2019
A
n
n
u
a
l
R
e
p
o
r
t
Letter to Shareholders
2019 was a year of inflection for Trisura, as we gained scale in our North American specialty insurance
platform and protected our legacy European business against market volatility. Our Canadian team
continued to deliver strong underwriting results and growth, keeping the pace set over the past 14 years.
In the U.S., we continued to deliver on our operating targets, generating over $250 million in premiums
and significant fee income through our hybrid fronting model, demonstrating exciting potential. We
closed our first acquisition, adding critical admitted licenses to our U.S. regulated entity. We also
completed our inaugural equity raise, building a stronger base of capital to support growth while
expanding our network of partners. As our global business develops, we remain focused on maintaining
the culture, principles and disciplined underwriting standards that have made us preferred partners for
our specialty insurance distribution networks in Canada for so many years.
Financial Highlights
Our specialty P&C insurance business delivered strong performance, with $448 million in gross premiums
written, more than double what we wrote last year. Our growth was led by acceleration of new business
from our U.S. fronting platform – delivering five times the premium of 2018 and supported by increased
premiums year over year in each of Surety, Risk Solutions, and Corporate Insurance in Canada. Although
annual income declined in the face of reserve strengthening in our European life annuities, income in core
North American platforms grew significantly, benefitting from strong investment income and profitability
in the U.S.
For the full year, net income of $5.1 million, or $0.69 per share, is reflective of growing profitability across
our North American platforms, combined with losses from European life annuity reserve strengthening.
Book value per share has risen to $21.58, an increase of 9.9% over December 31, 2018, supported by
earnings as well as our equity raise in the third quarter.
Our balance sheet is conservatively managed and growing, with $190 million in capital and a consolidated
debt-to-capital ratio of 13.5%, providing financial flexibility for future growth.
Insurance Operations
We continue to be a leader in the speciality commercial insurance market. Our Canadian subsidiary is our
most mature business line and is led by an experienced and skilled management team. In Canada, we
achieved a combined ratio of 87.8%, which coupled with improved investment income drove a strong
19.1% return on equity. 2019 saw improved performance and growth from our Risk Solutions and
Corporate Insurance lines, demonstrating the benefits of our diversification within specialty lines. Our
profitability continues to be anchored by our established Surety practice.
Our goal in 2019 was to demonstrate the scalability and profitability of our U.S. fronting platform.
Following a healthy ramp in 2018, we grew our team to 22 professionals, and bound an additional 15
programs generating $264 million in gross premium. We increased premium and net income in every
quarter and anticipate growth to continue. As programs mature, earned premium and fee income accrue
to our net income, driving profits from break even in the first quarter to $1.6 million in the fourth quarter,
despite continued investment in infrastructure and costs associated with our acquisition. As we look to
2020 our focus will be on maintaining our growth trajectory in the excess and surplus lines, while
introducing admitted capabilities through the acquisition and expansion of new licenses.
Our reinsurance platform had a volatile year, driven by less-than-perfect asset liability matching coupled
with historic declines in European interest rates. Over the course of the year we improved our asset
liability matching through the deployment of cash into securities that better reflected the duration of our
underlying liabilities. Although we observed significant movements in interest rates in every quarter, the
work we did to reduce volatility demonstrated its effectiveness in the third and fourth quarters, as
movements in liabilities were more effectively offset by movements in assets. We licensed our
international entity to act as a captive reinsurer to our onshore subsidiaries and commenced writing
business for our U.S. platform in the fourth quarter.
Investments
With a backdrop of supportive markets, we benefitted from a stronger investment income across all
jurisdictions. Our centralized investment management and advisory function broadened the tool kit
available to our subsidiary portfolios. The introduction of currency hedging and new asset classes
improved diversification and resulted in greater investment income in 2019. We continue to broader our
exposure to alternatives, including infrastructure debt and commercial mortgages. These are investments
that we feel are both appropriate and attractive for insurance portfolios, today more than ever in the
context of low prevailing interest rates. We made significant progress in matching assets and liabilities in
our international portfolio, deploying capital into long-dated European securities with a duration profile
better suited to our annuity policies.
The majority of our portfolios remain invested in high quality, investment grade bonds, complemented by
preferred shares, secured private debt, and high quality, dividend paying equities. Corporate spreads
tightened significantly in 2019, coupled with strong equity performance. The volatility experienced in
December 2018 and our ability to deploy into high quality investments that we can hold over the long
term enabled us to selectively add equity and fixed income positions at attractive valuations. Today,
prevailing interest rates are lower, corporate spreads are tighter, and equity valuations are higher. Despite
solid economic fundamentals in North America, headline risk continues to create volatility, as well as
opportunity. We believe that we can be successful by applying principles of prudent investment
management while seeking opportunities to enhance performance over the long term.
Strategic Priorities
Following a successful equity raise in 2019 we are better positioned than ever to provide our subsidiaries
with the resources to grow and prosper. We continue to expand our reach in Canada and the U.S. through
both organic and acquisitive growth supported by our history of profitability through disciplined
underwriting and investment returns. We also maintain a firm focus on culture and recognize the
importance of our people. We're proud of our Canadian subsidiary for once again being recognized as one
of Canada's Top Small and Medium Employers, demonstrating the special culture our organization has
fostered and providing a strong foundation for Trisura Group’s future.
Closing
In 2019 our core businesses demonstrated exciting potential. Profitability in Canada has strengthened,
and we are benefitting from a growing footprint and increased profile. Consolidation of competitors and
distribution channels provides challenges for us to defend our market share, but also opportunities to
grow. The early trajectory of our U.S. platform has exceeded expectations and provides a complimentary
business to the mature and profitable platform in Canada. We are well-positioned to continue our
trajectory of growth in 2020.
We are encouraged by firming markets in the commercial insurance space, providing an opportunity to
enhance both growth and profitability. We believe our niche focus will serve shareholders well and we
expect that specialty insurance will continue to outperform the boarder P&C market’s underwriting
results.
As we look forward towards 2020, I would like to thank our employees, partners, and shareholders for
their continued support. We have an opportunity to build a larger and more profitable specialty insurance
platform in Trisura, one that I am excited to be a part of.
Sincerely,
David Clare
President and CEO
Trisura Group Ltd.
February 12, 2020
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This letter to shareholders contains “forward-looking information” within the meaning of Canadian provincial securities laws and
“forward-looking statements” within the meaning of applicable Canadian securities regulations. Forward-looking statements
include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding
the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets,
goals, ongoing objectives, strategies and outlook of the Company and its subsidiaries, as well as the outlook for North American
and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “likely,”
“anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof
and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could”.
Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking
statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance
on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors,
many of which are beyond our control, which may cause the actual results, performance or achievements of our Company to differ
materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements
and information.
Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements
include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in the
countries in which we do business; the behaviour of financial markets, including fluctuations in interest and foreign exchange
rates; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets;
strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and
the ability to attain expected benefits; changes in accounting policies and methods used to report financial condition (including
uncertainties associated with critical accounting assumptions and estimates); the ability to appropriately manage human capital;
the effect of applying future accounting changes; business competition; operational and reputational risks; technological change;
changes in government regulation and legislation within the countries in which we operate; governmental investigations;
litigation; changes in tax laws; changes in capital requirements; changes in reinsurance arrangements; ability to collect amounts
owed; catastrophic events, such as earthquakes and hurricanes; the possible impact of international conflicts and other
developments including terrorist acts and cyberterrorism; and other risks and factors detailed from time to time in our documents
filed with securities regulators in Canada.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our
forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and
potential events. Except as required by law, Trisura Group Ltd. undertakes no obligation to publicly update or revise any forward-
looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.
Trisura Group Ltd.
Management’s Discussion and Analysis
For the year ended December 31, 2019
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our Management’s Discussion and Analysis (“MD&A”) is provided to enable a reader to assess the results of operations and financial
condition of Trisura Group Ltd. for the three and twelve months ended December 31, 2019. This MD&A should be read in conjunction
with the audited Consolidated Financial Statements for the year ended December 31, 2019.
Unless the context indicates otherwise, references in this MD&A to the “Company” refer to Trisura Group Ltd. and references to “us,”
“we” or “our” refer to the Company and its subsidiaries and consolidated entities.
The Company’s Consolidated Financial Statements are in Canadian dollars and are prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. In this MD&A, all references to “$” are to
Canadian dollars unless otherwise specified or the context otherwise requires.
This MD&A is dated February 12, 2020. Additional information is available on SEDAR at www.sedar.com.
1
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
TABLE OF CONTENTS
Section 1 – Overview ....................................................................................................................................................................................................... 3
• Our Business
• Organizational Structure & Regulatory Framework
Section 2 – Financial Highlights ....................................................................................................................................................................................... 4
Section 3 – Financial Review ............................................................................................................................................................................................ 5
Income Statement Analysis
•
• Balance Sheet Analysis
• Share Capital
• Liquidity
• Capital
Section 4 – Performance Review ..................................................................................................................................................................................... 9
• Specialty P&C
• Specialty P&C – Canada
• Specialty P&C – United States
• Reinsurance
• Corporate
Section 5 – Investment Performance Review ............................................................................................................................................................... 20
• Overview
• Summary of Investment Portfolio
•
Investment Performance
Section 6 – Outlook & Strategy ..................................................................................................................................................................................... 23
Industry
•
• Outlook and Strategy
Section 7 – Other Information ....................................................................................................................................................................................... 25
• Ratings
• Cash Flow Summary
• Segmented Reporting
• Contractual Obligations
• Financial Instruments
• Related Party Transactions
• Operating Metrics
Section 8 – Risk Management ....................................................................................................................................................................................... 29
• Corporate Governance
• Key Risks
Section 9 – Summary of Results .................................................................................................................................................................................... 40
• Selected Quarterly Results
Section 10 – Accounting and Disclosure Matters ........................................................................................................................................... 40
Internal Controls over Financial Reporting
• Disclosure Controls and Procedures
•
• Special Note Regarding Forward-Looking information
• Glossary of Abbreviations
2
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 1 - OVERVIEW
OUR BUSINESS
Our Company is a leading international specialty insurance provider operating in the Surety, Risk Solutions, Corporate Insurance,
Fronting and Reinsurance niche segments of the market. Our operating subsidiaries include a Canadian specialty insurance company,
a US specialty insurance company and an international reinsurance company. Our Canadian specialty insurance subsidiary started
writing business in 2006 and has a strong underwriting track record over its 13 years of operation. Our US specialty insurance company
has participated as a hybrid fronting entity in the non-admitted markets since early 2018 and is licensed as an excess and surplus lines
insurer in Oklahoma with the ability to write business across 50 states. Our US specialty insurance company can also write business
on an admitted basis in certain states. Our international reinsurance business has been in operation in Barbados for more than 17
years and although we ceased writing third party reinsurance business in 2008, we have commenced writing new business in support
of our US subsidiary.
Our Company has an experienced management team, strong partnerships with brokers, program administrators and reinsurers, and
a specialized underwriting focus. We plan to grow by building our business in the US and through expansion of our Canadian business
both organically and through strategic acquisitions. We believe our Company can capitalize on favourable market conditions through
our multi-line and multi-jurisdictional platform.
In Q4 2019, the Company closed its acquisition of 21st Century Preferred Insurance Company and completed its re-domestication from
Pennsylvania to Oklahoma. This acquisition enhances the offering of our US platform by providing licenses for admitted insurance
business in 14 states. The Company is in the process of applying for licenses in the remaining states.
Significant achievements in 2019 include:
✓ Demonstrated profitability and dramatic growth potential of our US fronting platform, generating $263.9 million in GPW and
$8.0 million in fee income, while continuing to build the infrastructure needed to support growth.
✓ Continued growth and underwriting excellence in our Canadian insurance operations, with a 19.1% ROE alongside 14.4%
annual NPE growth supported by higher investment income.
✓
Improved risk-adjusted investment returns following the internalization of the investment management function, as well as
continued asset re-allocation and diversification in 2019.
✓ Completed the acquisition of and re-domestication of an admitted shell, bringing admitted state licenses to 14.
✓ Successfully completed an inaugural $55.7 million capital raise supported by existing and new shareholders, which increased
capacity for US expansion and further improved asset liability matching in our international reinsurance business.
✓ Assumption of new business in our international operations in support of our US business in Q4 2019.
✓ Named one of Canada’s Top Small and Medium Employers by Canada’s Top 100 (Globe and Mail) for the third year in a row,
and AON’s Best Employer Platinum for Small and Medium organizations in Canada for four years running, employee
engagement score of 88%.
3
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
ORGANIZATIONAL STRUCTURE & REGULATORY FRAMEWORK
The Company was incorporated under the Business Corporations Act (Ontario) (“OCA”) in January 2017. We have three principal
regulated wholly owned insurance subsidiaries:
(i) Trisura Guarantee Insurance Company (“Trisura Guarantee”) is our Canadian specialty insurance company. Trisura Guarantee
is federally incorporated in Canada, is licensed in all provinces and territories of Canada and is subject to both prudential
regulation by the Office of the Superintendent of Financial Institutions (“OSFI”) and market conduct regulation by each of the
insurance regulatory authorities of the provinces and territories in which it conducts business.
(ii) Trisura Specialty is our US specialty insurance company. Trisura Specialty was incorporated in 2017 and is licensed by the
Oklahoma Insurance Department as a domestic surplus line insurer and can write business as a non-admitted surplus line
insurer in all states within the United States, as well as write business on an admitted basis in an additional 14 states.
(iii) Trisura International Insurance Ltd. (“Trisura International”) is our international reinsurance company for third party risks.
Trisura International is incorporated in Barbados, is licensed to write international reinsurance business and is regulated by
the Financial Services Commission (“FSC”) in Barbados. A wholly owned subsidiary of Trisura International was established
in Barbados, to act as a reinsurer of our on-shore companies and commenced writing business in Q4 2019.
SECTION 2 – FINANCIAL HIGHLIGHTS IN Q4 AND FULL YEAR 2019
✓ Net income of $4.2 million in the quarter and $5.1 million for the full year driven by positive results in Canada and the US,
offset in the full year period by increases of the life annuity reserves in our reinsurance business due to declines in European
interest rates.
✓ Basic EPS of $0.47 in Q4 2019 compared to $0.24 in Q4 2018 and $0.69 for the full year compared to $1.29 in 2018.
✓ BVPS of $21.58, a 9.9% increase over Q4 2018.
✓ LTM ROE of 3.5% compared to 6.9% in 2018, was impacted by negative results in our reinsurance business in the first nine
months of 2019 and was diluted by our capital raise in September.
✓ Continued strong performance of our operating subsidiaries in Canada and the US.
•
Canada:
▪ GPW and NPE growth of 16.4% and 19.2% respectively in Q4 2019 and 11.5% and 14.4% for the full year.
▪ Net income of $4.9 million in Q4 2019, an increase of 15.9% from Q4 2018 and net income of $15.8 million
for the full year, an increase of 12.3% over 2018.
▪ Q4 2019 and full year combined ratios of 82.9% and 87.8% respectively, alongside strong investment
income generated LTM ROE of 19.1%.
• US:
▪
Continued growth in GPW reaching $95.4 million in Q4 and $263.9 million for the full year.
▪ Net income of $1.5 million in Q4 and $3.8 million for the full year, early demonstration of profitability and
potential of the fronting model.
▪
Fronting operational ratios of 79.1% in Q4 2019 and 84.8% for the full year, both significantly better than
the corresponding periods in 2018 reflecting growth in NPE and fronting fees as the business builds scale.
✓ Strong capital position across the Company including an MCT ratio of 258% in our Canadian subsidiary, sufficient capital in
our US business to support its AM Best A- Rating (VII size category) and appropriate capital in our international reinsurer.
✓ Debt-to-capital ratio of 13.5% at Q4 2019 down from 18.6% at Q4 2018 and below our long-term target of 20%, due in part
to the capital raise.
4
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 3 – FINANCIAL REVIEW
INCOME STATEMENT ANALYSIS
Q4 2019
Q4 2018
$ variance
% variance
2019
2018 (1)
$ variance
% variance
Gross premiums written
Net premiums written
Net premiums earned
Fee income
143,212
39,656
29,710
3,575
68,274
31,114
22,983
675
Total underwriting revenue
33,285
23,658
Net claims
Net commissions
Premium taxes
Operating expenses
(687)
(9,677)
(1,405)
(11,059)
(5,920)
(6,545)
(1,278)
(8,934)
Net claims and expenses
(22,828)
(22,677)
Net underwriting income (loss)
Net investment (loss) income
Settlement from structured
insurance assets
Net (losses) gains
Interest expense
Income before income taxes
10,457
(3,868)
981
2,150
(92)
(341)
6,156
120
(261)
2,990
Income tax expense
(1,984)
(1,359)
Net income
4,172
1,631
74,938
109.8%
448,262
219,041
229,221
104.7%
8,542
6,727
2,900
9,627
5,233
(3,132)
(127)
(2,125)
(151)
9,476
27.5%
29.3%
142,628
115,475
107,504
88,809
429.6%
12,206
4,724
27,153
18,695
7,482
40.7%
119,710
93,533
26,177
(88.4%)
(49,936)
(19,402)
(30,534)
47.9%
9.9%
23.8%
(37,516)
(29,903)
(7,613)
(5,294)
(4,758)
(536)
(40,296)
(35,184)
(5,112)
0.7%
(133,042)
(89,247)
(43,795)
23.5%
21.1%
158.4%
28.0%
157.4%
25.5%
11.3%
14.5%
49.1%
966.0%
(13,332)
4,286
(17,618)
(411.1%)
(6,018)
(279.9%)
16,243
8,986
8,077
1,572
-
759
(970)
30.7%
(1,361)
105.9%
46.0%
155.8%
11,199
13,061
(6,105)
(4,423)
5,094
8,638
7,257
8,077
813
(391)
(1,862)
(1,682)
(3,544)
80.8%
nm
nm
40.3%
(14.3%)
38.0%
(41.0%)
-
-
-
nm
(212)
(176.7%)
Other comprehensive (loss)
income
(1,188)
152
(1,340)
(881.6%)
808
(316)
1,124
nm
Comprehensive income
2,984
1,783
1,201
0.47
0.47
0.24
0.24
67.4%
95.8%
5,902
8,322
(2,420)
(29.1%)
0.69
0.69
1.29
(0.60)
(46.5%)
1.27
(0.58)
(45.7%)
0.23
95.8%
(80)
3,166
(625)
2,541
0.23
21.58
19.63
1.95
9.9%
21.58
19.63
LTM ROE
3.5%
6.9%
n/a
(3.4pts)
3.5%
6.9%
(1) Certain Net investment income balances from December 31, 2018 have been reclassified to Net gains to conform with 2019 presentation.
1.95
n/a
9.9%
(3.4pts)
Earnings per common share -
basic - in dollars
Earnings per common share -
diluted - in dollars
Book value per share - in
dollars
5
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Premium Revenue and Fee Income
Strong premium growth continued in Q4 2019 with a 109.8% increase over Q4 2018 in GPW driven by continued acceleration in the
US. NPW growth of 27.5% was significant, but lower than GPW growth due to changes in the proportion of our US fronting business
that is ceded to reinsurers. NPE grew by 29.3% with contributions coming from our Canadian and US platforms. The increase in fee
income was driven by fronting fees from the US, as well as an increase in fee income in Canada.
Full year 2019 GPW grew by over 100% mainly from the US and supported by growth of 11.5% in Canada. Full year NPW and NPE
growth were 23.5% and 21.1% respectively with the growth spread across all North American lines of business. The increase in annual
fee income was driven primarily by fronting fee growth in the US.
Net Claims
Net claims in Q4 2019 were lower than Q4 2018 due to the reduction in our life annuity reserves arising from increases in European
interest rates. In the full year period, net claims in 2019 were greater than 2018 due to increases in our life reinsurance reserves
driven by declines in European interest rates during the first nine months of 2019. Importantly, a significant portion of these reserve
increases are offset by investment income (see Net Investment Income).
Operating Expenses
Operating expenses increased by 23.8% in Q4 2019, driven primarily by increases in the value of share based compensation issued in
2017 and 2018 which are impacted by movement in our share price.
The increase in Operating expenses in the full year period arose as a result of expense growth in the specialty insurance operations
associated with business development, one-time costs related to staffing transition costs in Canada, costs related to the acquisition of
21st Century Preferred and share based compensation costs at the Corporate level.
Net Underwriting Income (Loss)
The main driver of the net underwriting income in Q4 2019 was the reduction in the life annuity reserves of the Reinsurance business
due to an increase in European interest rates. In the full year 2019, the net underwriting loss compared to 2018 was due to life
reinsurance reserve increases arising from falling European interest rates in the first nine months of 2019.
Net Investment Income
See Section 5 – Investment Performance Review.
Other Comprehensive Income
See Section 5 – Investment Performance Review.
Income Tax Expense
The effective tax rate of the Company is currently high as the Company experienced losses during the year at Trisura International,
which resides in a lower tax jurisdiction, while the Company has generated taxable income in Canada and the US, which have relatively
higher tax rates. This difference in tax rates in different jurisdictions is reflected in the line “International operations subject to
different tax rates” in Note 28 of the Consolidated Financial Statements. The company is evaluating options to become more tax-
efficient.
6
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Net Income
Net income for the quarter was higher than prior year primarily due to ramp up of the US platform and improved results at the
reinsurance business. For the full year, lower net income is a result of reserve increases on the life annuity reserves of the reinsurance
business.
EPS, BVPS and ROE
Quarterly EPS of $0.47 compared to $0.24 in Q4 2018 improved as a result of a stronger contribution from fronting in the US mitigated
by an increase in the number of shares outstanding. Full year EPS was $0.69 compared to $1.29 (basic) in the prior year, impacted by
both reserve increases in our Reinsurance business and a greater number of shares outstanding. BVPS at Q4 2019 of $21.58
represented 9.9% growth over Q4 2018. Cumulative translation losses as a result of a weakening USD lowered BVPS in the quarter.
BALANCE SHEET ANALYSIS
As at
December 31, 2019
December 31, 2018
$ variance
Cash and cash equivalents, and short-term securities
Investments
Premiums and accounts receivable, and other assets
Deferred acquisition costs
Recoverable from reinsurers
Capital assets and intangible assets
Deferred tax assets
Total assets
Accounts payable, accrued and other liabilities
Reinsurance premiums payable
Unearned premiums
Unearned reinsurance commissions
Unpaid claims and loss adjustment expenses
Loan payable
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
85,905
392,617
86,669
104,197
293,068
14,477
1,460
978,393
40,916
80,186
328,091
51,291
257,880
29,700
788,064
190,329
978,393
95,212
282,874
46,276
63,715
109,567
2,512
826
600,982
24,167
41,406
182,623
19,137
173,997
29,700
471,030
129,952
600,982
(9,307)
109,743
40,393
40,482
183,501
11,965
634
377,411
16,749
38,780
145,468
32,154
83,883
-
317,034
60,377
377,411
Total assets at December 31, 2019 were $377.4 million higher than at December 31, 2018 as a result of growth across our Specialty
P&C businesses, as well as the additional capital raised in Q3 2019. The growth in the US has led to increases across a number of
assets categories, particularly Recoverables from reinsurers as well as Investments. The capital raise contributed to the increase in
investments, as cash raised was deployed into investment portfolios across the organization, and cash balances in our Reinsurance
subsidiary were redeployed into better matched investments which performed well through the year.
The increase in Capital assets and intangible assets arose primarily from the adoption of IFRS 16, effective January 1, 2019. The new
accounting standard brings most leases on to the Statement of Financial Position. In 2019, this resulted in the recognition of right of
use assets of $10.8 million with a corresponding lease liability included in Accounts payable, accrued and other liabilities.
The main drivers of liability increases were Unearned premiums, and Unpaid claims and loss adjustment expenses primarily as a result
of business growth in the US.
7
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SHARE CAPITAL
Our authorized share capital consists of: (i) an unlimited number of common shares; (ii) an unlimited number of non-voting shares;
and (iii) an unlimited number of preference shares (issuable in series).
During Q3 2019, the Company completed a $55.7 million capital raise, to support growth at Trisura Specialty, as well as to further
improve asset liability matching at Trisura International. The Company issued an additional 2,197,939 shares.
As at December 31, 2019, 8,819,619 common shares were issued and outstanding. During the quarter, the Company redeemed its
64,000 preferred shares outstanding at par.
LIQUIDITY
Liquidity sources immediately available to the Company include: (i) cash and cash equivalents, and short-term securities; (ii) our
portfolio of highly rated, highly liquid investments (iii) cash flow from operating activities which include receipt of net premiums, fee
income and investment income and; (iv) bank loan facilities including our revolving credit facility (see Note 18 to the Consolidated
Financial Statements). These funds are used primarily to pay claims and operating expenses, service the Company’s credit facility and
purchase investments to support claims reserves and capital requirements.
CAPITAL
The MCT ratio of Trisura Guarantee was 258% at December 31, 2019 (239% as at December 31, 2018), which comfortably exceeds the
150% regulatory requirements prescribed by OSFI.
Trisura Specialty’s capital and surplus of $83.3 million USD as at December 31, 2019 ($48.8 million USD as at December 31, 2018) was
in excess of the various Risk Based Capital requirements of the states in which it is licensed.
Trisura International’s capital of $14.2 million USD as at December 31, 2019 ($21.1 million USD as at December 31, 2018) was sufficient
to meet the FSC’s regulatory capital requirement. The reduction in capital in 2019 was due to losses on the life component of our
reinsurance business.
