granted are Performance Units (“PUs”). The value of the PUswill fluctuate based on the Company’s performance measured against certain performance criteria. The RUs and PUs vest twoor three years after the grant date, depending on the specific grant, and are then settled in cash. There are floor and ceilingmechanisms in place to ensure that the PUs do not pay when absolute performance is below a minimum threshold and thatthe total Plan payout does not exceed the ceiling even in periods of significant outperformance.

The cost of the awards are recognized as an expense over the vesting period based on the estimated payout under the Planat the end of the vesting period, with a corresponding financial liability recorded in “Accounts payable and other liabilities”.The Company re-estimates the value of awards that are expected to vest at each reporting period. The ultimate liability forany payment 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 are recognized when the Company determines that there is a present legal or constructive obligation as a result ofa past event or decision, it is more likely than not that an outflow of resources will be required to settle the obligation and theamount 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 currencyThe consolidated financial statements are presented in thousands 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.

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(m) Foreign currency translation (continued)

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 have been included in OCI. All other foreign currency gainsand losses have been included in net income (loss).

3. 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 International Accounting Standards Board (“IASB”) issued IFRS 17 – Insurance Contracts (“IFRS 17”), whichreplaces IFRS 4 – Insurance Contracts (“IFRS 4”). IFRS 17 establishes principles for the recognition, measurement,presentation and disclosure of insurance contracts. IFRS 17 is effective for annual periods beginning on or after January 1,2021. Retrospective application is required. The Company plans to adopt the new standard on the required effective datetogether with IFRS 9 – Financial Instruments (“IFRS 9”). The Company is currently analysing the impact these standards willhave 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 and all previous versions of IFRS 9. IFRS 9 sets outthe 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. IFRS 9 is effective for annual periods beginning on or afterJanuary 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 introduced an optional temporary exemption, whichpermits eligible companies to defer the implementation date of IFRS 9 until annual periods beginning on or after January 1,2021. The temporary exemption is available to companies whose predominant activity is to issue insurance contracts. Theamendments also include an option to apply the “overlay approach” to the presentation of qualifying financial assets, in whichan entity would be permitted to remove from profit or loss and present instead in OCI, the impact of measuring financialassets at fair value through profit or loss under IFRS 9 when they would not have been so measured under IAS 39. TheCompany meets the eligibility criteria of the temporary exemption from IFRS 9 and intends to defer the application of IFRS 9until the effective date of IFRS 17.

(c) Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which clarifies the principles forrecognizing revenue and cash flows arising from contracts with customers. The standard is effective for annual periodsbeginning on or after January 1, 2018. IFRS 15 applies to all contracts with customers except for lease contracts, insurancecontracts, and financial instruments. The Company plans to adopt the new standard on the required effective date. TheCompany has performed an assessment of IFRS 15 and determined that the standard will not have a material impact on itsconsolidated financial statements.

(d) Leases

In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”), which establishes principles for the recognition, measurement,presentation and disclosure of leases. The standard provides a single lessee accounting model, requiring lessees torecognize assets and liabilities for all leases, unless the lease term is twelve months or less or the underlying asset has a low



3. STANDARDS ISSUED BUT NOT YET EFFECTIVE (continued)

(d) Leases (continued)

value. At the commencement date of a lease, a lessee will recognize a liability to make lease payments and an assetrepresenting the right to use the underlying asset during the lease term. Lessees will be required to separately recognize theinterest 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 and is to be applied retrospectively. In 2018, the Company will continueits assessment of the potential effect of IFRS 16 on its consolidated financial statements.

4. 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.

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 (loss) incomein the year in which the change occurred. Note 8 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.

I-17


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

(b) Impairment of goodwill and intangible assets

The Company determines whether goodwill and intangible assets are impaired on an annual basis or more frequently if thereare indicators of potential impairment. Impairment testing of goodwill and intangible assets requires an estimation of therecoverable amount of the CGUs to 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) Control or significant influence over investees

The Company presumes that control or significant influence over an investee is evidenced primarily by the ownershippercentage held of the investee unless there are other factors which indicate the level of control is not aligned with theownership percentage. Currently there are no material investments in investees for which the assessment of control orsignificant influence is not aligned with the ownership percentage.

(e) 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 17. 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 OCIin the consolidated statement of comprehensive (loss) income. No estimation is required for the defined contribution pensionplan given the plan structure.

(f) 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.

5. INVESTMENTS

(a) Investment income and balances

Investment income by financial instrument classification is as follows:

(in thousands of dollars) 2017

Notes FVTPL AFSLoans and

receivables Total

Interest $ 26,350 $ 30,017 $ 3,086 $ 59,453

Dividends – 38,480 – 38,480

Realized (losses) gains on sale of investments (8,066) 79,514 – 71,448

Net impairment losses on AFS investments 5(c) – (11,381) – (11,381)

Unrealized losses on FVTPL financial instruments (18,891) – – (18,891)

Recognized (losses) gains on investments (26,957) 68,133 – 41,176

$ (607) $ 136,630 $ 3,086 $ 139,109



5. INVESTMENTS (continued)

(a) Investment income and balances (continued)



receivables Total

Interest $ 25,120 $ 34,762 $ 1,261 $ 61,143

Dividends – 39,177 – 39,177

Realized gains on sale of investments 14,330 54,047 – 68,377

Net impairment losses on AFS investments 5(c) – (6,317) – (6,317)

Unrealized losses on FVTPL financial instruments (26,987) – – (26,987)

Recognized (losses) gains on investments (12,657) 47,730 – 35,073

$ 12,463 $ 121,669 $ 1,261 $ 135,393

The fair value yield as at December 31, 2017 for the FVTPL bond portfolio was 2.17% (2016: 1.67%) and for the AFS bondportfolio was 2.65% (2016: 2.71%).

Investment carrying values by financial instrument classification are as follows:


FVTPL AFSLoans and

receivables Total

Short-term investments $ – $ 19,582 $ – $ 19,582

Bonds 1,671,540 1,015,563 – 2,687,103

Preferred stocks – 384,121 – 384,121

Common stocks – 701,182 – 701,182

Pooled funds – 107,802 – 107,802

Commercial loans – – 96,210 96,210

$ 1,671,540 $ 2,228,250 $ 96,210 $ 3,996,000


FVTPL AFSLoans and

receivables Total

Bonds $ 1,532,700 $ 1,163,429 $ – $ 2,696,129

Preferred stocks – 377,948 – 377,948

Common stocks – 639,187 – 639,187

Pooled funds – 116,148 – 116,148

Commercial loans – – 85,088 85,088

$ 1,532,700 $ 2,296,712 $ 85,088 $ 3,914,500

The commercial loans have an amortized cost of $96.2 million (2016: $85.1 million) and fair value of $85.9 million (2016: $74.6million).

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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

cost

Grossunrealized

gains

Grossunrealized

losses Fair value

Short-term investments $ 19,582 $ – $ – $ 19,582

Bonds:

Government 122,442 52 (1,360) 121,134

Corporate 899,643 1,377 (6,591) 894,429

1,022,085 1,429 (7,951) 1,015,563

Canadian preferred stocks 392,224 3,857 (11,960) 384,121

Common stocks:

Canadian 495,177 64,726 (3,882) 556,021

Foreign 83,547 61,803 (189) 145,161

Foreign pooled funds 102,848 4,954 – 107,802

681,572 131,483 (4,071) 808,984

$ 2,115,463 $ 136,769 $ (23,982) $ 2,228,250


Cost/amortized

cost

Grossunrealized

gains

Grossunrealized

losses Fair value

Bonds:

Government $ 234,878 $ 2,542 $ (2,065) $ 235,355

Corporate 926,583 10,096 (8,605) 928,074

1,161,461 12,638 (10,670) 1,163,429


Common stocks:

Canadian 430,670 73,581 (1,189) 503,062

Foreign 82,305 54,869 (1,049) 136,125

Foreign pooled funds 113,859 2,289 – 116,148

626,834 130,739 (2,238) 755,335

$2,223,798 $147,432 $(74,518) $2,296,712

(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 liabilities

that 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 all stocks, except the pooled funds.

(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 and




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

short-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, 2017, the Company has no financial instruments in this category (2016: 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 $ – $ 19,582 $ – $ 19,582

Bonds – 2,687,103 – 2,687,103

Preferred stocks 384,121 – – 384,121

Common stocks 701,182 – – 701,182

Pooled funds – 107,802 – 107,802

$ 1,085,303 $ 2,814,487 $ – $ 3,899,790



Bonds $ – $ 2,696,129 $ – $ 2,696,129

Preferred stocks 377,948 – – 377,948

Common stocks 639,187 – – 639,187

Pooled funds – 116,148 – 116,148

$ 1,017,135 $ 2,812,277 $ – $ 3,829,412

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 loss is as follows:


Common stocks:

Canadian $ 10,344 $ 6,149

Foreign 1,037 168

$ 11,381 $ 6,317

The remaining gross unrealized losses of $24.0 million (2016: $74.5 million) on the AFS investments have not beenrecognized in net 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.

(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, 2017, securities with an estimated fairvalue of $569.4 million (2016: $527.3 million) have been loaned and securities with an estimated fair value of $585.8 million(2016: $545.0 million) have been received as collateral from the financial institutions. Lending collateral as at December 31,2017 was 100.0% (2016: 100.0%) held in cash and government-backed securities. The securities loaned under this programhave not been removed from “Investments” on the consolidated balance sheet because the Company retains the risks andrewards of ownership.The financial compensation the Company receives in exchange for securities lending is reflected in the consolidatedstatement of comprehensive (loss) income in “Interest”.

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(e) 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.6. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

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 Statement of Investment Policies and Procedures (“SIP&P”) establishes asset mix parameters and risk limits whichminimize undue exposure to these risks in the investment portfolio. The SIP&P is reviewed at least annually by the InvestmentCommittee of the Board of Directors. Compliance with the SIP&P 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 8.The impact of an immediate hypothetical 1 percentage point change in interest rates (assuming a parallel shift across the yieldcurve), 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 loss before income taxes $ (69,336) $ 77,960 $ (64,778) $ 72,889

Fair value of AFS bonds and OCI before income taxes $ (48,639) $ 58,627 $ (63,770) $ 78,755

The estimated impact on income taxes would be calculated at the statutory rate of 26.71% (2016: 26.71%).(b) Common equity market price risk and preferred stock price risk

Economic trends, the political environment and other factors can positively or adversely impact the equity markets and,consequently, the value of equity investments the Company holds. The Company’s AFS portfolio includes Canadian commonstocks with fair value movements that are benchmarked against movements in the Toronto Stock Exchange 60 Index, andforeign stocks and pooled funds with fair values that are benchmarked against movements in the MSCI World Index. Alsoincluded in the AFS portfolio are the Company’s holdings of preferred stocks. Economic trends, interest rates, creditconditions, regulatory changes and other factors can positively or adversely impact the value of preferred stocks that theCompany holds. The fair value sensitivity of the Company’s preferred stocks are assessed against movements in the BMO 50Resets Sub-Index.The estimated impact of a 10% movement in the aforementioned indices to the value of the Company’s equity portfolios, 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 $ 59,584 $ (59,584) $ 46,490 $ (46,490)

Fair value of foreign stocks, pooled funds and OCI before income taxes $ 25,471 $ (25,471) $ 25,544 $ (25,544)

Fair value of preferred stocks and OCI before income taxes $ 34,334 $ (34,334) $ 31,117 $ (31,117)

The estimated impact on income taxes would be calculated at the statutory rate of 26.71% (2016: 26.71%).(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 sector. These risk concentrations are regularly monitored and adjusted as deemed necessary.



6. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS (continued)

(c) Credit risk (continued)

Bonds and preferred stocks

The Company’s SIP&P requires the Company to invest in bonds and preferred stocks of high credit quality and to limitexposure with respect to any one issuer. On a regular basis, the Company also monitors publicly available informationreferencing the investments held in the investment portfolio to determine whether there are investments which require closermonitoring of the credit risk. Of the bonds held as at December 31, 2017, 90.5% (2016: 92.3%) were rated “A-” or better and79.5% (2016: 85.4%) of the preferred stocks were rated “P2” or better. “A-” and “P2” represent the ratings provided by tworecognized rating services for high-grade bonds and preferred stocks, respectively, where both asset and earnings protectionare well assured.

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

2017 2016

Financial services 56.1% 66.3%

Utilities 11.9% 6.6%

Energy 8.1% 5.4%

Consumer staples 7.6% 2.4%

Industrial 4.8% 8.9%

Communications 2.8% 6.1%

Other 8.7% 4.3%

100.0% 100.0%

Of the preferred stocks and bonds held, the country of issuer is as follows:2017 2016

Canada 95.9% 90.5%

United States 3.2% 5.9%

Other 0.9% 3.6%

100.0% 100.0%

Securities lending

As disclosed in note 5, the Company participates in a securities lending program. The Company manages credit riskassociated with this program by only dealing with counterparties who are rated “A” or higher by independent rating agenciesand by obtaining collateral with a fair value in excess of the value of the securities loaned under the program. The ratio of fairvalue of collateral obtained in excess of the fair value of the securities loaned as at December 31, 2017 is 102.9% (2016:103.3%).

