ANNUAL REPORT
2020
Letter to Shareholders
At Trisura, we are building a leading international specialty insurance provider. Despite challenges mounted
by the extraordinary circumstances of 2020, we have made significant strides in developing our platform.
Before delving into results, we must recognize the incredible contributions of essential workers and medical
professionals throughout this pandemic. I would also like to highlight the strong effort and performance of
our team as they navigated new working arrangements, maintained our service-oriented culture, and
delivered growth and profitability in a year defined by volatility and uncertainty.
This year demonstrated the potential of a multi-line and multijurisdictional specialty insurance platform, with
diversified sources of income. Momentum in Canada delivered unprecedented growth, and our focus on
underwriting supported industry-leading returns. Our US business maintained its trajectory, showcasing the
value of our participatory fronting model to distribution partners, reinsurers, and shareholders. We took
advantage of internal reinsurance capabilities to improve our flexibility and generate returns in our
international entity, previously in run off. Following our acquisition in November 2019, expansion of critical
admitted licenses will enhance our offering in fronted products, and introduce our Surety practice to the US.
Despite volatile conditions, in May we reinforced our growth trajectory with a second equity raise, building
a stronger base of capital to fund growth in the US and providing a signal to our partners that we are here
to stay. Through volatility, we enhanced portfolio returns and grew interest and dividend income, managing
capital across Canada, the US and Europe to support underwriting. 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 – and now the US – for many years.
Financial Highlights
For the full year, net income of $32.4 million, or $3.28 per share, is reflective of growth in premium and
profitability in our North American entities, combined with improved asset liability matching of the European
life annuity reserve. The increase in net income is striking, growing by 6x over 2019 as US profitability
ramped, Canadian net income increased 25.4% and we managed asset liability matching appropriately.
Book value per share rose to $28.23, an increase of 30.8% over December 31, 2019, supported by earnings
as well as our accretive capital raise in the second quarter.
Specialty P&C operations delivered strong performance, with $926.4 million in gross premiums written,
more than double what we wrote last year – on the heels of a doubling in premium from 2018 to 2019.
Growth in premiums was led by maturation of programs and new business from our US fronting platform –
increasing premium by over $350 million vs. 2019. Through the year, our commitment to specialty lines and
stable presence generated momentum with distribution partners. Coupled with a hardening market in
Corporate Insurance, new programs in Risk Solution and market share gains in Surety, our Canadian
platform grew premiums by 51.5% for the full year. Importantly, net income from all entities grew materially,
benefitting from growth in premiums, maturation in earned fee income, strong underwriting, and growing
investment income. In the context of a doubling in revenues, expansion of our capital base, and uncertain
operating environments, we generated a 13.4% return on equity, approaching our mid-teens target.
Our balance sheet is conservatively managed and growing. With $289.9 million in equity and a consolidated
debt to capital ratio of 8.7%, we feel well positioned to fund future growth.
COVID-19
We have recently observed a rise in cases around the world leading to a reversal in earlier reopening
trends, especially in urban regions.
Our team has transitioned to working remotely well. Productivity has been strong through this period and
our results reflect that. With the introduction of a vaccine our focus has turned to re-entry, ensuring that
staff are re-integrated safely, and that the advantages of in-person interactions are enjoyed again.
Premium growth and claims have yet to observe a material impact related to COVID-19, although the
ultimate impact of the pandemic and related shutdown is not yet clear, and we have increased reserving
levels in certain instances to reflect this uncertainty.
Insurance Operations
We continue to be a leader in the speciality commercial insurance market. Our Canadian subsidiary is our
longest operating business and is led by an experienced and skilled management team. In Canada, we
achieved a combined ratio of 85.5%, which coupled with investment income drove a strong 19.9% return
on equity. 2020 showcased the strength of our Surety lines, and the potential for growth in our Corporate
Insurance practice. Risk Solutions continues to be a consistent engine of growth as we expand our fronting
activities.
If 2019 demonstrated the potential of our US fronting entity, 2020 achieved much of what was promised in
our early years. Following acceleration of premium in 2019, consecutive capital injections and significant
growth in the team, the fronting platform increased fee income and produced healthy returns despite its
early stage of maturity. We have grown premium and net income in every quarter and anticipate growth to
continue. Introducing admitted capabilities through the acquisition and expansion of new licenses is
expected to support this growth.
In 2020 we reoriented the international entity to enable it to assume premium from our North American
businesses. This captive channel provides flexibility to our retention, and a catalyst for profitability in our
reinsurance arm. In the year we ceded $13.0 million of premium from our US fronting model to our own
reinsurance arm, a figure we expect to grow in 2021. Our asset liability matching was an opportunity for
improvement vs. prior year and we focused on rationalizing unacceptable volatility in our earnings related
to our asset liability matching. The adoption of better duration-matched strategies and appointment of a
specialist manger produced better results in 2020, specifically in Q3 and Q4.
Investments
Despite the volatility experienced in March, our investment portfolio performed well, benefitting from
conservative allocations to liquid investment grade bonds and opportunistic rebalancing through market
dislocation. Due to the currency hedging facilities established last year, we were well-positioned to protect
and enhance book value through some dramatic movements in foreign exchange markets. We continue to
increase our exposure to alternatives, including infrastructure debt and senior secured credit products.
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.
Our portfolios remain primarily allocated to high quality, investment grade bonds, complemented by
preferred shares, alternative investments, and defensive, dividend paying equities. Corporate spreads
continued to tighten in 2020, coupled with strong equity performance despite a difficult first quarter. The
volatility experienced in March and our ability to deploy through market dislocations enabled us to rotate
selectively and add positions at attractive valuations. Although we made this observation last year, it
remains true: prevailing interest rates are lower than ever, corporate spreads are historically tight, and
equity valuations are approaching record highs. Economic health in the coming months and years will
depend upon safely navigating to a post-pandemic world. Much is uncertain, and we remain committed to
managing our capital prudently for the long term.
During the year we made two minority investments in technology-driven insurance vehicles, a digital
MGA, and an ai-enabled claims processing platform. Although early stage, we felt the business models
were compelling, and that beyond any financial gain, we could benefit from strategic, technology-enabled
partnerships.
Strategic Priorities
Following another successful equity raise, and expansion of our credit facility we are better positioned than
ever to provide our subsidiaries with the resources to grow. We continue to expand our reach in Canada
and the US through both organic and acquisitive growth supported by our history of profitability, 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’s future.
Closing
Our business continues to demonstrate exciting potential. Profitability in Canada has strengthened, as we
benefit from a growing footprint and increased profile. Our US platform has exceeded expectations and
provides a complimentary trajectory to the more mature business in Canada. Importantly, a significant
concern has been mitigated through the adoption of better asset liability matching in our Reinsurance entity,
demonstrated through a reduction in earnings volatility.
The hardening market accelerated through the events of early 2020. With the introduction of admitted
capabilities, and launch of a US Surety strategy, we have ample opportunities to grow.
It would be naive to assume a return to normal will be a smooth process following COVID-19 closures. I
expect the economic scarring of this event will be felt for years to come. For us, that means renewed
vigilance in our underwriting, especially on accounts that could be affected through an uneven reopening.
It means proactively monitoring government support programs to anticipate the impact of their
normalization. We must view pockets of volatility as opportunities to enhance our position in the market,
investing in distribution relationships in specialty lines while others step back. In US fronting, increased
reinsurance capacity and competition means that we must defend operational metrics and reiterate our
value proposition with partners.
As we begin 2021, I would like to thank our employees, partners and shareholders for their continued
support. We have enjoyed a strong first three years as a public company, and the next five will be a critical
evolution from a sub-scale entity to one of greater institutional sophistication.
Sincerely,
David Clare
President and CEO
Trisura Group Ltd.
February 10, 2021
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: developments related to COVID-19, including the impact
of COVID-19 on the economy and global financial markets; 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, hurricanes or pandemics; 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, the Company 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, 2020
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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, 2020. This MD&A should
be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2020.
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 10, 2021. 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 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
TABLE OF CONTENTS
Section 1 – Overview................................................................................................................................................................................ 3
• Our Business
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
• Canada
• 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 – Risk Management ............................................................................................................................................................... 25
• Corporate Governance
• Risks and Uncertainties
Section 8 – Other Information ............................................................................................................................................................... 37
• Ratings
• Cash Flow Summary
• Segmented Reporting
• Contractual Obligations
• Financial Instruments
• Related Party Transactions
• Accounting Estimates
Section 9 – Summary of Results .............................................................................................................................................. 40
• Selected Quarterly Results
• Selected Annual Results
Section 10 – Accounting and Disclosure Matters ..................................................................................................................... 41
Internal Controls over Financial Reporting
• Disclosure Controls and Procedures
•
• Operating Metrics
• Non-IFRS Financial Measures
• 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 2020
(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 14 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 most states. Our
international Reinsurance business has been in operation in Barbados for more than 18 years and has 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 2019, the Company closed its acquisition of 21st Century Preferred Insurance Company and completed its re-
domestication from Pennsylvania to Oklahoma. We have expanded our admitted licenses, which now includes licenses in
46 states. We continue the process of applying for licenses in the remaining states.
3
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 2 – FINANCIAL HIGHLIGHTS IN Q4 AND FULL YEAR 2020
✓ $10.9 million of net income in the quarter and $32.4 million for the full year, a substantial improvement over the
previous periods, driven by stronger results in Canada, accelerating profitability in the US, and improved asset
liability matching in our Reinsurance business.
✓ EPS of $1.05 the quarter and $3.28 for the full year compared to $0.47 and $0.69 respectively in 2019.
✓ ROE of 13.4% increased from 3.5% at Q4 2019. Consolidated ROE approached our mid-teens target despite
dilution from our equity raise in May 2020 and was achieved in the context of significant growth.
✓ BVPS of $28.23 was an increase of 30.8% over the previous year, the result of strong earnings and a book-value
accretive equity raise.
✓ Continued strong performance of our operations in Canada and the US.
• Canada:
▪ GPW and NPE growth of 116.5% and 53.9% respectively in Q4 2020 reflected accelerating growth
in challenging markets through strengthened distribution relationships, and the benefit of hardening
conditions in certain lines of business.
▪ NUI growth of 14.4% over Q4 2019 and 58.5% for the full year, was a result of sustained premium
growth across all lines and strong claims experience in Surety.
▪
In the context of significant growth, combined ratios remained strong with ratios of 87.3% and
85.5% for Q4 2020 and the full year. Full year results compare well to the corresponding 2019 full
year of 87.8%, the result of a similar loss ratio and an improved expense ratio.
▪ Q4 2020 NI of $6.0 million increased 22.7% over Q4 2019 and full year NI of $19.9 million grew by
25.4%, generating a strong 19.9% ROE.
• United States:
▪ Sustained growth in GPW reaching a new high of $210.7 million in the quarter, a $39.6 million
increase over Q3 2020. Full year premiums grew by $383.3 million or 145.2% over 2019.
▪ Net income of $5.7 million in the quarter and $16.4 million for the full year, demonstrate the potential
of the fronting model; quarterly net income almost matched Canada after three years of operations.
▪ Accelerating profitability generated an ROE of 11.7% despite an increase in the capital base.
▪ Continued growth in deferred fee income, a precursor to earned fees, reached $18.3 million at
December 31, 2020.
▪ The fronting operational ratio of 68.5% in the quarter and 70.6% for the full year is materially
improved versus the corresponding periods in 2019 reflecting growth in NPE and fronting fees as
the business builds scale.
✓
✓
Improved asset liability matching for the full year in our Reinsurance business resulted in better profitability,
mitigated by volatility through redeployment of investments in Q2.
Interest and dividend income in our Canadian and US portfolios increased by 25.8% in Q4 2020 and 28.2% in the
full year, despite a continued reduction in yields in the fixed income markets.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic. To date,
there have been restrictions on the conduct of business in many jurisdictions and the global movement of people and certain
goods. We are closely monitoring developments related to COVID-19, including the existing and potential impact on the
economy and global financial markets. Although COVID-19 has had minimal impact on our business to date, given the
ongoing and dynamic nature of the circumstances surrounding COVID-19 and continuing uncertainty of its magnitude,
outcome and duration, the longer-term impact of the COVID-19 pandemic on our Company, our insurance business or our
financial results, if any, is difficult to predict. These impacts may differ in magnitude depending on a number of scenarios,
which we continue to monitor and take into consideration in our decision making. See Section 7 – Risk Management.
4
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 3 – FINANCIAL REVIEW
INCOME STATEMENT ANALYSIS
Gross premiums written
314,200
143,212
Q4 2020
Q4 2019
$
variance
170,988
%
variance
119.4%
2020
2019
926,442
448,262
$
variance
478,180
%
variance
106.7%
98,696
53,180
69.2%
49.5%
Net premiums written
Net premiums earned
Fee income
Net investment income
(loss)
Settlement from
structured insurance
assets
Net gains (losses)
Total revenues
Net claims and loss
adjustment expenses
Net commissions
Operating expenses
Interest expense
Total claims and
expenses
Income before income
taxes
Income tax expense
Net income
Other comprehensive
income (loss)
Comprehensive income
Earnings per common
share - diluted - in
dollars
Adjusted earnings per
common share - diluted
- in dollars (1)
Book value per share -
in dollars
ROE(1)
Adjusted ROE(1)
88,400
51,091
39,656
29,710
48,744
21,381
122.9%
241,324
142,628
72.0%
160,684
107,504
9,659
3,575
6,084
170.2%
29,719
12,206
17,513
143.5%
5,922
(3,868)
9,790
nm
27,779
16,243
11,536
71.0%
-
-
-
n/a
-
8,077
(8,077)
nm
2,822
(92)
2,914
nm
8,450
1,572
6,878
437.5%
69,494
29,325
40,169
137.0%
226,632
145,602
81,030
55.7%
(23,096)
(687)
(22,409)
nm
(72,562)
(49,936)
(22,626)
45.3%
(17,484)
(9,677)
(14,037)
(12,464)
(7,807)
(1,573)
80.7%
12.6%
(55,915)
(37,516)
(18,399)
(57,560)
(45,590)
(11,970)
49.0%
26.3%
(222)
(341)
119
(34.9%)
(1,113)
(1,361)
248
(18.2%)
(54,839)
(23,169)
(31,670)
136.7%
(187,150)
(134,403)
(52,747)
39.2%
14,655
6,156
8,499
138.1%
39,482
11,199
28,283
252.5%
(3,706)
(1,984)
(1,722)
86.8%
(7,040)
(6,105)
(935)
15.3%
10,949
4,172
6,777
162.4%
32,442
5,094
27,348
536.9%
2,800
(1,188)
3,988
nm
96
808
(712)
(88.1%)
13,749
2,984
10,765
360.8%
32,538
5,902
26,636
451.3%
1.05
0.47
0.58
123.9%
3.28
0.69
2.59
375.4%
0.96
0.57
0.39
68.4%
3.68
1.92
1.76
91.7%
28.23
21.58
6.65
30.8%
28.23
21.58
6.65
30.8%
13.4%
15.0%
3.5%
9.4%
n/a
n/a
9.9pts
5.6pts
13.4%
15.0%
3.5%
9.4%
n/a
n/a
9.9pts
5.6pts
(1) See Non-IFRS financial measures in Section 10 – Accounting and Disclosure Matters.
5
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Premium Revenue and Fee Income
Premium growth continued for the quarter and full year period with GPW more than doubling over the comparable periods
in 2019 driven by continued acceleration in the US and growth in Canada. NPW growth for the quarter and the full year was
significant, but full year growth was lower than growth in GPW due to the high percentage of business ceded to reinsurers.
