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Audit Committee Mandate

This mandate provides terms of reference for the Audit Committees of each of Economical Mutual Insurance Company (“Economical”), The Missisquoi Insurance Company, Perth Insurance Company, Waterloo Insurance Company, Petline Insurance Company and Sonnet Insurance Company (collectively the “Companies” and individually the “Company”).

Purpose

The Company’s Board of Directors (the “Board”) has established the Audit Committee (the “Committee”) to assist the Board in fulfilling its oversight responsibilities by gaining and maintaining reasonable assurance in relation to:

  • the integrity of the Company’s financial statements and related disclosure provided to members, regulators and others;
  • the qualifications, independence and appointment by the members of the Company of a firm of chartered accountants as the external auditor of the Company;
  • the design, implementation and evaluation of internal controls over financial reporting and disclosure controls;
  • the performance of the Company’s internal audit function and external auditor; and
  • the additional matters described herein or as may be delegated to the Committee by the Board from time to time.

Members and Conduct

The Board shall appoint a minimum of three directors to be members of the Committee. The members of the Committee will be selected by the Board on the recommendation of the Corporate Governance Committee. Each year, the Board will appoint one member of the Committee to serve as chair of the Committee. If, in any year, the Board does not appoint a chair, the incumbent chair will continue in office until a successor is appointed.

All of the members of the Committee will meet the criteria for independence referred to in the Board mandate. In addition, every member of the Committee will be financially literate within the meaning of Canadian securities legislation and stock exchange rules. Members have a duty to immediately notify the chair of the Board if he or she ceases to meet the qualifications for Committee membership for any reason.

Any member may be removed and replaced at any time by the Board, and will automatically cease to be a member as soon as the member ceases to meet the qualifications set out above. The Board will fill vacancies on the Committee by appointment from among qualified members of the Board on the recommendation of the Corporate Governance Committee. If a vacancy exists on the Committee, the remaining members will exercise all of its powers so long as there is a quorum.

The Committee shall conduct itself in accordance with the committee operating procedures prescribed by the Board from time to time. At least quarterly the Committee shall meet, at the Committee’s discretion, in separate in camera sessions with each of the appointed actuary, external auditor, the internal auditor and the CFO. In camera meetings with the CEO may also be requested at the Committee’s discretion.

This mandate does not impose on any Committee member a standard of care or diligence that is in any way more onerous or extensive than the standard of care applicable to the Company’s directors generally.

Specific Responsibilities

The Committee is responsible for performing the duties set out below as well as any other duties delegated to the Committee by the Board from time to time, bearing in mind the duties required of an audit committee by any exchange upon which securities of the Company are traded, or any governmental or regulatory body exercising authority over the Company, as are in effect from time to time (collectively, the “Applicable Requirements”).

Appointment, engagement and review of the external auditor

The external auditor is ultimately accountable to the Committee and reports directly to the Committee. Accordingly, the Committee will directly oversee and be responsible for the Company’s relationship with each external auditor engaged for the purpose of preparing or issuing an external auditor’s report or performing other audit, review or attest services for the Company. Specifically, the Committee will:

  • use its best efforts to resolve any disagreements between management and the external auditor regarding financial reporting;
  • at least annually, discuss with the external auditor its internal independence and quality control procedures, such matters as are required by applicable auditing standards to be discussed by the external auditor with committee, and any material issues raised by the most recent peer review;
  • select, evaluate and recommend to the Board the external auditor to be proposed for appointment or reappointment, as the case may be, by the Company’s members and, where appropriate, recommend to the Company’s members that the external auditor be removed from office;
  • prior to recommending the external auditor’s appointment or reappointment:
    • obtain reasonable assurance that the firm possesses and will make available to the Company the personnel required to efficiently, cost-effectively and expertly execute its engagement with the Company;
    • review the independence, experience, qualifications and performance of the external auditor, including the lead audit partner,
    • consider whether the external auditor’s quality controls are adequate and the external auditor’s provision of any permitted non-audit services is compatible with maintaining its independence;
  • review and approve the audit plans, including proposed scope of the audit, the proposed areas of special emphasis to be addressed in the audit, the materiality levels which the external auditor proposes to employ, and any material changes to such plan, as well as the external auditor’s engagement letter, fee proposals and engagement terms;
  • oversee and regularly assess the quality of the work of the external auditor in preparing or issuing an audit or other report in respect of audit, review or attest services for the Company; and
  • annually review the effectiveness of the external audit process and report the Committee’s findings to the Board.