Premiums receivable

The Company’s credit exposure to any one individual policyholder or broker included in premiums receivable is notsignificant. The Company regularly monitors amounts due from policyholders and follows up on all overdue accounts. Aspermitted by regulation, when premiums are overdue for an extended period of time the Company cancels the insurancecoverage under the applicable policy. Before a broker is granted a contract, appropriate reviews are conducted by theCompany. Delinquent accounts are regularly monitored and the Company takes action against non-payment. The allowancefor doubtful accounts in the current and comparative periods is insignificant as overdue receivables are negligible.

Commercial loans

The Company periodically issues commercial loans to brokers. Sufficient collateral, principally in the form of security over aborrowing brokerage’s operating assets, is held to protect the Company against loss in the event of a default of any of theseloans. Annual, and where required more frequent, financial reviews are undertaken to determine if the broker will be able tomake the payments required by the loan as and when due. The Company’s gross credit exposure on these commercial loansis limited to their carrying value as disclosed in note 5. Management does not consider any of these current commercial loansto be impaired as at December 31, 2017.

Reinsurance receivable and recoverable

Credit exposures on the Company’s reinsurance receivable and recoverable balances exist to the extent that any reinsurermay or may 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 with whom the Company purchases coverage. The Company’s reinsurance risk managementpolicy generally precludes the use of reinsurers with credit ratings less than “A-”.

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(c) Credit risk (continued)

Reinsurance receivable and recoverable (continued)

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 (2016: $0.5 million).

Structured settlements

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, 2017, 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 (2016: nil). The original purchase price of the outstanding annuities is $298.6 million(2016: $287.5 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 $13.2 million(2016: $14.0 million). Under this same scenario, the impact on the fair value of non-US dollar foreign stocks, pooled funds andOCI before income taxes is $4.3 million (2016: $4.0 million) assuming historical correlations between currency pairs remainintact. The estimated impact on income taxes would be calculated at the statutory rate of 26.71% (2016: 26.71%).

(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, 2017, the Company has $166.4 million (2016: $189.6 million) of cash and cash equivalents and short-terminvestments of $19.6 (2016: nil). The Company also has a highly liquid investment portfolio. As at December 31, 2017, Canadianfixed income investments issued or guaranteed by domestic governments, investment-grade corporate bonds, publicly tradedCanadian and foreign equities and the pooled funds have a fair value of $3,801.4 million (2016: $3,774.1 million).

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




(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.


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

Assets:

Cash and cash equivalents $ 166,389 $ – $ – $ – $ 166,389

Short-term investments 19,582 – – – 19,582

FVTPL bonds 104,490 926,813 640,237 – 1,671,540

AFS bonds 96,623 330,047 520,318 68,575 1,015,563

Preferred stocks 50,223 328,581 5,317 – 384,121

Commercial loans 6,164 42,545 47,501 – 96,210

Accrued investment income 15,294 – – – 15,294

Premiums receivable 696,154 3,456 – – 699,610

Income taxes receivable 45,716 – – – 45,716

Reinsurance receivable and recoverable 27,255 20,303 3,426 481 51,465

$ 1,227,890 $ 1,651,745 $ 1,216,799 $ 69,056 $ 4,165,490

Liabilities:

Claim liabilities $ 724,999 $ 1,221,446 $ 400,378 $ 115,181 $ 2,462,004

Accounts payable and other liabilities 171,607 8,143 10,352 42,398 232,500

$ 896,606 $ 1,229,589 $ 410,730 $ 157,579 $ 2,694,504


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

Assets:

Cash and cash equivalents $ 189,553 $ – $ – $ – $ 189,553

FVTPL bonds 57,363 666,538 808,799 – 1,532,700

AFS bonds 58,750 447,056 468,943 188,680 1,163,429

Preferred stocks 100,565 253,328 24,055 – 377,948

Commercial loans 4,822 40,349 39,917 – 85,088

Accrued investment income 14,597 – – – 14,597

Premiums receivable 644,685 3,337 – – 648,022

Income taxes receivable 45,913 – – – 45,913

Reinsurance receivable and recoverable 53,413 33,693 6,990 981 95,077

$ 1,169,661 $ 1,444,301 $ 1,348,704 $ 189,661 $ 4,152,327

Liabilities:

Claim liabilities $ 698,036 $ 1,091,076 $ 390,265 $ 115,142 $ 2,294,519

Accounts payable and other liabilities 146,035 7,437 9,519 37,987 200,978

$ 844,071 $ 1,098,513 $ 399,784 $ 153,129 $ 2,495,497

Note 17(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 and regulatoryrequirements on an ongoing basis.7. 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 beforeDecember 31, 2017, 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 December 31, 2017.

I-25


7. POLICY LIABILITIES (continued)

(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 write-down to DPAE was considered necessary for the year endedDecember 31, 2017 (2016: nil).The following changes have occurred in UPR during the year:


Notes Gross Ceded Net Gross Ceded Net

UPR, beginning of year $ 1,077,303 $ 8,266 $ 1,069,037 $ 1,022,339 $ 8,651 $ 1,013,688

Acquisition of Petline 20 2,135 – 2,135 – – –

Premiums written during year 9 2,286,855 68,768 2,218,087 2,084,120 73,168 2,010,952

Premiums earned during year 9 (2,234,927) (69,106) (2,165,821) (2,029,156) (73,553) (1,955,603)

UPR, end of year $ 1,131,366 $ 7,928 $ 1,123,438 $ 1,077,303 $ 8,266 $ 1,069,037

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


DPAE, beginning of year $ 216,700 $ 207,837

Acquisition of Petline 20 132 –

Acquisition costs deferred 411,751 398,220

Amortization of acquisition costs (407,411) (389,357)

DPAE, end of year $ 221,172 $ 216,700

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 $ 534,268 $ – $ 534,268

Property 233,017 – 233,017

767,285 – 767,285

Commercial lines:

Auto 133,519 1,848 131,671

Property and liability 230,562 6,080 224,482

364,081 7,928 356,153

$ 1,131,366 $ 7,928 $ 1,123,438



Personal lines:

Auto $ 477,997 $ – $ 477,997

Property 210,031 – 210,031

688,028 – 688,028

Commercial lines:

Auto 144,317 1,606 142,711


389,275 8,266 381,009

$ 1,077,303 $ 8,266 $ 1,069,037

(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 will vary from the best estimate made fora variety of reasons, including additional information with respect to the facts and circumstances of the claims incurred. Note 4contains additional information on the judgments, estimates and assumptions used in determining claim liabilities. Thediscount rate as at December 31, 2017 used to discount the claim liabilities was 2.32% (2016: 1.78%).




(b) Claim liabilities (continued)

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


NotesGross claim

liabilitiesCeded claim

liabilitiesNet claimliabilities

Claim liabilities, beginning of year $ 2,399,254 $ 98,234 $ 2,301,020

Acquisition of Petline 20 3,347 – 3,347

Current year claims incurred 1,635,810 9,312 1,626,498

Prior year adverse (favourable) claims development 29,111 (3,471) 32,582

1,664,921 5,841 1,659,080

Decrease due to discounting (including PfAD) (39,065) (1,847) (37,218)

Claims and adjustment expenses 1,625,856 3,994 1,621,862

Claims paid during the year 1,500,784 47,741 1,453,043

Claim liabilities, end of year $ 2,527,673 $ 54,487 $ 2,473,186


Gross claimliabilities

Ceded claimliabilities

Net claimliabilities

Claim liabilities, beginning of year $ 2,309,265 $ 71,446 $ 2,237,819

Current year claims incurred 1,513,957 67,557 1,446,400

Prior year (favourable) adverse claims development (31,346) 8,761 (40,107)

1,482,611 76,318 1,406,293

(Decrease) increase due to discounting (including PfAD) (12,508) 1,108 (13,616)


Claims paid during the year 1,380,114 50,638 1,329,476

Claim liabilities, end of year $ 2,399,254 $ 98,234 $ 2,301,020

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





Personal lines:

Auto $ 1,519,224 $ 9,779 $ 1,509,445

Property 115,748 941 114,807

1,634,972 10,720 1,624,252

Commercial lines:

Auto 433,202 15,997 417,205


892,701 43,767 848,934

$ 2,527,673 $ 54,487 $ 2,473,186





Personal lines:

Auto $ 1,409,562 $ 10,041 $ 1,399,521

Property 112,230 6,682 105,548

1,521,792 16,723 1,505,069

Commercial lines:

Auto 371,474 20,921 350,553


877,462 81,511 795,951

$ 2,399,254 $ 98,234 $ 2,301,020

I-27


8. NATURE AND EXTENT OF RISKS ARISING FROM INSURANCE CONTRACTS

Insurance risk managementBy 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 written premiums by line of business and geographical region are as follows:

2017 2016

Personal auto 45.5% 44.1%

Personal property 21.7% 19.1%

Commercial auto 12.3% 13.7%

Commercial property and liability 20.5% 23.1%

100.0% 100.0%

2017 2016

Ontario 60.2% 59.3%

British Columbia 12.5% 13.9%

Alberta and Prairies 14.0% 13.6%

Atlantic 7.0% 6.7%

Quebec 6.3% 6.5%

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 to attract and retain risks at acceptable return rates. The process of calculating pricing involvesthe use of models, which exposes the Company to model risk in the event that actual results differ from those modelled, dueto model limitations, data issues or other factors.

New products are subject to a detailed review by management, including the Company’s actuarial specialists, prior to theirlaunch in order to mitigate the risk that they are priced at an inadequate level. The performance and pricing of new productsare regularly monitored and corrective action is taken as considered necessary, including re-pricing of the products and theuse of reinsurance.

To minimize the risk arising from underwriting, the Company has policies that set out the underwriting risk appetite andcriteria, as well as specified tolerances for maximum financial risk retention. The Company utilizes reinsurance in order tomanage its exposure to insured risks. Once the retention limits are reached, reinsurance is utilized to cover the excess risk.The Company reviews the adequacy of its reinsurance programs, at least annually, to ensure sufficient reinsurance protectionis in place 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 frequentinvestigation of possible fraudulent claims seeks to ensure the claims risk exposure matches the claim cost expectationsinherent in the pricing of the Company’s products.

In the normal course of business, the Company may, from time to time, be 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 activity may increase the Company’s exposure to these types ofclaims. This risk of potential liability may make reasonable resolution of claims more difficult to obtain.

Quality review procedures exist to ensure that the Company’s underwriting and claim activities fall within establishedguidelines and pricing structures. Head Office and field level reviews are conducted on a sampled basis. The results of thesequality reviews are shared with the appropriate field management staff to ensure any issues identified are promptly remedied.



8. NATURE AND EXTENT OF RISKS ARISING FROM INSURANCE CONTRACTS (continued)

(a) Underwriting risk (continued)

The Company uses reinsurance to manage its exposure to insured risks. Reinsurance coverage risk arises becausereinsurance terms, conditions, availability and/or 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. Senior managementreviews the Company’s reinsurance program to ensure its cost effectiveness and that adequate coverage is obtained, whichreflects the Company’s risk tolerances, underwriting practices, and financial strength, while at the same time complying withits 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 18 provides information on regulatory capital requirements. Note 19provides 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 estimates 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 or other factors. To address inflation risk, expectedinflation 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.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 dataor because recent judicial decisions, changes to government legislation or major shifts in a book of business indicate adeparture from historical trends. Such instances can require significant actuarial judgment, often supported by industrybenchmarks, in establishing an adequate provision for claim liabilities.As the outstanding claim liabilities represent payments that will be made in the future, they are discounted to reflect the timevalue of money, effectively recognizing that the bonds held to support insurance liabilities will earn a return during that period.The discount rate used to discount the actuarial value of claim liabilities is based on the fair value yield of the Company’sbonds that support the claim liabilities (note 5). In assessing the risks associated with investment income and therefore thediscount rate, the Company considers the nature of the bond portfolio and the timing of claim payments, and the extent towhich they match, to investment cash flows. Future changes in the bond portfolio could change the value of claim liabilities byimpacting the fair value yield.The following table presents the interest rate sensitivity analysis for a 1 percentage point change in interest rates on the netclaim liabilities:


Impact on: + 1 -1 + 1 -1

Net claim liabilities $ (69,681) $ 74,653 $ (67,320) $ 72,293

Establishing an appropriate level of claim liabilities is an inherently uncertain process and is closely monitored by theCompany’s corporate actuarial department. The sheer volume and diversity of considerations makes it impracticable tomeasure the impact on the Company’s insurance contracts resulting from a change in a particular assumption or group of

I-29



(b) Claims reserving risk (continued)

assumptions. The analysis below demonstrates the impact of changing assumptions for all lines of business and geographicalregions in such a way that the average claim severity and frequency is altered significantly. The analysis below also isolatesthe impact within the average claims severity of a change in internal claims expenses on claim liabilities. The impacts beloware on the reported claim liabilities as at December 31.