Strength in NPE growth for the quarter and the full year was supported by the US as earned premium in 2019 was
comparatively lower during the US business’ first years of operation. NPE growth was also supported by our Canadian lines,
where strong growth continued. The increase in fee income in both the quarter and full year periods was driven primarily by
fronting fees from the US, supported by consistent fee income in Canada.
Net Claims
Net claims in the quarter were greater than 2019, reflecting claims expense in 2020 associated with our life annuity reserves.
Importantly, a significant portion of these reserve increases associated with the annuity reserves are offset by investment
income (see Section 5 – Investment Performance Review). Net claims in the quarter grew for the US and Canada primarily
reflecting growth in the business. With the exception of the impact of the life annuity reserves, net claims expense grew in
the full year period in line with growth of the business with a majority of the increase represented by the US operations and
Corporate Insurance, mitigated by strong claims experience in Surety.
Operating Expenses
Operating expenses in Q4 2020 were comparable to Q4 2019. The increase in operating expenses for the full year was
driven by share-based compensation, as the increasing value of our share price led to an increase in the value of certain
outstanding options. Excluding share-based compensation, operating expenses increased 20.3% in the quarter and 15.8%
in the YTD periods, reflective primarily of growth in the US operations. Management expects that the impact of share-based
compensation should be mitigated going forward as we have completed a program to hedge market exposure of share-
based compensation.
Net Commissions
Net commissions expense has grown for the quarter by 80.7% and for the full year by 49.0% as a result of growth in GPW.
Growth of Net commissions is in line with the growth in Net premiums earned, which is to be expected.
Net Investment Income
See Section 5 – Investment Performance Review.
Other Comprehensive Income (Loss)
See Section 5 – Investment Performance Review.
Income Tax Expense
In Q4 2020, the effective tax rate was approximately 25.2% which is in line with expectations. For the full year, the
effective tax rate was 17.8% due to the recognition of a Deferred tax asset in Q1 2020 related to previously unrecognized
tax losses. For additional information see Note 27 of the Consolidated Financial Statements.
Net Income
Net income for the quarter and full year was higher than prior year primarily as a result of maturation of the US platform,
and strong growth in Canada. For the full year period, results were also supported by improved asset liability matching in
the Reinsurance business compared to the prior year.
6
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
EPS, Adjusted EPS, BVPS, Adjusted ROE and ROE
Quarterly diluted EPS of $1.05 compares favourably to $0.47 in Q4 2019 and improved as a result of growth, a stronger
contribution from our fronting operations in the US, and realized gains, and mitigated by an increase in the average number
of shares outstanding following our equity raise in May 2020. EPS of $3.28 was greater than $0.69 in the prior year, as a
result of growth in the Canadian and US operations, as well as improved asset liability matching in the Reinsurance
operations. BVPS of $28.23 was an increase of 30.8% over Q4 2019, as a result of an increase in net income over the prior
year, as well as an equity raise in 2020 which was accretive to BVPS.
We have introduced Adjusted EPS, a measure meant to adjust for non-recurring items and normalize earnings for core
operations to reflect the potential of our North American specialty operations. A detailed bridge between EPS and Adjusted
EPS is included in Section 10 – Accounting and Disclosure Matters. Adjusted EPS grew by 68.4% in Q4 2020 compared to
Q4 2019, less than growth in EPS, due to the impact of Net gains (losses). For the full year, Adjusted EPS grew by 91.6%,
less than growth in EPS primarily as a result of the adjustment for the impact of the annuity reserves.
BALANCE SHEET ANALYSIS
As at
Cash and cash equivalents
Investments
Premiums and accounts receivable, and other assets
Recoverable from reinsurers
Deferred acquisition costs
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
December 31, 2020
December 31, 2019
$ variance
136,519
503,684
178,883
676,972
188,190
13,907
8,577
1,706,732
57,343
151,707
592,711
100,281
487,271
27,555
1,416,868
289,864
1,706,732
85,905
392,617
86,669
293,068
104,197
14,477
1,460
978,393
40,916
80,186
328,091
51,291
257,880
29,700
788,064
190,329
978,393
50,614
111,067
92,214
383,904
83,993
(570)
7,117
728,339
16,427
71,521
264,620
48,990
229,391
(2,145)
628,804
99,535
728,339
Total assets at December 31, 2020 were $728.3 million higher than at December 31, 2019 as a result of growth across our
Specialty P&C businesses as well as our equity raise in May 2020. The growth in the US has led to increases across a
number of categories, particularly Recoverables from reinsurers which has grown alongside growth in premium and ceded
premium. The nature of the fronted operations of the US business generate significant Recoverables from reinsurers, which
increase alongside an increase in Unearned premiums and Unpaid claims and loss adjustment expenses. These
recoverables are regularly monitored in accordance with the Company’s reinsurance risk management policies and are
generally owing from reinsurers with A.M. Best ratings of A- or higher or are otherwise fully collateralized. Investments also
increased significantly as funds from the equity raise were invested.
Deferred tax assets increased as a result of the recognition of the deferred tax asset associated with previously
unrecognized tax losses (see Note 27 of the Consolidated Financial Statements).
7
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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. These increases are partially offset by an increase in Recoverable from reinsurers.
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).
In Q2 2020, the Company completed a $65.1 million equity raise, to support growth in the US. The Company issued an
additional 1,449,250 shares.
In Q3 2019, the Company completed a $55.7 million equity raise, to support growth in the US, 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, 2020, 10,268,869 common shares were issued and outstanding.
LIQUIDITY
Both short-term and long-term liquidity sources are available to the Company. Short-term liquidity sources immediately
available include: (i) cash and cash equivalents, (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 20 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 Canada was 249% at December 31, 2020 (258% as at December 31, 2019), which comfortably
exceeds the 150% regulatory requirements prescribed by OSFI, as well as the Company’s internal targets.
Trisura US’s capital and surplus of $122.6 million USD as at December 31, 2020 ($83.3 million USD as at December 31,
2019) was in excess of the various Company Action Levels of the states in which it is licensed.
Trisura International’s capital of $10.3 million USD as at December 31, 2020 ($14.2 million USD as at December 31, 2019)
was sufficient to meet the FSC’s regulatory capital requirement.
The Company’s debt-to-capital ratio of 8.7% as at December 31, 2020 (13.5% as at December 31, 2019), was below our
long-term target debt-to-capital ratio of 20.0% as a result of our May equity raise and growth in book value from strong
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 2020
(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 US written through a fronting model, referred to as US Fronting.
The tables and charts below provide a segmentation of our Specialty P&C GPW and NPW for the fourth quarter and full
year of 2020 and 2019, respectively. Our US operation produced 69.9% of GPW in 2020 having commenced writing
business in Q1 2018. Premium growth was also supported by momentum in Canada across all lines in the quarter and full
year periods.
GPW
Surety
Risk Solutions
Corporate Insurance
US Fronting
Total GPW
Q4 2020
Q4 2019
18,572
59,432
25,519
210,654
314,177
14,514
19,565
13,730
95,371
143,180
% growth
over prior
year
28.0%
203.8%
85.9%
120.9%
119.4%
2020
2019
71,575
137,717
69,843
647,183
926,318
59,028
77,838
47,373
263,911
448,150
% growth
over prior
year
21.3%
76.9%
47.4%
145.2%
106.7%
Gross Premiums Written
Q4 2020
Gross Premiums Written
2020
Surety
5.9%
Risk
Solutions
19.0%
Corporate
Insurance
8.1%
US
Fronting
67.0%
Surety
7.7%
Risk
Solutions
14.9%
Corporate
Insurance
7.5%
US
Fronting
69.9%
9
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Total NPW more than doubled in the quarter and grew by 69.7% in the full year period, with growth led by US Fronting, Risk
Solutions and Corporate Insurance. Our US operations continued to cede premium to our Reinsurance business in the
quarter, resulting in premium generation for our Reinsurance business in 2020 for the first time since entering run-off. In
certain tables, the premiums ceded to the reinsurance business are grouped with US Fronting to better reflect the result of
the business, and are identified as such.
NPW
Q4 2020
Q4 2019
% growth over
prior year
2020
2019
% growth over
prior year
Surety
Risk Solutions
Corporate Insurance
US Fronting
Reinsurance
Total NPW
12,447
40,329
17,996
13,151
4,477
88,400
9,213
15,119
9,711
5,228
-
39,271
35.1%
166.7%
85.3%
151.5%
nm
125.1%
44,723
103,622
48,941
30,922
13,116
241,324
40,400
52,444
34,995
14,328
-
142,167
10.7%
97.6%
39.9%
115.8%
nm
69.7%
Net Premiums Written
Q4 2020
Net Premiums Written
2020
Reinsurance
5.1%
US
Fronting
14.9%
Surety
14.1%
Corporate
Insurance
20.3%
Risk
Solutions
45.6%
Reinsurance
5.4%
US
Fronting
12.8%
Corporate
Insurance
20.3%
Surety
18.5%
Risk
Solutions
43.0%
10
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
CANADA
The table below presents financial highlights for our Canadian operations.
Q4 2020 Q4 2019
$
variance
%
variance
2020
2019
$
variance
%
variance
Gross premiums written
103,523
47,809
55,714
116.5%
279,135
184,239
94,896
Net premiums written
Net premiums earned
Fee income
70,772
34,043
36,729
107.9%
197,286
127,839
69,447
41,177
26,754
14,423
53.9%
133,535
100,510
33,025
1,046
472
574
121.6%
5,027
4,246
781
Net underwriting revenue
42,223
27,226
14,997
55.1%
138,562
104,756
33,806
Net underwriting income
Net investment income
Net income
Comprehensive income
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
Expense ratio
Combined ratio
ROE
5,215
1,863
5,965
12,136
25.2%
4.8%
30.0%
57.3%
87.3%
19.9%
4,562
2,010
4,864
5,883
25.0%
(3.2%)
21.8%
61.1%
82.9%
19.1%
653
14.3%
19,433
12,265
7,168
(7.3%)
7,842
7,796
46
(147)
1,101
22.6%
19,865
15,842
4,023
25.4%
6,253
106.3%
19,419
19,242
177
0.2pts
8.0pts
8.2pts
(3.8pts)
4.4pts
0.8pts
27.6%
(2.3%)
25.3%
60.2%
85.5%
19.9%
27.1%
(2.6%)
24.5%
63.3%
87.8%
19.1%
0.9%
0.5pts
0.3pts
0.8pts
(3.1pts)
(2.3pts)
0.8pts
51.5%
54.3%
32.9%
18.4%
32.3%
58.4%
0.6%
In the quarter and full year periods GPW growth was substantial across all lines led by Risk Solutions and Corporate
Insurance. Risk Solutions continued to benefit from the addition of new programs and fronting relationships. Corporate
insurance has benefitted from a hardening insurance market with improved pricing and growth in distribution partnerships.
Growth in Surety primarily reflects continued expansion of our market share as well as product expansion.
In Q4 2020 and for the full year 2020, growth in NPE was the result of the factors discussed above.
Increases in Fee income in Q4 2020 reflected product expansion in Surety, specifically into new home warranty products.
Growth in fee income for 2020 was the result of growth in surety accounts, as well as expansion of certain new home
warranty products that generate fee income.
The loss ratio of 30.0% for Q4 2020 and 25.3% for full year increased over both periods for 2019. This was primarily driven
by an increase in the loss ratio in Corporate Insurance which offset the strong improvement in the Surety loss ratio for both
Q4 and the full year. The expense ratio decreased to 57.3% for Q4 2020 compared to 61.1% for Q4 2019, as a result of
operational leverage and increased profit sharing from Surety reinsurers. The expense ratio fell to 60.2% for 2020 compared
to 63.3% for 2019. The improved expense ratio for the full year reflects improved operational leverage, a reduction in certain
operational costs due to the COVID-19 shutdown, as well as the impact of profit sharing arrangements with our reinsurers.
In Q4 2020, the combined ratio was greater than Q4 2019 as a result of a higher loss ratio, and for the full year 2020 the
combined ratio was lower than 2019 as a result of the lower expense ratio.
Net underwriting income for Q4 2020 experienced growth of 14.3% and full year 2020 experienced growth of 58.4%, a result
of growth across all lines, an improved loss ratio in surety and the impact of profit sharing arrangements with our reinsurers.
Investment income for both Q4 2020 and full year 2020 was comparable to the corresponding periods in 2019. See Section
5 – Investment Performance Review for further discussion.
Strong operating results resulted in strong growth in net income of 22.6% for Q4 2020 and 25.4% for the full year.
11
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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 5.9% and 14.1% of our overall GPW and NPW, respectively. For the full year, Surety accounted
for 7.7% and 18.5% of overall GPW and NPW, respectively.
Q4 2020 Q4 2019
Gross premiums written
18,572
14,514
Net premiums written
Net premiums earned
Fee income
12,447
10,232
1,046
9,213
9,425
472
$
variance
4,058
%
variance
28.0%
2020
2019
71,575
59,028
$
variance
12,547
%
variance
21.3%
3,234
35.1%
44,723
40,400
4,323
10.7%
807
8.6%
40,103
37,358
2,745
7.4%
574
121.6%
5,027
4,241
786
18.5%
Net underwriting revenue
11,278
9,897
1,381
14.0%
45,130
41,599
3,531
8.5%
Net underwriting income
4,914
1,364
3,550
260.3%
14,789
5,543
9,246
166.8%
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
8.5%
3.4%
11.9%
35.2%
(9.1%)
26.1%
(26.7pts)
12.5pts
(14.2pts)
14.6%
(4.2%)
10.4%
31.4%
(7.0%)
24.4%
(16.8pts)
2.8pts
(14.0pts)
Q4 2020 Surety GPW demonstrated strong 28.0% growth over Q4 2019. Full year premiums growth was significant, at
21.3% over 2019. The growth has been primarily driven by our expansion of our Developer surety products in western
Canada and continued growth in Commercial Surety attributed to large bonds issued for new accounts, as well as growth
with distribution partnerships.
The growth in NPW was strong in Q4 as a result of the growth in new home warranty products, a component of the developer
surety business, in the quarter. Growth in NPW for the year was primarily a result of growth in Commercial and Developer
surety, and was lower than growth in GPW as a result of a number of large bonds which have been issued during the period
where proportionately more premium is ceded to reinsurers. Growth in NPE for Q4 2020 and full year was primarily the
result of growth in Commercial and Developer surety.
For Q4 2020 and full year, Surety experienced a lower claims ratio than Q4 2019 and full year 2019, as a result of fewer
claims than the prior period. Since the beginning of the COVID-19 pandemic, most construction projects have been deemed
essential through the economic shutdowns and contractors have continued working. This has had a positive impact on the
loss ratio.
Net underwriting income for the quarter increased to $4.9 million compared to $1.4 million in Q4 2019 driven by growth, and
an improved loss ratio in the quarter. 2020 net underwriting income reflected both our growth and improvements in loss
ratios over 2019.
12
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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 Canada. 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 2020, Risk Solutions accounted for 19.0% and 45.6% of our overall GPW and NPW, respectively. For the full year,
Risk Solutions accounted for 14.9% and 43.0% of our overall GPW and NPW, respectively.