We had a debt-to-capital ratio of 13.5% as at December 31, 2019 (18.6% as at December 31, 2018), below our long-term target debt-
to-capital ratio of 20% as a result of the capital raise and growth in book value from earnings.
The Company is well-capitalized and we expect to have sufficient capital to meet our regulatory capital requirements, fund our
operations and support our current business plans.
8
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 4 – PERFORMANCE REVIEW
SPECIALTY P&C
Our Specialty P&C business consists of our Surety, Risk Solutions, and Corporate Insurance business lines which we write in Canada
and a broad range of surplus lines in the United States written through a fronting model.
The tables and charts below provide a segmentation of our Specialty P&C GPW and NPW for the fourth quarter and full year period of
2019 and 2018, respectively. Our US group produced over half of total GPW in Q4 2019 and full year 2019 having commenced writing
business in Q1 2018. Premium growth was supported by strong momentum in Surety and Corporate insurance.
GPW
Surety
Risk Solutions
Corporate Insurance
Fronting – US
Total GPW
Q4 2019
% growth over
prior year
Q4 2018
2019
% growth over
prior year
2018
14,514
19,565
13,730
95,371
143,180
42.3%
(3.2%)
29.0%
250.7%
109.8%
10,201
20,222
10,644
27,194
68,261
59,028
77,838
47,373
263,911
448,150
14.5%
4.3%
21.2%
391.2%
104.7%
51,535
74,614
39,073
53,731
218,953
Gross Premiums Written
Q4 2019
Gross Premiums Written
2019
Surety
10.1%
Risk Solutions
13.7%
Corporate
Insurance
9.6%
Fronting - US
66.6%
Fronting - US
58.9%
Surety
13.2%
Risk
Solutions
17.3%
Corporate
Insurance
10.6%
9
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Total NPW grew by 26.3% in Q4 2019 and 23.2% in 2019 with growth coming from all segments of the book.
NPW
Surety
Risk Solutions
Corporate Insurance
Fronting – US
Total NPW
Q4 2019
9,213
15,119
9,711
5,228
39,271
% growth over
prior year
28.1%
5.4%
15.4%
352.6%
26.3%
Q4 2018
2019
7,194
14,338
8,415
1,155
31,102
40,400
52,444
34,995
14,328
142,167
% growth over
prior year
11.5%
13.4%
15.2%
462.3%
23.2%
2018
36,228
46,238
30,378
2,548
115,392
Net Premiums Written
Q4 2019
Net Premiums Written
2019
Fronting -US
13.3%
Surety
23.5%
Corporate
Insurance
24.7%
Risk
Solutions
38.5%
Fronting - US
10.1%
Surety
28.4%
Corporate
Insurance
24.6%
Risk
Solutions
36.9%
10
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SPECIALTY P&C – CANADA
The table below presents financial highlights for our Canadian Specialty P&C business.
Q4 2019
Q4 2018
$ variance
% variance
2019
2018
$ variance
% variance
Gross premiums written
Net premiums written
Net premiums earned
Fee income
47,809
34,043
26,754
472
41,067
29,947
22,448
6,742
4,096
4,306
16.4%
13.7%
19.2%
184,239
165,222
127,839
112,844
100,511
87,852
80
392
490.0%
4,246
3,812
19,017
14,995
12,659
434
Net underwriting revenue
27,226
22,528
4,698
Net underwriting income
Net investment income
Net income
Comprehensive income (loss)
Loss ratio: current accident year
Loss ratio: prior years'
development
Loss ratio
Expense ratio
Combined ratio
LTM ROE
4,562
2,010
4,864
5,883
25.0%
(3.2%)
21.8%
61.1%
82.9%
19.1%
3,621
1,846
4,195
(916)
25.3%
(5.4%)
19.9%
64.0%
83.9%
19.1%
941
164
669
6,799
20.9%
26.0%
8.9%
15.9%
nm
(0.3pts)
2.2pts
1.9pts
(2.9pts)
(1.0pts)
0.0pts
104,757
91,664
13,093
12,265
11,984
281
2,336
1,737
12,151
7,796
15,842
19,242
27.1%
(2.6%)
24.5%
63.3%
87.8%
19.1%
5,460
14,105
7,091
26.5%
(4.9%)
21.6%
64.7%
86.3%
19.1%
11.5%
13.3%
14.4%
11.4%
14.3%
2.3%
42.8%
12.3%
171.4%
0.6pts
2.3pts
2.9pts
(1.4pts)
1.5pts
0.0pts
In Q4 GPW growth in Canadian Specialty P&C business of 16.4% was driven by a rebound in Surety premiums, compensating for a
comparably weaker earlier portion of the year, as well as strong results in Corporate Insurance as greater capacity, improved pricing
and strong retention drove GPW. On a full year basis, we enjoyed GPW growth in all business lines but observed outsized growth in
Surety and Corporate Insurance for the reasons described above.
NPE growth of 19.2% in Q4 2019 and 14.4% for the full year was driven by performance in Risk Solutions and Corporate Insurance.
Fee income, which arises mainly in the first quarter each year from Surety accounts, grew by 11.4% for the full year.
Q4 2019 combined ratio of 82.9% improved compared to Q4 2018 as a result of a lower expense ratio. The full year 2019 combined
ratio of 87.8% was slightly higher than the prior year as a result of a higher loss ratio, related to losses in Surety in 2019 compared to
exceptional performance in Surety in 2018. The impact of higher losses was somewhat mitigated by improvements in the expense
ratio from reduced compensation expenses, which is conditional on the profitability of the business. Net underwriting income in Q4
2019 improved over the prior year’s quarter by $0.9 million as a result of improved Corporate Insurance claims experience as well as
growth in the business. For the full year, Net underwriting income was comparable to 2018, as weaker Surety performance was offset
by stronger performance in Risk Solutions and Corporate Insurance. The expense ratio was lower in Q4 2019 and the full year in part
because of compensation expense.
Investment income improved in Q4 2019 and the full year, a result of higher interest and dividend income, following portfolio
rebalances as well as growth of the investment portfolio. See Section 5 – Investment Performance Review for further discussion.
Improved underwriting and investment income drove the increase in net income in Q4 2019. Higher investment income with stable
net underwriting income drove the increase in full year. LTM ROE of 19.1% matched 2018.
11
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Surety
The main products offered by our Surety business line are:
✓ Contract surety bonds, such as performance and labour and material payment bonds, primarily for the construction industry;
✓ Commercial surety bonds, such as license and permit, tax and excise, and fiduciary bonds, which are issued on behalf of
commercial enterprises and professionals to governments, regulatory bodies or courts to guarantee compliance with legal or
fiduciary obligations; and
✓ Developer surety bonds, comprising mainly bonds to secure real estate developers’ legislated deposit and warranty
obligations on residential projects.
In Q4, Surety accounted for 10.1% and 23.5% of our overall GPW and NPW, respectively. For the full year, Surety accounted for 13.2%
and 28.4% of our overall GPW and NPW, respectively.
Q4 2019
Q4 2018
$ variance
% variance
2019
2018
$ variance
% variance
Gross premiums written
14,514
10,201
Net premiums written
Net premiums earned
Fee income
Net underwriting revenue
Net underwriting income
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
Expense ratio
Combined ratio
9,213
9,425
472
9,897
1,364
35.2%
(9.1%)
26.1%
59.4%
85.5%
7,194
8,611
80
8,691
3,016
6.2%
(8.0%)
(1.8%)
66.7%
64.9%
4,313
2,019
814
392
42.3%
28.1%
9.5%
490.0%
59,028
40,400
37,358
4,241
51,535
36,228
35,965
3,802
1,206
13.9%
41,599
39,767
7,493
4,172
1,393
439
1,832
(1,652)
(54.8%)
29.0pts
(1.1pts)
27.9pts
(7.3pts)
20.6pts
5,543
9,879
(4,336)
31.4%
(7.0%)
24.4%
60.7%
85.1%
15.6%
(8.4%)
7.2%
65.4%
72.6%
14.5%
11.5%
3.9%
11.6%
4.6%
(43.9%)
15.8pts
1.4pts
17.2pts
(4.7pts)
12.5pts
Q4 Surety GPW and NPW growth accelerated in Q4 following slower growth in previous quarters. The faster growth was partially a
reflection of lower growth experienced in Q4 2018. Full year GPW and NPW growth was also strong, driven by increasing GPW in
Commercial and Developer surety, as well as growth in Contract surety in the Quebec and British Columbia offices. Slower NPE growth
in 2019 is partially related to the slower GPW growth experienced in 2018 and in early 2019. Our Contract surety line focuses more
on small to mid-sized contractors than that of some of our competitors, which has supported our low loss ratios. The corollary to this
focus is that individual account premium is less predictable and growth may be more volatile. In addition, our Surety team has
proactively managed portfolio credit quality, more so in regions suffering from weaker economic conditions, which has led to slower
premium growth for part of the year, but protected our loss ratio. Fee income primarily represents fees charged to insureds to
maintain their bonding facility with the Company and are typically collected and earned at the beginning of the year. Fee income for
the full year grew 11.6%, in line with premium growth for the year.
Surety experienced higher claims in Q4 2019 primarily related to Contract surety in Alberta which led to a higher loss ratio compared
to the exceptionally low loss ratio in the prior year. Q4 and full year expense ratios were lower than 2018 as a result of lower
compensation expense, which more than offset slightly higher commission expense. Net underwriting income was $1.4 million in Q4
and $5.5 million for the year. The higher 2018 NUI benefited from exceptionally low loss ratios in that year.
12
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Risk Solutions
Risk Solutions includes specialty insurance contracts which are structured, in some cases through fronting arrangements, to meet the
specific requirements of program administrators, managing general agents, captive insurance companies, affinity groups and
reinsurers. Our Risk Solutions business line consists primarily of warranty programs.
In 2018, the Company incorporated Trisura Warranty Services Inc. (“Trisura Warranty”), and in Q1 2019 purchased an existing book of
warranty contracts from a third party, which Trisura Warranty will continue to administer. Trisura Warranty has begun to sell warranty
products which will serve as a complimentary business to the insurance products sold through Trisura Guarantee. Financial results of
Trisura Warranty are currently not material and are grouped with the Canadian Specialty P&C results, as part of Risk Solutions for the
purpose of the MD&A.
In Q4, Risk Solutions accounted for 13.7% and 38.5% of our overall GPW and NPW, respectively. For the full year, Risk Solutions
accounted for 17.3% and 36.9% of our overall GPW and NPW, respectively.
Gross premiums written
Net premiums written
Net premiums earned
Fee income
Q4 2019
Q4 2018
$ variance
% variance
2019
2018
$ variance
% variance
19,565
20,222
15,119
14,338
8,768
6,459
-
-
(657)
781
2,309
n/a
(3.2%)
5.4%
35.7%
n/a
77,838
74,614
52,444
46,238
31,193
24,164
3,224
6,206
7,029
4.3%
13.4%
29.1%
5
10
(5)
(50.0%)
Net underwriting revenue
8,768
6,459
2,309
35.7%
31,198
24,174
7,024
Net underwriting income
974
372
602
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
Expense ratio
Combined ratio
31.2%
(9.8%)
21.4%
67.5%
88.9%
37.1%
(10.3%)
26.8%
67.4%
94.2%
161.8%
(5.9pts)
0.5pts
(5.4pts)
0.1pts
(5.3pts)
3,131
2,265
866
29.8%
(8.3%)
21.5%
68.6%
90.1%
29.9%
(7.5%)
22.4%
68.2%
90.6%
29.1%
38.2%
(0.1pts)
(0.8pts)
(0.9pts)
0.4pts
(0.5pts)
Risk solutions GPW has grown in 2019 in part because of growth in warranty, as well as the addition of new programs. Growth in NPW
and NPE arose primarily from existing GAP and warranty programs. Growth in NPW throughout 2019 has been greater than growth
in GPW as a result of a reduction in premium from certain fronted programs. The reduced volume from these programs impacted
growth in GPW but had no significant impact on growth in NPW. In Q4 2019, growth in Risk Solutions was negative primarily as a
result of reduced premium from fronted program.
For the quarter, the loss ratio was improved versus the same quarter in the prior year as a number of warranty programs continued
to mature and claims experience on certain programs improved in Q4 2019 versus Q4 2018. The expense ratio was comparable on a
quarterly and full year basis; despite growth in NPE commission expense increased as a result of shifts in the mix of business. Net
underwriting income in the quarter was $1.0 million, an increase of $0.6 million over the same quarter in 2018.
For the full year, the loss ratio, expense ratio and combined ratio were comparable to 2018. Stronger net underwriting income was
mostly driven by higher NPE from program growth as discussed above.
13
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Corporate Insurance
The main products offered by our Corporate Insurance business line are D&O insurance for public, private and non-profit enterprises,
E&O liability insurance for both enterprises and professionals, commercial package insurance for both enterprises and professionals
and fidelity insurance for both commercial and financial institutions.
In Q4 Corporate Insurance represented 9.6% and 24.7% of our overall GPW and NPW respectively. For the full year, Corporate
Insurance accounted for 10.6% and 24.6% of our overall GPW and NPW respectively.
Q4 2019
Q4 2018
$ variance
% variance
2019
2018
$ variance
% variance
Gross premiums written
13,730
10,644
Net premiums written
Net premiums earned
Net underwriting revenue
Net underwriting income (loss)
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
Expense ratio
Combined ratio
9,711
8,563
8,563
2,226
27.6%
(10.0%)
17.6%
56.4%
74.0%
8,415
7,378
7,378
232
37.0%
2.0%
39.0%
57.8%
96.8%
3,086
1,296
1,185
1,185
1,994
29.0%
15.4%
16.1%
16.1%
859.5%
(9.4pts)
(12.0pts)
(21.4pts)
(1.4pts)
(22.8pts)
47,373
34,995
31,960
31,960
3,591
35.4%
(8.1%)
27.3%
61.5%
88.8%
39,073
30,378
27,723
27,723
(159)
37.8%
1.9%
39.7%
60.9%
100.6%
8,300
4,617
4,237
4,237
3,750
21.2%
15.2%
15.3%
15.3%
nm
(2.4pts)
(10.0pts)
(12.4pts)
0.6pts
(11.8pts)
GPW, NPW and NPE grew strongly in Q4 and on a full year basis. This was due to a combination of new business growth and improved
retention.
In the quarter, loss ratio improved compared to 2018 due to favourable PYD and lower claims in the current accident year in
comparison to a difficult quarter in 2018. The improved claims experience alongside a consistent expense ratio led to a lower
combined ratio. Net underwriting income increased by $2.0 million.
For the full year these same factors led to significantly stronger net underwriting income of $3.6 million compared to a small net
underwriting loss in 2018.
14
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SPECIALTY P&C – UNITED STATES
Our US specialty insurance company is a non-admitted surplus line insurer in all states, primarily operating as a hybrid fronting carrier
with a fee-based business model. Following the close of our shell acquisition in Q4 2019, the company has access to 14 admitted state
licenses, and is actively broadening licenses in those states, as well as expanding to other non-licensed states, with the intention of
having admitted licenses across all 50 states in time.
The US continued to accelerate premium generation, producing GPW of $95.4 million in Q4 across 29 programs bound. The graph
below shows the evolution of GPW, fee income earned and deferred, and number of programs bound in the US. We are especially
proud of Q4 GPW, produced in the context of traditionally seasonally lower Q4 due to US Thanksgiving and Christmas holidays.
The US platform retained 5.5% of Q4 GPW, the remainder of which was ceded to reinsurance partners, compared with 4.2% retained
in 2018. For the full year GPW was $263.9 million with 5.4% retained compared to $53.7 million and 4.7% retention in 2018, reflecting
strong growth and retention within our target range. Importantly, fees as a percentage of ceded premium of 5.8% in the quarter and
5.7% in the year, in line with expectations and our targets.
The following chart shows the growth in GPW and fee income:
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
$1,294
$6
GPW
Fee income earned
$3,500
$95,371
$3,103
$3,000
$71,187
$2,352
$55,467
$1,540
$41,886
$965
$2,500
$2,000
$1,500
$1,000
$500
$-
$27,194
$595
$17,658
$254
$7,585
$57
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Number of
programs bound
4
11
11 14 16 23 25 29
15
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
The charts below provide a segmentation by class of business of our US Specialty P&C GPW and NPW for Q4 2019 and 2019.
Gross Premiums Written
Q4 2019
Gross Premiums Written
2019
Allied Lines - Flood $1,787 1.9%
Farmowners Multiple - Peril
$3,034 3.2%
Homeowners Multiple -
Peril $4,549 4.8%
Auto Physical Damage $1,724 1.8%
Auto Physical Damage $5,241 2.0% Allied Lines - Flood $2,944 1.1%
Other $863 0.9%
Farmowners Multiple -
Peril $8,103 3.1%
Other $1,608 0.6%
Homeowners Multiple -
Peril $15,807 6.0%
Primary and Excess
Casualty
$14,706 15.4%
Commercial Auto
$41,963 44.0%
Primary and Excess
Casualty
$34,067 12.9%
Commercial Auto
$122,783 46.5%
Commercial Multiple -
Peril $26,747 28.0%
Commercial
Multiple - Peril
$73,356 27.8%
Net Premiums Written
Q4 2019
Net Premiums Written
2019
Auto Physical Damage $34 0.7%
Homeowners Multiple -
Peril $250 4.8%
Allied Lines - Flood $17 0.3%
Other $16 0.3%
Auto Physical Damage $100 0.7%
Homeowners Multiple -
Peril $616 4.3%
Allied Lines - Flood $20 0.1%
Other $16 0.1%
Farmowners Multiple -
Peril $298 5.7%
Farmowners Multiple -
Peril $755 5.3%
Commercial Auto
$1,677 32.1%
Primary and
Excess Casualty
$1,333 25.5%
Primary and
Excess Casualty
$3,238 22.6%
Commercial Auto
$5,408 37.7%
Commercial
Multiple - Peril
$1,602 30.6%
Commercial
Multiple - Peril
$4,176 29.1%
16
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Fronting – US
Gross premiums written
Net premiums written
Net premiums earned
Fee income
Net underwriting revenue
Net underwriting income (loss)
Net investment income
Net income (loss)
Comprehensive (loss) income
Loss ratio
Acquisition ratio
Retained premium
Fees as percentage of ceded premium
Fronting operational ratio
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
95,371
5,228
2,896
3,103
5,999
1,251
665
1,549
(302)
60.9%
35.7%
5.5%
5.8%
79.1%
27,194
1,155
523
595
1,118
(607)
465
(298)
3,124
64.6%
33.8%
4.2%
5.8%
154.3%
68,177
4,073
2,373
2,508
4,881
1,858
200
1,847
(3,426)
263,911
14,328
6,859
7,960
14,819
2,249
2,112
3,813
2,236
63.2%
28.5%
5.4%
5.7%
84.8%
53,731
2,548
874
912
1,786
(3,039)
1,648
(1,637)
2,724
62.7%
30.2%
4.7%
5.8%
270.2%
210,180
11,780
5,985
7,048
13,033
5,288
464
5,450
(488)
Fee income in our US Specialty P&C business is comprised of fronting fees received from reinsurers and are recognized over the life of
the insurance contracts they are associated with, similar to the premium earnings profile. Earned fronting fees have grown strongly
since 2018 in line with the growth of the business and were $3.1 million in the quarter and $8.0 million for the year.
US Specialty achieved its third successive quarter of positive net underwriting income in Q4 as growth in net earned premiums and
fronting fee income continued to exceed claims, acquisition costs and operating expenses. Operating expenses were elevated in Q4
2019 as a result of certain costs related to the acquisition of 21st Century Preferred. Net income continues to benefit from investment
income generated by our growing investment portfolio.
The growth in net earned premium and fronting fees also drove the improvement in net income to $3.8 million for the full year
compared to a loss of $1.6 million in the corresponding period in 2018. The loss ratio improved in the quarter and was comparable
on a full year basis, in line with expectations.
Fronting fees are a key component of the profitability of our US business but are not reflected in the traditional calculation of combined
ratios. The fronting operational ratios were 79.1% in Q4 and 84.8% for the full year, both significantly better than in 2018 reflecting
growth in NPE and fronting fees as the business builds scale.
17
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
REINSURANCE
Our international reinsurance business ceased writing third party business in 2008 but previously wrote quota share reinsurance
(prospective), loss portfolio transfers (retrospective) and niche, specialty contracts covering international risks across multiple
commercial lines. Currently our international reinsurance business is managing its remaining portfolio of in-force reinsurance
contracts and has commenced writing captive business in support of our US subsidiary through a newly established Barbados
subsidiary.
The remaining in-force portfolio of third party reinsurance contracts is dominated by one large life annuity reinsurance contract
denominated in Euros. We measure the performance of our reinsurance business by reference to net income in order to capture (i)
the change in annuity reserves which is included in net underwriting income; and (ii) the offsetting change in the value of the
supporting assets, which is included in net investment income as these supporting assets are designated FVTPL.
Net underwriting income (loss)
Net investment (loss) income
Net (losses) gains
Net (loss)
Operating expenses
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
6,388
(6,564)
(163)
(384)
576
(1,644)
(164)
300
(1,507)
534
8,032
(23,395)
(6,400)
(463)
1,123
42
6,306
549
(9,303)
2,482
(2,116)
1,849
76
(170)
2,129
(21,279)
4,457
473
(9,133)
353
Underwriting income in the quarter arose from reserve decreases on the life component of the Reinsurance business driven by
European interest rate increases during the quarter from historic lows in earlier 2019. The key interest rate that drives the valuation
of our annuity liability is the average of the 10 and 15-year European swap rates on a spot and forward bases. These underwriting
gains were offset by market value losses on the assets supporting these reserves, demonstrating the improved asset liability matching
in the portfolio. For the full year, declined interest rates drove underwriting losses as life annuity reserves increased.
In Q4 we continued to deploy cash collateral into long dated European government bonds, increasing the duration of our assets to
more closely match the duration of our annuity liabilities. We have improved our asset liability matching, as well as increasing our
expected interest income. This improved matching lessened the impact of the decreases in life annuity reserves on net income. In
addition, in Q3 2019 the Reinsurance business changed the assumptions it uses in determining the interest rates selected to discount
the life annuity reserves. The Company began using an interest rate curve provided by the European Insurance and Occupational
Pensions Authority, which is used in Solvency II. The impact of this change in interest rate assumptions was a reduction of the life
annuity reserves by $5.8 million in Q3 2019.
Based on historical correlation of the current asset portfolio to the rates used to determine our liabilities, management believes that
a significantly greater proportion of reserve movements will be offset by investment income than has been the case in prior periods.
18
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
CORPORATE
Our corporate results represent expenses that do not relate specifically to any one business line of the Company as well as debt
servicing costs and certain derivative gains and losses on hedging instruments. Derivative gains of $0.2 million for the quarter and
$0.3 million for full year 2019 are included in the Corporate expenses line below. Derivative gains and losses are presented in Net
gains and losses on the Consolidated Financial Statements.
Q4 2019 corporate expenses were below Q4 2018 due to a reallocation of certain expenses to subsidiaries in Q4 2019. Full year
corporate expenses were comparable to 2018.
Share-based compensation includes payment to directors and senior management and is impacted by movement in the share price.
Share-based compensation grew significantly in Q4 and full year 2019 compared to 2018 because of increases in the value of the share
price. Importantly, we have introduced a hedging program for share based compensation which we expect will help mitigate future
share based compensation volatility.
Debt servicing costs in 2019 have been in line with 2018. Interest expense of $0.1 million for the quarter and $0.3 million for full year
2019 on the Consolidated Financial Statements is related to lease liabilities recognized as part of the adoption of IFRS 16 Leases and
is not related to external borrowing.
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
Corporate expenses
Share-based compensation
Debt servicing
Corporate
140
1,418
257
1,815
303
86
261
650
(163)
1,332
(4)
1,165
1,852
2,349
1,039
5,240
1,805
740
970
3,515
47
1,609
69
1,725
19
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 5 – INVESTMENT PERFORMANCE REVIEW
OVERVIEW
The Company’s investment policy seeks to achieve attractive total returns without incurring an undue level of investment risk while
supporting our liabilities and maintaining strong regulatory and economic capital levels. In 2018 we internalized our investment
management and advisory function, allowing the Group to take a centralized investment approach across all subsidiary portfolios. We
now have the ability to invest globally through our hedging facilities and have selectively introduced new products to our portfolios.
SUMMARY OF INVESTMENT PORTFOLIO
Our $478.5 million investment portfolio consists of cash and cash equivalents, and short-term securities, government and corporate
bonds, preferred shares, common shares and a small amount of alternative investments. Ninety-four percent of our fixed income
holdings are highly liquid, investment grade bonds.
Fixed Income Securities by Rating
Investment Portfolio by Asset Class
High Yield
6%
BBB
19%
A
31%
AAA
14%
AA
30%
Structured
Insurance
Asset
2%
Common
Shares and
Other
9%
Preferred
Shares
8%
Alternatives
1%
Corporate
Bonds and
Other Fixed
Income
37%
Cash &
Equivalents
18%
Government
Bonds
25%
20
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
INVESTMENT PERFORMANCE
Net Investment Income
Specialty P&C - Canada
Specialty P&C - US
Reinsurance
Investment income
Net (losses) gains
Net investment (loss) income
Settlement from structured
insurance assets
Total
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
2,010
665
(6,543)
(3,868)
(92)
(3,960)
1,846
465
(161)
2,150
120
2,270
164
200
(6,382)
(6,018)
(212)
(6,230)
7,796
2,112
6,335
16,243
1,572
17,815
5,460
1,648
1,878
8,986
759
9,745
-
-
-
8,077
-
2,336
464
4,457
7,257
813
8,070
8,077
(3,960)
2,270
(6,230)
25,892
9,745
16,147
The Company’s operations currently include Specialty P&C insurance (Surety, Risk Solutions, and Corporate Insurance business lines)
in Canada, Specialty P&C insurance in the US and international reinsurance through Trisura International. These businesses focus on
different market segments, geographic regions and risks and can be subject to different regulatory investment requirements and
accordingly, hold different assets and currencies to support their liabilities. Consequently, investment returns are most appropriately
viewed at a business unit level.