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

Change in average claims severity $ 116,227 $(116,227) $ 115,051 $ (115,051)

Change in frequency on unreported claims $ 11,727 $ (11,727) $ 9,007 $ (9,007)

Change in internal claims expenses $ 7,264 $ (7,264) $ 6,779 $ (6,779)

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 (loss) income 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, 2017.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 thousands of dollars) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total

Estimate of ultimate claims

At end of accident year $ 1,473,388 $ 1,401,630 $ 1,198,256 $ 1,129,584 $ 1,058,577 $ 1,224,981 $ 1,258,496 $ 1,273,526 $ 1,425,491 $ 1,602,560

1 year later 1,432,320 1,352,544 1,085,810 1,038,734 1,005,550 1,211,859 1,241,147 1,248,044 1,444,990

2 years later 1,422,564 1,349,179 1,086,656 1,031,543 1,003,497 1,211,541 1,238,117 1,278,937

3 years later 1,410,738 1,368,331 1,088,028 1,050,942 1,003,389 1,225,102 1,245,156

4 years later 1,427,118 1,367,656 1,099,605 1,047,484 1,010,459 1,234,644

5 years later 1,427,746 1,364,157 1,097,641 1,045,845 1,014,567

6 years later 1,421,896 1,352,093 1,090,703 1,042,173

7 years later 1,413,038 1,343,588 1,083,390

8 years later 1,405,486 1,336,246

9 years later 1,401,631

(Favourable) adversedevelopment recognizedin the year, undiscounted (3,855) (7,342) (7,313) (3,672) 4,108 9,542 7,039 30,893 19,499 $ 48,899

Adverse development recognized from 2007 and prior accident years 2,889

Favourable development recognized from FA and RSP/PRR ceded and assumed in the year (19,206)

Total adverse development recognized in the year $ 32,582

Reconciliation to the consolidated balance sheet

Current estimate ofultimate claims 1,401,631 1,336,246 1,083,390 1,042,173 1,014,567 1,234,644 1,245,156 1,278,937 1,444,990 1,602,560 $ 12,684,294

Cumulative claims paid 1,375,143 1,298,252 1,040,691 985,849 923,801 1,076,747 999,237 933,619 977,852 778,999 10,390,190

Current unpaid andunreported claimsbefore discounting 26,488 37,994 42,699 56,324 90,766 157,897 245,919 345,318 467,138 823,561 2,294,104

Current unpaid and unreported claims before discounting pertaining to 2007 and prior accident years 78,998

Impact of discounting (including PfAD) 64,180

FA and RSP/PRR ceded and assumed, unpaid and unreported 35,904

Unpaid and unreported claims, net of reinsurance $ 2,473,186

(c) Catastrophe risk

Catastrophe risk may arise if the Company experiences a considerable number of losses due to man-made or naturalcatastrophes that result in significant impacts on claims costs. Catastrophes can cause losses in a variety of different lines of




(c) Catastrophe risk (continued)

business 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, and monitoring the impact on capital position and overall risk tolerances. The Companycurrently purchases reinsurance to limit its aggregate exposure to loss from catastrophe events.

9. 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 $ 3,000 $ 3,000

Maximum limit 60,000 40,000

Auto and general liability

Net company retention 4,000 4,000


Catastrophe – primary

Net company retentions1 30,000 30,000

Maximum limit 1,150,000 1,250,000

1 In addition to $30.0 million (2016: $30.0 million) of net retention, the Company had a maximum $63.6 million (2016: $70.0 million) participation in higher layersof the treaty. If a catastrophe breaches the retention level, the Company is required to pay an automatic reinstatement premium commensurate with thereinsurance coverage utilized. Further reinstatement coverage may be sought by the Company at an additional cost.

In addition, the Company has purchased facultative 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 (loss) income:


Premiums written 7,16 $ 68,768 $ 73,168

Premiums earned 7 69,106 73,553

Claims and adjustment expenses 7 5,841 76,318

Commissions 3,747 3,842

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


Premiums written 16 $ (1,809) $ 3,676

Premiums earned (338) 4,466

Claims and adjustment expenses (2,521) 713

Commissions (336) 1,676

I-31


9. REINSURANCE CONTRACTS (continued)

(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 7 $ 7,928 $ 8,266

Reinsurers’ share of claim liabilities 7 54,487 98,234

Reinsurer receivables 6,885 12,238

Reinsurer payables (8,418) (12,058)

Unearned reinsurance commissions (1,825) (1,989)

$ 59,057 $ 104,691

(c) Reinsurance assumed contracts

The Company presents balances related to reinsurance assumed contracts in the same manner as it presents direct insurancebusiness with the exception of reinsurance assumed receivables and payables which are presented in “Reinsurancereceivable and recoverable”. The portion of assets and liabilities related to assumed contracts is as follows:

Reinsurance assumed assets:


DPAE $ – $ 565

Reinsurance assumed receivables 144 888

$ 144 $ 1,453

Reinsurance assumed liabilities:


UPR $ – $ 1,472

Claim liabilities 8,518 14,774

Reinsurance assumed payables 800 588

$ 9,318 $ 16,834

10. PROPERTY AND EQUIPMENT

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


Notes

Land andbuilding

structureBuildingfixtures

Buildinginfrastructure

Furnitureand

equipmentComputer

equipment Total

Cost:

Balance, beginning of year $ 27,685 $ 10,519 $ 13,544 $ 24,647 $ 13,299 $ 89,694

Acquisition of Petline 20 1,035 – – 148 147 1,330

Additions 2,630 392 570 2,846 2,440 8,878

Disposals – – – (125) (713) (838)

Balance, end of year $ 31,350 $ 10,911 $ 14,114 $ 27,516 $ 15,173 $ 99,064

Accumulated depreciation:


Depreciation charge 1,347 202 436 4,217 1,863 8,065

Depreciation on disposals – – – (96) (706) (802)


Net book value, end of year $ 21,037 $ 1,703 $ 6,252 $ 7,352 $ 4,846 $ 41,190



10. PROPERTY AND EQUIPMENT (continued)


Land andbuilding

structureBuildingfixtures

Buildinginfrastructure

Furnitureand

equipmentComputer

equipment Total

Cost:


Additions 424 81 1,333 2,113 1,677 5,628

Disposals – – – – (500) (500)


Accumulated depreciation:


Depreciation charge 1,081 281 393 1,845 1,566 5,166

Depreciation on disposals – – – – (489) (489)


Net book value, end of year $ 18,719 $ 1,513 $ 6,118 $ 8,604 $ 4,129 $ 39,083

Depreciation charged to “Operating expenses” amounted to $8.1 million (2016: $5.2 million).

11. INCOME TAXES

(a) Income tax recovery

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


Income tax recovery calculated based on statutory tax rates 26.7% $ (37,106) 26.7% $ (10,676)

Canadian dividend income not subject to tax 6.0% (8,277) 21.8% (8,698)

Non-deductible expenses (0.1%) 87 (1.0%) 406

Rate differential on recognized (losses) gains on AFS equity instruments 0.3% (482) (0.4%) 167

Other 0.4% (465) 2.2% (911)

Income tax recovery recorded in net loss 33.3% $ (46,243) 49.3% $ (19,712)


Current income taxes $ (39,156) $ (33,328)

Deferred income taxes (7,087) 13,616

Income tax recovery $ (46,243) $ (19,712)

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


Income taxes related to current year $ (38,621) $ (30,405)

Income taxes related to prior year (535) (2,923)

$ (39,156) $ (33,328)

Income taxes included in OCI are as follows:



Net unrealized gains on AFS investments $ 28,848 $ 28,200

Reclassification to net loss of net recognized gains on AFS investments (17,715) (12,916)

11,133 15,284

Items that will not be reclassified subsequently to net loss:

Post-employment benefit obligation (loss) gain (2,582) 117

Income tax expense $ 8,551 $ 15,401

I-33


11. INCOME TAXES (continued)

(b) Deferred income taxes

The components comprising net deferred income tax assets are as follows:(in thousands of dollars) 2017 2016

Net claim liabilities $ 32,984 $ 30,730

Post-employment benefit plans 14,873 12,456

DPAE 347 332

Capital assets 6,913 2,396

Intangible assets (26,658) (18,745)

Investments (25) (25)

Other 4,976 205

$ 33,410 $ 27,349

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

The components comprising deferred income tax expense are as follows:(in thousands of dollars) 2017 2016

Net claim liabilities $ (2,254) $ (844)

Post-employment benefit plans 165 (1,057)

DPAE (15) 1,006

Capital assets (4,947) 1,082

Intangible assets 4,735 11,986

Investments — 2

Other (4,771) 1,441

$ (7,087) $ 13,616

12. GOODWILL AND INTANGIBLE ASSETS

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


Goodwill $ 46,144 $ 26,925


$ 229,166 $ 167,080

(a) Goodwill

Goodwill has been allocated to three individual CGUs. The carrying amount of goodwill allocated to each of the CGUs isshown below:(in thousands of dollars) Notes 2017 2016

Economical Mutual Insurance Company $ 24,526 $ 24,526

Petline 20 19,219 —

Westmount Financial Inc. 2,399 2,399

$ 46,144 $ 26,925

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 2.1% (2016: 2.0%) for Economical Mutual Insurance Company and Westmount FinancialInc., and 4.0% for Petline do not exceed the historic long-term average growth rates.

‰ Pre-tax, market adjusted discount rates of 8.7% (2016: 9.6%) for Economical Mutual Insurance Company and itssubsidiaries are used to discount expected profits from future new business.



12. GOODWILL AND INTANGIBLE ASSETS (continued)

(a) Goodwill (continued)

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 (2016: nil).

(b) Intangible assets


Notes Brand Software

Otherintangible

assets Total

Cost:

Balance, beginning of year $ – $ 12,821 $ 178,058 $ 190,879

Acquisition of Petline 20 4,200 2,142 11,900 18,242

Additions – 6,545 41,882 48,427

Disposals – (2,508) – (2,508)

Balance, end of year $ 4,200 $ 19,000 $ 231,840 $ 255,040

Accumulated amortization:


Amortization expense – 4,594 19,208 23,802

Amortization on disposals – (2,508) – (2,508)

Balance, end of year $ – $ 8,317 $ 63,701 $ 72,018

Net book value, end of year $ 4,200 $ 10,683 $ 168,139 $ 183,022


Software

Otherintangible

assets Total

Cost:

Balance, beginning of year $ 11,439 $ 130,963 $ 142,402

Additions 4,748 47,095 51,843

Disposals (3,366) – (3,366)

Balance, end of year $ 12,821 $ 178,058 $ 190,879



Amortization expense 2,740 13,598 16,338

Amortization on disposals (3,366) – (3,366)

Balance, end of year $ 6,231 $ 44,493 $ 50,724

Net book value, end of year $ 6,590 $ 133,565 $ 140,155

Included in intangible assets is $41.3 million (2016: $4.4 million) that has not yet commenced being amortized as the assetsare still under development.

13. OTHER ASSETS

Other assets, as presented on the consolidated balance sheet, are composed of the following:


Investments in associates 14, 21 $ 98,708 $ 52,059

Pension asset 17 7,185 10,082

Prepaid expenses and other 9,020 7,488

$ 114,913 $ 69,629

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14. 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 $ 480,619 $ 330,535

Total liabilities 258,432 211,967

Total revenue 157,987 143,131

Total net income 2,423 15,690

The Company’s share of the comprehensive income of individually immaterial associates is $0.2 million (2016: $3.7 million).Impairment testing for the Company’s investments in associates determined that an impairment loss was not required (2016: nil).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.

15. ACCOUNTS PAYABLE AND OTHER LIABILITIESAccounts payable and other liabilities, as presented on the consolidated balance sheet, are composed of the following:


Pension and non-pension benefit obligations 17 $ 62,868 $ 56,718

Commissions payable 50,843 56,190

Premium taxes and other taxes payable 20,319 19,972

Accounts payable and other 98,470 68,098

$ 232,500 $ 200,978

16. PREMIUMSNet written premiums and net earned premiums, as presented on the consolidated statement of comprehensive (loss) income,are composed of the following:


Direct written premiums $ 2,288,664 $ 2,080,444

Premiums (ceded) assumed from other companies (1,809) 3,676

Gross written premiums 2,286,855 2,084,120

Premiums ceded to other companies 9 (68,768) (73,168)

Net written premiums 2,218,087 2,010,952

Change in gross unearned premiums (51,928) (54,964)

Change in ceded unearned premiums (338) (385)

Net earned premiums $ 2,165,821 $ 1,955,603

17. 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, 2015. 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$2.6 million in 2018. The contributions are expected to be made in the form of cash. Discretionary pension contributions forthe year ended December 31, 2017 were nil (2016: nil). Pension plan matters are regulated by the Financial ServicesCommission of Ontario.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 $11.8 million (2016: $10.7 million).



17. POST-EMPLOYMENT BENEFITS (continued)

(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.


