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18. CAPITAL MANAGEMENT

Management develops the capital strategy for the Company and supervises the capital management processes. The Board of Directors is responsible for overseeing management’s compliance with the capital management policies. As a federally regulated property and casualty insurance company, the Company’s capital position is monitored by OSFI. OSFI evaluates the Company’s capital adequacy through the Minimum Capital Test (“MCT”), which measures available capital against required risk-weighted capital. Available capital comprises total equity plus or minus adjustments prescribed by OSFI. Capital required is calculated by applying risk factors to the assets and liabilities of the Company. As at the reporting date, the Company’s MCT ratio of 276.1% significantly exceeds the minimum capital ratio of 150% required by OSFI.

Management actively monitors the MCT and the effect that external and internal actions have on the capital base of the Company. In particular, management determines the effect on capital before entering into any significant transactions to ensure that policyholders are not put at risk through the depletion of capital to unacceptable levels. The Board of Directors reviews the MCT on a quarterly basis. In accordance with regulatory requirements and the Company’s capital management policies, the Board of Directors has set internal targets at levels higher and more stringent than OSFI’s minimum requirements. Management also conducts its own risk solvency assessment on at least an annual basis and provides regular updates to its Management Risk Committee, the Risk Review Committee as well as the Board of Directors.

Reinsurance is also used to protect the Company’s capital level from large losses, including those of a catastrophic nature, which could have a detrimental impact on capital. The Company has adopted policies that specify tolerance for financial risk retention. Once the retention limits are reached, as disclosed in note 9, reinsurance is utilized to cover the excess risk.

On at least an annual basis, the Company performs stress testing, including Dynamic Capital Adequacy Testing, on the Company’s capital position to ensure that the Company has sufficient capital to withstand a number of significant adverse scenarios.