Q4 2020 Q4 2019
$
variance
%
variance
2020
2019
$
variance
%
variance
Gross premiums written
Net premiums written
Net premiums earned
Fee income
59,432
40,329
18,120
19,565
39,867
203.8%
137,717
77,838
59,879
15,119
25,210
166.7%
103,622
52,444
51,178
8,768
9,352
106.7%
51,696
31,193
20,503
-
-
-
nm
-
5
(5)
Net underwriting revenue
18,120
8,768
9,352
106.7%
51,696
31,198
20,498
Net underwriting income
Loss ratio: current accident year
Loss ratio: prior years' development
Loss ratio
572
22.0%
4.9%
26.9%
974
(402)
(41.3%)
31.2%
(9.8%)
21.4%
(9.2pts)
14.7pts
5.5pts
4,788
23.8%
(1.2%)
22.6%
3,131
1,657
29.8%
(8.3%)
21.5%
76.9%
97.6%
65.7%
nm
65.7%
52.9%
(6.0pts)
7.1pts
1.1pts
Risk solutions GPW and NPW for Q4 2020 increased significantly over Q4 2019 from the addition of new programs in the
warranty space, and revenue from fronting arrangements. Year over year growth has been primarily due to the addition of
new programs, supplemented by growth in existing programs as economic shutdowns normalized in the latter half of the
year.
Year over year growth in NPE was driven by maturation of the portfolio resulting in greater earned premiums from programs
written in prior years, as well as the impact of the new programs.
In Q4 2020 the loss ratio increased compared to the same period in the prior year, largely due to an adjustment to an
existing reserve for a program that is in run-off. Claims on active programs continued to be in line with expectations. The
2020 loss ratio for the full year was similar to that of 2019.
Net underwriting income in Q4 2020 was below Q4 2019 primarily as a result of an increase in the loss ratio. Net underwriting
income for 2020 was ahead of 2019 as a result of growth in the business, and in particular related to maturation of longer
term policies written in prior years where earnings have been deferred.
13
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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 Directors’ & Officers’ insurance for public, private
and non-profit enterprises, professional liability insurance for both enterprises and professionals, technology and cyber
liability insurance for enterprises commercial package insurance for both enterprises and professionals and fidelity
insurance for both commercial enterprises and financial institutions.
In Q4 2020 Corporate Insurance represented 8.1% and 20.3% of our overall GPW and NPW respectively. For the full year,
Corporate Insurance represented 7.5% and 20.3% of our overall GPW and NPW respectively.
Gross premiums written
25,519
13,730
Q4 2020 Q4 2019
$
variance
11,789
%
variance
85.9%
2020
2019
69,843
47,373
$
variance
22,470
%
variance
47.4%
Net premiums written
Net premiums earned
17,996
9,711
8,285
12,825
8,563
4,262
85.3%
49.8%
48,941
34,995
13,946
41,736
31,960
9,776
Net underwriting revenue
12,825
8,563
4,262
49.8%
41,736
31,960
9,776
39.9%
30.6%
30.6%
Net underwriting (loss) income
(271)
2,226
(2,497)
(112.2%)
(144)
3,591
(3,735)
(104.0%)
Loss ratio: current accident year
43.1%
27.6%
Loss ratio: prior years' development
5.7%
(10.0%)
15.5pts
15.7pts
44.6%
(1.7%)
35.4%
(8.1%)
Loss ratio
48.8%
17.6%
31.2pts
42.9%
27.3%
9.2pts
6.4pts
15.6pts
GPW, NPW and NPE grew strongly in Q4 and on a full year basis. This was due to new business growth, stable policy
retention, increasing rates in many lines of business as well as business from partnerships with certain MGAs, where the
Company cedes a larger portion of the business to reinsurers on some of the partnerships.
In the quarter, the loss ratio increased from Q4 2019, with higher current accident year losses as well as an increase in prior
years’ development. Current accident year loss ratio has increased, in part to reflect the uncertainty related to potential
COVID-19 related claims. An increase in certain claims from prior accident years resulted in an increase in prior years’
development loss ratio. The magnitude of growth experienced by Corporate Insurance also impacted the current accident
year loss ratio, as new business bound was reserved for at a higher rate than prior years to reflect the uncertainty related
to the current economic environment. Should the economic climate become more certain, the current year loss ratio may
return to previous levels. For the full year, the loss ratio increased due to increased severity of certain claims and less
favourable prior years’ development. It is important to note that a portion of this prior years’ development accrued under an
older reinsurance structure where our net retention was higher. This structure was amended in 2016.
The dynamics described above resulted in a small Net underwriting loss in Q4 2020 and the full year period.
14
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
UNITED STATES
Our US company is a non-admitted surplus line insurer in all states, operating as a hybrid fronting carrier with a fee-based
business model. We are actively expanding our admitted licenses, with licenses in 46 states and the intention of gaining
admitted licenses across all 50 states in time.
Our US company continued to accelerate premium generation, producing GPW of $210.7 million in Q4 2020 across 48
programs. The graph below shows the evolution of GPW, fee income earned (1), and the number of programs bound in the
US.
GPW
Fee income earned
$210,654
$8,449
$171,028
$144,819
$6,315
$5,513
$120,682
$95,371
$4,099
$55,467
$41,886
$71,187
$3,103
$2,352
$1,294
$7,585
$6
$57
$17,658
$27,194
$254
$595
$1,540
$965
Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020
4
11 11
14
16
23
25
29 35 38
40
48
Number
of
Programs
bound
(1) Fee income earned excludes fees earned on premiums ceded to captive reinsurance operations.
15
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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 GPW and NPW for Q4 2020 and 2020. The
charts include premiums ceded to the captive reinsurance operations.
Gross Premiums Written
Q4 2020(1)
Earthquake 3.3%
Other 8.2%
Farmowners Multiple -
Peril 1.5%
Homeowners Multiple -
Peril 6.4%
Gross Premiums Written
2020(1)
Other 7.4% Earthquake 1.1%
Farmowners Multiple -
Peril 2.4%
Homeowners Multiple -
Peril 6.1%
Commercial Auto
42.8%
Primary and Excess
Casualty
13.2%
Primary and Excess
Casualty
13.8%
Commercial Auto
44.6%
Commercial Multiple -
Peril 24.6%
Commercial Multiple -
Peril 24.6%
Net Premiums Written
Q4 2020(1)
Net Premiums Written
2020(1)
Earthquake 10.4%
Other 5.8%
Homeowners
Multiple -
Peril 4.3%
Farmowners
Multiple - Peril
3.2%
Commercial
Auto 35.6%
Primary and
Excess
Casualty
19.2%
Commercial
Multiple - Peril
21.5%
Earthquake 26.1%
Other 5.9%
Homeowners
Multiple - Peril
4.0%
Farmowners
Multiple - Peril
1.8%
Primary and
Excess
Casualty
13.1%
Commercial
Auto 31.2%
Commercial
Multiple - Peril
17.9%
(1)
“Other” includes Auto Physical Damage, Allied Lines – Flood, MonoLine Property and Inland Marine.
16
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
The table below presents financial highlights for our US operations. The table includes premiums ceded to the captive
reinsurance operations, and excludes fronting fees earned on premiums ceded to the captive reinsurance operations.
Gross premiums written
210,654
95,371
Q4 2020
Q4 2019
$
variance
115,283
%
variance
120.9%
2020
2019
647,183
263,911
$
variance
383,272
%
variance
145.2%
Net premiums written
Net premiums earned
Fee income
17,605
5,583
12,022
215.3%
43,915
14,683
29,232
199.1%
9,891
8,449
2,924
3,103
6,967
238.2%
27,026
6,887
20,139
292.4%
5,346
172.3%
24,375
7,960
16,415
206.2%
Net underwriting revenue
18,340
6,027
12,313
204.3%
51,401
14,847
36,554
246.2%
Net underwriting income
5,780
1,272
4,508
354.4%
15,113
2,252
12,861
571.1%
1,158
5,710
896
262
29.2%
3,880
2,112
1,768
83.7%
1,570
4,140
263.7%
16,382
3,816
12,566
329.3%
2,136
(281)
2,417
nm
14,908
2,239
12,669
565.8%
Net investment income
Net income
Comprehensive income
(loss)(1)
Loss ratio
Retention rate
Fees as percentage of ceded
premium
Fronting operational ratio
ROE(2)
75.9%
8.4%
60.9%
5.9%
6.0%
5.8%
68.5%
78.9%
11.7%
(1) Comprehensive income (loss) includes the impact of cumulative translation adjustments.
(2) ROE excludes premiums ceded to the captive reinsurance operations.
5.0%
74.0%
6.8%
63.2%
5.6%
5.8%
5.7%
70.6%
11.7%
84.8%
5.0%
The table below shows Deferred fee income as at Q4 2020, compared to Q4 2019.
As at
Deferred fee income
December 31, 2020
December 31, 2019
$ variance
18,306
8,286
10,020
GPW and NPW grew significantly over the prior year period for both the quarter and full year. The increase was a result of
the addition of new programs as well as maturation of existing programs. Growth in NPW was higher than growth in GPW
in Q4 2020 and for the full year as our US operations wrote more business in the period with a higher retention. In the
quarter, $11.2 million USD of premium were generated by admitted programs.
The US operations retained 8.4% of GPW in Q4 2020 and 6.8% for the full year inclusive of GPW retained by our reinsurance
operations. The remainder of which was ceded to third party reinsurers. The increase in retention in both periods reflects a
more mature business mix and selective increased retention on renewed programs. We continue to target retention between
5.0% and 10.0% on all new programs, after which we contemplate ceding to our captive reinsurer. Fees as a percentage of
ceded premium were 6.0% in Q4 2020 and 5.8% for the full year which is comparable to 2019. The results in this section
are inclusive of any premiums ceded to our Reinsurance operations.
NPE has grown significantly in both the quarter and full year periods over 2019 as a result of the growth in premium written
throughout 2019 and 2020 from both new and maturing programs. Fee income in the US reflects fronting fees received from
reinsurers which are recognized over the life of the insurance contracts with which they are associated. The earnings pattern
of fee income is similar to that of net premium earned. Earned fronting fees (Fee income) have grown strongly over the
comparable periods in 2019 reaching $8.4 million in the quarter, and $24.4 million for the full year, a result of the significant
growth in premiums in 2020 and their associated fee income.
17
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
The loss ratio increased for Q4 and the full year as US property business experienced losses associated with civil unrest
and storm activity in the quarter. Excluding these events which are associated with more volatile lines of business, the loss
ratio continues to be in line with expectations, supporting profitability.
The fronting operational ratio continued to improve to 68.5% in the quarter and 70.6% for the full year, significantly better
than in 2019 reflecting growth in NPE and fronting fees as the business builds scale.
Increases in investment income reflect a larger pool of assets as a result of the equity raises as well as reinvested earnings.
Net Income increased in Q4 and in the full year over the same periods in 2019, primarily as a result of increased fee income
as program volume and program partners continued to grow.
Our US operations continued its trend of growing profitability, achieving an 11.7% ROE, following a significant increase in
equity in Q2 2020.
REINSURANCE
Our 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 business in support of our US operations.
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 claims expense; (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 (loss) income from life annuity
Settlement from structured insurance
assets
Operating expenses and other (1)
Net loss from legacy reinsurance
Net income from reinsurance assumed
from US Fronting
Net loss before tax
Q4 2020
Q4 2019
$ variance
2020
2019
$ variance
(611)
163
(774)
(4,588)
(15,773)
11,185
-
-
-
-
8,077
(8,077)
(731)
(1,342)
(531)
(368)
(200)
(974)
(2,131)
(786)
(1,345)
(6,719)
(8,482)
1,763
168
21
147
501
3
498
(1,174)
(347)
(827)
(6,218)
(8,479)
2,261
(1) Includes operating and other expenses, operational income from legacy property casualty business currently in run-off, and certain gains/losses.
Net loss from legacy reinsurance in the quarter was driven by a slight mismatch in asset liability matching, and updated
actuarial assumptions adopted in the quarter. Our asset liability matching is a market-based program and can experience
volatility alongside volatile markets. Net loss from legacy reinsurance for the full year 2020 was lower than 2019 as a result
of improved asset liability matching over the course of the year. To further strengthen our asset liability matching in 2020
we appointed a specialist external investment manager for this portfolio effective April 1, 2020. Following volatility
experienced through the transition in Q2 2020, our new portfolio manager achieved improved matching in the remainder of
the year, demonstrated by the improved full year results.
Operating expenses and other in the quarter were higher than 2019 due to higher FX losses in 2020, as well as the impact
of greater investment income in 2019 than 2020. In the full year period, Operating expenses and other was higher than
2019 as the prior year benefitted from higher investment income and FX gains.
In Q4 2020 and for the full year 2020, positive net income has been generated from the reinsurance assumed in support of
the US operations.
18
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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.
In Q4 2020 and full year periods corporate expenses were lower than Q4 2019 and full year 2019 due to lower compensation
costs, which were higher in prior periods as a result of certain staffing transition costs, as well as an updated allocation of
certain expenses to subsidiaries.
Share-based compensation includes payment to directors and senior management and is impacted by movement in the
share price. Share-based compensation was lower in Q4 2020 compared to Q4 2019 because of the comparatively lower
increase in the value of our share price, and the increased effectiveness of our share-based compensation hedging program.
Importantly, we have completed the hedging program for share-based compensation and expect that it will mitigate future
share-based compensation volatility. Derivative gains of $0.6 million for Q4 2020 and $2.3 for the full year are included in
the Share-based compensation line below. Derivative gains and losses are presented in Net gains on the Consolidated
Financial Statements.
Debt servicing costs declined in Q4 and full year period as we benefitted from lower prevailing interest rates on our revolving
credit facility.
Q4 2020
Q4 2019
$ variance
2020
2019
$ variance
Corporate expenses
Share-based compensation
Debt servicing
Corporate
(240)
(180)
(120)
(540)
(327)
(1,231)
(257)
(1,815)
87
1,051
137
1,275
(1,109)
(5,184)
(663)
(6,956)
(2,102)
(2,099)
(1,039)
(5,240)
993
(3,085)
376
(1,716)
19
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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. We take a centralized
investment approach across all subsidiary portfolios and invest with a global posture.
SUMMARY OF INVESTMENT PORTFOLIO
Our $640.2 million investment portfolio consists of cash and cash equivalents, short-term securities, government and
corporate bonds, preferred shares, common shares and a small amount of alternative investments. Over ninety percent of
our fixed income holdings are highly liquid, investment grade bonds.
Fixed Income Securities by Rating
Investment Portfolio by Asset Class
High Yield
10%
AAA
11%
BBB
31%
AA
22%
A
26%
Common
Shares
and
Other
8%
Structured
Insurance
Asset
2%
Preferred
Shares
9%
Cash, Cash
Equivalent
and Short
Term
Securities
22%
Government
Bonds
15%
Corporate Bonds and
Other Fixed Income
44%
20
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
INVESTMENT PERFORMANCE
Investment Income
Q4 2020
Q4 2019
$ variance
2020
2019
$ variance
Canada
United States
Reinsurance Operations
Corporate
Investment income (loss)
Net gains (losses)
Net investment income (loss)
1,863
1,158
2,689
212
5,922
2,822
8,744
2,010
665
(147)
493
7,842
3,880
(6,543)
9,232
15,594
7,796
2,112
6,335
-
(3,868)
(92)
212
9,790
2,914
463
-
27,779
16,243
11,536
8,450
1,572
6,878
(3,960)
12,704
36,229
17,815
18,414
46
1,768
9,259
463
Settlement from structured insurance assets
-
-
-
-
8,077
(8,077)
Total
8,744
(3,960)
12,704
36,229
25,892
10,337
The Company’s operations currently include Specialty P&C insurance in Canada and the US, and international reinsurance.
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.