Amountsrecognizedin net loss

(Gains)losses

recognizedin OCI

Present value of benefit planobligations

Fair value ofplan assets

Other benefitplans

Pensionplans

Pensionplans


Current service cost $ 3,839 $ – 383 3,456 –

Interest cost 9,592 – 2,162 7,430 –

Interest income (14,464) – – – 14,464

Return on plan assets excluding interest income 6,615 (5,648) – – (967)

Actuarial losses (gains)

Due to changes in demographic assumptions – 1,979 509 1,470 –

Due to changes in financial assumptions (242) 13,825 4,161 9,422 –

Due to changes in experience losses 744 (494) 250 – –

Contributions by employer – – – – 5,948

Administration cost 564 – – – (564)

Contributions by plan participants – – – 406 406

Benefits paid – – (1,315) (8,352) (8,352)

Balance, end of year $ 6,648 $ 9,662 $ 62,868 $ 213,206 $ 220,391


Amountsrecognizedin net (loss)

income

(Gains)losses

recognizedin OCI

Present value of benefit planobligations

Fair value ofplan assets

Other benefitplans

Pensionplans

Pensionplans


Current service cost $ 4,008 $ – 731 3,277 –

Interest cost 9,511 – 2,117 7,394 –

Interest income (14,609) – – – 14,609

Return on plan assets excluding interest income 6,832 (5,004) – – (1,828)

Actuarial losses (gains)

Due to changes in financial assumptions 215 2,760 216 2,759 –

Due to changes in experience losses (132) (481) (613) – –

Contributions by employer – – – – 1,208

Administration cost 572 – – – (572)

Contributions by plan participants – – – 452 452

Benefits paid – – (1,229) (7,804) (7,804)

Balance, end of year $ 6,397 $ (2,725) $ 56,718 $ 199,374 $ 209,456

Of the amounts recognized in net loss, $6.6 million (2016: $6.4 million) in expenses were recorded in “Operating expenses”.

The actual return on plan assets was $13.5 million (2016: $12.8 million).

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(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 $ (213,206) $ (199,374)

Fair value of plan assets 220,391 209,456

Net defined benefit asset $ 7,185 $ 10,082

Actuarial gains on plan assets $ (5,648) $ (5,004)

Actuarial losses on plan liabilities $ 10,892 $ 2,759

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 $ (62,868) $ (56,718)

Actuarial losses (gains) on plan liabilities $ 4,920 $ (397)

(c) Maturity analysis of defined benefit obligations

The weighted average duration of the pension plan obligation is 16 years (2016: 14 years) and the weighted average durationof the other benefit plans obligation is 16 years (2016: 16 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 $ 8,419 $ 43,875 $ 44,017 $ 116,895 $ 213,206

Other benefit plans 1,975 8,143 10,352 42,398 62,868

$ 10,394 $ 52,018 $ 54,369 $ 159,293 $ 276,074


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

Pension plans $ 7,574 $ 38,890 $ 40,950 $ 111,960 $ 199,374

Other benefit plans 1,775 7,437 9,519 37,987 56,718

$ 9,349 $ 46,327 $ 50,469 $ 149,947 $ 256,092

(d) Pension plan asset allocation

The table below shows the allocation of defined benefit pension plan assets:


Cash $ 1,495 0.7% $ 6,663 3.2%

Canadian fixed income securities (investment grade)

Government of Canada 37,368 17.0% 23,025 11.0%

Provincial and municipal 13,176 6.0% 24,075 11.5%

Corporate 37,510 17.0% 28,353 13.5%

Pooled equity funds

Canadian 43,505 19.7% 55,929 26.7%

Foreign 79,301 36.0% 65,072 31.1%

Other 8,036 3.6% 6,339 3.0%

$ 220,391 100.0% $ 209,456 100.0%

Of the corporate bonds held in the pension plan, 47.0% (2016: 67.9%) are concentrated in the financial services industry, 13.9%(2016: 22.4%) are concentrated in utilities, 10.6% (2016: nil) are concentrated in consumer staples, 8.2% (2016: 9.7%) areconcentrated in industrial, 6.6% (2016: nil) are concentrated in energy, and 13.7% (2016: nil) are in other industries.

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.




(e) Assumptions appliedThe 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

2017 2016 2017 2016

To determine benefit obligation, end of year:

Discount rate 3.4% 3.9% 3.4% 3.8%

Future salary increases – – 2.5% 3.0%

Future pension increases – – 0.0% 0.0%

Inflation assumption – – 2.0% 2.0%

Prescription drug cost increase 7.7% 7.8% – –

Medical claims cost increase 4.5% 4.5% – –

To determine benefit expense for the year:

Discount rate 3.9% 3.9% 3.8% 3.9%

Future salary increases – – 3.0% 3.0%

Future pension increases – – 0.0% 0.0%

Inflation assumption – – 2.0% 2.0%

Prescription drug cost increase 7.8% 8.0% – –

Medical claims cost increase 4.5% 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, 2017 are based on the Canadian Pensioner 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 $ (28,815) $ 31,893 $ (24,810) $ 30,737

Defined benefit obligation – other benefit plans $ (9,642) $ 10,479 $ (7,940) $ 9,989

This impact is calculated by performing a calculation of the liabilities as at December 31, using a discount rate 1% higher orlower than the discount rate used, holding all other assumptions constant.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 $ 10,355 $ (9,562) $ 9,469 $ (7,598)

Aggregate of total service cost and interest cost $ 224 $ (150) $ 399 $ (345)

This impact is calculated by performing a calculation of the liabilities as at December 31, using a health care cost 1% higher orlower than the health care cost increase used, holding all other assumptions constant.

(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 are as follows:

(i) Inflation risk – Inflation can increase the cost of benefits provided under post-employment benefits and result inhigher benefit obligations. As the return on plan assets is indirectly influenced by inflation, an increase in inflationwould not result in a corresponding increase in the value of plan assets.

(ii) Interest rate risk – Changes in interest rates will influence discount rates resulting in an inverse change in benefitobligations. For the defined benefit pension plan, interest rate changes would also have an inverse effect on thefair value of fixed income security assets thereby somewhat offsetting the impact of the change in discounting ofthe benefit obligations.

(iii) Equity market price risk – Economic trends, the political environment and other factors can positively or adverselyimpact the equity markets and, consequently, the value of equity investments held by the defined benefit pensionplan. If equity market returns exceed or lag behind the discount rates, the net defined benefit obligation will beimpacted.

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(f) Risks arising from post-employment benefits (continued)

(iv) Foreign exchange risk – Changes in foreign exchange rates will impact the fair value of foreign pooled equityfunds held by the defined benefit pension plan. A decrease in the value of foreign currencies relative to theCanadian dollar will decrease the fair value of foreign pooled equity funds, increasing the net defined benefitobligation. An increase in the value of foreign currencies relative to the Canadian dollar will have an inverse effect.

(v) Life expectancy risk – Changes in life expectancy will impact the amount of benefits provided under the post-employment benefit plans resulting in a change in the benefit obligation. An increase in life expectancy willincrease the amount of benefits provided under post-employment benefit plans resulting in an increase in thebenefit obligation. A decrease in the life expectancy will have an inverse effect.

18. 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 property and casualty insurance company, the Company’s capital position is monitored by OSFI. OSFI evaluates theCompany’s capital adequacy through the Minimum Capital Test (“MCT”), which measures available capital against requiredrisk-weighted capital. Available capital comprises total equity plus or minus adjustments prescribed by OSFI. Capital requiredis calculated by applying risk factors to the assets and liabilities of the Company. As at the reporting date, the Company’s MCTratio of 242.1% significantly exceeds the 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 effect on capital before entering into any significant transactions to seekto ensure that policyholders are not put at risk through the depletion of capital to unacceptable levels. The Board of Directorsreviews the MCT on a quarterly basis. In accordance with regulatory requirements and the Company’s capital managementpolicies, the Board of Directors has set internal targets at levels higher and more stringent than OSFI’s minimum requirements.Management also conducts its own risk solvency assessment on at least an annual basis and provides regular updates to itsManagement Risk Committee, the Risk Review Committee as well as the Board of Directors.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 9, 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.

19. 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 46.4% (2016: 44.2%) 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 Commission of Ontario File and use or file and approve

Prince Edward Island Island Regulatory and Appeals Commission File and use

Québec Autorité des Marchés Financiers Use and file

20. BUSINESS COMBINATION

On January 1, 2017, the Company acquired all of the issued and outstanding shares of Western Financial Insurance Company(renamed Petline Insurance Company), a leading Canadian pet insurance provider. Petline’s core brand, Petsecure, offers petinsurance products that provide comprehensive coverage to pet owners in Canada. The acquisition further diversified theCompany’s business. The initial purchase price for the acquisition was $43.5 million. The final purchase price was determinedto be $46.1 million based on excess capital closing conditions, which was funded by cash on hand. In the year-ended



20. BUSINESS COMBINATION (continued)

December 31, 2017, the Company incurred acquisition-related costs of $0.5 million (2016: $3.7 million), which is included in“Other expense” in the consolidated statement of comprehensive (loss) income. In the year-ended December 31, 2017, theCompany recognized $58.0 million of net earned premiums and $2.7 million of net income from Petline in the consolidatedstatement of comprehensive (loss) income.

The allocation of the purchase price to the fair value of assets acquired and liabilities assumed as at the acquisition date is asfollows:

(in thousands of dollars) Notes

Purchase price consideration (net of cash acquired of $1,839) $ 44,239

Allocated to:

Investments $ 17,686

Accrued investment income 51

Deferred policy acquisition expenses 7(a) 132

Premiums receivable 426

Income taxes receivable 501

Property and equipment 10 1,330

Other assets 1,972

Unearned premiums 7(a) (2,135)

Claim liabilities 7(b) (3,347)

Accounts payable and other liabilities (6,230)

Deferred income tax liabilities (3,608)

Net identifiable tangible assets acquired 6,778

Finite life intangible assets acquired: 12(b)

Customer relationships 6,200

Distribution network 5,700

Software 2,142

Brand 12(b) 4,200

Goodwill 12(a) 19,219

$ 44,239

Included in intangible assets are customer relationships, distribution network, software, and brand. The fair value of thecustomer relationships and the distribution network was based on the multi-period excess earnings method, while the bookvalue of the software was determined to be representative of fair value. The fair value of the brand was based on the relieffrom royalty method, and was assessed as having an indefinite useful life. The Company plans to continue to use Petline’score brand, Petsecure, which is a trusted and recognizable brand amongst both pet owners and pet professionals in Canada.

The acquired intangible assets are being amortized on a straight-line basis over their estimated useful lives as follows:

Customer relationships 8 years

Distribution network 11 years

Software 4 years

Brand Indefinite

The goodwill is attributable to expected growth and profitability contributions of Petline and the workforce of the acquiredbusiness. The goodwill arising from this acquisition is not deductible for income tax purposes.

21. ACQUISITIONS

During the year, the Company purchased interests in strategically aligned brokerages for total consideration of $49.6 million,which were funded by cash on hand. The acquisitions are being accounted for using the equity method.

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22. COMMITMENTS AND CONTINGENCIES

Commitments

The Company’s commitments include operating lease commitments and certain non-cancellable contractual commitments.The Company’s non-owned buildings, motor vehicles, computers and office equipment are supplied through operating leases.The future contractual aggregate minimum lease payments under non-cancellable operating leases and other commitmentsare as follows:


Within 1 year $ 37,255 $ 39,666

Later than 1 year but not later than 5 years 49,346 52,078

Later than 5 years 8,956 12,966

Operating lease payments included in “Operating expenses” in the consolidated statement of comprehensive (loss) incomeduring 2017 were $17.8 million (2016: $18.1 million).

Total future minimum sublease income under non-cancellable subleases amounted to $0.8 million (2016: $1.4 million).

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 8.

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. The current phase in the demutualization process involves court-appointedpolicyholder committees negotiating the allocation of financial benefits, and the Company preparing a formal conversionproposal for submission to its primary regulator, OSFI.

OSFI will conduct a review of the Company’s submission, as well as all of the other information required by thedemutualization regulations, before granting its authorization for the Company to proceed with a series of policyholder votes.A successful outcome from both policyholder votes would put the Company in a position to apply to the federal Minister ofFinance for approval to demutualize. It is only after approval is received from the Minister that the Company can demutualizeand proceed with any proposed initial public offering. The Company will continually evaluate market conditions, companyperformance and other factors to determine the right time to complete the process.

Demutualization costs are included in “Other expense” in the consolidated statement of comprehensive (loss) income.

24. 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 has establishedprocedures to review and approve transactions with related parties and reports annually to the Corporate GovernanceCommittee 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 and severance $ 5,135 $ 3,590

Short-term and medium-term incentive plans 1,227 3,582

Post-employment defined benefit pension benefits 26 29

Post-employment defined contribution pension benefits 330 409

Other post-employment benefits 8 1

Other short-term employment benefits 77 79

Directors’ fees* 1,463 1,340

$ 8,266 $ 9,030

*Directors’ fees disclosed above include fees accrued in respect of all controlled entities in the group.



24. RELATED PARTY TRANSACTIONS (continued)

Post-employment benefit plansThe 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 17.

AssociatesAt the reporting date, commercial loans of $27.3 million (2016: $17.4 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 receivables(note 2).The Company previously participated in a quota share reinsurance treaty of a company subject to significant influence underterms consistent with the other reinsurers. Effective January 1, 2017, the Company no longer participates in this quota sharereinsurance treaty. The Company’s share of reinsurance (ceded) assumed from the associate, including reinsurance assumedcontracts (note 9), is as follows:


Premiums written 9,16 $ (1,784) $ 3,520

Premiums earned 7,9 (312) 4,310

Claims and adjustment expenses 7,9 (719) 1,984

Commissions 9 (336) 1,676



DPAE 9 $ – $ 565

Reinsurance assumed receivables 9 – 113

$ – $ 678



UPR 9 $ – $ 1,472

Claim liabilities 9 3,294 5,657

Reinsurance assumed payables 9 251 –

$ 3,545 $ 7,129

25. 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.