Canadian investment income is driven by interest and dividend income on portfolio assets. Net investment income in 2019 benefitted
from increased interest and dividend income and lower investment expense, both in Q4 2019 and full year 2019. The market-based
yield of the Canadian Specialty P&C portfolio as at December 31, 2019 was 4.1% (2018 – 4.0%). We continue to broaden the Canadian
Specialty P&C portfolio’s diversity, having introduced further alternative investments in 2019, which are expected to enhance portfolio
yield and grow as a portion of the portfolio going forward.
In the quarter we began to normalize the U.S. portfolio to include allocations to asset classes outside of investment grade bonds. The
market-based yield of the US Specialty P&C portfolio as at December 31, 2019 was 3.5% (2018 – 4.0%), the yield is lower than 2018 as
a result of the significant tightening in credit spreads observed through the year. Investment income, which is primarily driven by
interest income on this portfolio of bonds, grew in Q4 2019 and full year 2019 versus comparable prior year periods as growth in
operations led to an increase in the size of our investment portfolio, alongside the deployment of new capital from the capital raise in
Q3 2019.
In the Reinsurance portfolio, Euro-denominated bonds supporting the life annuity reserves are held at FVTPL. Investment returns
have grown in this portfolio on an annual basis as we continued to deploy cash to better match our reinsurance liabilities. Investment
returns also increased as interest rates fell through the year. This trend reversed in Q4 2019, resulting in negative investment income
as interest rates rose through the quarter. Importantly, this investment loss is offset by reserve reductions on the life annuity reserves.
The market-based yield of the Reinsurance portfolio as at December 31, 2019 was 1.7% (2018 – 1.2%). The Reinsurance portfolio also
benefitted from a favourable legal settlement on our structured insurance asset in Q1 2019, adding to the performance on a full year
basis.
Net gains and losses include realized gains and losses from sales of investments in the investment portfolio as well as the impact of
foreign exchange related to the operations of the business, and any derivative income or loss. Net losses were greater in Q4 2019
than Q4 2018 as a result of more realized losses incurred in Q4 2019. In the full year of 2019 Net gains were greater than the prior
year as a result of larger foreign exchange gains.
21
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Other Comprehensive Income (“OCI”)
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
Unrealized gains (losses) in OCI
936
(4,726)
Cumulative translation
OCI
(2,124)
(1,188)
4,878
152
5,662
(7,002)
(1,340)
5,717
(4,909)
808
(7,849)
7,533
(316)
13,566
(12,442)
1,124
The Company records unrealized gains and losses in the market value of its AFS assets through OCI. The mark to market impact of
these assets on OCI was positive in Q4 2019, driven by unrealized gains in the preferred share and equity portfolios. Our full year
results reflect the strength in the Canadian and U.S. equity and fixed income markets experienced through 2019.
Foreign exchange differences arising from the translation of the financial statements of Trisura International and Trisura Specialty to
Canadian dollars are recognized as cumulative translation gains or losses, which are also a component of OCI. Cumulative translation
losses in Q4 were due to the strengthening of the Canadian currency against the US dollar, driving lower Canadian dollar valuations of
capital and securities held outside of Canada. This relationship held on a full year basis.
Refer to Notes 21 and 22 in the Consolidated Financial Statements for more detail on the components of investment returns.
22
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 6 – OUTLOOK & STRATEGY
INDUSTRY
The specialty insurance market offers products and services that are not written by most insurance companies. The risks covered by
specialty insurance policies generally require specialist underwriting knowledge and technical financial and actuarial expertise.
Specialty lines are niche segments of the market that tend to involve more complex risks and a more concentrated set of competitors.
Consequently, these risks are difficult to place in the standard insurance market where many carriers are unable or unwilling to
underwrite them. As a result, specialty insurers have more pricing and policy form flexibility than traditional market insurers whose
prices and policy forms are subject to authorization and approval by insurance regulators. Specialty lines are less commoditized areas
of the market where relationships, product expertise and product structure are not easily replicated. For this reason, specialty insurers
have historically, and are expected to continue to outperform the standard markets by having lower claims ratios and combined ratios
than traditional insurance companies.
In contrast to the standard P&C insurance market, which is divided almost evenly between personal and commercial lines, specialty
insurers are focused almost exclusively on commercial lines. Even within the commercial sector, the business mix of the specialty
insurers can vary significantly from that of the overall P&C industry. Although no standard definition for the specialty insurance market
exists, some common examples of business written by specialty insurers include: non-standard insurance, niche market segments
(such as Surety, D&O and E&O) and products that require tailored underwriting. Many insurance groups with a specialty focus have
several different carriers and licenses and allocate business between these carriers depending on market conditions and regulatory
requirements. The agency channel is the primary distribution channel for specialty insurance. Managing general agents often serve
an important role in helping carriers distribute specialty insurance products.
In the US, the excess and surplus insurance industry is more fragmented than the standard marketplace. It is estimated that the top
ten players capture just under 40% of market share, with the top 25 players averaging one to two percent market share positions. An
estimated $50 billion of excess and surplus insurance direct premiums were written in 2018, exhibiting significant growth compared
to the broader P&C industry, expanding by 11%. From 2000 until 2018, the average combined ratio for excess and surplus markets
was 96.9% versus 101.9% for the P&C industry.
23
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
OUTLOOK AND STRATEGY
Our Company has an experienced management team with strong industry relationships and excellent reputations with rating agencies,
insurance regulators and business partners. We have operated in the Canadian specialty P&C insurance market for more than 13
years and in the international specialty reinsurance market for over 17 years, establishing a conservative underwriting and investing
track record.
In Canada, we have built our brand through serving our clients, brokers and institutional partners as a leading provider of niche
specialty insurance products. We will continue to build out our product offerings in existing and new niche segments of the market
with suitably skilled underwriters and professionals. We remain committed to our broker distribution channel to promote and sell
insurance products. We are selective in partnering with a limited brokerage force, focusing its efforts on leading brokerage firms in
the industry with expertise in specialty lines. This distribution network currently comprises over 150 major international, national and
regional brokerage firms operating across Canada in all provinces and territories as well as boutique niche brokers with a focus on
specialty lines.
Our US business is fully operational and demonstrating scale and profitability. It is licensed as a domestic excess and surplus lines
insurer in Oklahoma operating as a non-admitted surplus lines insurer in all states. We recently added 14 admitted licenses which will
support our growth trajectory. It is our belief that conditions are favourable for the continued growth of our US platform, which
operates as a hybrid fronting carrier using a fee-based business model. Our focus is to source high quality business opportunities by
partnering with a core base of established and well-managed program administrators. From our experience to date these program
administrators welcome our new capacity as there is currently a lack of fronting carriers and the products and arrangements currently
offered to them by the existing market do not always meet the needs of their business and clients.
Furthermore, we continue to benefit form a strong supply of highly rated international reinsurance capacity keen to partner with us
to gain exposure to this business, allowing us to cede the majority of the risk on policies to these reinsurers on commercially favourable
terms. This belief has been supported by our experience in the market through 2018 and 2019. We are confident that this platform
will generate attractive, stable fee income while maintaining a small risk position, right-sizing underwriting risk and aligning our
interests with our program distribution partners and capacity providers. Our US business is already the largest component of GPW,
and as we continue to grow, we expect that it will become a significant contributor to profitability.
We will continue to develop our distribution network, building on our existing partner network in Canada and our core base of program
administrators in the US. Our Company will strive to increase the penetration of our products with our partners by providing the
support they require to enhance the effectiveness of their sales and marketing efforts.
We also intend to consider acquisitions on an opportunistic basis and pursue those that fit with our strategic plan. Building on the
knowledge and expertise of our existing operations, we intend to initially target businesses in the US that operate in similar niches of
the specialty insurance market, or that can expand our licensing. The closing of 21st Century Preferred is a demonstration of the
willingness and capabilities our team has to pursue these acquisitions. Additionally, our reinsurance business has commenced writing
new business in support of our on-shore subsidiaries
24
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 7 – OTHER INFORMATION
RATINGS
Trisura Guarantee has been rated A- (Excellent) by A.M. Best since 2012. This rating was reaffirmed with stable outlook by A.M. Best
in October 2019. Trisura Specialty obtained an A- (Excellent) rating with stable outlook from A.M. Best in September 2017, which was
reaffirmed in October 2019. A.M Best increased the financial size category of Trisura Specialty from VI to VII (US $45 million to US $50
million capital) in May 2018.
CASH FLOW SUMMARY
Q4 2019
Q4 2018
$ variance
2019
2018
$ variance
Net income from operating activities
4,172
1,631
2,541
5,094
8,638
(3,544)
Non-cash items to be deducted
11,544
509
11,035
10,400
3,598
6,802
Change in working capital operating items
9,744
6,081
3,663
49,726
13,091
36,635
Realized (gains) losses on AFS investments
(60)
96
(156)
(2,860)
(686)
(2,174)
Income taxes paid
Interest paid
(114)
(987)
873
(2,573)
(3,354)
781
(354)
(270)
(84)
(1,410)
(995)
(415)
Net cash from operating activities
24,932
7,060
17,872
58,377
20,292
38,085
Proceeds on disposal of investments
13,805
18,004
(4,199)
55,452
99,729
(44,277)
Purchases of investments
(79,741)
(35,632)
(44,109)
(170,817)
(196,363)
25,546
Net purchases of capital and intangible assets
(2,723)
(82)
(2,641)
(3,131)
(666)
(2,465)
Net cash used in investing activities
(68,659)
(17,710)
(50,949)
(118,496)
(97,300)
(21,196)
Dividends paid
Shares issued
(24)
(24)
-
(96)
(96)
-
-
-
-
55,669
-
55,669
Preferred shares redeemed
(1,600)
-
(1,600)
(1,600)
-
(1,600)
Issuance of new loan payable
-
-
-
-
29,700
(29,700)
Repayment of note payable
Repayment of loan payable
Lease payments
-
(30)
30
-
(30)
30
-
-
-
-
(29,700)
29,700
(266)
-
(266)
(1,026)
-
(1,026)
Net cash (used in) from financing activities
(1,890)
(54)
(1,836)
52,947
(126)
53,073
Net decrease in cash
(45,617)
(10,704)
(34,913)
(7,172)
(77,134)
69,962
Cash at beginning of the period
131,913
102,688
29,225
95,212
165,675
(70,463)
Currency translation
(391)
3,228
(3,619)
(2,135)
6,671
(8,806)
Cash at the end of the period
85,905
95,212
(9,307)
85,905
95,212
(9,307)
Cash used in investing activities in Q4 2019 as well as Q4 2018 reflected the purchase and disposal of investments in all three principal
operating subsidiaries. In Q4 2019 investment activities partially reflected the deployment of capital raised in late Q3 2019. The
investing activities in Q4 YTD 2019 and Q4 YTD 2018 were also primarily related to purchases and disposals of investments in the
investment portfolios of all three principal operating subsidiaries.
25
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
In Q4 2019 Net cash from in operating activities was primarily related to Non-cash items to be deducted, which reflected primarily
unrealized losses on the investments at Trisura International which are used to support the life annuity reserves. This increase in
unrealized losses was greater than the prior year. In Q4 YTD 2019, Net cash from operating activities was primarily related to the
Change in working capital, which was driven primarily by increases in working capital at Trisura Guarantee and Trisura Specialty. The
Change in working capital was significantly higher at Trisura Specialty in Q4 YTD 2019 as a result of the growth in the business
throughout 2019. The Change in working capital at Trisura International was negative in 2018, as a result of movement in unpaid
claims, which also contributed to the variance from prior year.
In Q3 2019, the Company issued additional shares in the public market, which led to an increase in Net cash (used in) from financing
activities of $55.7 million. During 2018, the Company replaced the outstanding Loan payable of $29.7 million held at an intermediary
holding company, with a new credit facility with an outstanding balance of $29.7 million (see Note 18 in the Consolidated Financial
Statements). The net impact of this transaction was $nil.
SEGMENTED REPORTING
As at
Assets
Liabilities
Shareholder’s Equity
Book Value Per Share, $(4)
Trisura Guarantee
Trisura International (1)
Trisura Specialty
Corporate(2)
Total(3)
December 31, 2019
424,009
333,681
90,328
10.24
104,169
85,766
18,403
2.09
444,763
336,608
108,155
12.26
5,452
32,009
(26,557)
(3.01)
978,393
788,064
190,329
21.58
(1) Subsidiary includes the assets and liabilities of its holding company.
(2) Corporate includes consolidation adjustments.
(3) Total reflects the Group’s Assets, Liabilities, and Book Value Per Share after consolidation adjustments.
(4) Number of common shares used in the calculation of book value per share equals to the Group’s total number of common shares outstanding
as at December 31, 2019.
As at
Assets
Liabilities
Shareholder’s Equity
Book Value Per Share, $(4)
Trisura Guarantee
Trisura International (1)
Trisura Specialty
Corporate (2)
Total (3)
December 31, 2018
349,356
274,770
74,586
11.26
103,113
150,966
81,703
21,410
3.23
84,421
66,545
10.05
(2,453)
30,136
(32,589)
(4.91)
600,982
471,030
129,952
19.63
(1) Subsidiary includes the assets and liabilities of its holding company and adjustments for intercompany loans.
(2) Corporate includes consolidation adjustments and intercompany loans.
(3) Total reflects the Group’s Assets, Liabilities, and Book Value Per Share after consolidation adjustments.
(4) Number of common shares used in the calculation of book value per share equals to the Group’s total number of common shares
outstanding as at December 31, 2018.
26
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
CONTRACTUAL OBLIGATIONS
As at December 31, 2019
Payments due by period
Total
Less than 1 year
1 – 5 years
Thereafter
Loans payable
29,700
-
Interest payments on debt (1)
3,258
1,019
Lease liabilities
11,132
1,656
Total contractual obligations
(1) Based on the Company’s most recent borrowing rate on the outstanding loan payable.
44,090
2,675
29,700
2,239
6,650
38,589
-
-
2,826
2,826
FINANCIAL INSTRUMENTS
See Note 4 in the Company’s Consolidated Financial Statements.
RELATED PARTY TRANSACTIONS
See Note 26 to the Company’s Consolidated Financial Statements.
27
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
OPERATING METRICS
We use operating metrics to assess our operating performance.
Operating Metrics
Definition
Acquisition Ratio
Commissions and reinsurance commissions incurred as a percentage of NPE.
Adjusted EPS
Combined Ratio
Net income attributable to common shareholders for the reporting period divided by the ending number
of common shares as at the reporting date.
The sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio
represents underwriting income as a percentage of NPE, or underwriting margin. A combined ratio under
100% indicates a profitable underwriting result. A combined ratio over 100% indicates an unprofitable
underwriting result.
Expense Ratio
All expenses incurred (net of fee income in Trisura Guarantee) as a percentage of NPE.
Fees as Percentage of
Ceded Premium
Fronting Operational
Ratio
Loss Ratio
LTM ROE
MCT
Gross fee income divided by ceded written premium.
The sum of claims, acquisition costs and operating expenses divided by the sum of NPE and fronting fees.
Net claims and loss adjustment expenses incurred as a percentage of NPE.
Net income for the 12 month period preceding the reporting date, divided by the average common
shareholder’s equity over the same period, adjusted for significant capital transactions, if appropriate.
Trisura Guarantee reports the results of its MCT as prescribed by OSFI’s Guideline A — Minimum Capital
Test for Federally Regulated Property and Casualty Insurance Companies, as amended, restated or
supplemented from time to time. MCT determines the supervisory regulatory capital levels required by
Trisura Guarantee.
Retained premium (%) NPW as a percentage of GPW.
These operating metrics are operating performance measures that highlight trends in our core business or are required ratios used to
measure compliance with OSFI and other regulatory standards. Our Company also believes that securities analysts, investors and
other interested parties use these operating metrics to compare our Company’s performance against others in the specialty insurance
industry. Our Company’s management also uses these operating metrics in order to facilitate operating performance comparisons
from period to period, to prepare annual operating budgets and to determine components of management compensation. Such
operating metrics should not be considered as the sole indicators of our performance and should not be considered in isolation from,
or as a substitute for, analysis of our financial statements prepared in accordance with IFRS.
28
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 8 – RISK MANAGEMENT
Our Company has developed an enterprise risk management framework and internal controls processes to identify, measure, monitor
and mitigate risk. This framework is central to our business decision making including the business we choose to write and the business
we choose to decline. Furthermore, for the business we write the risk management framework informs our determination of whether
to retain the risk fully or to apply risk mitigation measures such as reinsurance.
CORPORATE GOVERNANCE
The Board of Directors is responsible for oversight of risk management and internal control systems and policies. The Board of
Directors has established Board of Directors level risk committees at group and subsidiary levels, whose members are mostly
independent of management. These committees meet quarterly to oversee and challenge the development and effectiveness of risk
management frameworks and priorities and to review risk reporting. The Group Risk Management function, under the direction of
the Group Chief Risk Officer, assists the group risk committee in fulfilling its responsibilities and in liaising with risk committees and
risk management functions at subsidiary levels coordinating its review and oversight of the Company’s risk management framework.
All Risk Officers at group and subsidiary levels report directly to their relevant risk committees. In addition, there are management
level risk and underwriting committees at group and subsidiary levels with escalation process to Board of Directors level committees.
The following factors in addition to the other information set forth in this MD&A and in the Company’s Consolidated Financial
Statements and Annual Information Form should be considered in assessing the risks to the Company and the industry and markets
in which we operate. If any of the following risks occur, our financial condition, results of operations would likely suffer. The following
list of risks are those that the Company believes are the most significant. They are not the only risks that we face or may face in the
future and other risks may emerge that could have a material adverse effect on our financial condition and results of operations.
29
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
KEY RISKS
Highly Competitive Specialty Insurance Business
The specialty insurance business is highly competitive. Elements of competition include pricing, availability and quality of products,
capacity, quality and speed of service, ratings, financial strength, distribution and technology systems and technical expertise. Our
Company competes with many other insurance companies. Many of these competitors are larger and have greater financial resources
than are available to our Company and have a greater ability to compete on the basis of price. Some of our competitors may offer a
broader range of policy administration or other services or be willing to take on significantly more underwriting risk. Any increase in
competition in this segment, especially by one or more larger companies, could materially and adversely affect our Company’s
business, financial condition, results of operations and prospects. Competitors may also acquire distributors to our detriment.
Consolidation amongst insurance companies and distribution partners could also impact our ability to compete. As competitors
introduce new products and as new competitors enter the market, our Company may encounter additional and more intense
competition. Technological change implemented by insurers or new market entrants can result in a change to the competitive
landscape and adversely impact our ability to compete. There can be no assurance that we will continue to increase revenues or be
profitable. To a large degree, future revenues of our Company are dependent upon our ability to continue to develop and market our
products and to enhance the capabilities of our products to meet changes in customer needs. We seek to manage competition risks
by fostering strong relationships with our distribution partners and by focusing on their needs, delivering excellence in service and
providing valuable product expertise. Technological change implemented by insureds could change the profile of the risks insured by
our policies.
Cyclical Nature of Insurance Industry
The financial performance of the insurance industry has historically tended to fluctuate in cyclical patterns of ‘‘soft’’ markets
characterized generally by increased competition, resulting in lower premium rates and underwriting standards, followed by ‘‘hard’’
markets characterized generally by lessening competition, stricter underwriting standards and increasing premium rates. Our
Company’s profitability tends to follow this cyclical market pattern with profitability generally increasing in hard markets and
decreasing in soft markets. These factors could result in fluctuations in the underwriting results and net income of our Company.
Historically, the results of companies in the specialty insurance industry have been subject to significant fluctuations and uncertainties.
Many of these factors are beyond our Company’s control. The profitability of specialty insurers can be affected significantly by many
factors, including regulatory regimes, developing trends in tort and class action litigation, adoption of consumer initiatives regarding
premium rates or claims handling procedures, and privacy and consumer protection laws that prevent insurers from assessing risk, or
factors that have a high correlation with risks considered, such as credit scoring. An economic downturn in those jurisdictions in which
our Company writes business or otherwise conducts business activities, or adverse political conditions, could result in less demand for
specialty insurance and lower policy premiums.
Reliance on distribution partners, capacity providers and program administrators (“PAs”)
Trisura Guarantee distributes its products primarily through a network of distribution partners. These distribution partners also sell
our competitors’ products and may, subject to certain limitations, stop selling our products altogether. Strong competition exists
among insurers for distribution partners with demonstrated ability to sell insurance products. Premium volume and profitability could
be materially adversely affected if there is a material decrease in the number of distribution partners that choose to sell our Company’s
products. Trisura Specialty offers fronting arrangements to capacity providers that want to access specific U.S. specialty insurance
business. Capacity providers may be under common control with a particular PA or may be independent. An independent capacity
provider may reinsure a single book or multiple books with various PAs. A single PA may control a single book with one capacity
provider or multiple books with various capacity providers. Other specialty insurance companies may compete with Trisura Specialty
for this business. These capacity providers and PAs may choose to enter into fronting arrangements with Trisura Specialty’s
competitors or PAs, or capacity providers may terminate fronting arrangements with Trisura Specialty if they no longer need access
to its fronting capacity or for other reasons.
30
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Consolidation among capacity providers could also reduce the availability of capacity available to our Company. A significant decrease
in business from any of these distribution partners, capacity providers or PAs would cause our Company to lose premiums and require
us to find other partners to replace those lost premiums. We seek to manage these risks by using a diversified group of distribution
partners, capacity providers and program administers. We further foster strong relationships with our business partners by delivering
excellence in service and product expertise. Where we have granted binding authority to our distribution partners and PAs we limit
such authority to agreed underwriting guidelines and monitor the business underwritten. Nonetheless, situations could arise where
binding authority business could result in losses and have a have a significant impact on our results of operations and financial
condition.
A.M. Best Ratings
Rating agencies evaluate insurance companies based on their ability to pay claims. The ratings of A.M. Best are subject to periodic
review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. A.M.
Best ratings are directed toward the concerns of policyholders and insurance agencies and are not intended for the protection of
investors or as a recommendation to buy, hold or sell securities. Ratings are an important factor in establishing and maintaining our
competitive position in the specialty insurance market and especially in commercial insurance. Each of Trisura Guarantee and Trisura
Specialty have been assigned a financial strength rating of A- (Excellent) by A.M. Best with stable outlook. There can be no assurances
that Trisura Guarantee or Trisura Specialty will be able to maintain these ratings. Any downgrade in these ratings would likely
adversely affect our business through the loss of certain existing and potential policyholders to other companies with higher ratings,
and through certain insurance brokerage firms with which we now do business seeking a higher rated issuing carrier to write their
business.
Insurance Risks:
Insurance risk is the risk that the ultimate cost of claims and loss adjustment expense, as well as acquisition expenses, related to
insurance contracts will exceed premiums received in respect of those contracts. This could occur where the frequency or severity of
claims is greater than expected. For Life and Annuity policies, insurance risk may also include differences between expected and actual
experience for policyholder behaviour, lapse, longevity, mortality, morbidity and the timing of claims. Some additional components
of insurance risk such as product and pricing risk, concentrations of insurance risk and exposure to large losses, and estimates of loss
reserves are described below.
For more information on insurance risk and the management of insurance risk see Note 2.4 (Insurance contracts), Note 8 (Unearned
premiums), Note 9 (Unpaid claims and loss adjustment expenses), and Note 13.1 (Insurance risk) to the Consolidated Financial
Statements.
1 - Product and Pricing
The pricing process relies on many estimates of future loss costs and loss adjustment expenses. If we do not accurately assess and
price for the risks assumed in our insurance policies, profitability could be negatively affected. On the other hand, setting premiums
too high could impact competitiveness and growth. We price our products considering numerous factors, including claims frequency
and severity trends, product line expense ratios, special risk factors, the capital required to support the product line, reinsurance costs,
the investment income earned on that capital, and the competitive landscape of the insurance markets where we compete. Our
Company’s pricing process is designed to ensure an appropriate return on capital. These factors are reviewed and adjusted periodically
to ensure they reflect the current environment. Our Company seeks to manage this risk through the effective use of underwriting
policies and guidelines, and by disciplined risk selection. Careful oversight is applied and guidelines are reviewed to reflect emerging
trends. Insurance risk is further mitigated through effective claims and expense management and through the use of reinsurance.
31
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
2 - Concentration of insurance risk and exposure to large losses
Concentration risk is the risk that our Company’s insurance products are concentrated within a particular geographic area, industry,
class of business, or insured, thereby increasing the exposure of our Company to a single event or a series of related events.