Following the equity raise in May 2020, and subsequent deployment of funds to support growth in the US, some excess
capital is being managed at Trisura Group in a conservative manner. Net Investment income is driven by interest and
dividend income on portfolio assets. The market-based yield of the Trisura Group portfolio as at December 31, 2020 was
3.4%. We expect to allocate additional capital to the US platform from Trisura Group as growth continues.
Canadian investment income is driven by interest and dividend income on portfolio assets. Net investment income in the
quarter and for the year was stable, benefitting from increased interest and dividend income in the full year, partially offset
by an adjustment to cost allocation associated with investment management fees charged from Trisura Group. The market-
based yield of the Canadian portfolio as at December 31, 2020 was 3.6% (Q4 2019 – 4.1%). We continue to diversify the
Canadian portfolio, having introduced additional alternative investments in Q4 2020, which are expected to enhance portfolio
yield and grow as a portion of the portfolio going forward.
In the quarter we continued to normalize the US portfolio to include allocations to asset classes beyond investment grade
bonds. The market-based yield of the US portfolio as at December 31, 2020 was 3.4% (Q4 2019 – 3.5%). Investment
income, which is primarily driven by interest income on this portfolio of bonds, grew in Q4 2020 and for the year as growth
in operations led to an increase in the size of our investment portfolio, alongside the deployment of new capital from the
equity raise in Q2 2020.
In the Reinsurance portfolio, Euro-denominated bonds supporting the life annuity reserves are held at FVTPL. Investment
income increased as interest rates fell through Q4 and full year 2020. Importantly, these investment gains were offset by
reserve strengthening on the life annuity reserves. The market-based yield of the Reinsurance portfolio as at December 31,
2020 was 1.5% (Q4 2019 – 1.7%).
Net gains include realized gains and losses from sales of investments in the investment portfolio, the impact of foreign
exchange related to the investment portfolio and the operations of the business, impairments and any derivative gain or
loss. Net gains were greater in Q4 2020 and for the year as a result of favourable foreign exchange movements and greater
realized gains.
21
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Other Comprehensive Income (Loss) (“OCI”)
Q4 2020
Q4 2019
$ variance
2020
2019
$ variance
Unrealized gains in OCI
Cumulative translation
Other Comprehensive Income (Loss)
10,853
(8,053)
2,800
936
9,917
4,942
5,717
(2,124)
(1,188)
(5,929)
(4,846)
(4,909)
3,988
96
808
(775)
63
(712)
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 2020 and for the year, driven by unrealized gains in the fixed income,
preferred share and equity portfolios in both Canada and the US.
Foreign exchange differences arising from the translation of the financial statements of Trisura International and Trisura US
to Canadian dollars are recognized as cumulative translation gains or losses, which are also a component of OCI.
Cumulative translation losses in Q4 2020 and for the year were due to the strengthening of the Canadian currency against
the US dollar, driving lower Canadian dollar valuations of capital held outside of Canada.
Refer to Notes 7 and 8 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 2020
(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 two percent market share
positions. An estimated $55.5 billion of excess and surplus insurance direct premiums were written in 2019, exhibiting
significant growth compared to the broader P&C industry, expanding by 11.2%. From 2000 until 2019, the average combined
ratio for excess and surplus markets was 97.0% versus 101.7% for the P&C industry.
23
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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 14 years and in the international specialty reinsurance market for over 18 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 now 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, and as an admitted carrier
in 46 states. We are in the process of obtaining admitted licenses in all remaining states. 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 2019 and 2020.
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 an increasingly
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
Insurance Company 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 US operations.
24
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 7 – 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, promotes sound and effective risk management across the
Company by (i) ensuring that effective processes are in place to identify, assess, monitor, manage and report the risks to
which the Company is or might be exposed, (ii) facilitating the setting of risk tolerances, limits and appetite by the Board
and (iii) providing comprehensive and timely information on material risks which enables the Board and the Risk Committee
to understand the overall risk profile of the Company. The Group Chief Risk Officer liaises with Risk Officers at subsidiary
levels to develop consistency of approach with respect to risk identifying, assessing, monitoring, managing and reporting
tailored to the operations of the subsidiaries. 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 processes to Board of Directors level committees.
Trisura Group Ltd.
Board of Directors
Trisura Group Ltd.
Risk Committee
Trisura Group Ltd.
Audit Committee
Trisura Guarantee
Risk Committee
Trisura Specialty
Audit and Risk Committee
Trisura International
Audit and Risk Committee
Group Risk Management Function
Entity Level Risk Management Functions
Entity Level Management Underwriting and Risk Committees
25
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 and 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.
RISKS AND UNCERTAINTIES
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.
Cyclical and Volatile 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.
Risks Associated with the COVID-19 Pandemic
The rapid spread of the COVID-19 coronavirus, which was declared by the World Health Organization to be a pandemic on
March 11, 2020, and actions taken by government authorities globally in response to COVID-19, have interrupted business
activities and supply chains; disrupted travel; contributed to significant volatility in the financial markets; resulted in lower
interest rates; impacted social conditions; and adversely impacted local, regional, national and international economic
conditions as well as the labour market. As a result of the rapid spread of COVID-19, many companies and various
governments have imposed restrictions on business activity and travel which may continue and could expand. The Company
has largely transitioned to a remote work environment as a result of the COVID-19 pandemic, with limited impact to the
26
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Company’s workforce. Governments and central banks around the world have enacted fiscal and monetary stimulus
measures to counteract the effects of the COVID-19 pandemic and various other response measures, however, the overall
magnitude and long-term effectiveness of these actions remain uncertain. Given the ongoing and dynamic nature of the
circumstances surrounding COVID-19, it is difficult to predict how significant the impact of COVID-19, including any
responses to it, will be on the global economy and our Company or for how long any disruptions are likely to continue.
The nature and extent of such impacts will depend on future developments, which are highly uncertain, rapidly evolving and
difficult to predict, including new information which may emerge concerning the severity of COVID-19. Additional actions
may be taken to contain COVID-19 or treat its impact, such as re-imposing previously lifted measures or putting in place
additional restrictions. The pace, availability, distribution and acceptance of effective vaccines could also affect the impact
of COVID-19. Such developments may result in a material adverse effect on our assets, liquidity, financial condition and the
operating results of our insurance business due to its impact on the economy and global financial markets there can be no
assurance that strategies to address these risks will mitigate the adverse impacts related to the outbreak.
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, reduce or 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 US 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.
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.
27
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 11
(Unearned premiums), Note 9 (Unpaid claims and loss adjustment expenses), and Note 15.1 (Insurance risk) to the
Consolidated Financial Statements.
1 - Product and Pricing
The pricing process relies on 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, reinsurance costs, the capital required
to support the product line, the investment income earned on that capital, and the competitive landscape of the insurance
markets where we compete. Our Company’s pricing processes are 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. Technological change implemented by
insureds could change the profile of the risks insured by our policies.
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. Climate change may increase the
frequency or severity on natural 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 exposures 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.
28
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 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.
Availability of Reinsurance
Our reinsurance arrangements are with a limited number of reinsurers. A decline in the availability of reinsurance or
increases in the cost of reinsurance 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 we issue. 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 its recoverable amounts due from reinsurers, see
Note 15.2 (Credit risk) and Note 16 (Reinsurance) to the Consolidated Financial Statements.
29
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 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 15.2 (Credit risk) to the Consolidated Financial Statements for more information on the management
of credit risk.
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 keeps some of its assets in cash and cash equivalents and has 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 relative to average duration of claim liabilities. See Note 15.3
(Liquidity risk) to the Consolidated Financial Statements for more information on the management of liquidity risk.
30
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 15.4 (Market risk) 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
regularly and the Company may use derivatives to manage foreign exchange risks where material unmatched foreign
exchange positions exist 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.
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
31
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 negligence 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. Claims of negligence against our Company could include, for example, errors and
omissions or intentional wrongful acts by the Company’s employees or agents, in the adjudication of claims, in the placing
of coverage, in the handling of consumer complaints, in failing to appropriately and adequately disclose insurer fee
arrangements to consumers, or in the handling of 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 with general corporate
and commercial litigation. To the extent that these risks emerge, they could have a material adverse effect on our Company’s
business, financial condition and performance. 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.
Adverse Effects of Regulatory Changes
The specialty insurance industry is heavily regulated. 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 US 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 and other provincial regulators in the provinces in which it conducts business.
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.
32
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Change of Control Restrictions of US 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 originated by 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.
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.
33
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 US business, and the status of competition and regulatory and rating agency 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, dilution to our existing shareholders will result. If adequate funds are not available,
our Company may be required to delay, scale back or abandon growth plans. 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.
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; (viii) actual or prospective changes in government laws, rules or regulations affecting our businesses; (ix) the
general state of the securities markets; (x) changes and developments in general economic, political, or social conditions,
including as a result of COVID-19 and the global economic shutdown; (xi) the depth and liquidity of the market for the
Common Shares; (xii) news reports relating to trends, concerns, technological or competitive developments, regulatory
changes and other related issues in our industry or target markets; and (xiii) the materialization of other risks described in
this section.
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 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.
34
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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.
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, by a disruption in key suppliers for example power grids, internet service providers, and cloud computing
providers, or by an epidemic or pandemic. 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 are in-effective 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. To ensure our Company is able to effectively respond to potential technology failures and mitigate the inherent
risk, our Company maintains technology disaster recovery plans 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 malware, social engineering, 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, or results of operations. Additionally, if
our information systems are compromised and personally identifiable information is released, there could be regulatory
reporting obligations leading to material reputational harm or even litigation. We seek to mitigate this risk through strong
network security, network monitoring, third party vulnerability assessments, employee training and awareness, data
backups, disaster recovery planning, and privacy breach planning.
35
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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 US 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.
36
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 8 – OTHER INFORMATION
RATINGS
Trisura Canada has been rated A- (Excellent) by A.M. Best since 2012. This rating was reaffirmed with stable outlook by
A.M. Best in November 2020. Trisura US obtained an A- (Excellent) rating with stable outlook from A.M. Best in September
2017, which was reaffirmed in November 2020. A.M Best increased the financial size category of Trisura US from VII to VIII
(US $50 million to US $100 million capital) in November 2020.
CASH FLOW SUMMARY
Q4 2020
Q4 2019
$ variance
2020
2019
$ variance
Net income from operating activities
10,949
4,172
6,777
32,442
5,094
27,348
Non-cash items
(3,439)
11,544
(14,983)
3,107
10,400
(7,293)
Change in working capital
23,958
9,744
14,214
81,412
49,726
31,686
Realized gains on investments
(1,223)
(60)
(1,163)
(22,666)
(2,860)
(19,806)
Income taxes paid
Interest paid
(1,860)
(114)
(1,746)
(9,808)
(2,573)
(7,235)
(223)
(354)
131
(1,144)
(1,410)
266
Net cash from operating activities
28,162
24,932
3,230
83,343
58,377
24,966
Proceeds on disposal of investments
37,776
13,805
23,971
238,827
55,452
183,375
Purchases of investments
(50,152)
(79,741)
29,589
(331,933)
(170,817)
(161,116)
Net purchases of capital and intangible assets
(673)
(2,723)
2,050
(1,296)
(3,131)
1,835
Net cash used in investing activities
(13,049)
(68,659)
55,610
(94,402)
(118,496)
24,094
Dividends paid
Shares issued
Preferred shares redeemed
Loans received
Repayment of loan payable
-
-
-
(24)
24
-
(96)
96
-
-
65,143
55,669
9,474
(1,600)
1,600
-
(1,600)
1,600
11,459
(11,459)
-
-
11,459
44,159
(11,459)
(44,159)
-
-
44,159
(44,159)
Lease payments
(318)
(266)
(52)
(1,515)
(1,026)
(489)
Net cash (used in) from financing activities
(318)
(1,890)
1,572
63,628
52,947
10,681
Net increase (decrease) in cash
14,795
(45,617)
60,412
52,569
(7,172)
59,741
Cash at beginning of the period
124,875
131,913
(7,038)
85,905
95,212
(9,307)
Currency translation
(3,151)
(391)
(2,760)
(1,955)
(2,135)
180
Cash at the end of the period
136,519
85,905
50,614
136,519
85,905
50,614
37
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
Net cash used in investing activities in Q4 2020 and 2020 as well as Q4 2019 and 2019 reflected the purchase and disposal
of portfolio investments in all three principal operating subsidiaries. In Q4 2020, purchases of investments were lower than
Q4 2019, as Q4 2019 included a number of new investments associated with the equity raise in Q3 2019. Disposals of
investments were greater in Q4 2020 than in Q4 2019 as a result of a higher rotation of investments in the portfolio than in
the prior year. In 2020 purchases and disposals of investments increased relative to 2019 reflecting a larger investment
portfolio following the equity raises in 2019 and 2020, and a higher rotation of securities throughout the investments
portfolios relative to the prior year.
Net cash (used in) from financing activities was lower in Q4 2020 than Q4 2019, as Q4 2019 included funds used to redeem
the outstanding preferred shares. In Q4 2020, there was movement in Loans received and Repayment of loans payable,
which reflected a shift in borrowing from the Company’s credit facility, to its margin facility with the same bank. The purpose
of the shift was to achieve a lower borrowing rate. In 2020 movement in Net cash (used in) from financing activities was
greater than Q4 2019 YTD as a result of a larger equity offering in 2020 than in 2019. Full year 2020 also included the
repayment of the outstanding CAD denominated Loan payable balance, which was replaced with a new Loan payable
balance denominated in USD.
In Q4 2020 the increase in Net cash from operating activities was primarily related to an increase in cash generated from
operating activities at our Canadian operations. In 2020 the increase in Net cash from operating activities was primarily
related to an increase in cash generated from operating activities at our US operations, which generated more cash from
operations in 2020 than in 2019, largely as a result of growth in the business. Net cash from operating activities was lower
in 2020 in our Reinsurance operations as a result of higher cash inflows associated with the repayment of certain outstanding
receivables in Q3 2019.
SEGMENTED REPORTING
As at
Assets
Liabilities
Trisura Canada
Trisura US
December 31, 2020
Trisura International
Corporate (1)
Total (2)
541,603
431,858
1,021,020
864,983
121,347
108,295
22,762
11,732
1,706,732
1,416,868
109,745
Shareholders’ Equity
Book Value Per Share, $ (3)
(1) Corporate includes consolidation adjustments.
(2) Total reflects the Group's Assets, Liabilities, and Book Value Per Share after consolidation adjustments.
(3) 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, 2020.
156,037
11,030
13,052
15.20
10.69
1.06
1.27
289,864
28.23
As at
Assets
Liabilities
Shareholders’ Equity
Book Value Per Share, $ (4)
Trisura Canada
Trisura US
Trisura International (1) Corporate (2)
Total (3)
December 31, 2019
424,009
333,681
90,328
10.24
444,763
336,608
108,155
12.26
104,169
85,766
18,403
2.09
5,452
32,009
(26,557)
(3.01)
978,393
788,064
190,329
21.58
(1) Includes the assets and liabilities of its intermediary 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.
38
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
CONTRACTUAL OBLIGATIONS
As at December 31, 2020
Payments due by period
Total
Less than 1 year
1 – 5 years
Thereafter
Loans payable (1)
Interest payments on debt (2)
Lease liabilities
27,555
11,459
16,096
995
397
598
10,278
1,566
6,212
Total contractual obligations
(1) See Note 20 in the Company’s Consolidated Financial Statements for details on Loan payable.
(2) Based on the Company’s most recent borrowing rate on the outstanding loan payable.
13,422
38,828
22,906
-
-
2,500
2,500
On April 1, 2020, the Company’s five-year revolving credit facility was amended to increase the Company’s borrowing
capacity from $35,000 to $50,000.