2017

Performance cycles Number of units

Liability(in thousands of

dollars)

2015-2017 62,271 $ 1,062

2016-2018 68,816 836

2017-2018 66,556 574

2017-2019 124,865 770

322,508 $ 3,242

2016



dollars)

2014-2016 73,694 $ 1,344

2015-2017 70,368 1,025

2016-2018 140,978 1,116

285,040 $ 3,485

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25. MEDIUM-TERM INCENTIVE PLAN (continued)

Restricted units (continued)

The following table shows the movements in the RUs during the year.

2017 2016

Number of units Number of units

Outstanding, beginning of year 285,040 243,895

Awarded 210,001 165,732

Cancelled (98,839) (46,873)

Settled (73,694) (77,714)

Outstanding, end of year 322,508 285,040

A reconciliation of the RU liability is provided below:


Balance, beginning of year $ 3,485 $ 3,275

Provisions made during the year 1,084 1,592

Payments made during the year (1,327) (1,382)

Balance, end of year $ 3,242 $ 3,485

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.

2017



dollars)

2015-2017 93,406 $ 1,281

2016-2018 103,224 902

2017-2018 99,834 805

2017-2019 167,914 991

464,378 $ 3,979

2016


Liability(in thousands

of dollars)

2014-2016 110,542 $ 1,818

2015-2017 105,554 1,498

2016-2018 211,466 1,828

427,562 $ 5,144

The following table shows the movements in the PUs during the year.

2017 2016

Number of units Number of units

Outstanding, beginning of year 427,562 365,843

Awarded 295,618 248,597

Cancelled (148,260) (70,306)

Settled (110,542) (116,572)

Outstanding, end of year 464,378 427,562



25. MEDIUM-TERM INCENTIVE PLAN (continued)

Performance units (continued)

A reconciliation of the PU liability is provided below:


Balance, beginning of year $ 5,144 $ 4,674

Provisions made during the year 326 2,688

Payments made during the year (1,491) (2,218)

Balance, end of year $ 3,979 $ 5,144

The liability for the RUs and PUs are recorded in “Accounts payable and other”. The amount charged to “Operating expenses”for the MTIP was $1.4 million for the year ended December 31, 2017 (2016: $4.3 million).

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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APPENDIX “J”: UNAUDITED INTERIMCONSOLIDATED FINANCIAL STATEMENTSCHIEF FINANCIAL OFFICER’S REPORT

I, Philip Mather, in my capacity as Executive Vice-President and Chief Financial Officer of Economical and not in my personalcapacity, make this report in accordance with section 14(3)(b) of the Mutual Property and Casualty Insurance Company withNon-mutual Policyholders Conversion Regulations (the “Regulations”). This report should be read in conjunction with theattached unaudited interim consolidated financial statements for Economical (the “Interim Financial Statements”) prepared inaccordance with section 14(2)(g) of the Regulations.

The Interim Financial Statements have not been audited but have been, in all material respects, prepared in accordance withInternational Accounting Standards as issued by the International Accounting Standards Board, using accounting policieswhich are consistent with those used in Economical’s 2017 audited consolidated financial statements, including theaccounting requirements of the Office of the Superintendent of Financial Institutions, Canada.

PHILIP MATHERExecutive Vice-President and Chief Financial Officer,

Economical Mutual Insurance Company


INTERIM REVIEW REPORT

To the Audit Committee of the Board of Directors

In accordance with our engagement letter dated 25 July 2017, we have performed an interim review of the condensed interimconsolidated statement of financial position of Economical Mutual Insurance Company as at 30 September 2018 and thecondensed interim consolidated statements of comprehensive loss, changes in equity and cash flows for the three-month andnine-month periods ended 30 September 2018. These condensed consolidated financial statements are the responsibility ofEconomical Mutual Insurance Company’s Management.

We performed our interim review in accordance with Canadian generally accepted standards for a review of interim financialstatements by an entity’s auditor (an “interim review”).

An interim review is substantially less in scope than an audit, the objective of which is the expression of an opinion regardingthe financial statements. Accordingly, we do not express such an opinion. An interim review does not provide assurance thatwe would become aware of any or all significant matters that might be identified in an audit.

Based on our interim review, we are not aware of any material modification that needs to be made for these condensedinterim consolidated financial statements to be in accordance with IAS 34 Interim Financial Reporting.

This report is solely for the use of the Audit Committee of Economical Mutual Insurance Company to assist it in discharging itsregulatory obligation to review these financial statements, and should not be used for any other purpose.


Kitchener, Canada2 November 2018

2019 Special Meeting of Eligible Mutual Policyholders Information Circular J-1

APPENDIX “J”: UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

INTERIM CONSOLIDATED BALANCE SHEET (UNAUDITED) J-3

INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (UNAUDITED) J-4

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) J-5

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) J-5

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. NATURE OF OPERATIONS J-6

2. BASIS OF PREPARATION J-6

3. ACCOUNTING POLICIES J-6

4. SEASONALITY J-6

5. INVESTMENTS J-7

6. POLICY LIABILITIES J-10

7. REINSURANCE CONTRACTS J-13

8. INCOME TAXES J-15

9. GOODWILL AND INTANGIBLE ASSETS J-16

10. OTHER ASSETS J-17

11. ACCOUNTS PAYABLE AND OTHER LIABILITIES J-17

12. POST-EMPLOYMENT BENEFITS J-17

13. DEMUTUALIZATION J-17

14. RESTRUCTURING EXPENSES J-18

15. BUSINESS COMBINATION J-18

J-2


INTERIM CONSOLIDATED BALANCE SHEET (UNAUDITED)

As at

(in thousands of dollars) Notes September 30, 2018 December 31, 2017

ASSETS

Cash and cash equivalents $ 217,124 $ 166,389

Investments 5 3,949,652 3,996,000




Reinsurance receivable and recoverable 7 64,404 59,057

Deferred policy acquisition expenses 6 234,606 221,172

Property and equipment 40,472 41,190

Deferred income tax assets 77,551 33,410

Goodwill and intangible assets 9,15 239,497 229,166

Other assets 10 109,202 114,913

$ 5,744,223 $ 5,621,917


Unearned premiums 6 $ 1,226,439 $ 1,131,366

Claim liabilities 6 2,652,849 2,527,673

Accounts payable and other liabilities 11 227,492 232,500

4,106,780 3,891,539

EQUITY

Retained earnings 1,585,213 1,644,781

Accumulated other comprehensive income 52,230 85,597

Total equity 1,637,443 1,730,378

$ 5,744,223 $ 5,621,917




INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (UNAUDITED)

For the periods ended September 30

(in thousands of dollars) Three months ended Nine months ended

Notes 2018 2017 2018 2017

Gross written premiums $ 670,992 $ 596,265 $ 1,811,284 $ 1,745,469

Net written premiums 7 $ 651,248 $ 579,342 $ 1,758,443 $ 1,696,473

Net earned premiums $ 563,068 $ 552,809 $ 1,661,788 $ 1,609,898

Other underwriting revenues 3,829 3,875 11,771 12,709

Total underwriting revenues 566,897 556,684 1,673,559 1,622,607

Underwriting expenses:

Net claims and adjustment expenses, undiscounted 6,7 440,998 440,115 1,271,043 1,207,104

Net commissions 7 91,995 96,855 275,363 286,648

Operating expenses 92,993 89,472 280,971 266,923

Premium taxes 20,289 19,910 59,788 57,730

646,275 646,352 1,887,165 1,818,405

Underwriting loss before the impact of discounting (79,378) (89,668) (213,606) (195,798)

Impact of discounting 6 16,317 17,657 28,827 26,842

Underwriting loss (63,061) (72,011) (184,779) (168,956)

Investment income:

Interest 5 18,263 14,418 51,413 44,144

Dividends 5 7,771 9,162 26,797 28,340

Recognized (losses) gains on investments 5 (10,149) (22,531) 20,212 12,390

15,885 1,049 98,422 84,874

Other expense 13 2,654 3,102 2,528 12,786

Restructuring expenses 14 — — 2,807 —

Loss before income taxes (49,830) (74,064) (91,692) (96,868)

Income tax recovery 8 (16,555) (22,590) (32,124) (32,203)

Net loss $ (33,275) $ (51,474) $ (59,568) $ (64,665)


Net unrealized (losses) gains on AFS investments 5 (2,221) 7,431 (2,361) 57,954

Reclassification to net loss of net recognized (gains)losses on AFS investments 5 (4,496) 2,732 (44,514) (40,319)

Foreign exchange (loss) gain on investments inassociates (462) (921) 823 (1,668)

Income tax (recovery) expense 8 (1,770) 2,749 (12,685) 4,745

Other comprehensive (loss) income (5,409) 6,493 (33,367) 11,222

Comprehensive loss $ (38,684) $ (44,981) $ (92,935) $ (53,443)


J-4


INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

For the nine months ended September 30


Retainedearnings

Accumulatedother

comprehensiveincome

Totalequity

Retainedearnings

Accumulatedother

comprehensiveincome

Totalequity

Balance, beginning of the period $ 1,644,781 $ 85,597 $ 1,730,378 $ 1,744,539 $ 58,543 $ 1,803,082

Net loss (59,568) — (59,568) (64,665) — (64,665)

Other comprehensive (loss)income — (33,367) (33,367) — 11,222 11,222

Total comprehensive loss (59,568) (33,367) (92,935) (64,665) 11,222 (53,443)

Balance, end of the period $ 1,585,213 $ 52,2301 $ 1,637,443 $ 1,679,874 $ 69,7651 $ 1,749,639

1 Included in accumulated other comprehensive income (“AOCI”) is $4,205 (December 31, 2017: $3,382) related to the cumulative foreign exchange gain oninvestments in associates.


INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

For the periods ended September 30

(in thousands of dollars) Three months ended Nine months ended

Notes 2018 2017 2018 2017

Operating activities:

Receipts:

Premiums collected (net of reinsurance ceded) $ 589,462 $ 560,737 $ 1,670,812 $ 1,622,256

Interest received 17,697 16,075 56,366 55,072

Dividends received 8,685 9,588 27,390 28,538

615,844 586,400 1,754,568 1,705,866

Payments:

Claims paid 6 344,830 349,844 1,116,016 1,051,906

Commissions and expenses paid 176,643 160,286 552,188 539,845

Premium taxes paid 18,171 16,553 63,144 59,788

Income taxes received (41,351) (5,670) (39,208) (1,034)

Restructuring expenses paid 14 117 — 2,609 —

498,410 521,013 1,694,749 1,650,505

Net cash provided by operating activities 117,434 65,387 59,819 55,361

Investing activities:

Investments purchased (1,479,382) (1,599,653) (5,041,062) (3,132,157)

Investments sold, redeemed or matured 1,500,322 1,550,303 5,061,254 3,163,775

Commercial loans advanced (8,400) (6,955) (12,310) (20,155)

Commercial loans repaid 1,322 9,255 5,479 12,401

Other assets purchased (12,954) (5,507) (39,727) (29,256)

Business acquisitions 15 — — — (94,424)

Business dispositions 439 — 17,282 —

Net cash provided by (used in) investing activities 1,347 (52,557) (9,084) (99,816)

Cash and cash equivalents:

Net increase (decrease) during the period 118,781 12,830 50,735 (44,455)

Balance, beginning of the period 98,343 175,768 166,389 233,053

Balance, end of the period $ 217,124 $ 188,598 $ 217,124 $ 188,598

Cash 135,387 188,433 135,387 188,433

Cash equivalents 81,737 165 81,737 165

Total cash and cash equivalents $ 217,124 $ 188,598 $ 217,124 $ 188,598




NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2018

1. 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 domiciled inCanada. Its registered office and principal place of business is 111 Westmount Road South, Waterloo, Ontario, Canada.

2. BASIS OF PREPARATION

The condensed interim consolidated financial statements (“interim financial statements”) are prepared in compliance withInternational Accounting Standard 34 (“IAS 34”)—Interim Financial Reporting. Accordingly, certain information and disclosuresnormally included in annual financial statements prepared in accordance with International Financial Reporting Standards(“IFRS”), as issued by the International Accounting Standards Board, have been omitted or condensed. The preparation ofinterim financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requiresmanagement to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree ofjudgment or complexity, or areas where assumptions and estimates are significant to the financial statements have been setout in note 4 of the Company’s audited consolidated financial statements for the year ended December 31, 2017. Theseinterim financial statements should be read in conjunction with the Company’s consolidated financial statements for the yearended December 31, 2017.

These interim financial statements have been prepared on a historical cost basis, except for those financial instruments thathave been measured at fair value and claim liabilities which are valued on a discounted basis in accordance with acceptedactuarial 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 interim financial statements include the accounts of Economical Mutual Insurance Company and its wholly-owned subsidiaries, Waterloo Insurance Company, Perth Insurance Company, The Missisquoi Insurance Company, SonnetInsurance Company, Petline Insurance Company (“Petline”), Westmount Financial Inc., Family Insurance Solutions Inc. and theTEIG Investment Partnership, which manages the investment portfolio for all insurance companies in the group, except forPetline. 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. Allsignificant inter-company transactions and balances have been eliminated on consolidation to the extent of the interest in theassociate.

