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As a mutual company with limited access to external sources of capital, we have adopted a capital management policy intended to ensure sufficient capital is available to protect us and our policyholders from adverse events. As a federally-regulated P&C insurance company, our capital position, along with that of our insurance subsidiaries, is monitored by the Office of the Superintendent of Financial Institutions Canada (“OSFI”). OSFI evaluates our financial strength primarily through the MCT, which measures available capital against required risk-weighted capital.

Available capital comprises total equity subject to adjustments prescribed by OSFI. Capital required is calculated by applying risk factors to certain assets and liabilities. As at December 31, 2016, our regulatory capital significantly exceeded the supervisory minimum MCT requirement of 150% required by OSFI, as well as a higher and more stringent internal target established in our capital management policy.

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

Figure 18 shows our MCT ratio as at December 31.

2016 MCT Ratio
Figure 18
  2016 2015
MCT 276.1% 285.2%

Figure 19 shows our regulatory capital position as at December 31. Capital available and capital required included in the figure below are determined in accordance with rules prescribed by OSFI.

2016 Regulatory Capital Position
Figure 19
(in millions of dollars, except as otherwise noted) 2016 2015
Capital available 1,601.6 1,617.0
Capital required 580.1 567.1
MCT % 276.1% 285.2%
Excess capital at 175% 586.4 624.7
Excess capital at 200% 441.4 482.9

We continue to be in a strong position from a solvency standpoint. We regularly monitor our MCT ratio, the results of our annual dynamic capital adequacy stress testing, and periodic stress testing, to ensure that a strong regulatory capital position is maintained and take corrective actions as necessary. Reinsurance is also used to protect our capital from large losses, including those of a catastrophic nature, which could have a detrimental impact on capital. We have formal policies that specify tolerance for financial risk retention. Once the retention limits are reached, reinsurance is utilized to cover the excess risk.

We also have intercompany reinsurance agreements (the “Agreements”) in place, which results in each insurance company subsidiary reporting the same combined ratio. The Agreements are supported by documented agreements between each of the companies, and the cash flows resulting from the arrangement are settled on a monthly basis. The Agreements allow the impact of any insurance losses to be spread across each insurance company subsidiary, enabling each subsidiary to maintain a strong capital position without the need to move capital via dividends or capital injections. Further supporting the Agreements, the insurance companies have pooled all of their invested assets into a partnership, The Economical Insurance Group Investment Partnership. The vast majority of invested assets of the companies are held in the partnership with each company owning a share of the partnership generally approximating to its participation in the Agreements described above.

Own Risk and Solvency Assessment (“ORSA”)

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

We integrate the ORSA with our enterprise risk management framework, enterprise risk management policies, risk assessment, management reporting, and decision-making processes. Our Board of Directors, Risk Review Committee, and Management Risk Committee provide oversight and review of the ORSA, challenging assumptions and results to ensure they are considered appropriate in the circumstances.

We develop the ORSA by reviewing our key risks and identifying key risk indicators, quantitative risk sensitivity and/or stress tests and analyses, which could help relate the key risks to capital requirements. This process includes thoroughly assessing OSFI’s methodology for relating risks to capital as presented in OSFI’s 2015 MCT guideline, and determining its appropriateness to our risk profile. As the regulatory method has been developed with consideration to the entire industry, some capital factors are more suitable than others in addressing our risks. Depending on the risk, the regulatory approach is validated and accepted, modified to our circumstances, or a new methodology is developed. The output of this effort is the relation of risks to ORSA capital requirements using both quantitative and qualitative methods in a deterministic capital model. Stress testing is then utilized to assess the resiliency of our capital under a range of adverse conditions, including extreme scenarios. The ORSA is integrated into the budgeting and planning process to determine our ability to meet internal and regulatory capital targets in the future, and to identify contingency plans and procedures should capital levels threaten to fall below warning levels.

After reviewing the results of the most recent ORSA and the corresponding ORSA report, which documented the ORSA process, methodology and capital model, we are satisfied that we have sufficient capital to maintain solvency based on our risk profile.


On October 21, 2016, A.M. Best reaffirmed our A- (Excellent) financial strength rating and “a-” issuer credit rating. By extension, Waterloo Insurance Company (branded as Economical Select) had these same ratings reaffirmed. The ratings of A- (Excellent) and “a-” respectively provide further reinforcement of our financial strength. The outlook for all ratings is stable.


The liquidity requirements of our business are met primarily by funds generated by insurance operations and investment returns. Cash provided from these sources normally exceeds cash requirements to meet claim payments and operating expenses.

As at December 31, 2016, we have $189.6 million (2015: $89.0 million) of cash and cash equivalents. We also have a highly liquid investment portfolio comprising actively traded securities including: Canadian fixed income investments issued or guaranteed by domestic governments, investment-grade corporate bonds, publicly-traded Canadian and foreign equities, and a foreign equity pooled fund. We believe our internal resources will provide sufficient funds to fulfil cash requirements during the next twelve months and to satisfy all regulatory capital requirements. Adherence to the liquidity policy seeks to ensure that we have sufficient cash and highly liquid resources to meet our financial obligations, to support our future growth initiatives, and that excess cash is appropriately invested.

We have no outstanding debt other than bank overdraft operating lines and trade payables.

Figure 20 provides a summary of cash flows for the year ended December 31.

2016 Summary of Cash Flows
Figure 20
(in millions of dollars, except as otherwise noted) 2016 2015 $ Change
Operating activities
Cash provided by operating activities 26.9 119.2 Loss: (92.3)
Investing activities
Investments sold, net of investments purchased 285.4 Loss: (80.3) 365.7
Commercial loans advanced, net of commercial loans repaid Loss: (60.1) 7.6 Loss: (67.7)
Other assets purchased Loss: (92.3) Loss: (45.3) Loss: (47.0)
Business acquisitions Loss: (15.9) (1.3) (14.6)
Net increase (decrease) in cash and cash equivalents, and restricted cash 144.0 Loss: (0.1) 144.1

We generated positive cash flows from operations, although they were lower than the prior year, primarily due to an increase in claims paid, costs associated with the replacement of our personal lines policy administration system, and the development and launch of Sonnet, including building the supporting infrastructure, and increased staff costs to support our growth initiatives. These were partially offset by an increase in premiums collected and lower income taxes paid. Cash flow provided by investing activities was higher in 2016 due to investments sold to fund our infrastructure and operational investments, to issue commercial loans to broker partners, and to purchase an ownership interest in a broker in January 2016.