Unexpected large losses may result from events such as the unforeseen failure of a large contractor, as a result of accumulations of
large numbers of insurance or reinsurance contracts exposed to similar perils, adverse economic conditions, exposure to mass torts,
terrorism, or natural or man-made catastrophes. Large losses could also be the result of future unforeseen changes in the legal
environment that could broaden our insurance coverage beyond the policy’s original intent. Exposure could also aggregate through
cyber-attacks where directly covered under our policies or through “silent cyber” where potential losses are not specifically included
nor excluded in the policy wording. Certain policy exclusions could also be found to be unenforceable. When a large loss is identified,
we may be required to strengthen reserves which could decrease earnings in that period. We seek to mitigate this risk through
monitoring and modeling techniques to review the portfolio for concentration and aggregation of risks and through the purchase of
reinsurance. We make adjustments as needed in order to ensure exposure are within tolerances. The active management of our
reinsurance programs and collateral requirements is also an important element in maintaining net claims exposures within the
Company’s risk tolerance.
3 - Estimates of Loss Reserves
The liability for unpaid claims and loss adjustment expense (“LAE”) represents an estimate of the ultimate cost of all claims incurred
but not paid by the statement of financial position date. The reserving process employed in determining future claims and LAE
payments includes consideration of individual case claims and LAE estimates on open reported claims as well as provisions for future
development of such estimates and claims and LAE related to incurred but not reported claims. In some instances, further provisions
are made for the time value of money by applying discount rates based on projected investment income from the assets supporting
this liability. The Company uses qualified actuaries in its reserving processes.
In estimating unpaid claims and LAE, a range of actuarial techniques are used. Typically, these techniques consider historical loss
development factors and payment patterns. They require the use of assumptions relating to future development of claims and LAE,
future rates of claims frequency and severity, claims inflation, the level of insurance fraud, payment patterns and reinsurance
recoveries, taking into consideration the nature of the insurance policies. For Life and Annuity policies, the reserve process typically
includes estimates of lapse, future policyholder behaviour, longevity, mortality, morbidity, the timing of claim payments and discount
rates. Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and
unforeseen factors could negatively impact our Company’s ability to accurately assess the reserves required for the policies that we
write. Typically, the delay to ultimate settlement of claims increases the uncertainty of the estimate of the ultimate cost of those
claims and LAE. The uncertainty in estimation tends to be higher for long-tail lines where information typically emerges over time.
For the reinsurance business, the time lag in obtaining information from ceding insurers as well as the differing reserve practices
employed by ceding insurers can further increase the uncertainty of the estimate. In certain circumstances, explicit actuarial margins
are included in the reserves in recognition of the inherent uncertainty of the estimates and the possibility of deterioration in
experience relative to expectation in relation to claims development, investment return rates and recoverability of reinsurance
balances. The reserves for unpaid claims and LAE are reviewed regularly and evaluated in light of emerging claims experience and
changing circumstances. Nonetheless, although our Company’s management believes our overall reserve levels as at the date of the
financial statements are adequate to meet our obligations under existing policies, actual losses may deviate, perhaps substantially,
from the reserves reflected in our Company’s financial statements. To the extent reserves prove to be inadequate, our Company
would have to increase such reserves and incur a charge to earnings.
32
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Availability of Reinsurance
Our reinsurance arrangements are with a limited number of reinsurers. In recent years, favourable market conditions, including
growth in the role of PAs, reinsurance on and offshore and other alternative sources of reinsurance have provided strong capacity to
the industry. A decline in the availability of reinsurance or increases in the cost of reinsurance or a decreased level of activity by PAs
could increase costs or materially impact the amount of business we could underwrite. There can be no assurance that developments
may not occur in the future which might cause a shortage of reinsurance capacity in those classes of business which we underwrite.
Ability to recover amounts due from reinsurers
Our Company uses reinsurance in the ordinary course of business to reduce its exposure to any one claim or event under the policies
it issues. Reinsurance is also a key component of the Trisura Specialty hybrid fronting model. Reinsurance does not relieve our
Company of its obligations to policyholders. Our Company is ultimately at risk on the limits of coverage provided under insurance
policies we write, regardless of whether we have ceded a portion of this exposure to reinsurers. If a reinsurer is unwilling or unable
to satisfy its obligations, our Company does not have the right to correspondingly reduce its claims payment obligations.
If our Company fails to realize a reinsurance recoverable owed under these arrangements our financial condition could be materially
and adversely affected. The Company has a reinsurance risk management policy in place to manage the credit risk associated with
recoverables from reinsurers including requirements for using licensed reinsurers, minimum credit ratings and concentration limits.
When the Company uses un-registered or un-rated reinsurers, collateral is used to manage credit risk.
For more information on reinsurance and the Company’s management of the ability to recover amounts due from reinsurers, see Note
13.2 (Credit risk) and Note 14 (Reinsurance) to the Consolidated Financial Statements.
Financial Risks:
The significant financial risks are credit risk, liquidity risk and market risk (comprising currency risk, interest rate risk and other price
risks such as equity risk). The notes to our Company’s Consolidated Financial Statements as at and for the year ended December 31,
2019 provide further detail on these risks and the ways in which we monitor and control these risks. To the extent that those risks
emerge, they could have a material adverse effect on our Company’s business, financial condition and performance.
1 - Credit Risk
Credit risk is the risk that a party to a financial instrument will fail to discharge an obligation and cause our Company to incur a financial
loss. Credit risk arises mainly from investments in bonds and short-term securities, the structured insurance assets, and balances
receivable from insurance brokers and reinsurers. Concentrations of credit risk can arise from exposures to a single debtor, a group
of related debtors or groups of debtors that have similar risk characteristics, for example they may operate in the same or similar
industries. For premiums receivable, our Company uses insurance brokers, managing general agents, and PAs as intermediaries for
the distribution of its product offerings and is therefore subject to the risk that these agents fail to remit the premiums they have
collected on its behalf. With respect to credit risk associated with recoveries under reinsurance contracts, see the section “Ability to
recover amounts due from reinsurers”. Our investment policies mitigate credit risk through requirements relating to type, credit
quality, size and duration of permitted investments among other factors. Management monitors credit quality on an ongoing basis.
For premiums receivable, the Company monitors accounts receivable and follows-up all past due amounts to ensure satisfactory
collection arrangements are in place. See Note 13.2 (Credit risk) to the Consolidated Financial Statements for more information on
the management of credit risk.
33
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
2 – Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are
settled by delivering cash or another financial asset. Generally, our Company’s financial liabilities are settled by delivering cash from
the cash flow generated from its operations to satisfy its liquidity requirements, which are primarily operating expenses and claims
and loss adjustment payments. By their nature, the timing and quantum of claims and loss adjustment payments are subject to
significant uncertainty and are estimated actuarially. Although our Company has reinsurance treaties in place under which a portion
of the claim payments may be recovered, including by way of set off against premiums payable to the reinsurers, such recoveries
usually follow the making of payments and often delays of a number of months can occur. Hence our Company must have access to
sufficient liquid resources to fund gross amounts payable when required. Our Company periodically pledges assets under insurance
and reinsurance trust arrangements which are therefore not readily available for general use by our Company. To manage its liquidity
requirements, the Company maintains a minimum balance of cash and cash equivalents and a highly rated, highly liquid investment
portfolio. The Company’s investment policy sets out credit quality criteria and has limits on single issuer exposures. In addition, the
investment policy stipulates average duration of bonds. See Note 13.3 to the Consolidated Financial Statements for more information
on the management of liquidity risk.
3 - Market Risk
Exposure to this risk results from business activities including investment transactions involving the purchase or sale of financial
instruments. Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market prices which could be driven by financial market conditions, general economic conditions, political conditions, or other
factors. Market risk includes currency risk, interest rate risk and other price risks such as equity risk. See Note 13.4 of the Consolidated
Financial Statements for more information on the management of market risk.
i)
Currency Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign
exchange rates. Our Company has operations in the United States and Canada, as well as European exposure through its reinsurance
operations and therefore has exposure to currency risk arising from fluctuations in exchange rates of the Canadian dollar and Euro
against the USD. The Company also has currency risk as a result of holding investments in the Company’s Canadian operations
denominated in USD. The foreign currency positions of the Company are monitored quarterly and the Canadian operations use
derivatives throughout the year to manage foreign exchange risks where a material unmatched foreign exchange position exists in the
investment portfolio.
ii)
Interest Rate Risk
Interest rate risk is the potential for financial loss resulting from changes in interest rates. Bonds, structured insurance assets and
preferred shares are subject to interest rate risk although, in the case of bonds, to the extent they are held to maturity, the risk is
limited to the reinvestment yield being different from the original yield to maturity. The fair value of bonds generally changes inversely
with changes in market rates of interest, with greater impact to bonds with longer durations. The Company’s unpaid claims balance
is also subject to interest rate risk, in particular the Company’s life annuity reserves which have longer durations. The Company
manages its interest rate risk through its investment policy which considers average duration of bonds held and maximum maturity
limit as well as asset liability matching.
iii)
Equity Price Risk
Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. The Company’s
exposure to equity price risk is managed and mitigated through its investment policy which sets out maximum exposures to equities
at aggregate and per issuer levels as well as requiring diversification across different industry sectors.
34
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Negative Publicity in the Specialty Insurance Industry
A number of our Company’s products and services are ultimately distributed to individual consumers. From time to time, consumer
advocacy groups or the media may focus attention on products and service of the specialty insurance industry or our Company, thereby
subjecting the specialty insurance industry or our Company to periodic negative publicity. Negative publicity may also result in
increased regulation and legislative scrutiny of practices in the specialty insurance industry as well as increased litigation. Such
consequences may increase our Company’s costs of doing business and adversely affect our Company’s profitability by impeding our
ability to market our products and services or increasing the regulatory burdens under which our Company operates.
Reliance on Key Personnel
The success of our Company depends upon the personal efforts of our senior management. The loss of the services of such key
personnel could have a material adverse effect on the operations of our Company. In addition, our Company’s continued growth
depends on our ability to attract and retain skilled management and employees and the ability of our key personnel to manage our
Company’s growth. Recruiting and retaining skilled personnel is costly and highly competitive. If our Company fails to retain, hire,
train and integrate qualified employees and contractors, we may not be able to maintain and expand our business. Certain key
personnel are not bound by non-competition covenants. If such personnel depart our Company and subsequently compete with our
Company or determine to devote significantly more time to other business interests, such activities could have a material adverse
effect on our Company’s business, financial condition and performance. The Company’s strategies to manage this risk include
succession planning for key employees, employee engagement surveys and third-party compensation reviews.
Litigation Risk
The Company is subject to claims and litigation in the ordinary course of business resulting from alleged errors and omissions in placing
specialty insurance and handling claims. The placement of specialty insurance and the handling of claims involve substantial amounts
of money. Since errors and omissions claims against our Company may allege our Company’s potential liability for all or part of the
amounts in question, claimants may seek large damage awards and these claims can involve significant defense costs. Errors and
omissions could include, for example, our Company’s employees or sub-agents failing, whether negligently or intentionally, to place
coverage or file claims on behalf of customers, to appropriately and adequately disclose insurer fee arrangements to our customers,
to provide insurance providers with complete and accurate information relating to the risks being insured or to appropriately apply
funds that we hold for our customers on a fiduciary basis. It is not always possible to prevent or detect errors and omissions, and the
precautions our Company takes may not be effective in all cases. In addition to litigation associated with our insurance policies, we
also face risk associated general corporate and commercial litigation. Our Company’s business, financial condition or results may be
negatively affected if in the future our corporate insurance coverage proves to be inadequate or unavailable. In addition, litigation
may harm our Company’s reputation or divert management resources away from operating our business.
Holding Company
Trisura Group is a holding company and its material assets consist primarily of interests in our operating subsidiaries. Consequently,
we depend on distributions and other payments from our operating businesses to provide us with the funds necessary to meet our
holding company financial obligations. Our operating businesses are legally distinct from Trisura Group and some of them are or may
become restricted in their ability to pay dividends and distributions or otherwise make funds available to Trisura Group pursuant to
local law, regulatory requirements and their contractual agreements, including agreements governing their financing arrangements.
Our operating businesses are generally required to meet their policyholder and other obligations before making distributions to Trisura
Group.
35
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Adverse Effects of Regulatory Changes
The specialty insurance industry is heavily regulated, and changes in the regulations governing the specialty insurance industry in any
jurisdiction in which we operate, or increased regulations, may significantly affect the operations and financial results of our Company.
Our Company is subject to the laws, rules and regulations of the jurisdictions in which we carry on business, including Canada, the U.S.
and Barbados. These laws, rules and regulations cover many aspects of our business, the assets in which we may invest, the levels of
capital and surplus and the standards of solvency that we must maintain, and the amounts of dividends which we may declare and
pay. Changes to laws, rules or regulations are difficult to predict and could materially adversely affect our Company’s business, results
of operations and financial condition. In addition, more restrictive laws, rules or regulations may be adopted in the future that could
make compliance more difficult or expensive. Trisura Guarantee is regulated by OSFI. Trisura Specialty is regulated by the Department
of Insurance in Oklahoma, as well as other state regulatory agencies in which it conducts business. Trisura International Insurance is
regulated by the Financial Services Commission in Barbados. Each of these regulators has broad supervisory and regulatory powers
available to them in connection with licenses, solvency capital requirements, investments, dividends, corporate governance,
requirements for key personnel, conduct of business rules, periodic examinations and reporting requirements. The regulators have
the authority to take enforcement actions and impose sanctions, including directing the regulated entity to refrain from a course of
action or to perform acts necessary to remedy situations, imposing fines and the withdrawal of authorization. In certain circumstances,
the regulators may take control of regulated insurance or reinsurance companies. There is no guarantee that these regulators would
not take such actions under certain circumstances with respect to Trisura Guarantee, Trisura Specialty or Trisura International
Insurance. The imposition of such actions could have a material adverse effect on our business, financial condition and performance.
Change of Control Restrictions of U.S. Insurance Laws
The laws of the State of Oklahoma, where Trisura Specialty is domiciled, require prior approval by the Department of Insurance in
Oklahoma of any change of control of an insurer. ‘‘Control’’ is defined as the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of the regulated insurance company, whether through the ownership of voting
securities, by contract or otherwise. Control is presumed to exist through the direct or indirect ownership of 10% or more of the
voting securities of an insurance company domiciled in Oklahoma or any entity that controls an insurance company domiciled in
Oklahoma. Any person wishing to acquire ‘‘control’’ of our Company would first be required to obtain the approval of the Department
of Insurance in Oklahoma or file appropriate disclaimers. These laws may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of our Company, including through transactions (and in particular, unsolicited transactions), that
some or all of our shareholders might consider to be desirable.
Regulatory Challenges to Use of Fronting Arrangements
Trisura Specialty enters into arrangements under which it permits its licensed status to be used in partnerships with high quality and
collateralized reinsurers to issue insurance policies with PAs. The PA underwrites (consistent with rates and forms agreed to by Trisura
Specialty and its reinsurers), and administers the business, a third party administrator is hired by Trisura Specialty to settle all claims,
and the reinsurer(s) reinsure, on average, 90% to 100% of the risks. This is considered a hybrid “fronting” arrangement. Trisura
Specialty receives a ceding fee, and shares its proportionate share in the profits or losses of the business it writes with the reinsurer(s).
Some state insurance regulators may object to Trisura Specialty’s fronting arrangements.
36
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Notwithstanding these state law restrictions on ceding insurers, the Nonadmitted and Reinsurance Reform Act contained in the United
States Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘NRRA’’) provides that all laws of a ceding insurer’s
nondomestic state (except those with respect to taxes and assessments on insurers or insurance income) are pre-empted to the extent
that they otherwise apply the laws of the state to reinsurance agreements of nondomestic ceding insurers. The NRRA places the
power to regulate reinsurer financial solvency primarily with the reinsurer’s domiciliary state and requires credit for reinsurance to be
recognized for a nondomestic ceding company if it is allowed by the ceding company’s domiciliary state. A state insurance regulator
might not view the NRRA as pre-empting a state regulator’s determination that an unauthorized reinsurer must obtain a license or
that a statute prohibits Trisura Specialty from engaging in a fronting business. However, such a determination or a conflict between
state law and the NRRA could cause regulatory uncertainty about Trisura Specialty’s fronting business, which could have a material
and adverse effect on our business, financial condition, results of operations and prospects.
Future Acquisitions
A key part of our Company’s growth strategy involves seeking acquisition opportunities. We face competition for acquisitions,
including from our competitors, many of whom will have greater financial resources than us. There can be no assurance that we will
complete acquisitions. In addition, future acquisitions will likely involve some or all of the following risks, which could materially and
adversely affect our Company’s business, financial condition or results of operations: the difficulty of integrating the acquired
operations and personnel into our current operations; potential disruption of our current operations; diversion of resources, including
our Company’s management’s time and attention; the difficulty of managing the growth of a larger organization; the risk of not
attaining expected benefits; the risk of entering markets in which we have little experience; the risk of becoming involved in labour,
commercial or regulatory disputes or litigation related to the new enterprise; the risk of environmental or other liabilities associated
with the acquired business; and the risk of a change of control resulting from an acquisition triggering rights of third parties or
government agencies under contracts with, or authorizations held by, the operating business being acquired. It is possible that due
diligence investigations into businesses being acquired may fail to uncover all material risks, or to identify a change of control trigger
in a material contract or authorization, or that a contractual counterparty or government agency may take a different view on the
interpretation of such a provision to that taken by us, thereby resulting in a dispute.
Inability to Generate Necessary Amount of Cash to Service Existing Debt
Our Company’s ability to pay principal and interest on our credit facility will depend on its future financial performance. Our Company’s
ability to generate cash will depend on many factors, some of which may be beyond its control, including general economic, financial
and regulatory conditions. If our Company cannot generate enough cash flow in the future to service its debt or cannot renew the
credit facility on its existing terms, it may need to refinance its debt, obtain additional financing (on terms that may be less favourable
than existing financing terms) or sell assets. Our Company might not be able to implement any of these strategies on satisfactory terms
or on a timely basis, if at all. If our Company is unable to meet its debt service obligations or comply with its covenants, a default
under the credit facility would result.
Future Capital Requirements
Our Company’s future capital requirements will depend upon many factors, including the performance of Trisura Guarantee,
continued development of our U.S. business, and the status of competition and regulatory requirements. There can be no assurance
that financing will be available to our Company on acceptable terms, or at all. If additional funds are raised by issuing equity securities,
further dilution to our existing shareholders will result. If adequate funds are not available, our Company may be required to delay,
scale back or eliminate our programs. An inability to obtain financing or similar financial support could have a material adverse effect
on our Company’s business, financial condition and results of operations.
37
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Potential Volatility of Common Share Price
The market price for the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of
which are beyond our Company’s control, including, but not limited to, the following: (i) actual or anticipated fluctuations in our
Company’s quarterly results of operations; (ii) changes in estimates of our Company’s future financial performance; (iii)
recommendations by securities research analysts; (iv) changes in the economic performance or market valuations of other issuers that
investors deem comparable to our Company; (v) the addition or departure of our executive officers and other key personnel; (vi) sales
or anticipated sales of additional Common Shares; (vii) significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving our Company or our competitors; and (viii) news reports relating to trends, concerns,
technological or competitive developments, regulatory changes and other related issues in our industry or target markets.
Financial markets have in the past experienced significant price and volume fluctuations that have particularly affected the market
prices of equity securities of public entities and that have, in many cases, been unrelated to the operating performance, underlying
asset values or prospects of such entities. Accordingly, the market price of the Common Shares may decline even if our Company’s
operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors,
may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well,
certain institutional investors may base their investment decisions on consideration of our Company’s governance and social practices
and performance against such institutions’ respective investment guidelines and criteria, and failure to satisfy such criteria may result
in limited or no investment in the Common Shares by those institutions, which could materially adversely affect the trading price of
the Common Shares. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased
levels of volatility and market turmoil continue for a protracted period of time, our Company’s operations and the trading price of the
Common Shares may be materially adversely affected.
Small Company Liquidity Risk
Trisura Group is a relatively small company in terms of market capitalization. As such, the share price of the Common Shares may be
more volatile than the shares of larger, more established companies. The Common Shares may trade less frequently and in smaller
volume than shares of large companies. As a result, it may be difficult to buy or sell the Common Shares in a timely fashion relative
to buying or selling shares of large companies on the secondary market. We may also have relatively few Common Shares outstanding
at any given time, so a sale or purchase of Common Shares may have a greater impact on the price of the Common Shares.
Future Sales of Substantial Amount of Share Capital
The articles of incorporation, as amended, of Trisura Group provide that Trisura Group may issue an unlimited number of Common
Shares, an unlimited number of non-voting shares and an unlimited number of preference shares (issuable in series), subject to the
rules of any stock exchange on which Trisura Group’s securities may be listed from time to time. If Trisura Group was to issue any
additional Common Shares, non-voting shares or preference shares, or such other classes of authorized shares that are convertible or
exchangeable for Common Shares, the percentage ownership of existing holders may be reduced and diluted. We cannot foresee the
terms and conditions of any future offerings of our securities nor the effect of such offerings on the market price of the Common
Shares. Any issuance of a significant percentage of Trisura Group’s securities, or the perception that such issuances may occur, could
have a material adverse effect on the market price of the Common Shares and limit our ability to fund our operations through capital
raising transactions in the future. The Board of Directors has the authority to issue non-voting shares and preference shares and
determine the price, designation, rights (including voting and dividend rights), preferences, privileges, restrictions and conditions of
the preference shares, and to determine to whom non-voting and preference shares shall be issued.
38
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Business Interruption from Unpredictable Catastrophic Events
Our company’s operations may be subject to losses resulting from the disruption in operations. Regular functioning of our operations
may be disrupted by natural catastrophes such as hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather
and fires, by man-made catastrophic events include hostilities, terrorist acts, riots, crashes and derailments, or by a disruption in key
suppliers for example power grids, internet service providers, and cloud computing providers. Certain events may also cause damage
to our Company’s physical property or may impact key personnel or trading positions. Our company maintains business continuity
plans and technology disaster recovery plans. If these plans cannot be put into action or do not take such events into account, losses
may further increase.
Dependence on Technology
Our Company is heavily dependent on systems technology to process large volumes of transactions and our business would suffer if
the technology employed is inadequate or inappropriate to support current and future business needs and objectives. There is no
assurance that we will be able to respond to technology failures effectively and with minimal disruption. To mitigate this risk, our
Company maintains technology disaster recovery plans with data backups for each of our operating companies.
Cyber-Security
Our information technology systems may be subject to cyber terrorism intended to obtain unauthorized access to our proprietary
information, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses, cyber-
attacks and other means, and could originate from a wide variety of sources, including internal or unknown third parties. If our
information systems are compromised, do not operate or are disabled, this could have a material adverse effect on our business
prospects, financial condition, results of operations. We seek to mitigate this risk through network security, network monitoring, third
party vulnerability assessments, employee training and awareness, and disaster recovery planning.
Other Operational Risks
Through the course of our business we rely on employees, systems, distribution partners, third party vendors and service providers.
We are exposed to the potential failure on the part of any of these parties, whether through error, fraud, crime, failure to comply with
regulatory standards, failure to comply with internal policies or otherwise. It is not always possible to identify and correct these
failures and the internal processes that we have in place may not be effective in all cases at identifying or mitigating these situations
in time. In such a case, our reputation, financial condition and results of operations could be negatively impacted. We rely on
estimates and models in the course of our business whether internal models or vendor models. These models have a high degree of
uncertainty and are based on historical data, scenarios and judgement that may not accurately reflect future conditions. For example,
models are used in the estimation of Probable Maximal Loss for contract surety account, in informing reinsurance purchase decisions,
in investment decisions, in pricing, and in reserving. Models estimates could deviate materially from actual experience and thereby
have a material negative impact on our financial condition and results of operations.
Taxation Risk
Our Company is subject to income taxes and premium taxes in the jurisdictions in which we carry on business, including Canada, the
U.S. and Barbados. Changes to tax laws or the interpretation of these tax laws by government authorities prospectively or
retrospectively could have a material adverse impact our profitability. Deferred tax assets are only recognized to the extent that it is
probable that they will be realized. Estimates are used to determine the value of the deferred tax asset balance based on the
assumption that the Company will generate taxable income in future years. Estimates are used to determine the taxes payable balance
based on applicable tax legislation. If our Company were not to achieve the expected level of profitability, the deferred tax asset may
not be realized which could have a material negative impact on our financial condition and results of operations.
39
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 9 – SUMMARY OF RESULTS
SELECTED QUARTERLY RESULTS
2019
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Gross premiums written
143,212
114,354
109,313
Net premiums written and other revenue
Total underwriting revenue
Net income (loss) attributable to shareholders
EPS, basic (in dollars)
EPS, diluted (in dollars)
43,231
33,285
4,172
0.47
0.47
39,959
32,249
38,885
27,734
2,543
(4,138)
0.37
0.37
(0.63)
(0.63)
81,383
32,759
26,442
2,517
0.38
0.37
68,274
31,789
23,658
1,631
0.24
0.24
57,282
30,442
25,651
4,160
0.62
0.62
58,661
30,781
21,694
984
0.14
0.14
Q1
34,824
27,187
22,530
1,863
0.28
0.27
SECTION 10 – ACCOUNTING AND DISCLOSURE MATTERS
DISCLOSURE CONTROLS AND PROCEDURES
We maintain information systems, procedures and controls to ensure that new information disclosed externally is complete, reliable
and timely. Management of the Company, at the direction and under the supervision of the Chief Executive Officer and the Chief
Financial Officer of the Company evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in
“National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings” (“NI 52-109”)) as at December 31, 2019,
and have concluded that the disclosure controls and procedures are operating effectively.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
We maintain “internal control over financial reporting” (as defined in NI 52-109) and the Chief Executive Officer and the Chief Financial
Officer of the Company have concluded that the internal controls have been designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Management has evaluated whether there were changes in our internal control over financial reporting during the year ended
December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting and has determined that there have been no such changes.