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

3. ACCOUNTING POLICIES

The interim financial statements were prepared using the same accounting policies as disclosed in note 2 of the Company’saudited consolidated financial statements for the year ended December 31, 2017.

4. SEASONALITY

The P&C insurance business is seasonal in nature. As such, net underwriting income (loss) may vary significantly betweenquarters due to weather-related or other significant losses.

J-6


5. INVESTMENTS

(a) Investment income and balances

Investment income by financial instrument classification is as follows:

(in thousands of dollars) Three months ended September 30, 2018


receivables Total

Interest $ 8,792 $ 8,481 $ 990 $ 18,263

Dividends — 7,771 — 7,771

Realized (losses) gains on sale of investments (9,788) 7,304 — (2,484)

Net impairment losses on available for sale (“AFS”) investments 5(c) — (2,808) — (2,808)

Unrealized losses on fair value through profit or loss (“FVTPL”) financialinstruments (4,857) — — (4,857)

Recognized (losses) gains on investments (14,645) 4,496 — (10,149)

$ (5,853) $ 20,748 $ 990 $ 15,885



receivables Total

Interest $ 6,510 $ 7,061 $ 847 $ 14,418

Dividends — 9,162 — 9,162

Realized losses on sale of investments (6,431) (1,646) — (8,077)Net impairment losses on AFS investments 5(c) — (1,086) — (1,086)

Unrealized losses on FVTPL financial instruments (13,368) — — (13,368)

Recognized losses on investments (19,799) (2,732) — (22,531)

$ (13,289) $ 13,491 $ 847 $ 1,049

(in thousands of dollars) Nine months ended September 30, 2018


receivables Total

Interest $ 24,730 $ 23,683 $ 3,000 $ 51,413

Dividends — 26,797 — 26,797

Realized (losses) gains on sale of investments (18,110) 49,441 — 31,331

Net impairment losses on AFS investments 5(c) — (4,927) — (4,927)


Recognized (losses) gains on investments (24,302) 44,514 — 20,212

$ 428 $ 94,994 $ 3,000 $ 98,422



receivables Total

Interest $ 18,930 $ 23,050 $ 2,164 $ 44,144

Dividends — 28,340 — 28,340

Realized (losses) gains on sale of investments (6,414) 51,139 — 44,725

Net impairment losses on AFS investments 5(c) — (10,820) — (10,820)


Recognized (losses) gains on investments (27,929) 40,319 — 12,390

$ (8,999) $ 91,709 $ 2,164 $ 84,874

The fair value yield as at September 30, 2018 for the FVTPL bond portfolio was 2.65% (September 30, 2017: 2.13%) and for theAFS bond portfolio was 3.17% (September 30, 2017: 2.65%).





Investment carrying values by financial instrument classification are as follows:

(in thousands of dollars) As at September 30, 2018

FVTPL AFSLoans and

receivables Total

Short-term investments $ — $ 146,816 $ — $ 146,816

Bonds 1,717,714 999,387 — 2,717,101

Preferred stocks — 396,004 — 396,004

Common stocks — 517,145 — 517,145

Pooled funds — 69,545 — 69,545

Commercial loans — — 103,041 103,041

$ 1,717,714 $ 2,128,897 $ 103,041 $ 3,949,652

(in thousands of dollars) As at December 31, 2017

FVTPL AFSLoans and

receivables Total


Bonds 1,671,540 1,015,563 — 2,687,103

Preferred stocks — 384,121 — 384,121

Common stocks — 701,182 — 701,182

Pooled funds — 107,802 — 107,802

Commercial loans — — 96,210 96,210

$ 1,671,540 $ 2,228,250 $ 96,210 $ 3,996,000

The commercial loans have an amortized cost of $103.0 million (December 31, 2017: $96.2 million) and fair value of$94.8 million (December 31, 2017: $85.9 million).

Of the bonds held as at September 30, 2018, 92.3% (December 31, 2017: 90.5%) were rated “A-” or better and 83.2%(December 31, 2017: 79.5%) of the preferred stocks were rated “P2” or better.

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

As atSeptember 30,

2018

As atDecember 31,

2017

Financial services 59.0% 54.3%

Energy 11.9% 8.1%

Industrial 7.2% 4.8%

Utilities 6.7% 11.9%

Real estate 5.3% 1.8%

Telecommunications 3.7% 2.8%

Consumer staples 3.3% 7.6%

Other 2.9% 8.7%

100.0% 100.0%

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

As atSeptember 30,

2018

As atDecember 31,

2017

Canada 97.8% 95.9%

United States 1.9% 3.2%

Other 0.3% 0.9%

100.0% 100.0%

J-8




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/amortizedcost

Gross unrealizedgains

Gross unrealizedlosses Fair value

Short-term investments $ 146,816 $ — $ — $ 146,816

Bonds:

Government 148,660 — (1,391) 147,269

Corporate 864,969 82 (12,933) 852,118

1,013,629 82 (14,324) 999,387


Common stocks:

Canadian 372,246 41,972 (12,894) 401,324

Foreign 58,797 57,124 (100) 115,821

Foreign pooled funds 67,101 2,444 — 69,545

498,144 101,540 (12,994) 586,690

$ 2,062,985 $ 103,662 $ (37,750) $ 2,128,897


Cost/amortizedcost

Gross unrealizedgains

Gross unrealizedlosses Fair value

Short-term investments $ 19,582 $ — $ — $ 19,582

Bonds:

Government 122,442 52 (1,360) 121,134

Corporate 899,643 1,377 (6,591) 894,429

1,022,085 1,429 (7,951) 1,015,563


Common stocks:

Canadian 495,177 64,726 (3,882) 556,021

Foreign 83,547 61,803 (189) 145,161

Foreign pooled funds 102,848 4,954 — 107,802

681,572 131,483 (4,071) 808,984

$ 2,115,463 $ 136,769 $ (23,982) $ 2,228,250

(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 liabilities that

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 all stocks, except the pooled funds.

(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 active markets,quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable but are not pricessuch as interest rates and credit risks and inputs that are derived from or corroborated by observable market data.Included in the Level 2 category are all bonds which are valued on a discounted cash flow basis, the pooled funds whichare valued based on quoted prices of the underlying securities in an active market and short-term investments which arevalued on a discounted cash flow basis. The inputs into the discounted cash flow model for the bonds and short-terminvestments are an estimate of the expected cash flows discounted at a pre-tax risk-free rate plus an appropriateadjustment for credit risk.




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

(iii) Level 3 fair value measurements use significant non-market observable inputs, including assumptions about risk orliquidity. As at September 30, 2018, the Company has no financial instruments in this category (December 31, 2017: 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 a pre-taxrisk-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:




Bonds — 2,717,101 — 2,717,101

Preferred stocks 396,004 — — 396,004

Common stocks 517,145 — — 517,145

Pooled funds — 69,545 — 69,545

$ 913,149 $ 2,933,462 $ — $ 3,846,611




Bonds — 2,687,103 — 2,687,103

Preferred stocks 384,121 — — 384,121

Common stocks 701,182 — — 701,182

Pooled funds — 107,802 — 107,802

$ 1,085,303 $ 2,814,487 $ — $ 3,899,790

There were no transfers of financial instruments between the levels during the three month or nine month period endedSeptember 30, 2018 (December 31, 2017: nil).

(c) Impairment review

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

(in thousands of dollars) Three months ended September 30

2018 2017

Common stocks:

Canadian $ 2,808 $ 1,086

Foreign — —

$ 2,808 $ 1,086

(in thousands of dollars) Nine months ended September 30

2018 2017

Common stocks:

Canadian $ 4,927 $ 10,212

Foreign — 608

$ 4,927 $ 10,820

The remaining gross unrealized losses of $37.8 million (December 31, 2017: $24.0 million) on the AFS investments have notbeen recognized in net 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.

6. POLICY LIABILITIES

These interim 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 and

J-10



consist of premium and claim liabilities. Claim liabilities are associated with claims that have occurred on or beforeSeptember 30, 2018, 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 September 30, 2018.

(a) Premium liabilities

Premium liabilities are represented by the amount of net unearned premiums (“UPR”) less the amount of net deferred policyacquisition expenses (“DPAE”). Generally, the commissions and premium taxes corresponding to the net UPR are deferrable;however, this amount is written down if the resulting expected future net policy costs are greater than the net UPR. No write-down to DPAE was considered necessary for the period ended September 30, 2018 (December 31, 2017: nil).

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

(in thousands of dollars) September 30, 2018


Personal lines:

Auto $ 628,024 $ – $ 628,024

Property 261,068 – 261,068

889,092 – 889,092

Commercial lines:

Auto 123,952 253 123,699


337,347 6,346 331,001

$ 1,226,439 $ 6,346 $1,220,093

(in thousands of dollars) December 31, 2017


Personal lines:

Auto $ 534,268 $ – $ 534,268

Property 233,017 – 233,017

767,285 – 767,285

Commercial lines:

Auto 133,519 1,848 131,671


364,081 7,928 356,153

$ 1,131,366 $ 7,928 $ 1,123,438

(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 period, including incurred but not reported claims. The ultimate cost of these liabilities will varyfrom the best estimate made for a variety of reasons, including additional information with respect to the facts andcircumstances of the claims incurred. Additional information on the judgments, estimates and assumptions used indetermining claim liabilities is contained in note 4 to the Company’s consolidated financial statements for the year endedDecember 31, 2017. The discount rate as at September 30, 2018 used to discount the claim liabilities was 2.79% (December 31,2017: 2.32%).





The following table presents the movement of the Company’s claim liabilities during the period:





Claim liabilities, beginning of period $ 2,569,259 $ 49,724 $ 2,519,535

Current period claims incurred 446,310 2,474 443,836

Prior period adverse (favourable) claims development 9,251 12,089 (2,838)

455,561 14,563 440,998

(Decrease) increase due to discounting (including PfAD) (16,270) 47 (16,317)

Claims and adjustment expenses 439,291 14,610 424,681

Claims paid during the period 355,701 10,871 344,830

Claim liabilities, end of period $ 2,652,849 $ 53,463 $ 2,599,386






Current period claims incurred 438,870 1,541 437,329

Prior period adverse (favourable) claims development 835 (1,951) 2,786

439,705 (410) 440,115

(Decrease) increase due to discounting (including PfAD) (17,628) 29 (17,657)

Claims and adjustment expenses 422,077 (381) 422,458

Claims paid during the period 357,120 7,276 349,844







Current period claims incurred 1,312,557 9,695 1,302,862

Prior period (favourable) adverse claims development (21,947) 9,872 (31,819)

1,290,610 19,567 1,271,043

Decrease due to discounting (including PfAD) (28,970) (143) (28,827)


Claims paid during the period 1,136,464 20,448 1,116,016



NotesGross claim

liabilitiesCeded claim

liabilitiesNet claimliabilities


Acquisition of Petline 15 3,347 – 3,347

Current period claims incurred 1,197,622 8,007 1,189,615

Prior period adverse (favourable) claims development 11,544 (5,945) 17,489

1,209,166 2,062 1,207,104

Decrease due to discounting (including PfAD) (27,473) (631) (26,842)


Claims paid during the period 1,084,817 32,911 1,051,906


J-12




The following table presents the Company’s claim liabilities by line of business as at the end of the period:





Personal lines:

Auto $ 1,585,972 $ 9,834 $ 1,576,138

Property 149,474 1,674 147,800

1,735,446 11,508 1,723,938

Commercial lines:

Auto 432,452 8,212 424,240


917,403 41,955 875,448

$ 2,652,849 $ 53,463 $ 2,599,386





Personal lines:

Auto $ 1,519,224 $ 9,779 $ 1,509,445

Property 115,748 941 114,807

1,634,972 10,720 1,624,252

Commercial lines:

Auto 433,202 15,997 417,205


892,701 43,767 848,934

$ 2,527,673 $ 54,487 $ 2,473,186

7. 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:

(in thousands of dollars) As atSeptember 30,

2018

As atDecember 31,

2017

Individual loss

Property

Net company retention $ 3,000 $ 3,000


Auto and general liability

Net company retention 4,000 4,000


Catastrophe – primary

Net company retentions1 30,000 30,000

Maximum limit 1,150,000 1,150,000

1 In addition to $30.0 million (December 31, 2017: $30.0 million) of net retention, the Company had a maximum $63.6 million (December 31, 2017: $63.6 million)participation in higher layers of the treaty. If a catastrophe breaches the retention level, the Company is required to pay an automatic reinstatement premiumcommensurate with the reinsurance coverage utilized. Further reinstatement coverage may be sought by the Company at an additional cost.

In addition, the Company has purchased facultative reinsurance coverage as required in line with its underwriting guidelines.