As at December 31, 2019
Payments due by period
Total
Less than 1 year
1 – 5 years
Thereafter
Loans payable
Interest payments on debt (1)
Lease liabilities
29,700
-
3,258
1,019
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 Notes 4, 5, 6, 7, and 8 in the Company’s Consolidated Financial Statements for financial statement classification of the
change in fair value of financial instruments, significant assumptions made in determining the fair values, amounts of
income, expenses, gains and losses associated with the instruments.
RELATED PARTY TRANSACTIONS
See Note 25 in the Company’s Consolidated Financial Statements.
ACCOUNTING ESTIMATES
See Note 3 in the Company’s Consolidated Financial Statements for accounting estimates on unpaid claims, level 3
investments, as well as the provisions on income taxes.
39
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
SECTION 9 – SUMMARY OF RESULTS
SELECTED QUARTERLY RESULTS
Gross premiums written
Net premiums written and
other revenue
Total revenues
Net income (loss)
attributable to
shareholders
EPS, basic (in dollars)
EPS, diluted (in dollars)
Distributions or cash
dividends per-share
Total assets
Total non-current
financial liabilities (1)
2020
2019
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
314,200
239,607
202,683
169,952
143,212
114,354
109,313
81,383
98,059
71,195
52,748
49,041
43,231
39,959
38,885
32,759
69,494
60,095
52,455
44,588
29,325
42,752
34,038
39,487
10,949
6,535
6,587
8,371
4,172
2,543
(4,138)
2,517
1.07
1.05
0.64
0.62
0.69
0.68
0.95
0.94
0.47
0.47
0.37
0.37
(0.63)
(0.63)
0.38
0.37
-
-
-
-
$ 0.375
$ 0.375
$ 0.375
$ 0.375
1,706,732
1,517,516
1,327,613
1,143,064
978,393
886,893
750,472
667,922
16,096
28,869
29,494
33,704
29,700
29,700
29,700
29,700
SELECTED ANNUAL RESULTS
Gross premiums written
Net premiums written and other revenue
Total revenues
Net income attributable to shareholders
EPS, basic (in dollars)
EPS, diluted (in dollars)
Distributions or cash dividends per-share
Total assets
Total non-current financial liabilities (1)
(1) See Note 20 in the Company’s Consolidated Financial Statements for details on Loan payable.
1,706,732
16,096
2020
2019
2018
926,442
271,043
226,632
32,442
3.33
3.28
-
448,262
154,834
137,525
5,094
0.69
0.69
1.50
978,393
29,700
103,278
120,199
103,278
8,638
1.29
1.27
1.50
600,982
29,700
40
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
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, 2020, 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, 2020 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.
41
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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
Combined Ratio
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 our Canadian operations) as a percentage of NPE.
Fees as Percentage
of Ceded Premium
Written fee income divided by ceded written premium.
Fronting Operational
Ratio
The sum of claims, acquisition costs and operating expenses divided by the sum of NPE and
fronting fees.
Loss Ratio
Net claims and loss adjustment expenses incurred as a percentage of NPE.
ROE
Net income for the twelve month period preceding the reporting date, divided by the average
common shareholders’ equity over the same period, adjusted for significant capital
transactions, if appropriate.
Adjusted ROE
ROE calculated using Adjusted net income.
Adjusted Net Income Net income, adjusted to remove impact of non-recurring items and normalize earnings for core
operations.
MCT
Retained Premium
(%)
Rolling average
equity
Net Underwriting
Revenue
Net Underwriting
Income
Our Canadian operations report 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 our Canadian operations.
NPW as a percentage of GPW.
Shareholders’ equity over twelve month period, adjusted for significant capital transactions, if
appropriate.
The sum of net premiums earned and fee income earned.
Net underwriting revenue, less net claims and loss adjustment expenses, net commissions,
and operating expenses.
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.
42
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
NON-IFRS FINANCIAL MEASURES
We report certain financial information using non-IFRS financial measures. Non-IFRS financial measures do not have
standardized meanings prescribed by IFRS and may not be comparable to similar measures used by other companies in
our industry. They are used by management and financial analysts to assess our performance.
Further, they provide users with an enhanced understanding of our results and related trends, and increase transparency
and clarity into the core results of the business.
Adjusted Earnings per Common Share
Net income
Adjustments, net of tax
Q4 2020
Q4 2019
2020
2019
10,949
4,172
32,442
5,094
Add: impact of share-based compensation expenses (net of tax)
548
1,042
5,490
1,727
Less: net (gains) losses (net of tax)
(2,050)
107
(6,119)
(1,291)
Less: settlement from structured insurance assets (net of tax)
-
-
-
(7,293)
Add: impact of Annuity reserve losses (gains)
592
(191)
4,588
15,773
Adjusted net income
10,039
5,130
36,401
14,010
Less: dividends declared on preferred shares, net of tax
-
(24)
-
(96)
Adjusted net income attributable to shareholders
Weighted-average number of common shares outstanding - basic
(in thousands of shares)
Adjusted earnings per common share – basic - in dollars
Weighted-average number of common shares outstanding - diluted
(in thousands of shares)
10,039
5,106
36,401
13,914
10,269
8,820
9,733
7,213
$ 0.98
$ 0.58
$ 3.74
$ 1.93
10,474
8,884
9,893
7,245
Adjusted earnings per common share – diluted - in dollars
$ 0.96
$ 0.57
$ 3.68
$ 1.92
ROE and Adjusted ROE
Rolling net income attributable to shareholders
Adjusted net income attributable to shareholders
Rolling average equity
ROE
Adjusted ROE
2020
2019
32,442
5,094
36,401
13,914
241,488
147,153
13.4%
15.0%
3.5%
9.4%
43
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(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: developments related to COVID-19, including the impact of COVID-19 on the economy and
global financial markets; 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, hurricanes or pandemics; 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, the Company 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.
44
TRISURA GROUP LTD.
TRISURA GROUP LTD.
Management’s Discussion and Analysis for the year ended 2020
(in thousands of Canadian dollars, except per share numbers and as otherwise noted)
GLOSSARY OF ABBREVIATIONS
Abbreviation
Description
AFS
BVPS
D&O
E&O
EPS
Available for Sale Financial Asset
Book Value Per Share
Directors’ and Officers’ insurance
Errors and Omissions Insurance
Earnings Per Share
FVTPL
Fair Value Through Profit & Loss
GPW
MCT
MGA
n/a
nm
NPE
NPW
NUI
OCI
pts
Gross Premium Written
Minimum Capital Test
Managing General Agent
not applicable
not meaningful
Net Premiums Earned
Net Premium Written
Net Underwriting Income
Other Comprehensive Income
Percentage points
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
45
TRISURA GROUP LTD.
Trisura Group Ltd.
Consolidated Financial Statements
For the years ended December 31, 2020 and 2019
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 and the Board of Directors of
Trisura Group Ltd.
Opinion
We have audited the consolidated financial statements of Trisura Group Ltd. (the “Company”), which
comprise the consolidated statements of financial position as at December 31, 2020 and 2019, 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, 2020 and 2019, 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the consolidated financial statements for the year ended December 31, 2020. These matters
were addressed in the context of our audit of the consolidated financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
Unpaid claims and loss adjustment expenses for the property and casualty insurance
business - Refer to Notes 2.4(d) and 9 to the financial statements
Key Audit Matter Description
The Company conducts insurance operations including a property and casualty insurance business
through Trisura Guarantee Insurance Company, Trisura Specialty Insurance Company, and Trisura
International Insurance Ltd. In the property and casualty business, the liability for unpaid claims and
loss adjustment expenses represents an estimate of the ultimate cost of all claims incurred but not paid
by the statement of financial position date. This estimation process includes consideration of individual
case estimates of claims and loss adjustment expenses on reported claims, provision for future
development of case estimates on reported claims, and provision for claims and loss adjustment
expenses related to incurred but not reported (“IBNR”) claims.
In estimating the IBNR claims, the Company uses a range of actuarial methodologies which consider
assumptions related to historical loss development factors and payment patterns. While there are
several assumptions that go into determining the IBNR claims, significant management judgment is
applied regarding the use of assumptions relating to future development of claims and loss adjustment
expenses that have not yet been reported, future rates of claim frequency and severity, payment
patterns and reinsurance recoveries (“significant assumptions”). Auditing the selection of the actuarial
methodologies and the significant assumptions involves a high degree of subjectivity in applying audit
procedures and in evaluating the results of those procedures. This resulted in an increased extent of
audit effort, including the involvement of actuarial specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the selection of the actuarial methodologies and the significant
assumptions used to value the IBNR claims for the property and casualty insurance business included
the following audit procedures, among others:
Tested the underlying data that served as the basis for the actuarial analysis, including historical
claims and loss adjustment expenses data used to develop future expectations, to evaluate the
reasonableness of key inputs to the actuarial estimate.
With the assistance of actuarial specialists:
o Evaluated management’s actuarial methodologies and the significant assumptions in accordance
with actuarial principles and practices under generally accepted actuarial standards of practice.
o
Independently estimated the claim liabilities for selected lines of business, focusing on the
largest IBNR claims liabilities, and compared the recalculated results to those recorded by the
Company.
o Performed a retrospective assessment to determine whether management judgments and
assumptions relating to the significant estimates indicated a possible bias on the part of
management.
Unpaid claims and loss adjustment expenses for the life reinsurance business — Refer to
Notes 2.4(d) and 9 to the financial statements
Key Audit Matter Description
The Company conducts insurance operations including a life reinsurance business through Trisura
International Insurance Ltd. In the life reinsurance business, the liability for unpaid claims and loss
adjustment expense represents a closed block of deferred annuities with guaranteed annuity conversion
options which is denominated in Euros and has been in run-off since 2008. The Company uses an
actuarial model to determine the claims liability.
While there are several assumptions that go into determining the liability on the life reinsurance
business, significant management judgment is applied regarding the use of assumptions relating to the
guaranteed annuity option future take-up rates, changes in the European Insurance and Occupational
Pensions Authority (“EIOPA”) published interest rates for use in discounting claims liability, and a
volatility adjustment (“significant assumptions”). The significant assumptions require subjective auditor
judgment when historical trends may not accurately reflect future results and future changes in
annuitant policyholders’ needs are unpredictable. Auditing the selection of the actuarial methodologies
and the significant assumptions involves a high degree of subjectivity in applying audit procedures and
in evaluating the results of those procedures. This resulted in an increased extent of audit effort,
including the involvement of actuarial specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the selection of the actuarial methodology and the significant
assumptions used to value the liability for the life reinsurance business included the following audit
procedures, among others:
With the assistance of actuarial specialists:
o Evaluated management’s actuarial methodologies and the significant assumptions in accordance
with actuarial principles and practices under generally accepted actuarial standards of practice.
o Assessed the reasonableness of the guaranteed annuity option future take-up rates, applicable
EIOPA published interest rates, and the volatility adjustment, by considering industry and other
external sources of data, where applicable.
o Analyzed management’s use of stochastic modelling in the methodology, including an
assessment of the selection of the number of scenarios used, and evaluated the results of the
model.
Page 2
Other Information
Management is responsible for the other information. The other information comprises:
Management’s Discussion and Analysis
The information, other than the financial statements and our auditor’s report thereon, in the Annual
Report
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 and Financial Supplement 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 Annual Report 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.
Page 3
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.
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.
From the matters communicated with those charged with governance, we determine those matters that
were of most significance in the audit of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences
of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.
The engagement partner on the audit resulting in this independent auditor’s report is Ratan Ralliaram.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
February 10, 2021
Page 4
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, 2020
December 31, 2019
136,519
503,684
178,883
676,972
188,190
13,907
8,577
1,706,732
57,343
151,707
592,711
100,281
487,271
27,555
1,416,868
285,731
1,332
4,133
(1,332)
289,864
1,706,732
Assets
Cash and cash equivalents
Investments
Premiums and accounts receivable, and other assets
Recoverable from reinsurers
Deferred acquisition costs
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
Contributed surplus
Accumulated retained earnings (deficit)
Accumulated other comprehensive loss
Total liabilities and shareholders’ equity
4, 6
13
16
10
12, 17, 18
27
14
13
11
10
9
20
21
28.1, 28.4
See accompanying notes to the Consolidated Financial Statements
On behalf of the Board
George Myhal
Director
David Clare
Director
85,905
392,617
86,669
293,068
104,197
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
2
TRISURA GROUP LTD.
Consolidated Statements of Income
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
Gross premiums written
Reinsurance premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
Fee income
Net Investment Income
Net gains
Settlement from structured insurance assets
Total revenues
Claims and expenses
Net claims and loss adjustment expenses
Net commissions
Operating expenses
Interest expense
Total claims and expenses
Income before income taxes
Income tax expense
Net income attributable to shareholders
7
8
4.4
9
10
20
27
Weighted average number of common shares
outstanding during the year (in thousands) – basic
Earnings per common share (in dollars) – basic
Earnings per common share (in dollars) – diluted
22
22
See accompanying notes to the Consolidated Financial Statements
2020
926,442
(685,118)
241,324
(80,640)
160,684
29,719
27,779
8,450
-
226,632
(72,562)
(55,915)
(57,560)
(1,113)
(187,150)
39,482
(7,040)
32,442
9,733
3.33
3.28
2019
448,262
(305,634)
142,628
(35,124)
107,504
12,206
16,243
1,572
8,077
145,602
(49,936)
(37,516)
(45,590)
(1,361)
(134,403)
11,199
(6,105)
5,094
7,213
0.69
0.69
3
TRISURA GROUP LTD.
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
Note
Net income attributable to shareholders
Net unrealized gains on available-for-sale investments
Income tax expense
Items that may be reclassified subsequently to net income
Net realized gains
Impairment loss
Income tax benefit
Items reclassified to net income
4.2
Items other than cumulative translation loss
Items that will not be reclassified subsequently to net income –
Cumulative translation loss
Other comprehensive income
Total comprehensive income
See accompanying notes to the Consolidated Financial Statements
2020
32,442
7,629
(1,597)
6,032
(6,258)
4,144
1,024
(1,090)
4,942
(4,846)
96
32,538
2019
5,094
7,379
(1,178)
6,201
(499)
-
15
(484)
5,717
(4,909)
808
5,902
4
TRISURA GROUP LTD.
Consolidated Statements of Changes in Equity
(in thousands of Canadian dollars, except as otherwise noted)
Balance at January 1, 2020
Net income
Other comprehensive income
Comprehensive income
Issuances, net of taxes
Share based payments
Balance at December 31, 2020
Note
21
28
Common
shares
219,251
-
-
-
66,480
-
285,731
Contributed
surplus
815
-
-
-
-
517
1,332
Accumulated
retained
earnings
(28,309)
32,442
-
32,442
-
-
4,133
Accumulated other
comprehensive loss
(net of income
taxes)
(1,428)
-
96
96
-
-
(1,332)
Total
190,329
32,442
96
32,538
66,480
517
289,864
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
Note
21
21
28
21
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)
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
-
-
-
-
5
TRISURA GROUP LTD.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars, except as otherwise noted)
For the years ended December 31,
2020
2019
Operating activities
Net income
Items not involving cash:
Depreciation and amortization
Unrealized (gains) loss
Impairment loss
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
Principal portion of lease payments
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents during the year
Cash, beginning of year
Cash equivalents, beginning of year
Cash and cash equivalents, beginning of year
Impact of foreign exchange on cash and cash equivalents
Cash, end of year
Cash equivalents, end of year
Cash and cash equivalents, end of year
See accompanying notes to the Consolidated Financial Statements
32,442
5,094
2,628
(4,957)
4,992
(285)
729
81,412
(22,666)
(9,808)
(1,144)
83,343
2,500
7,927
-
(529)
502
49,726
(2,860)
(2,573)
(1,410)
58,377
238,827
(331,933)
(1,086)
(210)
(94,402)
55,452
(170,817)
(386)
(2,745)
(118,496)
-
65,143
-
44,159
(44,159)
(1,515)
63,628
(96)
55,669
(1,600)
-
-
(1,026)
52,947
52,569
(7,172)
68,208
17,697
85,905
93,152
2,060
95,212
(1,955)
(2,135)
120,538
15,981
136,519
68,208
17,697
85,905
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 through which it conducts insurance operations. These subsidiaries are Trisura
Guarantee Insurance Company (“Trisura Guarantee”), Trisura Specialty Insurance Company (“Trisura Specialty”) and Trisura
International Insurance Ltd. (“Trisura International”), which was wholly-owned through the intermediary holding company Trisura
International Holdings Ltd. (“TIHL”). TIHL was wound up on May 21, 2020 (see Note 23), and Trisura International is now owned
directly by the Company.