40
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This MD&A contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking
statements” within the meaning of applicable Canadian securities regulations. Forward-looking statements include statements that
are predictive in nature, depend upon or refer to future events or conditions, include statements regarding the operations, business,
financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives,
strategies and outlook of the Company and its subsidiaries, as well as the outlook for North American and international economies for
the current fiscal year and subsequent periods, and include words such as “expects,” “likely,” “anticipates,” “plans,” “believes,”
“estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future
or conditional verbs such as “may,” “will,” “should,” “would” and “could”.
Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking
statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on
forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many
of which are beyond our control, which may cause the actual results, performance or achievements of our Company to differ materially
from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and
information.
Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include,
but are not limited to: the impact or unanticipated impact of general economic, political and market factors in the countries in which
we do business; the behaviour of financial markets, including fluctuations in interest and foreign exchange rates; global equity and
capital markets and the availability of equity and debt financing and refinancing within these markets; strategic actions including
dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected
benefits; changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical
accounting assumptions and estimates); the ability to appropriately manage human capital; the effect of applying future accounting
changes; business competition; operational and reputational risks; technological change; changes in government regulation and
legislation within the countries in which we operate; governmental investigations; litigation; changes in tax laws; changes in capital
requirements; changes in reinsurance arrangements; ability to collect amounts owed; catastrophic events, such as earthquakes and
hurricanes; the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; and
other risks and factors detailed from time to time in our documents filed with securities regulators in Canada.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-
looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Except as required by law, Trisura Group Ltd. undertakes no obligation to publicly update or revise any forward-looking statements or
information, whether written or oral, that may be as a result of new information, future events or otherwise.
41
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2019
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
GLOSSARY OF ABBREVIATIONS
Abbreviation
Description
AFS
BVPS
CTA
D&O
E&O
EPS
FVTPL
GAP
GPW
LTM
MCT
n/a
nm
NPE
NPW
NUI
OCI
pts
PYD
Available for Sale Financial Asset
Book Value Per Share
Cumulative Translation Adjustment
Directors’ and Officers’ insurance
Errors and Omissions Insurance
Earnings Per Share
Fair Value Through Profit & Loss
Guaranteed Asset Protection
Gross Premium Written
Last Twelve Months
Minimum Capital Test
not available
not meaningful
Net Premiums Earned
Net Premium Written
Net Underwriting Income
Other Comprehensive Income
Percentage points
Prior Years’ Net Reserve Development
Q1, Q2, Q3, Q4
The three months ended March 31, June 30, September 30 and December 31 respectively
Q2 YTD
Q3 YTD
Q4 YTD
ROE
USD
YTD
The six months ended June 30
The nine months ended September 30
The twelve months ended December 31
Return on Shareholders’ Equity
United States Dollar
Year to Date
42
TRISURA GROUP LTD.
Trisura Group Ltd.
Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
Deloitte LLP
Bay Adelaide East
8 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Independent Auditor’s Report
To the Shareholders of
Trisura Group Ltd.
Opinion
We have audited the consolidated financial statements of Trisura Group Ltd. and its subsidiaries (the
“Company”), which comprise the consolidated statements of financial position as at December 31, 2019
and 2018, and the consolidated statements of comprehensive income, changes in equity and cash flows
for the years then ended, and notes to the consolidated financial statements, including a summary of
significant accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2019 and 2018, and its financial performance and
its cash flows for the years then ended in accordance with International Financial Reporting Standards
(“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian
GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
● The information, other than the financial statements and our auditor’s report thereon, in the Annual
Report
● Management’s Discussion and Analysis
● Financial Supplement
Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon. In connection with our audit of the financial
statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based
on the work we have performed on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact in this auditor’s report. We
have nothing to report in this regard.
The Financial Supplement is expected to be made available to us after the date of the auditor’s report.
If, based on the work we will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those charged with
governance.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends to liquidate the Company or
to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting
process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in
our auditor’s report to the related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
Page 2
We communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Ratan Ralliaram.
Chartered Professional Accountants
Licensed Public Accountants
February 12, 2020
Page 3
TRISURA GROUP LTD.
Consolidated Financial Statements
Table of contents for the Consolidated Financial Statements of Trisura Group Ltd.
Consolidated Statements of Financial Position .....................................................................................................................................................2
Consolidated Statements of Income .....................................................................................................................................................................3
Consolidated Statements of Comprehensive Income ...........................................................................................................................................4
Consolidated Statements of Changes in Equity .....................................................................................................................................................5
Consolidated Statements of Cash Flows ...............................................................................................................................................................6
Notes to the Consolidated Financial Statements ..................................................................................................................................................7
1
TRISURA GROUP LTD.
Consolidated Statements of Financial Position
(in thousands of Canadian dollars, except as otherwise noted)
As at
Note
December 31, 2019
December 31, 2018
Assets
Cash and cash equivalents, and short-term securities
Investments
Premiums and accounts receivable, and other assets
Deferred acquisition costs
Recoverable from reinsurers
Capital assets and intangible assets
Deferred tax assets
Total assets
Liabilities
Accounts payable, accrued and other liabilities
Reinsurance premiums payable
Unearned premiums
Unearned reinsurance commissions
Unpaid claims and loss adjustment expenses
Loan payable
Shareholders’ equity
Common shares
Preferred shares
Contributed surplus
Accumulated deficit
Accumulated other comprehensive loss
Total liabilities and shareholders’ equity
4
11
7
14
10, 15, 16
28
12
9
8
7
9
18
19
19
29.1
85,905
392,617
86,669
104,197
293,068
14,477
1,460
978,393
40,916
80,186
328,091
51,291
257,880
29,700
788,064
219,251
-
815
(28,309)
(1,428)
190,329
978,393
See accompanying notes to the Consolidated Financial Statements
On behalf of the Board:
George Myhal
Director
David Clare
Director
95,212
282,874
46,276
63,715
109,567
2,512
826
600,982
24,167
41,406
182,623
19,137
173,997
29,700
471,030
163,582
1,600
313
(33,307)
(2,236)
129,952
600,982
2
TRISURA GROUP LTD.
Consolidated Statements of Income
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
2019
2018
Gross premiums written
Reinsurance premiums ceded
Retrospective premiums refund
Net premiums written
Change in unearned premiums
Net premiums earned
Fee income
Total underwriting revenue
Net claims and loss adjustment expenses
Net commissions
Operating expenses and premium taxes
Total claims and expenses
Net underwriting (loss) income
Net investment income
Net gains
Settlement from structured insurance assets
Interest expense
Income before income taxes
Income tax expense
Net income attributable to shareholders
Weighted average number of common shares outstanding
during the period (in thousands) – basic
Earnings per common share (in dollars) – basic
Earnings per common share (in dollars) – diluted
See accompanying notes to the Consolidated Financial Statements
9
7
21
22
4.4
18
28
20
20
448,262
(305,480)
(154)
142,628
(35,124)
107,504
12,206
119,710
(49,936)
(37,516)
(45,590)
(133,042)
(13,332)
16,243
1,572
8,077
(1,361)
11,199
(6,105)
5,094
7,213
0.69
0.69
219,041
(103,405)
(161)
115,475
(26,666)
88,809
4,724
93,533
(19,402)
(29,903)
(39,942)
(89,247)
4,286
8,986
759
-
(970)
13,061
(4,423)
8,638
6,622
1.29
1.27
3
TRISURA GROUP LTD.
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Net income attributable to shareholders
Net unrealized gains (losses) on available-for-sale investments
Income tax (expense) benefit
Items that may be reclassified subsequently to net income
Net realized losses
Impairment adjustment
Income tax benefit
Items reclassified to net income
Items other than cumulative translation (loss) gain
Items that will not be reclassified subsequently to net income –
Cumulative translation (loss) gain
Other comprehensive income (loss)
Total comprehensive income
See accompanying notes to the Consolidated Financial Statements
2019
5,094
7,379
(1,178)
6,201
(499)
-
15
(484)
5,717
(4,909)
808
5,902
2018
8,638
(8,699)
2,258
(6,441)
(2,042)
325
309
(1,408)
(7,849)
7,533
(316)
8,322
4
TRISURA GROUP LTD.
Consolidated Statements of Changes in Equity
(in thousands of Canadian dollars, except as otherwise noted)
Balance at January 1, 2019
Net income
Other comprehensive income
Comprehensive income
Share issuance
Share redemption
Share based payments
Dividends paid
Balance at December 31, 2019
Balance at January 1, 2018
Net income
Other comprehensive loss
Comprehensive income
Share based payments
Dividends paid
Balance at December 31, 2018
Note
19
19
19
Note
19
Common
shares
163,582
-
-
-
55,669
-
-
-
219,251
Preferred
shares
1,600
-
-
-
-
(1,600)
-
-
-
Contributed
surplus
313
-
-
-
-
-
502
-
815
Accumulated
deficit
(33,307)
5,094
-
5,094
-
-
-
(96)
(28,309)
Common
shares
163,582
-
-
-
-
-
163,582
Preferred
shares
1,600
-
-
-
-
-
1,600
Contributed
surplus
89
-
-
-
224
-
313
Accumulated
deficit
(41,849)
8,638
-
8,638
-
(96)
(33,307)
See accompanying notes to the Consolidated Financial Statements
Accumulated other
comprehensive loss
(net of income taxes)
Total
(2,236) 129,952
5,094
808
5,902
55,669
(1,600)
502
(96)
(1,428) 190,329
-
808
808
-
-
-
-
Accumulated other
comprehensive loss
(net of income taxes)
Total
(1,920) 121,502
8,638
(316)
8,322
224
(96)
(2,236) 129,952
-
(316)
(316)
-
-
5
TRISURA GROUP LTD.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Operating activities
Net income
Items not involving cash:
Depreciation and amortization
Unrealized gains
Impairment loss on available-for-sale investments
Payment in kind
Stock options granted
Change in working capital
Realized gains on investments
Income taxes paid
Interest paid
Net cash flows from operating activities
Investing activities
Proceeds on disposal of investments
Purchases of investments
Purchases of capital assets
Purchases of intangible assets
Net cash flows used in investing activities
Financing activities
Dividends paid
Shares issued
Preferred shares redeemed
Loans received
Repayment of loans payable
Repayment of notes payable
Principal portion of lease payments
Net cash flows from (used in) financing activities
Net decrease in cash and cash equivalents,
and short-term securities during the period
Cash, beginning of period
Cash equivalents, beginning of period
Cash and cash equivalents, beginning of period
Impact of foreign exchange on cash and cash equivalents, and short-term
securities
Cash, end of period
Cash and cash equivalents and short-term securities, end of period
Cash and cash equivalents, and short-term securities, end of period
See accompanying notes to the Consolidated Financial Statements
2019
2018
5,094
8,638
2,500
7,927
-
(529)
502
49,726
(2,860)
(2,573)
(1,410)
58,377
55,452
(170,817)
(386)
(2,745)
(118,496)
(96)
55,669
(1,600)
-
-
-
(1,026)
52,947
1,544
1,505
325
-
224
13,091
(686)
(3,354)
(995)
20,292
99,729
(196,363)
(531)
(135)
(97,300)
(96)
-
-
29,700
(29,700)
(30)
-
(126)
(7,172)
(77,134)
93,152
2,060
83,137
82,538
95,212
165,675
(2,135)
6,671
68,208
17,697
85,905
93,152
2,060
95,212
6
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 1 – The Company
Trisura Group Ltd. (the “Company”) was incorporated under the Business Corporations Act (Ontario) (the “Act”) on January 27, 2017. The
Company’s head office is located at 333 Bay Street, Suite 1610, Box 22, Toronto Ontario, M5H 2R2.
The Company owns three principal subsidiaries, in some instances through wholly-owned intermediary holding companies, through which it
conducts insurance operations. These subsidiaries are Trisura Guarantee Insurance Company (“Trisura Guarantee”), Trisura International
Insurance Ltd. (“Trisura International”), which is wholly-owned through the intermediary holding company Trisura International Holdings Ltd.
(“TIHL”), and Trisura Specialty Insurance Company (“Trisura Specialty”). Trisura Guarantee was previously held through an intermediary
holding company, 6436978 Canada Limited (“643 Can Ltd”), which was wound up in June 2018 (see Note 23).
Trisura Guarantee operates as a Canadian property and casualty insurance company. Trisura International is currently managing its in-force
portfolio of specialty reinsurance contracts and assumes some premium from Trisura Specialty. Trisura Specialty is licensed by the Oklahoma
Insurance Department as a domestic surplus lines insurer and can write business as a non-admitted surplus line insurer in all states within
the United States. Through its newly acquired subsidiary Trisura Specialty can also write admitted business in certain states.
In 2018, the Company incorporated Trisura Warranty Services Inc. (“Trisura Warranty”), and on January 22, 2019 purchased an existing book
of warranty contracts from a third party, which Trisura Warranty will continue to administer. Trisura Warranty has begun to sell warranty
products, which will serve as a complimentary business to the insurance products sold through Trisura Guarantee.
The common shares of the Company are publicly traded on the Toronto Stock Exchange under the symbol “TSU”.
Note 2 – Summary of significant accounting policies
2.1
Basis of presentation
These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).
The Consolidated Financial Statements comprise the financial results of the Company and all entities controlled by the Company, on a
consolidated basis of presentation. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.
In accordance with IFRS, presentation of assets and liabilities on the Consolidated Statements of Financial Position is in order of liquidity. The
Company’s functional and presentation currency is Canadian dollars.
These Consolidated Financial Statements were authorized for issuance by the Company’s Board of Directors on February 12, 2020.
2.2
Cash and cash equivalents, and short-term securities
Cash and cash equivalents include short-term investments with original maturities of 90 days or less. Short-term securities include
investments with original maturities of one year or less. The Company has classified cash and cash equivalents, and short-term securities
along with loans and receivables, at amortized cost, which approximates fair value.
2.3
a)
i)
Financial instruments
Categories of financial instruments
Fair Value Through Profit or Loss (“FVTPL”)
FVTPL financial instruments are carried at fair value and recognized on the trade date, with the changes in fair value recognized in net income.
Certain investments are designated as FVTPL to reduce the volatility within net income associated with the movement of the underlying
claims which are supported by these investments. Structured insurance assets consisting of purchased commission arrangements are
designated on inception as FVTPL. Transaction costs related to FVTPL financial instruments are expensed in investment income.
7
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.3
a)
ii)
Financial instruments (continued)
Categories of financial instruments (continued)
Available-for-sale (“AFS”)
AFS financial instruments are carried at fair value and recognized on the trade date, with changes in fair value recorded as unrealized gains
or losses in other comprehensive income. Fixed income securities and equities are classified as AFS, unless they have been classified or
designated otherwise. Transaction costs related to financial instruments classified as AFS are capitalized on initial recognition and, where
applicable, amortized to interest income using the effective interest method.
iii)
Loans and receivables
Financial instruments are categorized as Loans and receivables when they have fixed or determinable payments and are not quoted in an
active market. Loans and receivables are carried at amortized cost. Transaction costs are capitalized on initial recognition and are recognized
in investment income using the effective interest rate method. The Company has classified Premiums and accounts receivable, and other
assets as Loans and receivables, with the exception of derivative assets which are grouped with Premiums and accounts receivable, and other
assets but are carried at fair value. The Company has also classified certain investments as Loans and receivables, which meet the criteria to
do so.
Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and
the Company has transferred substantially all the risks and rewards of ownership. Any gain or loss arising on derecognition is recognized
directly in profit or loss and presented in realized gains or losses on investments.
iv)
Other financial liabilities
Other financial liabilities are measured at amortized cost. Loan payable, Reinsurance premiums payable, are both classified as Other financial
liabilities. Accounts payable, accrued and other liabilities, is also classified as Other financial liabilities, with the exception of derivative
liabilities, cash-settled share based payments and deferred share units, which are grouped with Accounts payable, accrued and other liabilities
but are carried at fair value.
b)
Measurement of fair values
The Company has an established control framework with respect to the measurement of fair values which includes input from the Company’s
investment managers who report directly to management.
When measuring the fair value of an asset or a liability, the Company uses market observable data as far as possible. Fair values are
categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques.
Investments carried at fair value are classified in accordance with a valuation hierarchy that reflects the significance of the inputs used in
determining their fair value. Under Level 1 of this hierarchy, fair value is derived from unadjusted quoted prices in active markets for identical
investments. Under Level 2, fair value is derived from market inputs that are directly or indirectly observable, other than unadjusted quoted
prices for identical investments. Under Level 3, fair value is derived from inputs, some of which are not based on observable market data.
Significant unobservable inputs and valuation adjustments are regularly reviewed. If third party information, such as broker quotes or pricing
services, is used to measure fair values, then the evidence obtained from the third parties is assessed in light of the requirements of IFRS,
including the level in the fair value hierarchy in which such investments should be classified.
If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then
the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant
to the entire measurement.
The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has
occurred.
c)
Derivative financial instruments
Derivative financial instruments are classified as held for trading. All derivatives are carried as assets when the fair values are positive and as
liabilities when the fair values are negative.
Derivative financial instruments held for trading are typically entered into with the intention to settle in the near future. These instruments
are recorded at fair value. Based on market prices, fair value adjustments and realized gains or losses are recognized in Net gains or losses
in the Consolidated Statements of Comprehensive Income (Note 5 and Note 22).
8
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.3
d)
Financial instruments (continued)
Impairment of financial assets
The Company’s financial assets are assessed at each reporting date to determine whether there is any objective evidence that they are
impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect
on the estimated future cash flows of that asset.
When an unrealized loss on an AFS investment results from objective evidence of impairment, the difference between the acquisition cost
(net of any principal repayment and amortization) of the investment and its fair value is recognized as a realized loss in net income and a
corresponding adjustment is made to other comprehensive income (loss). For debt securities, impairment could occur if there is objective
evidence of impairment as a result of a loss event and that loss event has an impact on future cash flows, and for equity securities, impairment
could occur as a result of a significant or prolonged decline in the fair value below its cost. In determining whether there is objective evidence
of impairment, the factors considered are, primarily, the term of the unrealized loss and the amount of the unrealized loss. If, in a subsequent
period, the fair value of a debt instrument classified as AFS increases and the increase can be objectively related to an event occurring after
the impairment loss was recognized in net income, the impairment loss is reversed, with the amount of the reversal recognized in net income.
The carrying amounts of the Company’s non-financial assets are assessed at each statement of financial position date to determine whether
there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated and the carrying value is
reduced to the estimated recoverable amount by means of an impairment charge to net income. The recoverable amount of an asset is the
higher of its fair value less costs of disposal and its value in use.
e)
Offsetting of financial assets and financial liabilities
Financial assets and liabilities are offset and the net amount reported in the Consolidated Statements of Financial Position only when there
is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and
settle the liability simultaneously.
2.4
Insurance contracts
When significant insurance risk exists, the Company’s products are classified at contract inception as insurance contracts, in accordance with
IFRS 4, Insurance Contracts (“IFRS 4”). Significant insurance risk exists when the Company agrees to compensate policyholders of the contract
or ceding companies for specified uncertain future events that adversely affect the policyholder and whose amount and timing is unknown.
The level of insurance risk is assessed by considering whether there are any scenarios with commercial substance in which the Company is
required to pay significant additional benefits. These benefits are those which exceed the amounts payable if no insured or reinsured event
were to occur. In the absence of significant insurance risk, the contract is classified as an investment contract.
a)
Premiums, premiums receivable, and unearned premiums
Premiums are earned over the terms of the related policies or surety bonds, generally on a pro rata basis. There are some instances where
premiums are earned over the term of the policy in accordance with the risk profile of those policies with more premiums being earned when
the risk exposure from the policy is greatest. Unearned premiums represent the unexpired portion of premiums written. Gross premiums
written are presented gross of retrospective premium refunds to insureds. Retrospective premium refunds are accounted for on an accrual
basis.
In the normal course of business, the Company enters into fronting arrangements with third parties, whereby the Company assumes the
insurance risk but then cedes all or most of the risk to other insurers and reinsurers. Where appropriate, security arrangements are
established to offset the Company’s risk exposure. Premiums related to those fronting arrangements are recognized over the term of the
related policies on a pro rata basis.
Premiums receivable consist of premiums due to the Company for insurance contracts sold.
b)
Fees
Effective January 1, 2018, the Company adopted the new revenue standard IFRS 15 Revenue from contracts with customers. Fees charged
by Trisura Guarantee to insureds are recognized in the period in which they are charged provided that no significant obligations to insureds
exist and reasonable assurance exists regarding collectability. Fees charged by Trisura Specialty to reinsurers are recognized over the same
period as the related insurance contract.
9
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.4
c)
Insurance contracts (continued)
Deferred acquisition costs
Acquisition costs comprise commissions and premium taxes. These costs are deferred to the extent they are recoverable from unearned
premiums and are amortized on the same basis as the related premiums are earned. If unearned premiums are not sufficient to pay expected
claims and expenses, including the deferred acquisition costs, after taking into consideration anticipated investment income, the resulting
premium deficiency is recognized in the current period by first reducing, to a corresponding extent, the deferred amount of the acquisition
costs. Any residual amount is recorded in Deferred acquisition costs in the Consolidated Statements of Financial Position as a provision for
premium deficiency.
d)
Unpaid claims and loss adjustment expenses
The liability for unpaid claims and loss adjustment expense (“LAE”) represents an estimate of the ultimate cost of all claims incurred but not
paid by the statement of financial position date. The reserving process employed in determining future claims and LAE payments includes
consideration of individual case estimates of future claims and LAE payments on reported claims as well as provisions for future development
of case estimates, and claims and LAE related to incurred but not reported claims (“IBNR”). In some instances, further provisions are made
for the time value of money by applying discount rates based on projected investment income from the assets supporting this liability. Unpaid
claims and LAE of Trisura Specialty are not discounted. The unpaid claims and LAE related to the property and casualty reserves of Trisura
International are not discounted. The unpaid claims and LAE of Trisura Guarantee and the life reserves of Trisura International are discounted.
The Company uses qualified actuaries in its reserving processes.
In estimating unpaid claims and LAE, a range of actuarial techniques are used. Typically, these techniques consider historical loss
development factors and payment patterns. They require the use of assumptions relating to future development of claims and LAE, future
rates of claims frequency and severity, claims inflation, payment patterns and reinsurance recoveries, taking into consideration the
circumstances of the Company and the nature of the insurance policies. Typically, the delay to ultimate settlement of claims increases the
uncertainty of the estimate of the ultimate cost of those claims and LAE. The uncertainty in estimation tends to be higher for long-tail lines
where information typically emerges over time. For the reinsurance business, the time lag in obtaining information from ceding insurers as
well as the differing reserve practices employed by ceding insurers can further increase the uncertainty of the estimate. In certain
circumstances, explicit actuarial margins are included in the liability in recognition of the inherent uncertainty of the estimates and the
possibility of deterioration in experience relative to expectation in relation to claims development, investment return rates and recoverability
of reinsurance balances.
As a result of the uncertainly in estimation, actual future claims and LAE payments may deviate in quantum and timing, perhaps materially,
from the liability recorded in the Company’s current provision for unpaid claims and LAE and investment contract liabilities as recorded on
the Consolidated Statements of Financial Position. The liability for unpaid claims and LAE is reviewed regularly and evaluated in light of
emerging claims experience and changing circumstances. Any resulting adjustments to the estimates of the ultimate liability are recorded as
claims and LAE in the period in which such changes are made.
e)
Recoverable from reinsurers and Unearned reinsurance commissions
The reinsurers’ share of unearned premiums and their estimated share of unpaid claims and LAE are presented as Recoverable from reinsurers
on a basis consistent with the methods used to determine the unearned premium liability and the unpaid claims liability, respectively.
Unearned reinsurance commissions are deferred and earned using principles consistent with the method used for deferring and amortizing
acquisition costs.
f)
Investment contracts
Contracts issued to policyholders that transfer financial risk, but do not transfer significant insurance risk to the Company are classified as
investment contract liabilities. The contributions received from policyholders on these contracts are recorded as investment contract
liabilities, and not as premiums written, and claim payments made are recorded as adjustments to the investment contract liabilities.
Investment contract liabilities are carried at amortized cost and are measured at the date of initial recognition as the fair value of
consideration received, less payments for transaction related costs. At each reporting period, the liability is measured based on the estimated
future cash flows relating to all claims expected to be settled on the contracts. Gains or losses associated with the measurement are recorded
in Claims and LAE. Investment contract liabilities are included in Accounts payable, accrued and other liabilities in the Consolidated
Statements of Financial Position.
10
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.5
Capital assets
Capital assets are carried at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of these assets using
the following rates and methods:
Office equipment
Furniture and fixtures
Leasehold improvements
2.6
Intangible assets
30% – 40%, declining balance
20% – 25%, declining balance
5 to 10 years, straight-line over the term of the lease
Intangible assets are carried at cost less accumulated amortization. Amortization is provided over the estimated useful lives of those assets.
A 40% amortization rate and the declining balance method of amortization are applied to computer software. A 20% amortization rate and
the declining balance method of amortization are applied to the customer lists recorded as intangible assets. Licenses have indefinite useful
lives and are not amortized.