7. REINSURANCE CONTRACTS (continued)

(a) Underwriting impact of reinsurance contracts

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

(in thousands of dollars) Three months endedSeptember 30

Notes 2018 2017

Premiums written $ 19,744 $ 16,923

Premiums earned 20,753 17,258

Claims and adjustment expenses 6(b) 14,563 (381)

Commissions 908 935

(in thousands of dollars) Nine months endedSeptember 30

Notes 2018 2017

Premiums written $ 52,841 $ 48,996

Premiums earned 54,421 50,138

Claims and adjustment expenses 6(b) 19,567 1,431

Commissions 2,651 2,783

(b) Reinsurance receivable and recoverable

The amounts presented under reinsurance receivable and recoverable in the interim consolidated balance sheet representthe Company’s contractual rights under reinsurance contracts and are evaluated in a manner consistent with the grossliabilities.

(in thousands of dollars)

Notes

As atSeptember 30,

2018

As atDecember 31,

2017

Reinsurers’ share of UPR 6(a) $ 6,346 $ 7,928

Reinsurers’ share of claim liabilities 6(b) 53,463 54,487

Reinsurer receivables 13,407 6,885

Reinsurer payables (6,950) (8,418)

Unearned reinsurance commissions (1,862) (1,825)

$ 64,404 $ 59,057

(c) Reinsurance assumed contracts

The Company presents balances related to reinsurance assumed contracts in the same manner as it presents direct insurancebusiness with the exception of reinsurance assumed receivables and payables which are presented in “Reinsurancereceivable and recoverable”. The portion of assets and liabilities related to assumed contracts is as follows:



2018

As atDecember 31,

2017

Reinsurance assumed receivables $ 155 $ 144

$ 155 $ 144



2018

As atDecember 31,

2017

Claim liabilities $ 7,234 $ 8,518

Reinsurance assumed payables 661 800

$ 7,895 $ 9,318

J-14


8. INCOME TAXES

The reconciliation of income tax calculated at the Canadian statutory tax rate to the income tax recovery at the effective taxrate recorded in net loss in the interim consolidated statement of comprehensive loss is provided in the table below:

(in thousands of dollars) Three months ended September 30

2018 2017

Income tax recovery calculated based on statutory tax rates 26.9% $ (13,404) 26.7% $ (19,784)


Effect of change in tax rates 0.5% (270) – –


Rate differential on recognized losses on AFS equity instruments 0.2% (101) 0.1% (38)

Other 2.0% (993) 1.1% (825)

Income tax recovery recorded in net loss 33.2% $ (16,555) 30.5% $ (22,590)


2018 2017

Current income taxes $ 2,160 $ (24,607)



(in thousands of dollars) Nine months ended September 30

2018 2017

Income tax recovery calculated based on statutory tax rates 26.9% $(24,647) 26.7% $(25,873)


Effect of change in tax rates 0.2% (204) — —


Rate differential on recognized gains (losses) on AFS equity instruments (0.1%) 89 0.0% (36)

Other 1.5% (1,473) 0.5% (497)

Income tax recovery recorded in net loss 35.0% $(32,124) 33.2% $(32,203)


2018 2017

Current income taxes $ 2,521 $ (38,626)



Income taxes included in other comprehensive (loss) income are as follows:


2018 2017


Net unrealized (losses) gains on AFS investments $ (598) $ 1,985

Reclassification to net loss of net recognized (gains) losses on AFS investments (1,172) 764

Income tax (recovery) expense $ (1,770) $ 2,749


2018 2017


Net unrealized (losses) gains on AFS investments $ (635) $ 15,480

Reclassification to net loss of net recognized gains on AFS investments (12,050) (10,735)

Income tax (recovery) expense $ (12,685) $ 4,745



9. GOODWILL AND INTANGIBLE ASSETS

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


2018

As atDecember 31,

2017

Goodwill $ 46,144 $ 46,144


$ 239,497 $ 229,166

(a) Goodwill


Notes

As atSeptember 30,

2018

As atDecember 31,

2017

Balance, beginning of period $ 46,144 $ 26,925

Acquisition of Petline 15 – 19,219

Balance, end of period $ 46,144 $ 46,144

(b) Intangible assets



Otherintangible

assets Total

Cost:

Balance, beginning of period $ 4,200 $19,000 $ 231,840 $ 255,040

Additions – 1,649 28,112 29,761

Disposals – (2,330) – (2,330)

Balance, end of period $ 4,200 $18,319 $ 259,952 $ 282,471


Balance, beginning of period $ – $ 8,317 $ 63,701 $ 72,018



Balance, end of period $ – $ 8,914 $ 80,204 $ 89,118

Net book value, end of period $ 4,200 $ 9,405 $ 179,748 $ 193,353



Otherintangible

assets Total

Cost:


Acquisition of Petline 15 4,200 2,142 11,900 18,242

Additions – 6,545 41,882 48,427

Disposals – (2,508) – (2,508)

Balance, end of year $ 4,200 $ 19,000 $ 231,840 $ 255,040





Balance, end of year $ – $ 8,317 $ 63,701 $ 72,018

Net book value, end of year $ 4,200 $ 10,683 $ 168,139 $ 183,022

Included in software and other intangible assets is $4.2 million (December 31, 2017: $41.3 million) that has not yet commencedbeing amortized as the assets are still under development. Other intangible assets include capitalized costs associated withthe Company’s digital direct distribution channel, Sonnet, and the development of the policy administration system forpersonal lines and individually rated commercial auto, Vyne.

J-16


10. OTHER ASSETS

Other assets, as presented on the interim consolidated balance sheet, are composed of the following:


As atSeptember 30,

2018

As atDecember 31,

2017

Investments in associates $ 89,360 $ 98,708

Pension asset 12 6,701 7,185

Prepaid expenses and other 13,141 9,020

$ 109,202 $ 114,913

11. ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities, as presented on the interim consolidated balance sheet, are composed of thefollowing:


Notes

As atSeptember 30,

2018

As atDecember 31,

2017

Pension and non-pension benefit obligations 12 $ 64,388 $ 62,868

Commissions payable 43,933 50,843

Premium taxes and other taxes payable 18,814 20,319

Accounts payable and other 100,159 98,470

Restructuring provision 14 198 –

$ 227,492 $ 232,500

12. 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 contribution to be paid by the Company to the defined benefit pension plans is determined each year by the Company’spension actuaries based on the latest actuarial valuations of all its plans. The total contributions to the defined benefit pensionplans made by the Company during the three month period ended September 30, 2018 was $0.7 million (September 30, 2017:nil). The total contributions to the defined benefit pension plans made by the Company during the nine month period endedSeptember 30, 2018 was $2.3 million (September 30, 2017: $4.2 million).

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 planduring the three month period ended September 30, 2018 was $2.7 million (September 30, 2017: $2.7 million). Contributionsunder the defined contribution component of the pension plan during the nine month period ended September 30, 2018 was$8.9 million (September 30, 2017: $8.6 million).

13. 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. Court-appointed policyholder committees representing eligible mutualpolicyholders and eligible non-mutual policyholders have negotiated the method of allocating the financial benefits resultingfrom demutualization, and the Company has prepared a conversion plan that contains the agreed-upon allocation, as well asother particulars to effect demutualization.

The Company has submitted the conversion plan to its primary regulator, the Office of the Superintendent of FinancialInstitutions Canada (“OSFI”). OSFI will conduct a review of the Company’s submission, as well as all of the other informationrequired by the demutualization regulations, and its authorization is required for the Company to proceed with a series ofpolicyholder votes. A successful outcome from both policyholder votes would put the Company in a position to apply to thefederal Minister of Finance for approval to demutualize. It is only after approval is received from the Minister that the Companycan demutualize and proceed with any proposed initial public offering. The Company will continually evaluate marketconditions, company performance and other factors to determine the right time to complete the process.

Demutualization costs are included in “Other expense” in the interim consolidated statement of comprehensive loss.



14. 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 include the consolidation of theCompany’s brands and headcount reductions of approximately 10% of the Company’s workforce, aimed at improving futureoperating results. The Company expects to execute this plan in phases over an 18 month period. The provisions made to datereflect decisions and plans communicated as of September 30, 2018 and include employee-related expenses. Due to thephased approach, additional provisions will be recognized as restructuring costs meet the criteria for recognition. Therestructuring provision is recorded in “Accounts payable and other liabilities” on the interim consolidated balance sheet, andthe corresponding expense is recorded in “Restructuring expenses” on the interim consolidated statement of comprehensiveloss.

A reconciliation of the restructuring provision is provided below:

Three months ended September 30


Balance, beginning of period $ 315 $ –

Provisions made during the period – –

Payments made during the period (117) –

Balance, end of period $ 198 $ –

Nine months ended September 30


Balance, beginning of period $ – $ –

Provisions made during the period 2,807 –

Payments made during the period (2,609) –

Balance, end of period $ 198 $ –

15. BUSINESS COMBINATION

On January 1, 2017, the Company acquired all of the issued and outstanding shares of Western Financial Insurance Company(renamed Petline Insurance Company), a leading Canadian pet insurance provider. Petline’s core brand, Petsecure, offers petinsurance products that provide comprehensive coverage to pet owners in Canada. The acquisition further diversified theCompany’s business. The initial purchase price for the acquisition was $43.5 million. The final purchase price was determinedto be $46.1 million based on excess capital closing conditions, which was funded by cash on hand.

The allocation of the purchase price to the fair value of assets acquired and liabilities assumed as at the acquisition date wasas follows:


Net identifiable tangible assets acquired 6,778

Finite life intangible assets acquired: 9(b)

Customer relationships 6,200

Distribution network 5,700

Software 2,142

Brand 9(b) 4,200

Goodwill 9(a) 19,219

$ 44,239

The goodwill is attributable to expected growth and profitability contributions of Petline and the workforce of the acquiredbusiness. The goodwill arising from this acquisition is not deductible for income tax purposes.

J-18

GLOSSARY OF TERMS“Act” means the Insurance Companies Act, S.C. 1991, c. 47.

“AFS” means available for sale.

“Allocation” means the group-level allocation and the individual-level allocation that were negotiated by the PolicyholderCommittees.

“allowable capital loss” means one-half of any capital loss.

“Appointed Actuary” means Linda Goss or such other person appointed as the company actuary for Economical Mutual.

“attributable” means the contribution to surplus of eligible policyholders and inherent rights of mutual policyholders.

“Board” means the Board of Directors of Economical Mutual.

“By-Law Amendment” means the amendment to Economical Mutual’s by-laws to allow eligible non-mutual policyholders tovote at the Third Special Meeting.

“By-Law Amendment Resolution” means the special resolution on page 11 of this Circular authorizing the amendment of theby-laws of Economical Mutual to extend the right to vote at the Third Special Meeting to the eligible non-mutual policyholders.

“CBCA” means the Canada Business Corporations Act, R.S.C., 1985, c. C-44.

“Cash in Lieu of Shares Opinion” means the opinion prepared by the independent financial market and valuation expert,Origin Merchant Partners, for the demutualization process that opines that the cash distributions (as described in the opinion)are an appropriate substitute for the Common Shares (as described in the opinion) as of May 31, 2018, subject to the methods,qualifications, limitations, assumptions and conditions set forth in the opinion.

“Circular” means this policyholder information circular of Economical Mutual.

“Claims development” means the difference between prior year end estimates of ultimate undiscounted claim costs and thecurrent estimates for the same block of claims. A favourable development represents a reduction in the estimated ultimateclaim costs during the period for that block of claims

“Common Shares” means the common shares of Economical’s new parent holding company, Economical Holdings.

“contribution to surplus (CTS)” has the meaning set out under the heading “Allocation Methodology Framework” onpage 19 in the Circular.

“Conversion Approval Resolutions” means the special resolutions on whether to approve the conversion plan and whetherto authorize Economical Mutual to apply to the Minister of Finance to demutualize, to be voted on by all eligible policyholdersat the Third Special Meeting.

“conversion plan” means the plan setting out the terms for the conversion of Economical Mutual from a mutual company to acompany with common shares, which constitutes a “conversion proposal” for the purposes of section 237 of the Act. Theconversion plan is attached as Appendix “A” to this Circular on page A-1.

“Court” means the Ontario Superior Court of Justice.

“CRA” means the Canada Revenue Agency.

“demutualization” means a regulated process in which a mutual insurance company converts from a company with mutualpolicyholders as its voting members to a share company with share capital and voting shareholders.

“demutualization benefits” means the financial benefits in the form of Common Shares and/or cash distributed to eligiblerecipients in the process of demutualizing.

“Depositary Agent” means Economical Mutual’s depositary agent for demutualization.

“Discounting” means to reflect the time value of money, the expected future payments of claim liabilities are discounted backto present value using the market yield rate of the investments used to support those liabilities. Provisions for adversedeviation are also included when determining the discounted value.

“DPSPs” means deferred profit sharing plans.

“DWP” means direct written premium.

“Economical”, the “Company”, “we”, “us”, and “our” means (i) before demutualization, Economical Mutual; or (ii) afterdemutualization, Economical Holdings. In each case these terms include Economical Mutual’s or Economical Holdings’subsidiaries where the context so requires.

“Economical Mutual” means Economical Mutual Insurance Company prior to demutualization.

“EIC” means Economical Mutual after demutualization.

“Economical Holdings” or “Holdco” means a holding company that will be incorporated under the Act that will wholly-ownEIC after demutualization.