Trisura Guarantee operates as a Canadian property and casualty insurance company. 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 and through its subsidiary can also write admitted business in certain states. Trisura Specialty
operates as a hybrid fronting carrier where a large portion of its premium is ceded to reinsurers. Trisura Specialty earns fee
income from the reinsurers to whom it ceded premium. Trisura International is currently managing its in-force portfolio of specialty
reinsurance contracts and assumes some premium from Trisura Specialty.
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 10,
2021.
2.2
Cash and cash equivalents
Cash and cash equivalents include short-term investments with original maturities of 90 days or less. The Company has classified
cash and cash equivalents 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.
ii)
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.
7
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.3
a)
iii)
Financial instruments (continued)
Categories of financial instruments (continued)
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. Derivative assets which are grouped with
Premiums and accounts receivable, and other assets are carried at fair value as described in Note 2.3(c). 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, and Accounts payable,
accrued and other liabilities are classified as Other financial liabilities. Derivative liabilities and cash-settled Share based payments,
which are grouped with Accounts payable, accrued and other liabilities are carried at fair value as described in Note 2.3(c) and
Note 2.9.
b)
Measurement of fair values
The Company has an established control framework with respect to the measurement of fair values by management, which
includes input from the Company’s external investment manager.
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 8).
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. 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.
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
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, in accordance with IFRS 15 Revenue from
contracts with customers. 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 estimation process employed in determining future claims and LAE
payments includes consideration of individual case estimates of claims and LAE payments on reported claims, provision for future
development of case estimates on reported claims, and provision for claims and LAE related to incurred but not reported (“IBNR”)
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. 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 the IBNR claims, the Company uses a range of actuarial methodologies which consider assumptions related to
historical loss development factors and payment patterns. While there are several assumptions that go into determining the IBNR
claims, significant management judgment is applied regarding the use of assumptions relating to future development of claims
and LAE that have not yet been reported, 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. 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.
In the life reinsurance business, the liability for unpaid claims and LAE represents a closed block of deferred annuities with
guaranteed annuity conversion options which is denominated in Euros and has been in run-off since 2008. The Company uses an
actuarial model to determine the claims liability. While there are several assumptions that go into determining the liability on the
life reinsurance business, significant management judgment is applied regarding the use of assumptions relating to the guaranteed
annuity option future take-up rates, changes in the European Insurance and Occupational Pensions Authority published interest
rates for use in discounting claims liability, and a volatility adjustment.
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 provision for unpaid claims and LAE 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.
10
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.4
f)
Insurance contracts (continued)
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 end of 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.
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
4 to 16 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, the related tax is also presented in other comprehensive income.
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 financial instruments with 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 within other comprehensive income. For other financial instruments classified as AFS, foreign
exchange differences are included as unrealized gains within other comprehensive income.
11
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.8
b)
Foreign currency (continued)
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.
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 28.1. 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 28.2. 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 28.3. 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.
d)
Equity-settled restricted share units plan (“RSU”)
The Company has adopted a RSU plan, which is described in Note 28.4. This entitles certain employees to receive RSUs based
on the market value of the Company’s commons shares at the grant date. These RSUs typically vest over the course of three
years, however in some instances the vesting period may differ. Obligations related to the equity-settled RSU plan are recorded
in shareholders’ equity as contributed surplus. The cost of the RSUs is recognized in Operating expenses over the course of the
vesting period.
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 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 12). 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.
12
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
2.10
Leases (continued)
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”) in 2019. 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 years ended December 31, 2020 and 2019.
2.13
Future accounting policy changes
a)
IFRS 9 Financial instruments (“IFRS 9”)
IFRS 9, which replaces IAS 39, Financial Instruments: Recognition and Measurement, requires financial assets to be classified
and measured at fair value, with changes in fair value recognized in profit and loss as they arise, unless certain criteria are met
for classifying and measuring the asset at either amortized cost or fair value through other comprehensive income. IFRS 9 also
established new criteria for hedge accounting and an expected credit loss model for the impairment assessment of loans and
receivables. IFRS 9 generally was effective January 1, 2018, however, the IASB agreed to provide entities whose predominant
activities are insurance to defer implementation of IFRS 9 to January 1, 2023 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 15.2(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, later revised to January 1, 2023; 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, 2023, as pronounced by the IASB in September 2020. It is applied retrospectively unless impracticable, in which case
the modified retrospective approach or the fair value approach is applied. The Company is actively assessing the impact that IFRS
17 will have on its Consolidated Financial Statements.
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).
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 15 and Note 16).
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 27).
d)
Impairment of financial instruments
Management assesses financial instruments for objective evidence of impairment at each reporting date and there are inherent
risks and uncertainties in performing this assessment of impairment loss, including factors such as general economic conditions
and issuers’ financial conditions (see Note 2.3(d) and Note 4.2)
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 cash equivalents and investments
The following table presents the classification of cash and cash equivalents, and investments:
As at December 31, 2020
Cash and cash equivalents
Investments
Short-term securities
Fixed income
Common shares
Preferred shares
Structured insurance assets
Total cash and investments
As at December 31, 2019
Cash and cash equivalents
Investments
Fixed income
Common shares
Preferred shares
Structured insurance assets
Total cash and investments
Designated
FVTPL
Cash, loans and
receivables
AFS
Total
-
-
136,519
136,519
-
299,452
48,523
59,361
-
407,336
AFS
-
226,122
40,621
39,084
-
305,827
-
80,371
-
-
9,690
90,061
5,000
1,287
-
-
-
142,806
5,000
381,110
48,523
59,361
9,690
640,203
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
In April 2020, the Company recognized an impairment loss of $848 (December 31, 2019 – Nil) on a fixed income investment
classified as loans and receivables. Thereafter, in May 2020, the Company received common shares as settlement against this
financial asset and the excess of the carrying value of the financial asset of $4,575 over the fair value of the common shares
received of $3,450 resulted in a further loss of $1,125. As at December 31, 2020, these common shares are Level 3 investments
measured at fair value.
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, 2020 and December 31, 2019 were as follows:
As at December 31, 2020
FVTPL
investments
At carrying
value
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
Carrying
value
Total
investments
At carrying
value
Short-term securities
-
5,000
-
-
5,000
5,000
Government
Corporate
Total bonds
Other loans
Total fixed income
Common shares
Preferred shares
Structured insurance assets
As at December 31, 2019
Government
Corporate
Total bonds
Other loans
Total fixed income
Common shares
Preferred shares
Structured insurance assets
59,320
21,051
80,371
-
80,371
-
-
9,690
90,061
36,649
255,180
291,829
1,287
293,116
47,232
58,848
-
404,196
1,273
7,229
8,502
-
8,502
5,682
3,185
-
17,369
(3)
(876)
(879)
-
(879)
(4,391)
(2,672)
-
(7,942)
37,919
261,533
299,452
1,287
300,739
48,523
59,361
-
413,623
FVTPL
investments
At carrying
value
Other investments
Amortized
cost
Unrealized
gains
Unrealized
losses
Carrying
value
71,838
-
71,838
-
71,838
-
-
10,658
82,496
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
97,239
282,584
379,823
1,287
381,110
48,523
59,361
9,690
503,684
Total
investments
At carrying
value
121,631
176,329
297,960
4,294
302,254
40,621
39,084
10,658
392,617
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, 2023.
Management has reviewed currently available information regarding those investments with a fair value less than carrying value.
During the year ended December 31, 2020, management recognized total impairments of $4,992 (December 31, 2019 – $nil), of
which $4,144 was on AFS investments and $848 on loans and receivables. 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, 2020, the Company has pledged cash
amounting to $1,582 USD and pledged fixed maturity investments amounting to $68,182 USD (December 31, 2019 - $2,576 USD
and $58,981 USD, respectively), under insurance and reinsurance trust arrangements and are therefore not readily available for
general use by the Company.
As at December 31, 2020, the Company pledged $5,592 USD (December 31, 2019 – $311 USD) of fixed income investments as
security deposits to various US state insurance departments to be held in trust for and pledged to various states.
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 amounts due to other parties and expenses of the trusts, are paid. The
commission income for the year ended December 31, 2020 amounted to $1,349 (December 31, 2019 – $1,658), which has been
recorded within Net investment income (see Note 7).
In March 2019, there was a settlement gain of $6,075 USD on the structured insurance assets that arose from a legal action
against the third party, from whom Trisura International purchased the structured insurance assets in 2004.
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, 2020 and December 31, 2019:
As at
Foreign currency contracts
Forwards
Equity contracts
Swap agreements
Interest rate contracts
Swap agreements
Term to maturity
less than one year
from one to five years
from five to ten years
December 31, 2020
December 31, 2019
Fair value
Notional
amount
Asset
Liability Notional
amount
Fair value
Asset
Liability
51,000
-
152
43,700
327
8,112
8,272
-
494
745
4,134
63,246
57
8,329
-
152
-
44,194
-
1,072
59,086
26
4,134
7,940
332
57
152
-
-
43,700
494
-
327
745
-
-
-
-
-
-
-
-
The Company uses foreign currency forward contracts to reduce its exposure to fluctuations in the exchange rates that could arise
from its USD, EUR and GBP denominated investments. The notional amounts of the forwards as at December 31, 2020 are
$32,392 USD (December 31, 2019 – $25,991 USD), €1,669 EUR (December 31, 2019 – €1,636 EUR) and £4,226 GBP (December
31, 2019 – £4,193). The Company also uses swap agreements to mitigate exposure to interest rate on its investment portfolio and
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 (see Note 8).
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, 2020
and December 31, 2019:
As at December 31, 2020
Total fair value
Level 1
Level 2
Level 3
Government
Corporate
Total bonds
Common shares
Preferred shares
Structured insurance assets
Total investments
Derivative financial assets
Derivative financial liabilities
97,239
282,584
379,823
48,523
59,361
9,690
497,397
8,329
(152)
505,574
-
-
-
25,213
48,008
-
73,221
-
-
73,221
97,239
282,584
379,823
12,626
11,060
-
403,509
8,329
(152)
411,686
-
-
-
10,684
293
9,690
20,667
-
-
20,667
As at December 31, 2019
Total fair value
Level 1
Level 2
Level 3
Government
Corporate
Total bonds
Common shares
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
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 US 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, 2020
December 31, 2019
Impact on comprehensive income
(560)
608
(576)
622
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)
For the years ended December 31, 2020 and December 31, 2019, 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 for the years ended December 31, 2020 and the year ended December 31, 2019:
Balance at beginning of year
Unrealized gains (losses)
Purchase of securities
Foreign exchange
Balance at end of year
December 31, 2020 December 31, 2019
11,568
1,891
7,403
(195)
20,667
13,105
(1,092)
119
(564)
11,568
The following tables present quantitative information about the significant fair value inputs utilized by the Company for Level 3
assets:
Structured insurance assets
Private equity investment
Fair value as at
December 31, 2020
Valuation
technique
9,690 Discounted
cash flow
4,832 Discounted
cash flow
Unobservable inputs
Discount rate load (1)
Morbidity rates (2)
Lapse rates (3)
Discount rate
Exit multiple
Range
0.25% - 3.00%
0.00% - 29.00%
1.00% - 3.60%
9%
10x
Private equity investments
6,145 Net asset value (4) n/a
n/a
Structured insurance assets
Fair value as at
December 31, 2019
Valuation
technique
10,658 Discounted
cash flow
Private equity investments
910 Net asset value (4)
Unobservable inputs
Discount rate load (1)
Morbidity rates (2)
Lapse rates (3)
n/a
Range
0.25% - 3.00%
0.00% - 24.50%
1.00% - 3.90%
n/a
(1) The discount rate used by the Company consists of three components:
• 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, 2020, the average morbidity rate was 5.3% corresponding to an average policyholder age of 81 (December 31, 2019 –
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.
(3)
(4) Based on the net asset value of the equity fund and market transactions which approximates the fair value of the investment.
19
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 7 – Net investment income
For the years ended December 31
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 on investments held at FVTPL
Commission income on structured insurance assets
Investment expenses
Other investment income
Net investment income
Note 8 – Net gains
2020
644
175
892
8,272
9,983
1,998
2,806
4,804
12,893
1,349
(1,250)
12,992
27,779
2019
702
764
423
7,818
9,707
1,318
1,708
3,026
2,374
1,658
(522)
3,510
16,243
For the years ended December 31
2020
2019
Net gains (losses) from:
financial instruments:
AFS common shares and income and investment trust units
AFS preferred shares
AFS bonds
derivatives:
swap agreements (1)
Embedded derivatives
Net foreign currency gains
Impairment on investments (see Note 4.2)
Net gains
3,649
1,282
1,746
6,677
2,197
(1,314)
5,882
(4,992)
8,450
(1) Excluding foreign currency contracts, which are reported in the line Net foreign currency gains.
1,052
98
(652)
498
250
-
824
-
1,572
20
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
The following changes have occurred to the claim reserves:
For the year ended December 31, 2020
Direct
Ceded
Net
Unpaid claims, beginning of year
257,880
114,657
143,223
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 year
407,439
(10,169)
20,157
732
418,159
(180,814)
(7,954)
487,271
352,118
(7,023)
715
(213)
345,597
(133,629)
(12,721)
313,904
55,321
(3,146)
19,442
945
72,562
(47,185)
4,767
173,367
For the year ended December 31, 2019
Direct
Ceded
Net
Unpaid claims, beginning of year
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 discount rate
Change in provision for adverse deviation
Total claims incurred
Claims paid
Foreign exchange
Unpaid claims, end of year
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
The unpaid claims and LAE of Trisura Guarantee were discounted to take into account the time value of money using a rate of
2.39% (2019 – 3.0%) 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
(0.64%) to 3.75% (2019 – (0.35%) to 3.9%).
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 this estimation change 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.
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.