2.7
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method of tax allocation, deferred income tax
assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, and are
measured using the tax rates and laws that are expected to be in effect in the periods in which the deferred income tax assets or liabilities
are expected to be settled or realized, where those tax rates and laws have been substantively enacted.
Deferred tax assets are only recognized to the extent that it is probable that they will be realized. Estimates are used to determine the value
of the deferred tax asset balance based on the assumption that the Company will generate taxable income in future years. Estimates are
used to determine the taxes payable balance based on applicable tax legislation. For items in other comprehensive income (loss), the related
tax is also presented in other comprehensive income (loss).
2.8
a)
Foreign currency
Functional and presentation currency
The Company’s functional and presentation currency is Canadian dollars. Foreign currency transactions are translated into Canadian dollars
at the foreign exchange rate in effect on the date of the transaction.
Monetary assets and liabilities denominated in a foreign currency are translated into the functional currency at the exchange rate in effect
at the statement of financial position date. Foreign exchange differences arising on translation are recognized in net income. Foreign
currency non-monetary assets and liabilities which are measured at historical cost are recorded at the exchange rate in effect at the date of
transaction. Foreign currency non-monetary assets and liabilities which are measured at fair value are recorded at the exchange rate in effect
at the date that fair value was determined.
For fixed maturities classified as AFS, foreign exchange differences resulting from changes in amortized cost are recognized in net income,
while foreign exchange differences arising from unrealized fair value gains and losses are included as unrealized gains (losses) within other
comprehensive income (loss). For other financial instruments classified as AFS, foreign exchange differences are included as unrealized gains
(losses) within other comprehensive income (loss).
b)
Financial statements of foreign operations
For foreign operations that have a functional currency other than Canadian dollars, the results and financial position of such operations are
translated into Canadian dollars. Assets and liabilities of the foreign operations are translated at the foreign exchange rates in effect at the
statement of financial position date, and income and expenses are translated at average rates approximating the foreign exchange rates in
effect at the dates of the transactions.
Foreign exchange differences arising from the translation to Canadian dollars are recognized as cumulative translation adjustment in other
comprehensive income (loss).
11
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.9
Share based compensation
The Company’s accounting policies with respect to share based compensation are in accordance with IFRS 2, Share based payment.
a)
Equity-settled stock option plan
The Company maintains an equity-settled stock option plan, which is described in Note 29.1. The value of equity-settled stock options is
measured at the grant date, and the cost is recognized in Operating expenses as an expense over the vesting period. Obligations related to
equity-settled stock option plans are recorded in shareholders’ equity as contributed surplus. Any consideration paid by stock option holders
to exercise the options increases share capital. The Company uses the Black-Scholes model to measure the fair value of stock options. Inputs
to the model include a volatility measure, a risk-free rate and expected life of the options.
b)
Cash-settled share based plan
The Company maintains a cash-settled share based plan, which is described in Note 29.2. The cost of cash-settled share based options is
recognized in Operating expenses as an expense over the vesting period. Obligations related to cash-settled share based plans are recorded
as liabilities at fair value in Accounts payable, accrued and other liabilities. At each reporting date, obligations related to the plan are re-
measured at fair value with reference to the fair value of the Company’s stock price and the number of units that have vested. The
corresponding share based compensation expense or recovery is recognized over the vesting period. The Company uses the Black-Scholes
model to measure the fair value of cash-settled share based options. Inputs to the model include a volatility measure, a risk-free rate and
expected life of the options.
c)
Deferred share units plan (“DSU”)
The Company has adopted a non-employee director DSU plan, which is described in Note 29.3. This entitles the participants to receive,
following the end of the director’s tenure as a member of the Board, an amount equivalent to the value of a common share at settlement,
for each DSU unit that the participant holds. Obligations related to the plan are recorded as liabilities at fair value in Accounts payable,
accrued and other liabilities, and re-measured at each reporting date at fair value with reference to the fair value of the Company’s stock
price and the number of units that have vested. The cost of the DSUs is recognized in Operating expenses in the period they are awarded.
2.10
Leases
Effective January 1, 2019, the Company adopted the new leases standard IFRS 16 Leases (“IFRS 16”) and applied the modified retrospective
method upon adoption. The Company has determined that the impact of adoption resulted in the addition of a right-of-use (“ROU”) asset
of $10,058 and a corresponding lease liability of $10,058 (see Note 10). At the commencement date, the Company measured the ROU assets
at cost and the lease liability at the present value of future lease payments. The lease liability is initially measured at the present value of the
lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily
determined, the Company uses its incremental borrowing rate. The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial
direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. The Company used the
incremental borrowing rate at the date of initial application as the discount rate, as the rate implicit in the lease was not readily determinable.
The ROU assets are depreciated over the earlier of the end of the useful life of the underlying asset or the end of the term of the underlying
lease contracts. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using
the effective interest method) and by reducing the carrying amount to reflect the lease payments made.
Short-term leases or leases of low-value assets are accounted for by recognizing the lease payments associated with those leases as an
expense on a straight-line basis over the term of the leases, as permitted by IFRS 16.
2.11
Transaction costs
The Company accounts for transaction costs that are incremental and directly attributable to an equity transaction as a deduction from
equity, in accordance with IAS 32 Financial Instruments: Presentation.
2.12
Uncertainty over income tax treatments
The Company has adopted IFRIC 23 Uncertainty over Income Tax Treatments (“IFRIC 23”) for the first time in the current year. IFRIC 23 sets
out how to determine the accounting tax position when there is uncertainty over income tax treatments. The adoption of this interpretation
did not impact the Company’s Consolidated Financial Statements for the year ended December 31, 2019.
12
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.13
Future accounting policy changes
a)
IFRS 9 Financial instruments (“IFRS 9”)
In November 2009, the IASB issued IFRS 9 as part of its plan to replace IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”).
IFRS 9 requires financial assets, including hybrid contracts, to be measured at either fair value or amortized cost. In October 2010, the IASB
added to IFRS 9 the requirements for classification and measurement of financial liabilities previously included in IAS 39. Another revised
version of IFRS 9 was issued in July 2014 to include impairment requirements for financial assets and limited amendments by introducing a
“fair value through other comprehensive income” measurement category. It also removed the mandatory effective date of January 1, 2015
and replaced it with a new effective date of January 1, 2018. This notwithstanding, the Company has elected to defer implementation of IFRS
9 to coincide with the implementation of IFRS 17 Insurance contracts (“IFRS 17”).
Deferral of IFRS 9
The Company has adopted the amendments of IFRS 4, which addresses the deferral of the implementation of IFRS 9 for insurance companies.
The Company is applying the temporary exemption from IFRS 9 as its activities are predominantly connected with insurance. The Company’s
percentage of liabilities connected with insurance contracts over total liabilities is greater than the 80% threshold as described in IFRS 4 and
the Company does not engage in any significant activity not connected with insurance. Based on this analysis, the Company meets the criteria
to defer implementation of IFRS 9.
The Company must also disclose certain elements related to the classification and fair value (see Note 4.2), as well as credit rating (see Note
13.2(c)) of financial assets. The Company is assessing the impact that IFRS 9 will have on its Consolidated Financial Statements.
b)
IFRS 17
On May 18, 2017, the IASB issued the new standard IFRS 17 which allows insurance entities to elect one of the following two approaches
with respect to financial instruments: (a) the deferral approach, which provides entities whose predominant activities are to issue insurance
contracts within the scope of IFRS 4 a temporary exemption to continue using IAS 39, instead of IFRS 9, until January 1, 2021; and (b) the
overlay approach, which can be applied to eligible financial assets and provides an option for all issuers of insurance contracts to reclassify
from profit or loss to other comprehensive income any additional accounting volatility that may arise from applying IFRS 9 before IFRS 17 is
applied. IFRS 17 requires insurance liabilities to be measured at current fulfillment value and provides a more uniform measurement and
presentation approach for all insurance contracts. IFRS 17 supersedes IFRS 4 and related interpretations and is effective for fiscal years
beginning on or after January 1, 2021. It is applied retrospectively unless impracticable, in which case the modified retrospective approach
or the fair value approach is applied. An exposure draft Amendments to IFRS 17 addresses concerns and implementation challenges that were
identified after IFRS 17 was published. One of the main changes proposed is the deferral of the date of initial application of IFRS 17 by one
year to annual periods beginning on or after 1 January 2022. The Company is assessing the impact that IFRS 17 will have on its Consolidated
Financial Statements.
c)
Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting policies, changes in accounting estimates, and
errors with respect to the definition of material
The amendments are intended to make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying
concept of materiality in IFRS Standards. The concept of ‘obscuring’ material information with immaterial information has been included as
part of the new definition. The threshold for materiality influencing users has been changed from ‘could influence’ to ‘could reasonably be
expected to influence’. The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. In addition,
the IASB amended other Standards and the Conceptual Framework that contain a definition of material or refer to the term ‘material’ to
ensure consistency. The amendments are applied prospectively for annual periods beginning on or after January 1, 2020, with earlier
application permitted.
d)
IFRS 3 Business Combinations
The amendments clarify that while businesses usually have outputs, outputs are not required for an integrated set of activities and assets to
qualify as a business. To be considered a business an acquired set of activities and assets must include, at a minimum, an input and a
substantive process that together significantly contribute to the ability to create outputs. Additional guidance is provided that helps to
determine whether a substantive process has been acquired. The amendments introduce an optional concentration test that permits a
simplified assessment of whether an acquired set of activities and assets is not a business. Under the optional concentration test, the acquired
set of activities and assets is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single
identifiable asset or group of similar assets. The amendments are applied prospectively to all business combinations and asset acquisitions
for which the acquisition date is on or after the first annual reporting period beginning on or after January 1, 2020, with early application
permitted.
13
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 3 – Critical accounting judgments and estimates in applying accounting policies
The preparation of Consolidated Financial Statements in accordance with IFRS requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses for the years presented.
3.1
Critical accounting judgments in applying the Company’s accounting policies
Judgments are used in applying the accounting policies used to prepare financial statements. Those judgments affect the carrying amount
of certain assets and liabilities and the reported amounts of revenues and expenses recorded during the year.
a)
Insurance Contracts
Judgments are used to determine whether contracts should be classified as insurance or investment contracts (see Note 2.4(f)).
b)
Financial assets
Judgments are used in determining the classification of financial assets as AFS, FVTPL or Loans and receivables (see Note 2.3(a)).
c)
Unpaid claims and LAE
Judgments are used in establishing provisions for unpaid claims and LAE (see Note 2.4(d)).
3.2
Assumptions and estimation uncertainty
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the
Consolidated Financial Statements is included below. Any changes in estimates are recorded in the period in which they are determined.
Accordingly, actual results may differ from these and other estimates thereby impacting future financial statements:
a)
Valuation of claims liabilities
Assumptions and estimation uncertainties exist related to the valuation of unpaid claims and LAE (see Note 2.4(d)), as well as significant risk
factors associated with insurance and reinsurance (see Note 13 and Note 14).
b)
Valuation of level 3 assets
Assumptions and estimation uncertainties exist related to the valuation of the structured insurance assets (see Note 4.4 and Note 6) as well
as other Level 3 assets (see Note 6).
c)
Measurement of income taxes
Assumptions and estimates are used in measuring the provision for incomes taxes (see Note 2.7 and Note 28).
14
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 4 – Investments
4.1
Classification of cash and investments
The following table presents the classification of cash and cash equivalents, and short-term securities and investments:
As at December 31, 2019
Cash and cash equivalents, and short-term securities
Investments
Fixed income
Common shares (1)
Preferred shares
Structured insurance assets
Total cash and investments
As at December 31, 2018
Cash and cash equivalents
Investments
Fixed income
Common shares (1)
Preferred shares
Structured insurance assets
Total cash and investments
AFS
-
226,122
40,621
39,084
-
305,827
AFS
-
195,966
27,040
25,307
-
248,313
Designated
FVTPL
Cash, loans and
receivables
Total
-
85,905
85,905
71,838
-
-
10,658
82,496
4,294
-
-
-
90,199
302,254
40,621
39,084
10,658
478,522
Designated
FVTPL
Cash, loans and
receivables
Total
-
95,212
95,212
18,302
-
-
12,300
30,602
3,959
-
-
-
99,171
218,227
27,040
25,307
12,300
378,086
(1) Common shares include income and investment trust units.
On November 20, 2018, the Company derecognized financial assets with a face value of $2,762 as the rights to receive cash flows and risks
and rewards of ownership to the assets have been transferred. The carrying value of the assets were measured at $2,785, resulting in a
realized loss of $21. As at December 31, 2019, the Company’s continuing interest in the financial assets were measured at carrying value of
$4,294 (December 31, 2018 – $3,959).
15
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
4.2
Unrealized gains and losses and carrying value of investments
The amortized cost and carrying value of investments as at December 31, 2019 and December 31, 2018 were as follows:
As at December 31, 2019
Government
Corporate
Total bonds
Other loans
Total fixed income
Common shares (1)
Preferred shares
Structured insurance assets
As at December 31, 2018
Government
Corporate
Total bonds
Other loans
Total fixed income
Common shares (1)
Preferred shares
Structured insurance assets
FVTPL
investments
At carrying
value
71,838
-
71,838
-
71,838
-
-
10,658
82,496
FVTPL
investments
At carrying
value
18,302
-
18,302
-
18,302
-
-
12,300
30,602
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
Carrying
value
49,046
174,957
224,003
4,294
228,297
34,543
42,832
-
305,672
796
2,121
2,917
-
2,917
6,335
518
-
9,770
(49)
(749)
(798)
-
(798)
(257)
(4,266)
-
(5,321)
49,793
176,329
226,122
4,294
230,416
40,621
39,084
-
310,121
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
Carrying
value
45,418
152,757
198,175
3,959
202,134
24,307
28,456
-
254,897
389
113
502
-
502
5,270
108
-
5,880
(90)
(2,621)
(2,711)
-
(2,711)
(2,537)
(3,257)
-
(8,505)
45,717
150,249
195,966
3,959
199,925
27,040
25,307
-
252,272
Total
investments
At carrying
value
121,631
176,329
297,960
4,294
302,254
40,621
39,084
10,658
392,617
Total
investments
At carrying
value
64,019
150,249
214,268
3,959
218,227
27,040
25,307
12,300
282,874
(1) Common shares include income and investment trust units.
The Company is currently assessing the cash flow characteristics test, to determine if the securities the Company holds would pass the solely
payments of principal and interest (“SPPI”) test. Based on a preliminary assessment, most of the debt securities would pass the test, however
the composition of debt securities may change significantly by the time IFRS 9 is adopted along with IFRS 17, effective for fiscal year
commencing January 1, 2022.
Management has reviewed currently available information regarding those investments with a fair value less than carrying value. For the
year ended December 31, 2019, management did not recognize any impairments (December 31, 2018 – $325). Assumptions are used when
estimating the value of impairment based on the Company’s impairment policy, which involves comparing fair value to carrying value.
16
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
4.3
Pledged assets
In the normal course of insurance and reinsurance operations, the Company must secure its obligations under certain insurance and
reinsurance contracts by collateralizing them with letters of credit or trust arrangements. These trusts and letters of credit may, in turn, be
secured by the Company’s fixed income investments. As at December 31, 2019, the Company has pledged cash amounting to $2,576 USD
and pledged fixed maturity investments amounting to $58,981 USD (December 31, 2018 – $32,088 USD and $20,090 USD, respectively),
under insurance and reinsurance trust arrangements and are therefore not readily available for general use by the Company.
As at December 31, 2019, the Company pledged $311 USD (December 31, 2018 – $294 USD) of fixed income investments as security deposit
to the Oklahoma Insurance Department to be held in trust for and pledged to the State of Oklahoma.
4.4
Structured insurance assets
The structured insurance assets represent the Company’s purchase of the rights to collect commission income on portfolios of long-term care
insurance policies issued by insurance companies. The commissions are paid into trusts, from which the amounts due to the Company, being
the commissions net of expenses of the trusts, are paid. The commission income for the year ended December 31, 2019 amounted to $1,658
(December 31, 2018 – $1,874), which has been recorded within Net investment income (see Note 21).
In March 2019, there was a one-time settlement gain of $6,075 USD on the structured insurance assets. In 2016, Trisura International, along
with two other parties, commenced legal action against the third party, from whom Trisura International purchased the structured insurance
assets in 2004. The lawsuit was fully settled in March 2019, and the amount was fully received in April 2019.
Note 5 – Fair value and notional amount of derivatives
The following sets out the fair value and notional amount of derivatives as at December 31, 2019 and December 31, 2018:
As at
Foreign currency contracts
Forwards
Equity contracts
Swap agreement
Term to maturity
less than one year
from one to five years
December 31, 2019
December 31, 2018
Notional
amount
Fair value
Asset
Liability
Notional
amount
Fair value
Asset
Liability
43,700
327
494
44,194
745
1,072
43,700
494
327
745
-
-
-
-
-
24,101
-
24,101
24,101
-
-
-
-
-
-
380
-
380
380
-
The Company entered into foreign currency forward contracts to reduce its exposure to fluctuations in the USD, EUR and GBP exchange rates
that could arise from its foreign denominated investments. The notional amounts of the derivatives as at December 31, 2019 are $25,991
USD (December 31, 2018 – $16,819 USD), €1,636 EUR (December 31, 2018 – €1,000 EUR) and £4,193 GBP (December 31, 2018 – £nil). The
Company also entered into a swap agreement to mitigate exposure to equity market fluctuations associated with its share based
compensation. These derivatives are recorded at fair value and gains and losses are recorded in Net gains (losses) (see Note 22).
17
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 6 – Fair value measurement
The following sets out the financial instruments classified in accordance with the fair value hierarchy as at December 31, 2019 and December
31, 2018:
As at December 31, 2019
Total fair value
Level 1
Level 2
Level 3
Government
Corporate
Total bonds
Common shares (1)
Preferred shares
Structured insurance assets
Total investments
Derivative financial assets
121,631
176,329
297,960
40,621
39,084
10,658
388,323
1,072
389,395
-
-
-
39,711
39,084
-
78,795
-
78,795
121,631
176,329
297,960
-
-
-
297,960
1,072
299,032
-
-
-
910
-
10,658
11,568
-
11,568
As at December 31, 2018
Total fair value
Level 1
Level 2
Level 3
Government
Corporate
Total bonds
Common shares (1)
Preferred shares
Structured insurance assets
Total investments
Derivative financial liabilities
64,019
150,249
214,268
27,040
25,307
12,300
278,915
(380)
278,535
-
-
-
26,235
25,307
-
51,542
-
51,542
64,019
150,249
214,268
-
-
-
214,268
(380)
213,888
-
-
-
805
-
12,300
13,105
-
13,105
(1) Common shares include income and investment trust units.
For the years ended December 31, 2019 and December 31, 2018, there were no transfers between levels.
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the
hierarchy as at December 31, 2019 and December 31, 2018:
December 31, 2019 December 31, 2018
Balance at beginning of period
Unrealized losses
Amortization of premium
Purchase of securities
Sale of securities
Foreign exchange
Balance at end of period
13,105
(1,092)
-
119
-
(564)
11,568
13,223
(982)
(63)
205
(363)
1,085
13,105
18
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 6 – Fair value measurement (continued)
Included within the Level 3 assets are the structured insurance assets. The structured insurance assets are valued using a proprietary
discounted cash flow valuation model. The fair value of this investment is based on discounting the expected future commission using a U.S.
Treasury yield curve adjusted for credit risk associated with the receipt of future commission payments from the insurance companies. The
credit risk adjustment is made since the Company takes on the credit risk of the insurance companies who have the ultimate commission
obligations. The majority of commissions are received from insurance companies with an A.M. Best Company, Inc. (“A.M. Best”) long-term
issuer credit ratings of A or better.
Expected future cash flows are projected considering the probability of the policy being cancelled by the insured (referred to as lapse), the
insured becoming sick and making a claim under the insurance policy (referred to as morbidity) and having future premium payments waived,
or the insured dying (referred to as mortality). These actuarial risks are modeled using data drawn from the insurance companies and the
Society of Actuaries Long Term Care Studies, as well as data from other public and non-public sources supplemented, as appropriate, by
assistance from external actuarial consultants. Mortality rates used in the valuation of the Structured insurance assets are derived from the
2012 Individual Annuity Mortality table developed by the Society of Actuaries in the United States. The assumptions used are reviewed on a
regular basis.
Management uses sensitivity analyses to ensure risks assumed are within the Company’s risk tolerance level. Sensitivity analyses are
performed on factors that would impact the Company’s results and financial condition. Results of the sensitivity analyses should only be
viewed as directional estimates as they can differ materially from actual results. The following table shows the sensitivity of the valuation to
a 1% change in the lapse rate.
Sensitivity factor
100 basis point increase in lapse rate
100 basis point decrease in lapse rate
December 31, 2019
December 31, 2018
Impact on comprehensive income
(576)
622
(587)
632
The following tables present quantitative information about the significant fair value inputs utilized by the Company for Level 3 assets:
Structured insurance assets
Fair value as at
December 31, 2019
Valuation technique
10,658 Discounted cash flow
Private equity fund investments
910 Net asset value (4)
Structured insurance assets
Fair value as at
December 31, 2018
Valuation technique
12,300 Discounted cash flow
Private equity fund investments
805 Net asset value (4)
(1)
The discount rate used by the Company consists of three components:
Unobservable inputs
Range
Discount rate load (1)
Morbidity rates (2)
Lapse rates (3)
n/a
0.25% - 3.00%
0.00% - 24.50%
1.00% - 3.90%
n/a
Unobservable inputs
Range
Discount rate load (1)
Morbidity rates (2)
Lapse rates (3)
n/a
0.25% - 3.00%
0.30% - 25.30%
2.50%
n/a
•
•
•
Risk free rate: based on U.S. Treasury strip rates that are quoted observable fair value inputs;
Credit risk: based on counterparty credit default swap rates that are quoted observable fair value inputs; and
Discount rate load: the risk premium applied to projected cash flows which increases over time. A decrease in discount rate load
increases estimated fair value.
(2) Morbidity rates refer to the percentage of policyholders in receipt of benefit during which time premiums are waived. These morbidity rates
vary by age and gender (e.g. from 0.0% at age 50 to over 20% for ages in excess of 97) and are based on long term care industry data. At
December 31, 2019, the average morbidity rate was 5.0% corresponding to an average policyholder age of 81 (December 31, 2018 – 5.0% and
average policyholder age of 81).
Lapse rates are the percentage of policyholders electing to cancel their policy and are based on long term care industry data and recent
portfolio experience.
The reported net asset value from the Asset Manager approximates the fair value of the investment.
(4)
(3)
19
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 7 – Deferred acquisition costs
The following changes have occurred to the deferred acquisition costs for the years ended December 31, 2019 and December 31, 2018:
Deferred acquisition costs
Opening costs, beginning of year
Acquisition costs deferred
Amortization of deferred costs
Foreign exchange
Closing balance, end of year
Reinsurers’ share of deferred acquisition costs
Opening costs, beginning of year
Acquisition costs deferred
Amortization of deferred costs
Foreign exchange
Closing balance, end of year
December 31, 2019
63,715
124,742
(83,171)
(1,089)
104,197
December 31, 2018
40,266
68,999
(46,098)
548
63,715
December 31, 2019
19,137
77,268
(43,845)
(1,269)
51,291
December 31, 2018
5,566
26,605
(13,671)
637
19,137
The reinsurers’ share of deferred acquisition costs is referred to as Unearned reinsurance commissions in the Consolidated Statements of
Financial Position.
The following table presents the breakdown of net commissions expense for the years ended December 31, 2019 and December 31, 2018:
Net commissions
Commissions expense
Reinsurance commissions
Net commissions expense
Note 8 – Unearned premiums
December 31, 2019
82,923
(45,407)
37,516
December 31, 2018
45,314
(15,411)
29,903
Unearned premiums are generally calculated on a pro rata basis from the unexpired portion of the premiums written (see Note 2.4(a)). The
unearned premiums estimate is validated through standard actuarial techniques to ensure that after deducting any deferred policy
acquisition costs, these premiums are sufficient to cover the estimated future costs of servicing the associated policies, expected claims, LAE,
and taxes to be incurred. In estimating these costs, the Company in some instances uses discounting techniques to take into account the
time value of money and a provision for adverse deviation is added to the discounted amount. There was no premium deficiency at December
31, 2019 or December 31, 2018.
The carrying value of unearned premiums approximates their fair value.
20
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 8 – Unearned premiums (continued)
The following changes have occurred in the provision for unearned premiums during the years ended December 31, 2019 and December 31,
2018:
Unearned premiums
Unearned premiums, beginning of year
Gross premiums written
Gross premiums earned
Foreign exchange
Unearned premiums, end of year
Reinsurers’ share of unearned premium
Reinsurers’ share of unearned premiums, beginning of year
Ceded premiums written
Ceded premiums earned
Foreign exchange
Reinsurers’ share of unearned premiums, end of year
Note 9 – Unpaid claims and loss adjustment expenses
December 31, 2019
182,623
448,262
(298,408)
(4,386)
328,091
December 31, 2019
67,519
305,480
(190,445)
(4,143)
178,411
December 31, 2018
115,357
219,041
(153,753)
1,978
182,623
December 31, 2018
27,008
103,405
(64,783)
1,889
67,519
As at September 30, 2019, the Company changed its estimation methodology for determining the long-term interest rates used in discounting
the claims reserves of the life reinsurance business of Trisura International. Prior to September 30, 2019, Trisura International used the Euro
swap rate curve to represent market-consistent risk-free interest rates.