“Effective Date” means the effective date stated in the Letters Patent of Conversion, on which Economical Mutual will ceaseto be a mutual P&C company and will become a P&C company with common shares.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular Glossary-1

GLOSSARY OF TERMS

“Election Form” means the election form (which may have different formats for different groups of eligible recipients) that willbe sent to eligible recipients (other than the Foundation) after the Third Special Meeting.

“Election Deadline” means the date and time chosen by Economical as the deadline for receipt of the Election Form, as willbe disclosed in the Election Form.

“eligible mutual policyholder” means an Economical Mutual policyholder identified in the Masterfile as an eligible mutualpolicyholder, with joint holders treated as one eligible mutual policyholder and each unique combination of eligiblepolicyholders treated as a distinct eligible policyholder (see Section 4.3 of the conversion plan on page A-7 for moreinformation).

“Eligible Mutual Policyholder Committee” means the committee representing the eligible mutual policyholders as a class inthe demutualization of Economical.

“eligible non-mutual policyholder” means an Economical Mutual policyholder identified in the Masterfile as an eligiblenon-mutual policyholder, with joint holders treated as one eligible non-mutual policyholder and each unique combination ofeligible policyholders treated as a distinct eligible policyholder (see Section 4.3 of the conversion plan on page A-7 for moreinformation).

“Eligible Non-Mutual Policyholder Committee” means the committee representing the eligible non-mutual policyholders as aclass in the demutualization of Economical.

“eligible policyholder” means either an eligible mutual policyholder or eligible non-mutual policyholder.

“eligible recipients” means (i) eligible mutual policyholders, (ii) eligible non-mutual policyholders, and (iii) other recipients.

“excess” means the component of CTS remaining after the attributable component.

“Foreign Recipients” means eligible recipients who, on the Election Deadline, have an address listed in the Masterfile that isoutside of Canada who do not certify on their Election Form (or in some other manner acceptable to Economical) that they area Canadian resident for the purposes of the Income Tax Act (Canada).

“Foundation” means the new charitable foundation, to be known as the Economical Insurance Heritage Foundation.

“Foundation Sub-Committee” means the sub-committee formed by the Policyholder Committees to consider and oversee theformation of the Foundation, including its governance structure, objects, and mission.

“Frequency” means a measure of how often a claim is reported as a function of PIF.

“FVTPL” means Fair Value Through Profit and Loss.

“GAAP” means Generally Accepted Accounting Principles.

“Governments” means eligible recipients who are Her Majesty in right of Canada or of a province or an agent (as that term isdefined under section 406.1 of the Act) or agency of Her Majesty in either of those rights, or the government of a foreigncountry or any political subdivision thereof, or any agent or agency thereof.

“group-level allocation” means the method of allocating demutualization benefits between the eligible mutual and eligiblenon-mutual policyholder classes and the Foundation.

“GWP” means gross written premiums.

“historical commitment” means, in the context of allocation for eligible mutual policyholders, recognizing the long-standingcommitment of eligible mutual policyholders to the Company.

“Holder” means an eligible policyholder (i) who receives cash from EIC and/or Common Shares from Holdco in respect of anEconomical Mutual policy held by the eligible policyholder, and (ii) who, for purposes of the Tax Act and at all relevant times,deals at arm’s length with Economical Mutual, EIC, and Holdco, and is not affiliated with Economical Mutual, EIC or Holdco.

“IASB” means International Accounting Standards Board.

“ICBC” means Insurance Corporation of British Columbia, a provincial Crown corporation.

“IFRS” means International Financial Reporting Standards.

“Incurred but not reported (IBNR)” means the amount that is added to case reserves to establish the total claim liabilities. It isintended to cover future development on reported claims, as well as claims that have occurred but not yet been reported tothe Company.

“IPO” means an initial public offering of Common Shares.

“IPO Valuation Range” means a range of estimated equity market values for Economical Holdings based solely on estimatedprices at which the Common Shares could have been expected to be offered as of May 31, 2018 in an IPO of the CommonShares conducted in a manner consistent with the terms of the conversion plan, as if the date of the closing of such IPO wasMay 31, 2018.

“independent” with respect to a member of the Special Committee, means a director who is not “affiliated” with Economicalfor the purposes of the Act and the Affiliated Persons (Insurance Companies) Regulations made under the Act. Economicalhas taken the view that, for purposes of demutualization, a mutual policyholder could have a financial relationship withEconomical that could be material to the policyholder. As a result, Economical has established the practice that a director whois also a mutual policyholder is treated as being affiliated with Economical, is not independent, and does not qualify to be amember of the Special Committee. However, a director who is a non-mutual policyholder can be treated as beingindependent and is qualified to be a member of the Special Committee.

Glossary-2 2019 Special Meeting of Eligible Mutual Policyholders Information Circular

GLOSSARY OF TERMS

“Independent Actuary” means William Weiland or such other person appointed as the independent actuary of Economical ascontemplated by the Regulations.

“individual-level allocation” means the formula to determine allocation among eligible policyholders within an eligiblepolicyholder class.

“inherent rights” means the unique governance rights and benefits that mutual policyholders have in Economical Mutual as amutual company that will be lost or diminished as a result of demutualization.

“IRCA” means individually rated commercial auto.

“Large loss” means a single claim with a gross loss in excess of $1 million.

“Letters Patent of Conversion” means the letters patent of conversion to be issued by the Minister of Finance effectingEconomical’s demutualization pursuant to Section 237(1)(b) of the Act.

“Liquidity Opinion” means the opinion provided by the independent financial market and valuation expert, Origin MerchantPartners that the measures to be taken by Economical as set out in conversion plan, in the two years following the EffectiveDate, are likely to assist the eligible recipients who receive Common Shares to sell such Common Shares on a public marketand to address any potential imbalances that may arise between the volume of Common Shares offered for sale by them andthe volume of Common Shares sought for purchase by public market participants, subject to the methods, qualifications,limitations, assumptions and conditions set forth in the opinion.

“Market Stabilization Restrictions” means the trading restrictions that will apply to the Common Shares received by eligiblerecipients for a period of time after the Offering.

“Masterfile” means the database of eligible policyholder information, as more fully described in Schedule 3 to the conversionplan, “SUMMARY DESCRIPTION OF DEVELOPMENT OF MASTERFILE”, on page A-17.

“Minister of Finance” means the Minister of Finance (Canada).

“Minors” means eligible recipients where Economical knows or is advised they would be less than the age of majority in thejurisdiction where they reside on the Effective Date.

“mutual company” means a company in which rights are evidenced by mutual insurance policies.

“mutual policy” means a mutual policy that is issued by Economical Mutual.

“mutual policyholders” means policyholders that have a mutual policy.

“Net earned premiums” means the portion of NWP (as defined in “NON-GAAP FINANCIAL MEASURES” on page 88) equalto the expired period of time an insurance policy is in effect.

“non-mutual policy” means a policy, other than a mutual policy, that is issued by Economical.

“Non-Resident Holder” means a Holder that, at all relevant times and for purposes of the Tax Act, is not resident or deemedto be resident in Canada for purposes of the Tax Act, does not use or hold, and is not deemed to use or hold, an eligiblepolicy in a business carried on in Canada, and will not use or hold, and will not be deemed to use or hold, Common Shares ina business carried on in Canada.

“OCI” means other comprehensive income (loss).

“Offering” means the IPO and any concurrent private placement.

“ORSA” means Own Risk and Solvency Assessment.

“OSFI” means the Office of the Superintendent of Financial Institutions.

“other recipients” means those persons or classes of persons identified as eligible to receive demutualization benefitspursuant to Section 12(4) of the Regulations, as determined through the negotiations of the Policyholder Committees (seeSection 4.4 of the conversion plan on page A-8 for more information).

“P&C” means property and casualty.

“participation rights” means, in the context of allocation for eligible non-mutual policyholders, recognizing that theRegulations required the participation of eligible non-mutual policyholder as a fundamental aspect of demutualization.

“Petline” means Petline Insurance Company.

“Plans” means RRSPs, RRIFs, RESPs, DPSPs, RDSPs, and TFSAs.

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

“Policyholder Committees” means the Eligible Mutual Policyholder Committee and the Eligible Non-Mutual PolicyholderCommittee.

“Provision for adverse deviation (PfAD)” means an amount that is added to the discounted claims and adjustment expensesto reduce the potential adverse effect of the uncertainty that is inherent in the assumptions and data used to estimate suchliabilities.

“PwC” means PricewaterhouseCoopers LLP, the allocation advisor.

“qualifying mutual policy” means a mutual insurance policy issued by Economical Mutual that was held by an eligible mutualpolicyholder, and in force, on November 3, 2015, as recorded in the Masterfile.

2019 Special Meeting of Eligible Mutual Policyholders Information Circular Glossary-3

GLOSSARY OF TERMS

“qualifying non-mutual policy” means a non-mutual insurance policy (including a surety bond) issued by Economical Mutualthat was held by an eligible non-mutual policyholder, and in force, on November 3, 2015, as recorded in the Masterfile.

“qualifying policy” means a qualifying mutual policy or a qualifying non-mutual policy. For greater certainty, qualifying policiesinclude policies issued under the Western General brand or through Family Insurance, but do not include policies issued byThe Missisquoi Insurance Company, Perth Insurance Company, Waterloo Insurance Company, Federation Insurance Companyof Canada, Sonnet Insurance Company or Petline Insurance Company.

“Regulations” means the Mutual Property and Casualty Insurance Company with Non-Mutual Policyholders ConversionRegulations made under the Act.

“Reinsurance Agreements” means the intercompany reinsurance agreements put in place by Economical.

“Resident Holder” means a Holder who, at all relevant times and for purposes of the Tax Act, is resident in Canada and holdsany Common Shares as capital property.

“RDSPs” means registered disability savings plans.

“RESPs” means registered education savings plans.

“RRIFs” means registered retirement income funds.

“RRSPs” means registered retirement savings plans.

“Severity” means a measure of the average dollar amount paid per claim.

“share company” means a traditional (limited liability) corporation with common shares.

“Share Sales Agent” means the third party that will manage the Share Selling Service.

“Share Selling Service” has the meaning set out under the heading “Selling Your Shares After the IPO” on page 28 in theCircular.

“Small Lot Shareholders” means eligible recipients whose allocation is equivalent to less than 200 Common Shares.

“Special Committee” means the special committee composed exclusively of independent members of the Board, tasked bythe Board with providing recommendations to the Board on whether and how to proceed with demutualization and bringingforward a proposal for the demutualization of Economical Mutual.

“Special Meeting” means the special meeting of the eligible mutual policyholders of Economical Mutual that will be held onMarch 20, 2019, at 10:30 a.m. to consider and vote on the By-Law Amendment Resolution, and any adjournment orpostponement thereof.

“surplus” means Economical’s value and reflects premiums paid over time, investment income, claims paid, expenses, andtaxes.

“transactional consent rights” means the exclusive rights of the eligible mutual policyholders to vote at the first specialmeeting and at this Special Meeting, and the right of all eligible policyholders to vote at the Third Special Meeting.

“taxable capital gain” means one-half of any capital gain.

“Tax Act” means the Income Tax Act (Canada) and the regulations thereunder.

“Tax Proposals” means all specific proposals to amend the Tax Act publically announced by or on behalf of the Minister ofFinance prior to the date of this Circular.

“Third Special Meeting” means the meeting that will be called by the Board in accordance with Section 237(1.1) of the Act (ifthe By-Law Amendment Resolution is passed and the demutualization process is not otherwise terminated) at which alleligible policyholders of Economical Mutual will be asked to vote on the Conversion Approval Resolutions.

“TFSAs” means tax-free savings accounts.

“Total equity” means retained earnings plus accumulated other comprehensive income.

“Underwriting Agreement” means the underwriting agreement to be entered into between Economical Mutual, EconomicalHoldings and the Underwriters in respect of the IPO, as amended, from time to time.

“Underwriters” means Economical’s underwriters for the IPO.

“US Treaty” means the Canada-United States Tax Convention (1980) (as amended).

“Valuation Report” means the report dated June 18, 2018 prepared by Economical’s financial advisors, BMO Nesbitt BurnsInc. and RBC Dominion Securities Inc.

“Valuation Opinion” means the report prepared by Economical’s independent financial market and valuation expert, OriginMerchant Partners, that gives an opinion that the method and assumptions used by BMO Nesbitt Burns Inc. and RBCDominion Securities Inc. to estimate the range of equity market values for Economical Holdings for purposes of the ValuationReport are appropriate and that such estimated value reasonably reflects prevailing market conditions as of May 31, 2018,subject to the methods, qualifications, limitations, assumptions and conditions set forth in the opinion.

“waiting period” means the one-year period following demutualization during which Economical may not issue shares, shareoptions, or the right to acquire shares to any director, officer, or employee.

Glossary-4 2019 Special Meeting of Eligible Mutual Policyholders Information Circular

2019 SPECIAL MEETING OF ELIGIBLE MUTUAL POLICYHOLDERSNOTICE AND POLICYHOLDER INFORMATION CIRCULAR

HEAD OFFICE 111 Westmount Road South P.O. Box 2000, Waterloo, ON N2J 4S4 T 519 570 8500

For demutualization news and resources, visit joininourfuture.com

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