Oversight and review of the internal auditor

The Committee will oversee the Company’s relationship with each internal auditor engaged for the purpose of providing services for the Company. Specifically, the Committee will:

  • use its best efforts to resolve any disagreements between management and the internal auditor regarding control expectations;
  • at least annually, discuss with the internal auditor its internal independence and quality control procedures and any material issues raised by the most recent peer review;
  • obtain reasonable assurance that the firm possesses and will make available to the Company the personnel required to efficiently, cost-effectively and expertly execute its engagement with the Company;
  • review the independence, experience, qualifications and performance of the internal auditor, including the lead audit partner;
  • consider whether the internal auditor’s quality controls are adequate and the internal auditor’s provision of any permitted non-audit services is compatible with maintaining its independence;
  • review and approve annually the Internal Audit Charter and the proposed scope of the internal auditor’s work, including the proposed areas of special emphasis to be addressed, as well as the internal auditor's fee proposals;
  • review with the internal auditor any significant reports to management prepared by the internal auditor, management’s responses thereto, and any problem or difficulty the internal auditor may have encountered in connection therewith including, without limitation, any restrictions on the scope of activities or access to required information;
  • oversee and regularly assess the quality of the work of the internal auditor in preparing or issuing an audit or other report in relation to the Company;
  • regularly meet with the internal auditor to discuss the effectiveness of the internal control procedures established for the Company;
  • annually review the effectiveness of the internal audit process and report the Committee’s findings to the Board;
  • appoint an internal auditor; and
  • where appropriate and in conjunction with management, remove the internal auditor from office.

Confirmation of auditor independence

At least annually, and before the external auditor issues its report on the annual financial statements, the Committee will:

  • obtain from the Company’s external auditor a written report in relation to the Company’s most recently completed financial year
    1. listing all fees paid by the Company or its affiliate(s) to the external auditor or its affiliate(s); and
    2. describing all relationships of any kind between the external auditor or its affiliate(s) and the Company or its affiliate(s);
       
  • obtain written confirmation from the external auditor that it is objective within the meaning of the Rules of Professional Conduct/Code of Ethics adopted by the provincial institute or order of Chartered Professional Accountants to which it belongs and is an independent public accountant within the meaning of the Independence Standards of the Chartered Professional Accountants of Canada (“CPA Canada”);
  • obtain written confirmation from the internal auditors as to its independence in relation to the Company and its affiliates;
  • discuss with the internal auditors and external auditor any disclosed relationships or services that may affect their respective objectivity and independence;
  • obtain confirmation that the Board and the Committee, and not management, are the clients of the external auditor in relation to the audit services they provide to the Company; and
  • satisfy itself that management has placed no restrictions on the scope or extent of the internal or external auditors’ audit examinations or reviews or the internal or external auditors’ reporting of their respective findings to the Board or the Committee.

At least every three years, the company will review and approve the Company’s hiring policies for hiring partners and employees and former partners and employees of the present and any former external auditor of the Company.

Pre-approval of non-audit services

The Committee must pre-approve any non-audit service to be provided to the Company or any of its subsidiaries by the Company’s external auditors or the external auditors of any of the Company’s subsidiaries, provided that it will not approve any service that is prohibited under the rules of the Canadian Public Accountability Board, the Independence Standards of the CPA Canada, or Applicable Requirements.