Effective September 30, 2019, Trisura International began to determine the interest rates used in discounting its life reinsurance claims
reserves by using the interest rate curve provided by the European Insurance and Occupational Pensions Authority (“EIOPA”). This curve is
based on the Euro swap rate curve and also incorporates a credit risk adjustment, a volatility adjustment and the extrapolation of interest
rates at longer durations. The EIOPA curve is used in Solvency II, a risk-based insurance regulatory and capital regime applied in Europe and
is an accepted practice for valuation of claims reserves under IFRS 4.
The aggregate impact of these estimation changes reduced Trisura International’s life Unpaid claims and loss adjustment expenses by $5,773
as at September 30, 2019, with a corresponding decrease of $5,773 in Claims and loss adjustment expenses for the period ended September
30, 2019. It is impracticable for the Company to determine the impact of these estimation changes on future periods.
Unpaid claims and loss adjustment balances due from reinsurers are grouped with unearned reinsurance assets in Recoverable from
reinsurers on the Consolidated Statements of Financial Position.
The unpaid claims and LAE of Trisura Guarantee were discounted to take into account the time value of money using a rate of 3.0% (2018 –
3.25%) on expected claims settlement patterns. The expected future claim and LAE payments related to the Life liabilities of Trisura
International were discounted to take into account the time value of money using rates which ranged from (0.35%) to 3.9% (2018 – (0.36%)
to 1.38%).
21
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 9 – Unpaid claims and loss adjustment expenses (continued)
The following changes have occurred to the provision for unpaid claims for the years ended:
December 31, 2019
Direct
Ceded
Net
Unpaid claims, beginning of period
Purchase of Trisura Warranty outstanding warranty contracts
Gross unpaid claims
Claims occurring in current year (including paid)
Change in undiscounted estimates for losses of prior years
Change in discounting
Change in provision for adverse deviation
Total claims incurred
Claims paid
Foreign exchange
Unpaid claims, end of period
173,997
987
174,984
174,646
(8,141)
19,759
766
187,030
(96,370)
(7,764)
257,880
42,048
-
42,048
138,364
(1,679)
134
275
137,094
(62,645)
(1,840)
114,657
131,949
987
132,936
36,282
(6,462)
19,625
491
49,936
(33,725)
(5,924)
143,223
December 31, 2018
Direct
Ceded
Net
Unpaid claims, beginning of period
178,885
38,246
140,639
Claims occurring in current year (including paid)
Change in undiscounted estimates for losses of prior years
Change in discounting
Change in provision for adverse deviation
Total claims incurred
Claims paid
Foreign exchange
Unpaid claims, end of period
59,169
1,252
(1,957)
413
58,877
(68,307)
4,542
173,997
36,021
3,786
(347)
(245)
39,215
(35,863)
450
42,048
23,148
(2,534)
(1,610)
658
19,662
(32,444)
4,092
131,949
The Reinsurance premiums payable balance of $80,186 (December 31, 2018 – $41,406) on the Consolidated Statements of Financial Position
reflects $84,572 of reinsurance payable (December 31, 2018 – $45,694), netted against $4,386 (December 31, 2018 – $4,288) of reinsurance
recoverable.
22
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
9.1 Prior year claims development
The following table presents the net cumulative claim payments to date and estimate of gross and net ultimate claims incurred, including
IBNR claims and provisions for adverse deviation (“PfAD”), at the end of the year:
Net claims loss development
Accident year
Estimate of net
ultimate claims
incurred
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Estimate of net
ultimate claim
incurred
Cumulative claim
payments to
date
Net unpaid claims
Impact of
discounting
Impact of PfAD
Present value of
net unpaid
claims with PfAD
All prior
years
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
18,997
15,878
14,365
14,421
13,340
28,378
26,772
26,380
25,826
21,741
19,059
17,409
23,148
20,068
35,869
14,002
12,363
10,310
9,224
8,934
8,269
12,349
9,953
6,651
5,648
5,324
5,254
5,179
10,463
8,872
7,402
6,845
6,568
7,861
8,102
7,899
10,003
10,211
9,683
9,253
7,564
7,053
6,958
7,090
6,680
14,802
13,019
13,599
13,114
11,350
10,439
10,500
10,643
10,973
11,236
2,796,630
11,236
6,680
7,899
5,179
8,269
13,340
25,826
17,409
20,068
35,869
2,948,405
(2,789,453)
(10,769)
(6,433)
(5,777)
(4,314)
(7,406)
(11,285)
(14,434)
(11,807)
(11,640)
(11,784)
(2,885,102)
7,177
467
247
2,122
865
863
2,055
11,392
5,602
8,428
24,085
63,303
-
9
(18)
61
(11)
33
(116)
284
(47)
148
(57)
160
(136)
314
(579)
1,394
(465)
775
(689)
1,119
(1,382)
2,500
(3,500)
6,797
7,186
510
269
2,290
966
966
2,233
12,207
5,912
8,858
25,203
Add: Net discounted reserves on life contracts
Add: Trisura Warranty unpaid claims
Total net unpaid claims and LAE
66,600
75,875
748
143,223
23
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 10 – Leases
The Company leases office premises for its own use. These leases have terms that range from 5 years to 12 years, most with an option to
extend the lease at the end of the lease term. The Company also leases office equipment. These leases generally have a lease term of five
years, with no renewal option or variable lease payments.
As at December 31, 2019, ROU assets of $9,599 (December 31, 2018 – $nil) are recorded in Capital assets and intangible assets, along with
$4,878 (December 31, 2018 – $2,512) of other Capital assets and intangible assets.
Information about leases for which the Company is a lessee is presented below:
As at December 31, 2019
Right-of-use assets
Balance as at December 31, 2018
Impact of IFRS 16 adoption
Balance as at January 1, 2019
Additions
Depreciation
Foreign exchange
Balance at end of period
As at
Lease liabilities maturity analysis
Less than one year
One to five years
More than five years
Total undiscounted lease liabilities
Lease liabilities included in the Statements of Financial Position
Total cash outflow for leases recognized in the Statements of Cash Flows
Premises Office equipment
Total
-
10,033
10,033
780
(1,167)
(60)
9,586
-
25
25
-
(11)
(1)
13
-
10,058
10,058
780
(1,178)
(61)
9,599
December 31, 2019
1,656
6,650
2,826
11,132
9,756
1,348
Amounts recognized in Statements of Comprehensive Income for the period ended
December 31, 2019
Interest on lease liabilities
Expense relating to short-term leases
Expenses relating to leases of low-value assets
Income from subleasing right-of-use assets
322
40
4
502
24
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 11 – Premiums and accounts receivable, and other assets
As at December 31, 2019 and December 31, 2018, Premiums and accounts receivable, and other assets consists of:
As at
Premiums receivable
Accrued investment income
Derivative assets
Tax recoveries
Prepaid expenses
Funds held by ceding companies
Miscellaneous assets
December 31, 2019 December 31, 2018
79,627
2,537
1,072
417
388
221
2,407
86,669
41,251
1,991
-
1,939
316
236
543
46,276
As at December 31, 2019, Premiums receivable of $79,627 (December 31, 2018 – $41,251) includes an amount of $54,187 (December 31,
2018 – $20,504) related to Trisura Specialty for which there is a reinsurance payable of $60,345 (December 31, 2018 – $21,355).
Note 12 – Accounts payable, accrued and other liabilities
As at December 31, 2019 and December 31, 2018, Accounts payable, accrued and other liabilities consist of:
As at
Deposits in trust
Accrued liabilities
Lease liabilities
Other liabilities
Taxes payable
Share based payment plan
Investment contract liabilities
Derivatives liabilities
Note 13 – Risk management
December 31, 2019
December 31, 2018
11,842
8,345
9,756
4,102
3,913
2,589
369
-
40,916
9,565
8,700
-
3,891
-
715
916
380
24,167
As a provider of insurance products, effective risk management is critical to the Company’s ability to protect the interests of its stakeholders.
The most significant risks include those associated with insurance contracts and holding financial instruments. The Company has policies and
procedures governing the identification, measurement, monitoring, mitigating and controlling of risks associated with insurance contracts
and holding financial instruments. The most significant risk associated with insurance contracts is insurance risk, which includes pricing risk,
concentration risk and reserving risk. The significant risks associated with financial instruments are credit risk, liquidity risk and market risk
(comprising currency risk, interest rate risk and other price risks such as equity risk). Sensitivity analyses are performed on these significant
risks which could impact the Company’s results and financial condition. Results of the sensitivity analyses should only be viewed as directional
estimates as they can differ materially from actual results.
The following sections describe how the Company manages its insurance risk and risks associated with financial instruments.
25
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.1
Insurance risk
Insurance risk is the risk that the ultimate cost of claims and LAE, as well as acquisition expenses, related to insurance contracts will exceed
premiums received in respect of those contracts. This could occur because either the frequency or severity of claims is greater than expected.
The Company’s objective for managing insurance risk is to mitigate the risk while continuing to grow and to achieve profitable underwriting
results within its identified product lines. Senior management seeks to achieve this objective through effective use of underwriting and
pricing policies, procedures and guidelines, which it has developed for pricing and issuing bonds and policies or assuming reinsurance risk. In
addition, careful oversight is applied to the underwriting process to ensure that these policies, procedures and guidelines are followed.
Furthermore, the Company regularly reviews its underwriting practices to ensure that they reflect emerging trends in its existing business
and in the marketplace. Insurance risk is further mitigated through effective claims and expense management, and through the use of
reinsurance.
The insurance risks associated with insurance contracts underwritten by the Company are subject to a number of variables such as estimated
loss ratios and estimated claims settlement costs, which are sensitive to various assumptions which can impact the estimation of claims
liabilities (see Note 2.4(d)).
Some additional factors that impact insurance risk include pricing risk, concentration risk and reserving risk, which are described below:
a)
Pricing risk
Pricing risk is the risk that an insurance product has been priced using assumptions about claims and LAE activity that are different from the
actual experience of that product line. The Company mitigates the impact of pricing risk through the use of guidelines, which are designed
such that premium rates take into account claims frequency and severity, expense levels, investment returns and profit margins required to
support a particular product line. The Company reviews pricing assumptions regularly to ensure that they reflect up-to-date claims experience
and expected future changes in that experience, as well as market conditions. The Company further mitigates the impact of pricing risk
through the employment of experienced underwriting staff.
b)
Reserving risk
Reserving risk is the risk that future claims and LAE arising on past exposure periods exceed the liability recorded in respect of unpaid claims
and LAE. The Company’s management of reserving risk is discussed in Note 2.4(d).
c)
Concentration of insurance risk
Concentration risk is the risk that the Company’s insurance products are concentrated within a particular geographic area, particular class of
business, or a particular insured, thereby increasing the exposure of the Company to a single event or a series of related events.
Concentration of risk could arise as a result of accumulations of large numbers of insurance or reinsurance contracts exposed to similar perils,
classes of business or geographic areas.
To mitigate the impact of concentration of risk, the Company applies risk management practices, including the use of reinsurance, monitoring
and modelling techniques, and regularly reviews its portfolio of insurance risks for concentration and aggregation of risks and makes
adjustments as needed in order to ensure exposures are within tolerances. The active management of its reinsurance programs and collateral
requirements is also an important element in maintaining net claims exposures and concentration and aggregation risks within the Company’s
risk tolerance.
The following table shows the mix of the Company’s policies by product line and geography, which reflects the Company’s diversification of
insurance risk:
December 31, 2019
U.S.
Canada
Other
Canada
December 31, 2018
U.S.
Other
Trisura Guarantee
Trisura Specialty
Trisura International
Gross premiums written
Surety
Corporate insurance
Risk solutions
Property & casualty
Life
57,022
47,253
77,717
-
-
181,992
2,247
-
-
263,911
-
266,158
-
-
-
-
112
112
49,783
39,073
74,615
-
-
163,471
1,751
-
-
53,731
-
55,482
-
-
-
-
88
88
26
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.1
Insurance risk (continued)
d)
Sensitivity to insurance risk
i) Property and casualty business of Trisura Guarantee, Trisura Specialty and Trisura International
The insurance risks associated with the lines of business underwritten by the Company are sensitive to various assumptions which can impact
the estimation of claims liabilities. The relevant risk variables for the Company’s property and casualty lines of business associated with the
estimation of claims liabilities are subject to assumptions that impact the ultimate value of the estimated loss ratio as well as the estimated
claims settlement costs. The loss ratio is used to calculate losses of the Company with respect to its ongoing property and casualty insurance
operations as a percentage of net premiums earned. Below is an analysis showing the impact of a 5% increase in the loss ratio, as a percentage
of net earned premium, and a 5% increase in claims settlement costs of the property and casualty claims reserves, based on an increase in
the current net unpaid claims balance. Such variances in the estimation were considered reasonably possible during the years ended
December 31, 2019 and 2018. The impacts described in the table below are independent of one another. A 5% decrease to the loss ratio
and a 5% decrease in claims settlement costs would have the opposite effect on comprehensive income and shareholders’ equity.
December 31, 2019
December 31, 2018 December 31, 2019
December 31, 2018
Sensitivity factor
Impact on comprehensive income, before tax
Impact on shareholders’ equity
5% increase to loss ratio
5% increase to claims settlement costs
(5,275)
(3,188)
(4,420)
(2,940)
(3,872)
(2,407)
(3,240)
(2,235)
ii) Life business of Trisura International
The Company’s life reserves are held in respect of a book of deferred annuities with guaranteed annuity conversion options (“GAO”). A
significant risk factor in relation to these reserves is the proportion of policyholders who take up the GAO upon retirement. The following
table shows the impact on reserves of a 100 basis point change in the GAO take-up rate.
Sensitivity factor
100 basis point increase in GAO take-up rate
100 basis point decrease in GAO take-up rate
December 31, 2019
December 31, 2018
Impact on comprehensive income
(881)
916
(1,251)
938
Unpaid claims and LAE reserves are discounted due to the time value of money and are sensitive to interest rates. The impact of the interest
rate sensitivity on unpaid claims is shown in Note 13.4(b). The structured insurance assets are sensitive to changes in lapse rates. The impact
of lapse rate sensitivity on the structured insurance assets is shown in Note 6.
13.2
Credit risk
Credit risk is the risk that a party to a financial instrument will fail to discharge an obligation and cause the Company to incur a financial loss.
Credit risk arises mainly from investments in bonds and short-term securities, the structured insurance assets, and balances receivable from
insurance brokers and reinsurers.
For debt securities, the Company manages its credit risk by placing limits on its exposure to a single counterparty, by reference to the credit
rating of the counterparty or based on the collateral supporting the counterparty risk. Management also limits its aggregate debt securities
credit risk by placing limits on aggregate values of securities at different credit rating levels. Management monitors credit quality of its debt
securities on an on-going basis through its reviews of the investment portfolio.
For the structured insurance assets, the Company minimizes its credit exposure through transacting with investment grade counterparties.
For Premiums receivable, the Company uses insurance brokers, managing general agents, and program administrators as intermediaries for
the distribution of its product offerings and is therefore subject to the risk that these intermediaries fail to remit the premiums they have
collected on its behalf. The Company primarily deals with intermediaries with which it has entered into a contract that details, among other
things, the intermediary’s responsibilities and payment obligations. These intermediaries are typically regulated and licensed by insurance
regulators. Further, the Company monitors accounts receivable and follows-up all past due amounts to ensure satisfactory collection
arrangements are in place. As at December 31, 2019, $2,717 of premiums receivable was past due but not considered to be impaired
(December 31, 2018 – $1,586).
27
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.2
Credit risk (continued)
For recoverables from reinsurers, the Company applies its reinsurance risk management policy to manage the credit risk associated with
these balances. The Company is ultimately at risk on the limits of coverage provided under its product offerings, regardless of whether it has
ceded a portion of this exposure to reinsurers. If a reinsurer is unwilling or unable to satisfy its obligations, the Company does not have the
right to correspondingly reduce its claims payment obligations. The Company generally uses licensed reinsurers that have a minimum A.M.
Best credit rating of A-, and management monitors these ratings on a regular basis. Furthermore, the Company’s reinsurance risk
management policy places limits on the participation of individual reinsurers in the Company’s reinsurance arrangements. These
participations and limits are reviewed regularly.
When the Company uses an unlicensed or unrated reinsurer, it is required to establish a custodial account secured under a reinsurance
security agreement, post a letter of credit or provide other forms of security acceptable to the Company.
For funds withheld by ceding companies, credit risk is monitored regularly. Funds withheld by ceding companies relate to the Company’s
reinsurance business and credit risk is mitigated by contractual rights to offset amounts receivable against claims and other amounts payable.
The Company periodically obtains letters of credit from counterparties to collateralize some of these and potential future receivables.
Derivative assets and other assets are monitored with reference to the credit quality of the counter-party, and an impairment allowance is
made if deemed appropriate.
a)
Maximum exposure to credit risk of the Company
The following table sets out the Company’s maximum exposure to credit risk related to financial instruments. The maximum credit exposure
is the carrying value of the asset net of any allowances for losses.
As at
December 31, 2019
December 31, 2018
Cash and cash equivalents, and short-term securities
Bonds
Government
Corporate
Other loans
Structured settlements
Premiums receivable
Accrued investment income
Funds held by ceding companies
Derivative assets
Other assets
85,905
121,631
176,329
4,294
10,658
79,627
2,537
221
1,072
2,824
485,098
95,212
64,019
150,249
3,959
12,300
41,251
1,991
236
-
2,483
371,700
28
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.2
Credit risk (continued)
b)
Concentration of credit risk of the Company
Concentrations of credit risk can arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar
risk characteristics, for example they may operate in the same or similar industries. The following table provides details of the fair value of
fixed income securities by industry sector:
As at
Government
Financial
Energy
Industrials
Consumer discretionary
Telecom services
Automotive
Real estate
Consumer staples
Utility
Power and pipelines
Retail
Other
c)
Asset quality
December 31, 2019
December 31, 2018
121,631
64,842
23,535
20,187
15,762
11,598
11,515
8,319
4,797
3,868
3,636
3,588
8,976
302,254
64,019
61,388
11,436
22,038
7,049
13,710
7,389
5,369
5,202
3,626
4,734
6,224
6,043
218,227
The following table summarizes the credit ratings for fixed income securities and cash equivalents:
As at
Fixed income securities
AAA
AA
A
BBB
Below BBB
Cash equivalents and short-term securities
R-1 (high)
R-1 (medium)
R-1 (low)
December 31, 2019
December 31, 2018
43,566
91,156
94,257
56,549
16,726
302,254
11,398
-
6,299
319,951
21,306
51,388
79,190
55,763
10,580
218,227
-
2,060
-
220,287
29
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.3
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled
by delivering cash or another financial asset. Liquidity risk may arise from a number of potential areas including, for example, duration
mismatch between assets and liabilities.
Generally, the Company’s financial liabilities are settled by delivering cash and it is able to rely on the cash flow generated from its operations
to satisfy its liquidity requirements, which are primarily operating expenses and claims and loss adjustment payments.
By their nature, the timing and quantum of claims and loss adjustment payments are subject to significant uncertainty and are estimated
actuarially as set out in Note 2.4(d). Although the Company has reinsurance treaties in place under which a portion of the claims payments
may be recovered, including by way of set off against premiums payable to the reinsurers, such recoveries usually follow the making of
payments and often delays of a number of months can occur. Hence the Company must have access to sufficient liquid resources to fund
gross amounts payable when required.
To manage its liquidity requirements, the Company maintains a minimum balance of cash and cash equivalents, and short-term securities
and a highly rated, highly liquid investment portfolio. The Company’s investment policy sets out credit quality criteria and has limits on single
issuer exposures. In addition, the investment policy stipulates average duration targets.
The Company also manages the liquidity risk associated with its assumed reinsurance liabilities through its asset liability matching processes.
The long-tailed nature of much of the Company’s reinsurance business also reduces the likelihood of sudden or unexpected spikes in claim
payment requirements.
The Company periodically pledges assets under insurance and reinsurance trust arrangements which are therefore not readily available for
general use by the Company (see Note 4.3).
The following tables set out the Company’s financial assets and liabilities by contractual maturity.
As at December 31, 2019
Up to 1 year
1 to 5 years Over 5 years
Cash and cash equivalents, and short-term securities
Investments
Premiums receivable
Other financial assets
Reinsurers’ share of claims reserves
Financial and insurance assets (1)
16,398
27,120
76,680
6,864
88,039
215,101
-
192,487
2,947
48
24,710
220,192
-
93,306
-
130
1,908
95,344
As at December 31, 2018
Up to 1 year
1 to 5 years
Over 5 years
Cash
Investments
Premiums receivable
Other financial assets
Reinsurers’ share of claims reserves
Financial and insurance assets (1)
2,060
4,972
39,773
4,866
18,763
70,434
-
183,558
1,478
-
20,093
205,129
-
41,988
-
-
3,192
45,180
No specific
maturity
69,507
79,704
-
-
-
149,211
No specific
maturity
93,152
52,356
-
160
-
145,668
Total
85,905
392,617
79,627
7,042
114,657
679,848
Total
95,212
282,874
41,251
5,026
42,048
466,411
(1) Deferred acquisition costs and reinsurers’ share of unearned premiums have been excluded as they are not subject to liquidity risk.
30
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.3
Liquidity risk (continued)
As at December 31, 2019
Up to 1 year
1 to 5 years
Over 5 years
Unpaid claims and LAE (2)
Reinsurance premiums payable
Other financial liabilities
Loans payable
Financial and insurance liabilities (3)
120,077
80,186
19,285
-
219,548
92,798
-
-
29,700
122,498
39,792
-
-
-
39,792
As at December 31, 2018
Up to 1 year
1 to 5 years
Over 5 years
No specific
maturity
-
-
11,875
-
11,875
No specific
maturity
Unpaid claims and LAE (2)
Reinsurance premiums payable
Other financial liabilities
Loans payable
Financial and insurance liabilities (3)
37,181
41,406
13,830
-
92,417
83,487
-
-
29,700
113,187
43,021
-
-
-
43,021
-
-
10,337
-
10,337
(2) Undiscounted and excluding PfADs.
(3) Unearned premiums and unearned reinsurance commissions have been excluded as they are not subject to liquidity risk.
Total
252,667
80,186
31,160
29,700
393,713
Total
163,689
41,406
24,167
29,700
258,962
13.4
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.
Market risk includes currency risk, interest rate risk and other price risks such as equity price risk.
a)
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange
rates. The Company faces currency risk as a result of having operations in the United States and Canada, as well as European exposure
through its reinsurance operations and therefore has exposure to currency risk arising from fluctuations in exchange rates of the Canadian
and Euro against the United States dollar. The Company also has currency risk as a result of having investments in the Company’s Canadian
operations denominated in USD. The foreign currency positions of the Company are monitored regularly and the Company uses derivatives
throughout the year to manage foreign exchange risks where a material unmatched foreign exchange position exists.
i)
Exposure to currency risk
The following table summarizes the net currency exposure of Trisura Guarantee categorized by major currency. The balances in the table
below are presented in the foreign currency indicated:
As at December 31,
Cash and investments
Less: foreign – currency derivatives, notional amount
Total net exposure
USD
2019
24,138
(25,991)
(1,853)
2018
17,415
(16,819)
596
EUR
2019
1,654
(1,636)
18
GBP
2019
4,370
(4,193)
177
2018
1,002
(1,000)
2
2018
-
-
-
31
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.4
Market risk (continued)
a)
i)
Currency risk (continued)
Exposure to currency risk (continued)
The following table summarizes the carrying value of assets and liabilities, denominated in a currency other than USD, of Trisura International
categorized by major currency. All amounts below are converted to Canadian dollar equivalents. The assets and liabilities below are
translated at exchange rates at the reporting date and are stated before considering the effect of any forward currency exchange contracts:
Assets
Liabilities
Net assets
December 31, 2019
December 31, 2018
EUR
73,947
76,251
(2,304)
Other
1,406
235
1,171
EUR
67,460
70,323
(2,863)
Other
1,417
155
1,262
As at December 31, 2019, Trisura International’s short position in Euro is unhedged and management considered the foreign exchange risk
to be acceptable.
The following table summarizes the carrying value of net assets of Trisura International and Trisura Specialty in their functional currency of
USD.
As at December 31,
Consolidated net assets of:
Trisura International
Trisura Specialty
Total net currency exposure to the USD
2019
2018
14,849
83,273
98,122
14,973
48,831
63,804
The Company manages its currency risk through its investment policy which considers duration of investments held as well as asset liability
matching.
ii)
Sensitivity to currency risk
As at December 31,
Sensitivity factor
USD investments supporting Trisura Guarantee
Consolidated net assets of Trisura Specialty
Consolidated net assets of Trisura International
Impact on comprehensive income and shareholders’ equity
2019
2018
2019
2018
10% increase in CDN versus USD
10% decrease in CDN versus USD
160
(7,769)
(1,651)
(54)
(4,783)
(1,711)
(176)
8,546
1,815
59
5,262
1,882
EUR net assets supporting Trisura International (in USD)
161
191
(177)
(210)
10% increase in USD versus EUR
10% decrease in USD versus EUR
b)
Interest rate risk
Interest rate risk is the potential for financial loss resulting from changes in interest rates. Fixed income investments, structured insurance
assets and preferred shares are subject to interest rate risk although, in the case of fixed income investments, to the extent they are held to
maturity, the risk is limited to the reinvestment yield being different from the original yield to maturity. The fair value of bonds changes
inversely with changes in market rates of interest, with greater impact to bonds with longer durations.