21
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 net ultimate claims incurred, including
IBNR and provisions for adverse deviation (“PfAD”), at the end of the year:
Net claims loss development
All prior
years
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
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
10,003
10,211
9,683
9,253
7,564
7,053
6,958
7,090
6,680
6,707
10,463
8,872
7,402
6,845
6,568
7,861
8,102
7,899
8,189
12,349
9,953
6,651
5,648
5,324
5,254
5,179
5,083
14,002
12,363
10,310
9,224
8,934
8,269
9,303
18,997
15,878
14,365
14,421
13,340
12,730
28,378
26,772
26,380
25,826
26,739
21,741
19,059
17,409
16,467
23,138
20,059
19,854
35,784
32,684
53,515
6,707
8,189
5,083
9,303
12,730
26,739
16,467
19,854
32,684
53,515
(6,494)
213
(5,867)
2,322
(4,459)
624
(8,515)
788
(11,579)
1,151
(19,141)
7,598
(12,253)
4,214
(13,601)
6,252
(20,134)
12,550
(17,407)
36,108
6,317
(6)
49
(7)
29
(78)
317
(28)
114
(33)
141
(53)
171
(260)
976
(256)
614
(418)
931
(715)
1,437
(1,299)
2,961
6,360
235
2,561
710
896
1,269
8,314
4,572
6,765
13,272
37,770
Add: Net discounted reserves on life contracts
Add: Trisura Warranty unpaid claims
Total net unpaid claims and LAE
78,137
(3,153)
7,740
82,724
90,058
585
173,367
22
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 10 – Deferred acquisition costs
The following changes have occurred to the deferred acquisition costs for the years ended December 31, 2020 and 2019:
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, 2020
104,197
254,813
(167,898)
(2,922)
188,190
December 31, 2019
63,715
124,742
(83,171)
(1,089)
104,197
December 31, 2020
51,291
163,470
(111,052)
(3,428)
100,281
December 31, 2019
19,137
77,268
(43,845)
(1,269)
51,291
The reinsurers’ share of deferred acquisition costs is referred to as Unearned reinsurance commissions in the Consolidated
Statements of Financial Position.
Net commissions For the years ended
December 31, 2020
December 31, 2019
Commissions expense
Reinsurance commissions
Net commissions expense
Note 11 – Unearned premiums
169,626
(113,711)
55,915
82,923
(45,407)
37,516
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, 2020 or December 31, 2019.
The following changes have occurred in the provision for unearned premiums:
For the year ended December 31, 2020
Unearned premiums, beginning of year
Premiums written
Premiums earned
Foreign exchange
Unearned premiums, end of year
For the year ended December 31, 2019
Unearned premiums, beginning of year
Premiums written
Premiums earned
Foreign exchange
Unearned premiums, end of year
Gross
328,091
926,442
(648,413)
(13,409)
592,711
Gross
182,623
448,262
(298,408)
(4,386)
328,091
Ceded
178,411
684,985
(487,973)
(12,355)
363,068
Ceded
67,519
305,480
(190,445)
(4,143)
178,411
Net
149,680
241,457
(160,440)
(1,054)
229,643
Net
115,104
142,782
(107,963)
(243)
149,680
23
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 12 – Leases
The Company leases office premises for its own use. These leases have terms that range from 4 years to 16 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, 2020, ROU assets of $8,470 (December 31, 2019 – $9,599) are recorded in Capital assets and intangible
assets, along with $5,437 (December 31, 2019 – $4,878) of other Capital assets and intangible assets.
Information about leases for which the Company is a lessee is presented below:
Right-of-use assets
Balance as at January 1
Impact of IFRS 16 adoption
Additions
Depreciation
Foreign exchange
Balance at end of year
Premises
Total
As at December 31, 2020
Office
equipment
13
-
-
(11)
1
3
9,586
-
527
(1,634)
(12)
8,467
9,599
-
527
(1,645)
(11)
8,470
As at December 31, 2019
Office
equipment
-
25
-
(11)
(1)
13
Premises
-
10,033
780
(1,167)
(60)
9,586
Total
-
10,058
780
(1,178)
(61)
9,599
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
December 31, 2020 December 31, 2019
1,566
6,212
2,500
10,278
8,793
1,965
1,656
6,650
2,826
11,132
9,756
1,348
Amounts recognized in Statements of Comprehensive Income
for the years ended
December 31, 2020
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
450
45
5
124
322
40
4
337
24
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 13 – Premiums and accounts receivable, and other assets
As at December 31, 2020 and December 31, 2019, Premiums and accounts receivable, and other assets consists of:
As at
Premiums receivable
Derivative assets
Accrued investment income
Tax recoveries
Prepaid expenses
Miscellaneous assets
December 31, 2020 December 31, 2019
166,017
8,329
2,879
409
317
932
178,883
79,627
1,072
2,537
417
388
2,628
86,669
As at December 31, 2020, Premiums receivable of $166,017 (December 31, 2019 – $79,627) includes an amount of $120,595
(December 31, 2019 – $54,187) related to Trisura Specialty for which there is a reinsurance payable of $129,740 (December 31,
2019 – $60,345).
The Reinsurance premiums payable balance of $151,707 (December 31, 2019 – $80,186) on the Consolidated Statements of
Financial Position reflects $186,382 of reinsurance payable (December 31, 2019 – $84,572), netted against $34,675 (December
31, 2019 – $4,386) of reinsurance recoverable.
Note 14 – Accounts payable, accrued and other liabilities
As at December 31, 2020 and December 31, 2019, Accounts payable, accrued and other liabilities consist of:
As at
December 31, 2020 December 31, 2019
Accrued liabilities
Deposits in trust
Lease liabilities
Share based payment plan
Taxes payable
Investment contract liabilities
Derivatives liabilities
Premium taxes payable and other liabilities
Note 15 – Risk management
15,725
12,140
8,793
5,670
4,558
339
152
9,966
57,343
8,345
11,842
9,756
2,589
3,913
369
-
4,102
40,916
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)
15.1
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, 2020
U.S.
Canada
Other
Canada
December 31, 2019
U.S.
Other
Trisura Guarantee(1)
Trisura Specialty
Trisura International
Gross premiums written
Surety
Corporate insurance
Risk solutions
Fronting
Life
66,081
69,691
137,869
-
-
273,641
5,493
-
-
647,183
-
652,676
-
-
-
-
125
125
57,022
47,253
77,717
-
-
181,992
2,247
-
-
263,911
-
266,158
-
-
-
-
112
112
(1) The operations of Trisura Guarantee comprises Surety, Risk Solutions and Corporate Insurance products underwritten in Canada as well
as the operations of Trisura Warranty, which are grouped with Risk Solutions.
26
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.1
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 operations of Trisura Guarantee include the operations of Trisura Warranty. 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 premiums earned, 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, 2020 and 2019. 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.
Sensitivity factor
5% increase to loss ratio
5% increase to claims
settlement costs
December 31, 2020
December 31, 2019 December 31, 2020
December 31, 2019
Impact on comprehensive income,
before tax
(7,790)
(4,009)
(5,275)
(3,188)
Impact on shareholders’ equity
(5,863)
(3,156)
(3,872)
(2,407)
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, 2020
December 31, 2019
Impact on net income
(987)
1,047
(881)
916
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 15.4(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.
15.2
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.
27
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.2
Credit risk (continued)
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, 2020, $2,171 of premiums
receivable was past due but not considered to be impaired (December 31, 2019 – $2,717).
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’s
reinsurance coverage is well diversified and controls are in place to manage exposure to reinsurance counterparties. 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 to ensure that no single reinsurer represents an undue level of
credit risk. 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.
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, 2020 December 31, 2019
Cash and cash equivalents, and short-term securities
Bonds
Government
Corporate
Other loans
Structured settlements
Premiums receivable
Accrued investment income
Derivative assets
Other assets
141,519
97,239
282,584
1,287
9,690
166,017
2,879
8,329
1,341
710,885
85,905
121,631
176,329
4,294
10,658
79,627
2,537
1,072
3,045
485,098
28
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.2
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
Industrial
Telecom services
Energy
Consumer discretionary
Power and pipelines
Real estate
Consumer staples
Automotive
Utility
Retail
Other
c)
Asset quality
December 31, 2020 December 31, 2019
97,239
90,247
39,260
25,904
23,818
23,594
18,305
16,283
16,060
13,501
6,625
-
10,274
381,110
121,631
64,842
20,187
11,598
23,535
15,762
3,636
8,319
4,797
11,515
3,868
3,588
8,976
302,254
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 (low)
15.3
Liquidity risk
December 31, 2020 December 31, 2019
40,880
84,757
100,659
118,717
36,097
381,110
20,981
-
402,091
43,566
91,156
94,257
56,549
16,726
302,254
11,398
6,299
319,951
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.
29
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.3
Liquidity risk (continued)
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, 2020
Cash and cash equivalents
Investments
Premiums receivable
Other financial assets
Reinsurers’ share of claims liabilities
Financial and insurance assets (1)
Up to 1
year
67,018
66,992
164,601
12,350
177,853
488,814
1 to 5 years Over 5 years
No specific
maturity
Total
-
188,167
1,416
332
126,788
316,703
-
151,230
-
184
9,263
160,677
69,501
97,295
-
-
-
136,519
503,684
166,017
12,866
313,904
166,796 1,132,990
As at December 31, 2019
Up to 1 year
1 to 5 years Over 5 years
No specific
maturity
Total
Cash and cash equivalents,
and short-term securities
Investments
Premiums receivable
Other financial assets
Reinsurers’ share of claims liabilities
Financial and insurance assets (1)
16,398
27,120
76,680
6,864
88,039
215,101
-
-
69,507
85,905
192,487
2,947
48
24,710
220,192
93,306
-
130
1,908
95,344
79,704
-
-
-
149,211
392,617
79,627
7,042
114,657
679,848
(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)
15.3
Liquidity risk (continued)
As at December 31, 2020
Up to 1 year
1 to 5 years Over 5 years
No specific
maturity
Unpaid claims and LAE (2)
Reinsurance premiums payable
Other financial liabilities
Loan payable
Financial and insurance liabilities (3)
220,291
151,707
35,947
11,459
419,404
208,555
-
-
16,096
224,651
54,900
-
-
-
54,900
-
-
12,150
-
12,150
As at December 31, 2019
Up to 1 year
1 to 5 years
Over 5 years
No specific
maturity
Unpaid claims and LAE (2)
Reinsurance premiums payable
Other financial liabilities
Loan payable
Financial and insurance liabilities (3)
120,077
80,186
19,285
-
219,548
92,798
-
-
29,700
122,498
39,792
-
-
-
39,792
-
-
11,875
-
11,875
(2) Undiscounted and excluding PfADs.
(3) Unearned premiums and unearned reinsurance commissions have been excluded as they are not subject to liquidity risk.
Total
483,746
151,707
48,097
27,555
711,105
Total
252,667
80,186
31,160
29,700
393,713
31
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.4 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 dollar 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 foreign currencies. 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 Company manages its currency risk through its investment policy which considers duration of investments held as well as
asset liability matching.
The following table summarizes the net currency exposure of Canadian domiciled entities 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
EUR
GBP
BRL
2020
42,043
2019
24,138
2020
1,661
2019
1,654
2020
4,195
2019
4,370
2020
5,500
(32,392)
9,651
(25,991)
(1,853)
(1,669)
(8)
(1,636)
18
(4,226)
(31)
(4,193)
177
-
5,500
2019
-
-
-
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, 2020
December 31, 2019
EUR
82,894
90,490
(7,596)
Other
2,254
212
2,042
EUR
73,947
76,251
(2,304)
Other
1,406
235
1,171
As at December 31, 2020 and 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 well as loan payable which is denominated in USD.
As at December 31,
Consolidated net assets of:
Trisura International
Trisura Specialty
Total net currency exposure to the USD
Loan denominated in USD
Net currency exposure to the USD
2020
2019
10,252
122,555
132,807
(21,642)
111,165
14,849
83,273
98,122
-
98,122
32
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.4 Market risk (continued)
ii)
Sensitivity to currency risk
As at December 31,
Sensitivity factor
USD investments supporting Canadian domiciled entities
Consolidated net assets of Trisura Specialty
Consolidated net assets of Trisura International
Loan denominated in USD
EUR net assets supporting Trisura International (in USD)
b)
Interest rate risk
Impact on comprehensive income and shareholders’ equity
2020
2019
2020
2019
10% increase in CDN
versus USD
(821)
(11,202)
(1,186)
1,840
160
(7,769)
(1,651)
-
10% decrease in CDN
versus USD
903
12,325
1,305
(2,025)
(176)
8,546
1,815
-
10% increase in USD
versus EUR
543
161
10% decrease in USD
versus EUR
(597)
(177)
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.
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, 2020
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
(34,330)
33,372
(486)
536
(27,741)
33,592
(4,761)
(1,776)
(1) Assumes parallel shift in the yield curve, and all other variables remain constant.
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)
(25,585)
25,582
Structured
insurance asset
Net unpaid
claims
Impact on
comprehensive
income
(507)
557
(22,432)
27,560
(2,487)
(2,575)
(1) Assumes parallel shift in the yield curve, and all other variables remain constant.
33
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
15.4 Market risk (continued)
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)
2020
2019
Impact on net income (1)
3,761
(3,761)
3,102
(3,102)
(1) 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 statement of financial position dates.
(2) Excluding preferred shares.
Note 16 – 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.
The Company’s fronting operations cede the majority of the premium generated through it to reinsurers. As such, Reinsurers’
share of claims liabilities and Reinsurers share of unearned premiums are significant components of the balance sheet, and the
associated credit risk is carefully monitored (see Note 15.2).
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. 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, or are otherwise required to post
acceptable levels of collateral.
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, 2020 and
December 31, 2019.
The following table summarizes the components of Recoverable from reinsurers as at December 31, 2020 and December 31,
2019:
As at
December 31, 2020 December 31, 2019
Reinsurers’ share of claims liabilities (see Note 9)
Reinsurers’ share of unearned premiums (see Note 11)
313,904
363,068
676,972
114,657
178,411
293,068
34
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 17 – Capital assets
The Company’s capital assets consist of the following as at December 31, 2020 and December 31, 2019:
Leasehold improvements
Office equipment
Furniture and fixtures
Note 18 – Intangible assets
Cost
1,581
1,643
1,546
4,770
As at December 31, 2020
Accumulated
depreciation
Carrying
value
As at December 31, 2019
Accumulated
depreciation
Cost
Carrying
value
(739)
(1,104)
(937)
(2,780)
842
539
609
1,990
1,188
1,419
1,103
3,710
(615)
(951)
(860)
(2,426)
573
468
243
1,284
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.
Intangible assets also include state licenses which were acquired as part of the 2019 acquisition for $1,950 USD. These licenses
have indefinite useful lives and are therefore not amortized.
Computer
software
December 31, 2020
Customer
list
Licenses
328
116
(154)
738
-
(148)
2,528
94
-
Computer
software
December 31, 2019
Customer
list
Licenses
332
162
(166)
922
-
(184)
-
2,583
-
Total
3,594
210
(302)
Total
1,254
2,745
(350)
-
-
(55)
(55)
-
-
(55)
(55)
290
590
2,567
3,447
328
738
2,528
3,594
Opening,
carrying value
Additions
Amortization
Foreign
exchange
Closing,
carrying value
Note 19 – Capital management
The Company’s capital is its shareholders’ equity, which consists of common shares, contributed surplus, accumulated retained
earnings 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.
19.1
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, 2020 and December 31, 2019.
35
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
19.1
Regulatory capital (continued)
b)
Trisura Specialty
Trisura Specialty is subject to externally imposed regulatory capital requirements by the Oklahoma Insurance Department as a
Domestic Surplus Line Insurer. As an admitted carrier, through its subsidiary, Trisura Specialty is subject to the various capital
requirements of each state in which it is licensed. A requirement of the regulators is that Trisura Specialty’s Risk Based Capital
exceed certain minimum thresholds as well as Company Action Levels (“CALs”), below which the Company would have to notify
the regulators. As at December 31, 2020 and December 31, 2019, Trisura Specialty was in excess of any CALs of the states in
which it was licensed.
c)
Trisura International
Trisura International is subject to externally imposed regulatory capital requirements in Barbados. As at December 31, 2020 and
December 31, 2019, Trisura International maintained sufficient capital to meet these requirements.