The Company’s discounted unpaid claims balance is also subject to interest rate risk, in particular the Company’s life reserves which have
longer durations.
32
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
13.4
Market risk (continued)
b)
Interest rate risk (continued)
The Company manages its interest rate risk through its investment policy which considers duration of investments held as well as asset
liability matching.
As at December 31, 2019
Sensitivity factor
100 basis point increase in the yield curve (1)
100 basis point decrease in the yield curve (1)
Fixed income
(including
preferred shares)
Structured
insurance asset
Net unpaid
claims
Impact on
comprehensive
income
(25,585)
25,582
(507)
557
(22,432)
27,560
(2,487)
(2,575)
(1) Assumes parallel shift in the yield curve, and all other variables remain constant.
As at December 31, 2018
Sensitivity factor
100 basis point increase in the yield curve (1)
100 basis point decrease in the yield curve (1)
Fixed income
(including
preferred shares)
Structured
insurance asset
(9,689)
9,658
(543)
593
Net unpaid
claims
(24,122)
31,835
Impact on
comprehensive
income
15,127
(22,796)
(1) Assumes parallel shift in the yield curve, and all other variables remain constant.
c)
Equity price risk
Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets.
The Company’s exposure to equity price risk is managed and mitigated through its investment policy which sets out maximum exposures to
equities at aggregate and per issuer levels as well as requiring diversification across different industry sectors.
As at December 31,
Sensitivity factor
10% increase in equity prices (2)
10% decrease in equity prices (2)
2019
2018
Impact on comprehensive income (1)
3,102
(3,102)
2,030
(2,030)
(1)
(2)
The methodology used to calculate the latter change is based on 10% of the fair value of the equities (excluding preferred shares and any
funds which hold predominantly fixed income securities), net of tax, at the balance sheet dates.
Excluding preferred shares.
33
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 14 – Reinsurance
The Company uses reinsurance in the ordinary course of business to reduce its exposure to any one claim or event under the policies it issues.
A large portion of this reinsurance is affected under reinsurance agreements known as treaty reinsurance. In some instances, it is negotiated
on a facultative (one-off) basis for individual policies, generally when the exposures under these policies are not sufficiently mitigated by the
treaty reinsurance.
Reinsurance does not relieve the Company of its obligations to policyholders. A contingent liability exists with respect to reinsurance ceded
which would become a liability of the Company in the event that any reinsurer fails to honour its contractual obligations. For this reason, the
Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk to minimize its exposure to losses from
reinsurer insolvencies. All licensed reinsurers providing treaty or facultative reinsurance policies are required to have a minimum A.M. Best
credit rating of A- at the inception of each policy.
In some instances, provisions are incorporated in the treaties to protect the Company in the event a reinsurer’s credit rating deteriorates
during the term of the reinsurance treaty. Unlicensed reinsurers must post an agreed upon level of collateral. The Company has determined
that a provision is not required for potentially uncollectible reinsurance as at December 31, 2019 and December 31, 2018.
The following table summarizes the components of Recoverable from reinsurers as at December 31, 2019 and December 31, 2018:
As at December 31,
Reinsurers’ share of claims liabilities (see Note 9)
Reinsurers’ share of unearned premiums (see Note 8)
2019
2018
114,657
178,411
293,068
42,048
67,519
109,567
Note 15 – Capital assets
The Company’s capital assets consist of the following as at December 31, 2019 and December 31, 2018:
As at December 31, 2019
Leasehold improvements
Office equipment
Furniture and fixtures
As at December 31, 2018
Leasehold improvements
Office equipment
Furniture and fixtures
Cost
1,188
1,419
1,103
3,710
Cost
1,188
1,460
1,015
3,663
Accumulated
depreciation
Carrying value
(615)
(951)
(860)
(2,426)
573
468
243
1,284
Accumulated
depreciation
Carrying value
(516)
(1,100)
(789)
(2,405)
672
360
226
1,258
34
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 16 – Intangible assets
Intangible assets consist of Computer software, customer lists, and licenses. Computer software is being amortized at a rate of 40%, using
the declining balance method.
Customer lists include the acquisition of two customer lists which were each acquired for $800. One was purchased in 2014 and another in
2017, both from other insurance companies. Both lists are being amortized at a rate of 20% using the declining balance method. The final
purchase price of the customer list purchased in 2017 is contingent on revenue generated from the list over the following two years, subject
to a fixed price of $500. The $800 of consideration paid included the $500 fixed price plus $300 of contingent consideration. In 2019 the
Company received the contingent consideration of $300 which was recorded with fee income.
Intangible assets also include state licenses which were acquired as part of the acquisition for $1,950 USD (see Note 24). These licenses have
indefinite useful lives and are therefore not amortized.
December 31, 2019
December 31, 2018
Computer
software
332
162
(166)
-
328
Customer list
922
-
(184)
-
738
Licenses
-
2,583
-
(55)
2,528
Total
1,254
2,745
(350)
(55)
3,594
Computer
software
375
135
(178)
-
Customer list
1,152
-
(230)
-
332
922
Total
1,527
135
(408)
-
1,254
Opening, carrying value
Additions
Amortization
Foreign exchange
Closing, carrying value
Note 17 – Capital management
The Company’s capital is its shareholders’ equity, which consists of common shares, preferred shares, contributed surplus, accumulated
deficit and accumulated other comprehensive loss. The Company reviews its capital structure on a regular basis to ensure an appropriate
capital structure in keeping with all regulatory, business and shareholder obligations.
Oversight of the capital of the Company rests with management and the board of directors. Their objectives are twofold: (i) to ensure the
Company is prudently capitalized relative to the amount and type of risks assumed and the requirements established by the laws and
regulations applicable to the Company’s regulated subsidiaries; and (ii) to ensure shareholders receive an appropriate return on their
investment.
17.1
Regulatory capital
a)
Trisura Guarantee
Under guidelines established by the Office of the Superintendent of Financial Institutions which apply to Trisura Guarantee, Canadian
property and casualty insurance companies must maintain minimum levels of capital as determined in accordance with a prescribed test, the
minimum capital test (“MCT”), which expresses available capital (actual capital plus or minus specified adjustments) as a percentage of
required capital. Companies are expected to maintain MCT level of at least 150% and are further required to establish their own unique
target MCT level based on the nature of their operations and the business they write. Management, with the board of directors’ approval,
has established Trisura Guarantee’s target MCT level in accordance with these requirements. Trisura Guarantee has exceeded this measure
as at December 31, 2019 and December 31, 2018.
b)
Trisura International
Trisura International is subject to externally imposed regulatory capital requirements in Barbados. As at December 31, 2019 and December
31, 2018, Trisura International, including its subsidiaries, maintained sufficient capital to meet these requirements.
c)
Trisura Specialty
Trisura Specialty is subject to externally imposed regulatory capital requirements by the Oklahoma Insurance Department as a Domestic
Surplus Line Insurer. A requirement of the regulator is that Trisura Specialty’s Risk Based Capital ratio (“RBC”) exceed 150%. As at December
31, 2019 and December 31, 2018, Trisura Specialty exceeded this requirement. As Trisura Specialty can now operate as an admitted carrier,
through its subsidiary Trisura Insurance Company, the Company is subject to the various RBC criteria of each state in which it is licensed. As
at December 31, 2019, the Company was in excess of the RBC requirements of the states in which it was licensed.
35
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 18 – Loan payable
On March 14, 2018, the Company entered a five-year revolving credit facility with a Canadian Schedule I bank (the “Bank”) which allows for
drawings of up to $35,000. Under this arrangement, the Company can draw funds in the form of short term banker’s acceptances, Canadian
prime rate advances, base rate advances or LIBOR rate advances. The interest rate is based on the current periods’ bankers’ acceptance rate,
Canadian prime rate, base rate, or LIBOR rate, plus a margin. The loan balance is accounted for at amortized cost, which is equal to the
carrying value. The minimum required annual payment consists only of interest, with no mandatory principal payments required.
On March 14, 2018, $29,700 was drawn under the loan, which was used to repay the outstanding loan payable of $29,700 which had been
borrowed by a subsidiary of the Company under a previous lending facility.
As part of the covenants of the current loan arrangement, the Company is required to maintain certain financial ratios, which were fully met
as at December 31, 2019 and December 31, 2018.
For the year ended December 31, 2019, the Company incurred $1,361 of interest expense, of which $1,039 (December 31, 2018 – $970) are
related to the loan payable. As at December 31, 2019, the loan balance was $29,700 (December 31, 2018 – $29,700).
Note 19 – Share capital
The Company’s authorized share capital consists of: (i) an unlimited number of common shares; (ii) an unlimited number of non-voting shares;
and (iii) an unlimited number of preference shares (issuable in series). As at December 31, 2019 and December 31, 2018, no non-voting
shares were issued.
On December 31, 2019, the Company exercised its right to redeem all 64,000 (in shares) of its issued and outstanding preferred shares, for
$1,600. As at December 31, 2019, there are no outstanding preferred shares. Holders of the preferred shares were entitled to a cumulative
dividend, payable quarterly, at a fixed rate of 6%. The Company had the right to redeem preferred shares at any time on 30 to 60 days’
notice.
In September 2019, the Company completed a public offering of 1,743,400 common shares for gross proceeds of $46,026. Concurrent with
the public offering, the Company issued 454,539 common shares to investors on a private placement basis for gross proceeds of $12,000.
The Company incurred costs of $1,841 in commission paid to underwriters as well as $516 of costs directly attributable to the share issuance,
which have been deducted from equity. The net impact of the share issuance is an increase in common shares of $55,669.
The following table shows the common shares issued and outstanding:
As at
December 31, 2019
December 31, 2018
Number of
shares
Amount
(in thousands)
Number of
shares
Amount
(in thousands)
Balance, beginning of period
Common shares issued
Balance, end period
6,621,680
2,197,939
8,819,619
163,582
55,669
219,251
6,621,680
-
6,621,680
163,582
-
163,582
The following table shows the preferred shares issued and outstanding:
As at
December 31, 2019
December 31, 2018
Number of
shares
Amount
(in thousands)
Number of
shares
Amount
(in thousands)
Balance, beginning of period
Preferred shares redeemed
Balance, end of period
64,000
(64,000)
-
1,600
(1,600)
-
64,000
-
64,000
1,600
-
1,600
As at December 31, 2019, the Company declared and paid four quarterly dividends, each of $0.375 (in dollars) (December 31, 2018 – $0.375
(in dollars)) per share for each Class A, Series 1, preferred share.
36
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 20 – Earnings per share
Basic earnings per common share are calculated by dividing the net income attributable to common shareholders for the reporting period by
the weighted-average number of common shares.
Diluted earnings per share is calculated by dividing the net income attributable to common shareholders for the reporting period by the
weighted-average number of common shares adjusted for the effects of all dilutive potential common shares, which consist of stock options.
Net income attributable to shareholders
Less: Dividends declared on preferred shares, net of tax
Net income attributable to common shareholders
Weighted-average number of common shares outstanding (in shares)
EPS – basic (in dollars)
Dilutive effect of the conversion of options on common shares (in shares)
Diluted weighted-average number of common shares outstanding (in shares)
EPS – diluted (in dollars)
Note 21 – Net investment income
2019
5,094
(96)
4,998
7,213,433
0.69
31,076
7,244,509
0.69
2018
8,638
(96)
8,542
6,621,680
1.29
162,000
6,718,133
1.27
The components of Net investment income for the years ended December 31, 2019 and 2018 were as follows:
Cash and cash equivalents, and short-term securities
Bonds classified as loans and receivables
FVTPL bonds
AFS bonds
Interest income
AFS common shares and income and investment trust units
AFS preferred shares
Dividend income
Gains (losses) on investments held at FVTPL
Commission income structured insurance assets
Investment expenses
Other investment income
Net investment income
2019
702
764
423
7,818
9,707
1,318
1,708
3,026
2,374
1,658
(522)
3,510
16,243
2018 (1)
553
118
-
5,100
5,771
1,289
932
2,221
(237)
1,874
(643)
994
8,986
(1) Certain Net investment income balances from December 31, 2018 have been reclassified to Net gains to conform with 2019 presentation.
37
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 22 – Net gains
The components of Net gains for the years ended December 31, 2019 and 2018 were as follows:
Net gains from:
financial instruments:
AFS common shares and income and investment trust units
AFS bonds
AFS preferred shares
derivatives: swap agreements (2):
Net foreign currency gains (losses)
Impairment on investments
Net gains
2019
2018 (1)
1,052
(652)
98
498
250
824
-
1,572
941
244
611
1,796
-
(712)
(325)
759
(1) Certain Net investment income balances from December 31, 2018 have been reclassified to Net gains to conform with 2019 presentation.
(2) Excluding foreign currency contracts, which are reported in the line Net foreign currency gains (losses).
Note 23 – Investment in subsidiary
On June 19, 2018, 643 Can Ltd, an intermediary holding company and wholly-owned subsidiary of the Company, completed a voluntary
dissolution. The assets and liabilities of the subsidiary were transferred to the Company, including the shares of its wholly-owned subsidiary
Trisura Guarantee. This dissolution had no impact on the Consolidated Financial Position and results of operations of the Company.
Note 24 – Acquisition of subsidiary
In June 2019, the Company applied for approval from the Pennsylvania Insurance Department to acquire control of a shell entity, with 13
admitted state licenses that will enhance the offering of Trisura Specialty. Regulatory approval was provided on October 22, 2019 and the
transaction closed November 1, 2019. The purchase price of the shell entity, a wholly-owned subsidiary of Trisura Specialty, was $7,950 USD.
The acquired assets included cash and cash equivalents of $6,000 USD and state licenses of $1,950 USD. On December 30, 2019, regulatory
approval was received for the shell entity to re-domesticate to the State of Oklahoma, and a pooling agreement between Trisura Specialty
and its wholly-owned subsidiary was also approved. The results of the wholly-owned subsidiary are included in the Consolidated Financial
Statements effective November 1, 2019.
Note 25 – Benefits
The Company has established and contributes to a number of group retirement savings plan arrangements under which the Company makes
contributions. Contributions are charged to operating expense and are recognized as incurred.
Note 26 – Related party transactions
The Company leases office space from, and subleases office space to, subsidiaries of Brookfield Asset Management Inc. (“Brookfield”), which
was the ultimate controlling party of the Company prior to June 2017. An entity with which Brookfield shares common management
continues to hold an interest in the Company, and as such the Company remains a related party with Brookfield. The Company occasionally
issues insurance contracts to subsidiaries of Brookfield and earns interest income from deposits with companies which are subsidiaries of
Brookfield. The Company also invests in publicly traded securities of companies which are subsidiaries of Brookfield and invests in publicly
traded funds managed by Brookfield subsidiaries. These transactions are conducted in the normal course of business and are measured at
the amount of consideration paid or established and agreed between the parties.
38
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 26 – Related party transactions (continued)
The following table shows the impact of transactions with related parties:
Income and expenses reported in:
Total underwriting revenue
Operating expenses
Net investment income
Income from dividends and interests
Investment management fee
Assets and liabilities reported in:
Investment in Brookfield securities
26.1
Key management personnel
December 31, 2019 December 31, 2018
2,196
(624)
1,286
(4)
15,629
2,045
(510)
231
(216)
6,311
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of
the Company, directly or indirectly, including any executive officers or directors of the Company.
The following transactions were carried out with key management personnel during the years ended December 31, 2019 and 2018:
Salaries and other employee benefits
Share based payments
Note 27 – Segmented information
December 31, 2019
December 31, 2018
2,542
2,029
2,369
756
The Company has three reportable segments. The operations of Trisura Guarantee are one reportable segment which comprises Surety, Risk
Solutions and Corporate Insurance products underwritten in Canada as well as the operations of Trisura Warranty. The operations of TIHL,
referred to below as Trisura International, is a second reportable segment which comprises the Company’s international reinsurance
operations. The operations of Trisura Specialty is a third operating segment, which provides specialty insurance solutions underwritten in
the United States. The operations of Trisura Guarantee included the operations of its intermediary holding company, 643 Can Ltd, until June
19, 2018.
The following tables show the results for the year ended December 31, 2019 and 2018:
December 31, 2019
Net premiums earned
Fee income
Total underwriting revenue
Net claims
Net expenses
Total claims and expenses
Net underwriting income (loss)
Investment income
Net gains (losses)
Settlement from structured insurance assets
Interest expense
Net income (loss) before tax
Trisura
Guarantee
Trisura
International
Trisura
Specialty
Corporate and
consolidation
adjustments
100,510
4,246
104,756
(24,579)
(67,910)
(92,489)
12,267
7,796
992
-
(265)
20,790
135
-
135
(21,024)
(2,506)
(23,530)
(23,395)
6,306
549
8,077
(16)
(8,479)
6,859
7,960
14,819
(4,333)
(8,237)
(12,570)
2,249
2,112
(171)
-
(41)
4,149
-
-
-
-
(4,453)
(4,453)
(4,453)
29
202
-
(1,039)
(5,261)
Total
107,504
12,206
119,710
(49,936)
(83,106)
(133,042)
(13,332)
16,243
1,572
8,077
(1,361)
11,199
39
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 27 – Segmented information (continued)
December 31, 2018
Net premiums earned
Fee income
Total underwriting revenue
Net claims
Net expenses
Total claims and expenses
Net underwriting income (loss)
Investment income (1)
Net gains (losses) (1)
Interest expense
Net income (loss) before tax
Trisura
Guarantee
Trisura
International
Trisura
Specialty
Corporate and
consolidation
adjustments
87,852
3,812
91,664
(19,001)
(60,677)
(79,678)
11,986
5,460
1,103
(185)
18,364
83
-
83
147
(2,346)
(2,199)
(2,116)
1,849
77
-
(190)
874
912
1,786
(548)
(4,277)
(4,825)
(3,039)
1,648
(246)
-
(1,637)
-
-
-
-
(2,545)
(2,545)
(2,545)
29
(175)
(785)
(3,476)
Total
88,809
4,724
93,533
(19,402)
(69,845)
(89,247)
4,286
8,986
759
(970)
13,061
(1) Certain Net investment income balances from December 31, 2018 have been reclassified to Net gains to conform with 2019 presentation.
The following table shows Loan payable of $29,700 included with the liabilities in Corporate and consolidation adjustments at December 31,
2019 and December 31, 2018.
As at December 31, 2019
Assets
Liabilities
As at December 31, 2018
Assets
Liabilities
Trisura
Guarantee
Trisura
International
424,009
333,681
104,169
85,766
Trisura
Specialty
444,763
336,608
Trisura
Guarantee
349,356
274,770
Trisura
International
110,423
81,703
Trisura Specialty
150,966
84,421
(9,763)
30,136
Corporate and
consolidation
adjustments
5,452
32,009
Corporate and
consolidation
adjustments
Total
978,393
788,064
Total
600,982
471,030
40
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 28 – Income taxes
Deferred taxes related to:
Loss carry-forwards and other
Unpaid claims and LAE
Capital, intangible and other assets
Less deferred taxes related to:
Investments – unrealized gains and losses
Capital, intangible and other assets
Deferred income taxes
Reported in:
Deferred tax assets
Income tax (recovery) expense reported to net income
Income tax recovery reported to other comprehensive loss
Statement of
financial position
Statement of
comprehensive income
December 31,
2019
December 31,
2018
December 31,
2019
December 31,
2018
139
1,369
100
1,608
(148)
-
(148)
1,460
1,460
-
-
181
705
39
925
(99)
-
(99)
826
826
-
-
35
(678)
(61)
(704)
49
-
49
(655)
-
(525)
(130)
(4)
-
(39)
(43)
(10)
(18)
(28)
(71)
-
733
(804)
A deferred income tax asset is recognized only to the extent that realization of the related income tax benefit through future taxable profits
is probable. Management has assessed the recoverability of the deferred income tax asset carrying values based on future years’ taxable
income projections and believes the carrying values of the deferred income tax assets as at December 31, 2019 and December 31, 2018 are
recoverable.
The following shows the major components of income tax expense for the year ended December 31, 2019 and 2018:
December 31, 2019 December 31, 2018
Current tax expense:
Current year
Prior year true up
Deferred tax expense:
Origination and reversal of temporary differences
Income tax expense
Income taxes recorded in other comprehensive income:
Net changes in unrealized gains on AFS investments
Reclassification to net income of net losses on AFS investments
Origination and reversal of temporary differences
Total income tax expense recorded in other comprehensive income (loss)
6,624
6
6,630
(525)
6,105
1,308
(15)
(130)
1,163
3,773
(83)
3,690
733
4,423
(2,247)
484
(804)
(2,567)
41
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 28 – Income taxes (continued)
The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income tax provision included in the
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019 and 2018:
December 31, 2019 December 31, 2018
Income before income taxes
Statutory income tax rate
Variations due to:
Permanent differences
International operations subject to different tax rates
Unrecognized tax loss
Rate differentials:
Current rate versus future rate
Change in future rate
True up
Income tax expense
11,199
26.5%
2,968
(625)
2,905
835
2
14
6
6,105
13,061
26.5%
3,461
(286)
215
1,117
(1)
-
(83)
4,423
As at December 31, 2019, the Company has unused tax losses of $11,669 (December 31, 2018 – $6,424). A deferred income tax asset
is not recognised since it is not considered probable that there will be future taxable profits. The unrecognized tax losses will expire
in the following years:
2033
2034
2036
2037
2038
2039
December 31, 2019
19
3
538
2,496
3,368
5,245
11,669
42
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 29 – Share based compensation
29.1
Equity-settled stock options
The Company currently administers a stock option plan. Under the stock option plan, the exercise price of each stock option will be
established at the time that the option is granted. It is expected that the vesting period will normally be 20% per year over five years and the
expiry date of stock options granted will not exceed ten years, however in some instances the vesting period may differ.
The following is a continuity schedule of stock options outstanding as at December 31, 2019:
December 31, 2019
December 31, 2018
Number of
options
Weighted average
exercise price (in dollars)
Number of
options
Weighted average
exercise price (in dollars)
Outstanding, beginning of year
Cancelled during the year
Granted during the year
Outstanding, end of year
162,000
(50,000)
130,235
242,235
24.96
25.66
27.86
26.38
87,000
-
75,000
162,000
24.36
-
25.66
24.96
As at December 31, 2019, the outstanding stock options consist of the following:
Exercise price per share (in dollars)
Number of options
outstanding
Average remaining
contractual life (in years)
Number of options
exercisable
28.65
29.24
27.08
25.66
24.36
10,000
40,000
80,235
25,000
87,000
9.63
9.21
9.16
8.88
7.64
-
-
-
5,000
34,800
As at December 31, 2019, 39,800 equity-based stock options were vested. As at December 31, 2019, the Company had recorded $815
(December 31, 2018 – $313) in share reserve related to the options in the contributed surplus balance of the Consolidated Statements of
Financial Position. For the year ended December 31, 2019, the Company recorded $502 (December 31, 2018 – $225) of expense related to
the options, in Operating expenses. The fair value of the options issued were determined using the Black-Scholes option pricing model.
Volatility estimate was based on the historical volatility of the Company. The weighted average fair value of stock options issued in 2019 at
the measurement date was $6.78 (in dollars) (December 31, 2018 – $6.79 (in dollars)).
29.2
Cash-settled stock options
As at December 31, 2019, 120,465 options were issued to officers of the Company by the board of directors as part of a cash-settled share
based payment plan (December 31, 2018 – 120,465), with a vesting period of 20% per year over five years, and an expiration date of ten
years. As at December 31, 2019, 36,093 options had been vested (December 31, 2018 – 12,000). As at December 31, 2019, the Company
had recorded $1,771 (December 31, 2018 – $421) in liabilities related to the options in the Consolidated Statements of Financial Position.
For the year ended December 31, 2019, the Company recorded $1,350 (December 31, 2018 – $291) of expense related to the options, in
Operating expenses. The fair value of the options issued were determined using the Black-Scholes option pricing model. Volatility estimate
was based on the historical volatility of the Company. As at December 31, 2019, the weighted average fair value of share options issued was
$19.97 (in dollars) (December 31, 2018 – $6.08 (in dollars)).
43
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
29.3
Cash-settled DSUs
DSUs are awarded to certain directors of the Company at the market value of the Company’s common shares at the grant date. These DSUs
are awarded in lieu of directors fees at the option of the Directors. Each DSU entitles the holder to receive an amount equivalent to the value
of a common share at settlement. As at December 31, 2019, 20,312 (December 31, 2018 – 11,261) DSUs were awarded to directors who are
not employees of the Company or one of its affiliates.
The following table shows the movement in the number of DSUs issued during the year:
For the years ended December 31,
2019 (in units)
2018 (in units)
Opening balance
Granted during the year
Ending balance
11,261
9,051
20,312
2,102
9,159
11,261
As at December 31, 2019, no units had been exercised and $818 (December 31, 2018 – $294) had been recorded as liabilities (see Note 12).
The liability was measured based on the fair value of the common shares of the Company at December 31, 2019. For the year ended
December 31, 2019, the Company recorded $499 (December 31, 2018 – $240) of expense related to the DSUs in Operating expenses.
Note 30 – Subsequent event
The Company identified a tax loss utilization strategy to utilize unused tax losses which have accumulated at the Company. On February 5,
2020, the Company received an Advance Income Tax Ruling from the Canada Revenue Agency (“CRA”) in which the CRA indicated it would
not reassess the Company if it implemented the strategy as proposed. The Company intends to proceed with the strategy.
44