Note 20 – Loan payable
As at December 31, 2020, the Company maintained a five-year revolving credit facility with a Canadian Schedule I bank (the
“Bank”) which allowed for drawings of up to $35,000. On April 1, 2020, the Company’s five-year revolving credit facility was
amended to increase the Company’s borrowing capacity from $35,000 to $50,000. Under this arrangement, the Company could
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 was 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 16, 2020, the Company converted its Canadian dollar denominated loan balance of $29,700 to a loan balance
denominated in US dollars, with the same bank. To do so, $21,642 USD was drawn under the loan to immediately repay the
outstanding loan payable of $29,700. On March 20, 2020, an additional $3,000 was drawn under the credit facility, which was
repaid on June 19, 2020. On December 14, 2020, the Company substituted a portion of its credit facility by borrowing $9,000 USD
through its Prime Brokerage account with the same Schedule I bank. The impact was to slightly lessen the borrowing rate charged.
The substituted portion is callable at the discretion of the bank.
As part of the covenants of the loan arrangement, the Company is required to maintain certain financial ratios, which were fully
met as at December 31, 2020 and December 31, 2019.
For the year ended December 31, 2020, the Company incurred $1,113 of interest expense (December 31, 2019 – $1,361), of
which $663 (December 31, 2019 – $1,039) are related to the loan payable. As at December 31, 2020, the loan balance was
$27,555 (December 31, 2019 – $29,700).
Note 21 – 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, 2020 and December
31, 2019, no non-voting shares were issued and no preferred shares are outstanding.
In May 2020, the Company completed a public offering of 1,289,150 common shares for gross proceeds of $60,397. Concurrent
with the public offering, the Company issued 160,100 common shares to investors on a private placement basis for gross proceeds
of $7,501. The Company incurred costs of $2,416 in commission paid to underwriters as well as $339 of costs directly attributable
to the share issuance, which have been deducted from equity. At December 31, 2020, the net impact of the share issuance is an
increase in common shares of $66,480, net of tax impact of $1,337 related to the share issuance costs.
In December 2019, the Company exercised its right to redeem all 64,000 (in shares) of its issued and outstanding preferred shares,
for $1,600. Holders of the preferred shares were entitled to a cumulative dividend, payable quarterly, at a fixed rate of 6%. During
the year ended December 31, 2020, no dividend payments have been made (December 31, 2019 – $72, at $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 21 – Share capital (continued)
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. At December 31, 2019, 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, 2020
December 31, 2019
Number of
shares
Amount
(in thousands)
Number of
shares
Amount
(in thousands)
Balance, beginning of year
Common shares issued, net of taxes
Balance, end year
8,819,619
1,449,250
10,268,869
219,251
66,480
285,731
6,621,680
2,197,939
8,819,619
163,582
55,669
219,251
The following table shows the preferred shares issued and outstanding:
As at
December 31, 2020
December 31, 2019
Number of
shares
Amount
(in thousands)
Number of
shares
Amount
(in thousands)
Balance, beginning of year
Preferred shares redeemed
Balance, end of year
-
-
-
-
-
-
64,000
(64,000)
-
1,600
(1,600)
-
As at December 31, 2020, the Company did not declare or pay quarterly dividends for each Class A, Series 1, preferred share
(December 31, 2019 – paid four quarterly dividends, each of $0.375 (in dollars)) per share.
Note 22 – 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 income attributable to common shareholders
Weighted-average number of common shares outstanding (in shares)
EPS – basic (in dollars)
2020
32,442
-
32,442
2019
5,094
(96)
4,998
9,732,845
7,213,433
3.33
0.69
Dilutive effect of the conversion of options on common shares (in shares)
159,766
31,076
Diluted weighted-average number of common shares outstanding (in shares)
9,892,611
7,244,509
EPS – diluted (in dollars)
3.28
0.69
37
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 23 – Investment in subsidiary
On May 21, 2020, TIHL, 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 International. This dissolution had no impact on the Consolidated Statements of Financial Position and results
of operations of the Company.
Note 24 – 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 25 – 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 continued to hold an interest in the Company, and as such the Company remained a related party with
Brookfield. The Company occasionally issues insurance contracts to subsidiaries of Brookfield. The Company also invests in
securities of companies which are subsidiaries of Brookfield and invests in 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. The related party designation between the Company and Brookfield ended in October 2020.
The following table shows the impact of transactions with related parties:
Income and expenses reported in:
Total revenues
Operating expenses
Net investment income
Income from dividends and interest
Investment management fee
Assets and liabilities reported in:
Investment in Brookfield securities
25.1
Key management personnel
December 31, 2020 December 31, 2019
1,236
(509)
1,155
-
2,196
(624)
1,286
(4)
not applicable
15,629
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, 2020 and
2019:
Salaries and other employee benefits
Share based payments
December 31, 2020
December 31, 2019
2,725
7,736
2,542
2,029
38
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 26 – Segmented information
The Company has three reportable segments. The operations of Trisura Guarantee comprises Surety, Risk Solutions and
Corporate Insurance products underwritten in Canada as well as the operations of Trisura Warranty. The operations of Trisura
Specialty provides specialty insurance solutions underwritten in the United States. The operations of Trisura International
comprises the Company’s international reinsurance operations.
The following tables show the results for the years ended December 31, 2020 and 2019:
Year ended December 31, 2020
Net premiums earned:
from external customers
inter-segment premiums (1)
Fee income
Net investment income
Net (losses) gains
Total revenues
Net claims
Net expenses
Interest expense
Total claims and expenses
Net income (loss) before tax
Trisura
Guarantee
Trisura
Specialty
Trisura
International
Corporate and
consolidation
adjustments
133,535
-
5,027
7,842
(829)
145,575
(33,762)
(85,367)
(383)
(119,512)
26,063
21,244
-
24,692
3,880
1,596
51,412
(16,216)
(15,108)
(40)
(31,364)
20,048
-
5,905
-
15,594
(683)
20,816
(22,584)
(4,423)
(27)
(27,034)
(6,218)
-
-
-
463
8,366
8,829
-
(8,577)
(663)
(9,240)
(411)
Total
154,779
5,905
29,719
27,779
8,450
226,632
(72,562)
(113,475)
(1,113)
(187,150)
39,482
(1) For the year ended December 31, 2020, Trisura International earned inter-segment premiums of $5,905 (December 31, 2019 – $nil)
from Trisura Specialty. The inter-segment ceding arrangement was entered into at prevailing market rates.
Year ended December 31, 2019
Net premiums earned
Fee income
Net investment income
Settlement from structured
insurance assets
Net gains (losses)
Total revenues
Net claims
Net expenses
Interest expense
Total claims and expenses
Net income (loss) before tax
Trisura
Guarantee
Trisura
Specialty
Trisura
International
Corporate and
consolidation
adjustments
100,510
4,246
7,796
-
992
113,544
(24,579)
(67,910)
(265)
(92,754)
20,790
6,859
7,960
2,112
-
(171)
16,760
(4,333)
(8,237)
(41)
(12,611)
4,149
135
-
6,306
8,077
549
15,067
(21,024)
(2,506)
(16)
(23,546)
(8,479)
-
-
29
-
202
231
-
(4,453)
(1,039)
(5,492)
(5,261)
Total
107,504
12,206
16,243
8,077
1,572
145,602
(49,936)
(83,106)
(1,361)
(134,403)
11,199
39
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 26 – Segmented information (continued)
The following table shows Loan payable of $27,555 included with the liabilities in Corporate and consolidation adjustments at
December 31, 2020 (December 31, 2019 – $29,700):
As at December 31, 2020
Assets
Liabilities
As at December 31, 2019
Assets
Liabilities
Note 27 – Income taxes
Trisura
Guarantee
541,603
431,858
Trisura
Guarantee
424,009
333,681
Trisura
Specialty
1,021,020
864,983
Trisura
International
121,347
108,295
Trisura
Specialty
444,763
336,608
Trisura
International
104,169
85,766
Corporate and
consolidation
adjustments
22,762
11,732
Corporate and
consolidation
adjustments
5,452
32,009
Total
1,706,732
1,416,868
Total
978,393
788,064
Deferred taxes related to:
Loss carry-forwards and other
Net unpaid claims and LAE
Investments – unrealized gains and losses
Capital, intangible and other assets, net
Less deferred taxes related to:
Investments – unrealized gains and losses
Capital, intangible and other assets, net
Deferred income taxes
Reported in:
Deferred tax assets
Income tax (recovery) reported to net income
Income tax expense (recovery) reported to
other comprehensive income
Income tax (recovery) reported to
retained earnings
Statement of
financial position
Statement of
comprehensive income
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
4,393
988
88
4,295
9,764
-
(1,187)
(1,187)
8,577
8,577
-
-
-
139
1,369
-
100
1,608
(148)
-
(148)
1,460
1,460
-
-
-
(4,257)
391
(88)
(4,416)
(8,370)
(148)
1,250
1,102
(7,268)
-
(6,992)
1,061
(1,337)
35
(678)
49
(61)
(655)
-
-
-
(655)
-
(525)
(130)
-
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, 2020
and December 31, 2019 are recoverable.
40
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 27 – Income taxes (continued)
The following shows the major components of income tax expense for the years ended December 31, 2020 and 2019:
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 losses 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
Year ended December 31
2019
2020
13,956
76
14,032
(6,992)
7,040
536
(1,024)
1,061
573
6,624
6
6,630
(525)
6,105
1,308
(15)
(130)
1,163
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 Income for the years ended December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Income before income taxes
Statutory income tax rate
Variations due to:
Permanent differences
International operations subject to different tax rates
Unrecognized tax (gain) loss
Rate differentials:
Current rate versus future rate
Change in future rate
True up
Income tax expense
39,482
26.5%
10,463
(807)
573
(3,303)
36
2
76
7,040
11,199
26.5%
2,968
(625)
2,905
835
2
14
6
6,105
On February 5, 2020, the Company obtained an Advance Income Tax Ruling from the Canada Revenue Agency on a strategy to
utilize accumulated tax losses. The strategy was implemented on February 20, 2020. As at December 31, 2020, the Company
has unused tax losses of $6,615 (December 31, 2019 – $11,669) which will expire in the following years:
December 31, 2020
2038
2039
3,278
3,337
6,615
41
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
Note 28 – Share based compensation
28.1
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, 2020 and December 31, 2019:
December 31, 2020
December 31, 2019
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
242,235
-
91,445
333,680
26.38
-
50.23
32.91
162,000
(50,000)
130,235
242,235
24.96
25.66
27.86
26.38
As at December 31, 2020, 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
50.23
28.65
29.24
27.08
25.66
24.36
91,445
10,000
40,000
80,235
25,000
87,000
9.15
8.63
8.21
8.16
7.88
6.64
-
2,000
8,000
16,047
10,000
52,200
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, 2020, 88,247 (December 31, 2019 – 39,800) equity-based stock options were vested. As at December 31,
2020, the Company had recorded $1,544 (December 31, 2019 – $815) 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, 2020, the Company
recorded $729 (December 31, 2019 – $502) 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. Inputs to the model include expected volatility, option life
and risk free rate. Volatility estimate was based on the historical volatility of the Company. The weighted average fair value of
stock options issued in 2020 at the measurement date was $10.15 (in dollars) (December 31, 2019 – $6.78 (in dollars)).
42
TRISURA GROUP LTD.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except as otherwise noted)
28.2
Cash-settled stock options
As at December 31, 2020, 68,870 options were outstanding which had been issued to officers of the Company by the board of
directors as part of a cash-settled share based payment plan (December 31, 2019 – 120,465), with a vesting period of 20% per
year over five years, and an expiration date of ten years. As at December 31, 2020, 4,186 options were vested (December 31,
2019 – 36,093). As at December 31, 2020, the Company had recorded $3,435 (December 31, 2019 – $1,771) in liabilities related
to the options in the Consolidated Statements of Financial Position. For the year ended December 31, 2020, the Company
recorded $5,723 (December 31, 2019 – $1,350) of expense related to the options, in Operating expenses, which includes one
exercise transaction of 56,000 options with weighted average price of $95.15 (in dollars) per share. The fair value of the options
issued were determined using the Black-Scholes option pricing model. Inputs to the model include expected volatility, option life
and risk free rate. Volatility estimate was based on the historical volatility of the Company. As at December 31, 2020, the weighted
average fair value of share options issued was $65.89 (in dollars) (December 31, 2019 – $19.97 (in dollars)).
28.3
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, 2020, 25,091 (December 31, 2019 – 20,312) 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,
2020 (in units)
2019 (in units)
Opening balance
Granted during the year
Ending balance
20,312
4,779
25,091
11,261
9,051
20,312
As at December 31, 2020, no units had been exercised (December 31, 2019 – nil) and $2,235 (December 31, 2019 – $818) had
been recorded as liabilities (see Note 14). The liability was measured based on the fair value of the common shares of the
Company at December 31, 2020. For the year ended December 31, 2020, the Company recorded $1,396 (December 31, 2019 –
$499) of expense related to the DSUs in Operating expenses.
28.4
Equity-settled restricted share units (“RSUs”)
On February 21, 2020, the Company awarded certain employees RSUs based on the fair value of the Company’s common shares
at the grant date. These RSUs will typically vest over three years, however in some instances the vesting period may differ.
The following table shows the movement in the number of RSUs issued during the year ended December 31, 2020:
For the years ended December 31,
2020 (in units)
2019 (in units)
Opening balance
Granted during the year
Ending balance
-
8,239
8,239
-
-
-
As at December 31, 2020, no units had vested. For the year ended December 31, 2020, $241 (December 31, 2019 – $nil) had
been recorded as expense related to the RSUs in Operating expenses. For the year ended December 31, 2020, a share reserve
to contributed surplus of $212 (December 31, 2019 – $nil) was recorded which is offset by an adjustment to contributed surplus
related to the vesting of stock options granted of $729 (December 31, 2019 – $502).
Note 29 – Subsequent event
On January 1, 2021, 25,000 stock options were granted under the existing stock option plan, with the standard five year vesting
period, and an exercise price of $87.94 per share.
43
CORPORATE OFFICE
Bay Adelaide Centre
333 Bay Street, Suite 1610
Toronto, Ontario
M5H 2R2
Telephone:
Facsimile:
(416) 214-2555
(416) 214-9597
REGISTRAR AND TRANSFER AGENT
AST Trust Company (Canada)
P.O. Box 700, Station B
Montreal, Quebec
H3B 3K3
Telephone:
(416) 682-3860 or
toll free within North America
(800) 387-0825
(888) 249-6189
https://www.astfinancial.com
inquiries@astfinancial.com
Facsimile:
Website:
E-mail:
EXCHANGE LISTING
TSX Stock Symbol: TSU
CORPORATE INFORMATION
DIRECTORS
George Myhal1
Chair of the Board
Paul Gallagher2
Corporate Director
Barton Hedges3
Corporate Director
Robert Taylor
Corporate Director
Greg Morrison
Corporate Director
David Clare
Corporate Director
1. Chair of the Governance and Compensation Committee
2. Chair of the Audit Committee
3. Chair of the Investment and Risk Committee
OFFICERS
David Clare
President and Chief Executive Officer
Chief Investment Officer
David Scotland
Chief Financial Officer
James Doyle
Chief Risk Officer
Chris Sekine
President and Chief Executive Officer
Trisura Guarantee Insurance Company
Michael Beasley
President and Chief Executive Officer
Trisura Specialty Insurance Company