The Committee will establish a written policy for the pre-approval of all non-audit services to be provided to the Company and its subsidiaries by the external auditor and will review the policy periodically. In addition, the Committee may delegate to one or more of its members the authority to pre-approve the appointment of the external auditor for any non- audit service to the extent permitted by applicable law, provided that any pre-approvals granted pursuant to such delegation shall be reported to the full Committee at its next scheduled meeting.

The Committee shall be informed by management of each non-audit service provided to the Companies in accordance with the pre-approval policy.

Audited financial statements — Corporate

The Committee will gain reasonable assurance as to whether the audited financial statements of the Company (including all returns prescribed by the Insurance Companies Act (Canada) (the “Act”) present fairly, in all material respects, the financial position of the Company, the results of its operations and its cash flows in accordance with International Financial Reporting Standards as adopted by the International Accounting Standards Board (“IFRS”). Specifically, the Committee will:

  • review the Company’s financial statements with management, the appointed actuary and the external auditor;
  • assess the reasonableness, and the effect upon the Company’s financial position and the results of the Company’s operations, of
    • significant estimates, accruals and provisions employed by management in preparing the current year comparative financial statements of the Company, and
    • the aggregate amount of all significant estimates, accruals and provisions employed by management in preparing the current year comparative financial statements of the Company;
  • review all unresolved items identified by the external auditor in conducting its audit;
  • review the critical accounting and other significant estimates and judgments underlying the financial statements;
  • review any material effects of regulatory accounting initiatives or off-balance sheet structures on the financial statements, including requirements relating to complex or unusual transactions, significant changes to accounting principles and alternative treatments under IFRS;
  • review any material changes in accounting policies and any significant changes in accounting practices and their impact on the financial statements;
  • review management’s report on the effectiveness of internal controls over financial reporting;
  • review the factors identified by management as factors that may affect future financial results;
  • obtain confirmation from the external auditor as to:
    • its views on the accounting policies, practices, estimates, judgments or disclosure practices employed in preparing the Company’s financial statements, including any significant changes from the prior year and the degree of consistency relative to those employed by others in the Canadian property and casualty insurance industry;
    • immaterial items in the Company’s financial statements of which it is aware that are treated in a manner which would have to be changed if such items became material in future years, or
    • whether there is any accounting principle, policy, practice, estimate, judgment or disclosure practice employed in preparing the Company’s financial statements of which it is aware that is not in accordance with IFRS but the use of which is justified on the basis of immateriality;
  • in connection with the review of the annual audited financial statements, obtain a report from the external auditor comparing (i) the extent of the external auditor’s reliance on the Company’s internal financial controls in auditing the current year comparative financial statements of the company to (ii) the extent of the external auditor’s reliance on the Company’s internal financial controls in auditing the preceding year’s financial statements;
  • review at least quarterly with management, the external auditor and the Company’s legal counsel all material non-claims litigation or other contingencies affecting the Company to gain reasonable assurance that all such claims and contingencies which could have a material effect on the financial position or results of operations of the Company have been reflected to the extent appropriate in the Company’s financial statements;
  • obtain from management appropriate representations relating to the Company’s financial statements; and
  • review any other matters, related to the financial statements, that are brought forward by the auditors or management, or which are required to be communicated to the Committee under accounting policies, auditing standards or Applicable Requirements.

Audited financial statements — pension plan

The Committee will gain reasonable assurance as to whether the audited financial statements of the Company’s defined benefit pension plan(s) (the “Plan”) present fairly, in all material respects, the financial position of the Plans in accordance with Part IV of the CPA Canada’s Handbook (the “CPA Handbook”) and applicable pension legislation. Specifically, the Committee will:

  • review the Plan’s financial statements with management and the Plan’s external auditor;
  • assess the reasonableness, and the effect upon the Plan’s financial position, of
    • each significant estimate, accrual and provision employed by management in preparing the Plan’s financial statements, and
    • the aggregate amount of all significant estimates, accruals and provisions employed by management in preparing the Plan’s financial statements;
  • review all unresolved items identified by the external auditor in conducting its audit;
  • obtain confirmation from the external auditor as to:
    • its views on the accounting policies, practices, estimates, judgments or disclosure practices employed in preparing the Plan’s financial statements, including any significant changes from the prior year;
    • immaterial items in the Plan’s financial statements of which it is aware that are treated in a manner which would have to be changed if such items became material in future years, or
    • whether there is any accounting principle, policy, practice, estimate, judgment or disclosure practice employed in preparing the Plan’s financial statements of which it is aware that is not in accordance with the CPA Handbook but the use of which is justified on the basis of immateriality; and
  • obtain from management appropriate representations relating to the Plan’s financial statements.

Review of other financial information

The Committee will:

  • before the Company publicly discloses such information, review the Company’s interim unaudited and annual audited financial statements and related management’s discussion and analysis with management and the external auditor;
  • review each management’s discussion and analysis to gain reasonable assurance that the statements and disclosures made therein are consistent with the Committee’s knowledge of the Company’s operations, financial condition and performance;
  • obtain from the external auditor their views on whether the financial information included in each management’s discussion and analysis is consistent with the related current year comparative financial statements of the Company;
  • review earnings press releases and other press releases containing financial information based on the Company’s interim and annual financial statements prior to their release. The Committee will also review the manner in which the Company uses references to “pro forma”, “adjusted” and other information and metrics that are not defined by generally accepted accounting principles in such press releases and financial information. Such review may consist of a general discussion of the types of information to be disclosed or the types of presentations to be made;
  • review all other financial statements of the Company that require approval by the Board before they are released to the public, including, without limitation, financial statements for use in prospectuses or other offering or public disclosure documents, financial statements required by regulatory authorities, and any other material financial disclosure, including financial guidance provided to analysts, rating agencies or otherwise publicly disseminated;
  • review all issues and statements related to a change of the auditor and the steps planned by management for an orderly transition; and
  • if advisable, approve and recommend for Board approval such financial statements, reports, management’s discussion and analysis, press release and/or other public disclosure.

Policy liabilities

For the purpose of ensuring that the Company’s policy liabilities are fairly stated and that the present and future solvency of the Company is regularly assessed, the Committee shall:

  • annually review with the external auditors the audit work carried out and their conclusions as to the adequacy of the Company’s policy liabilities and consistency with the methodology and practices of the prior year;
  • annually monitor the work of the appointed actuary of the Company through review of the reports of the appointed actuary, including the report on expected future financial condition, and meet with him or her to discuss the Company’s annual statement and those portions of the annual return filed with the Office of the Superintendent of Financial Institutions Canada pursuant to the Act prepared by the appointed actuary;
  • appoint, every three years, an independent actuary to review and opine on the adequacy of the assumptions and processes used by the Company’s appointed actuary; 
  • review every three years, the results of the report of the independent actuary on the full review of appointed actuary report for OSFI and take appropriate action in relation to any recommendations. In other years, review the results of the report of the independent actuary on the limited review of the appropriateness and extent of internal and external material changes affecting the valuation of policy liabilities and take appropriate action in relation to any recommendations; and
  • review every three years, the results of the report of the independent actuary on the full review of DCAT report and take appropriate action in relation to any recommendations. In off years, review the results of the report of the independent actuary on the limited review of appropriateness of the DCAT scenarios and take appropriate action in relation to any recommendations.

Oversight of internal controls and disclosure controls and procedures

The Committee will:

  • require management to implement and maintain appropriate systems of internal controls in accordance with Applicable Requirements, including internal controls over financial reporting and disclosure and to review and evaluate these procedures;
  • at least annually, or more frequently as required in the circumstances, consider and review with management and the auditors:
    1. the effectiveness of, or weaknesses or deficiencies in: the design or operation of the Company’s internal controls (including computerized information system controls and security); the overall control environment for managing business risks; and accounting, financial, disclosure and non-financial controls;
    2. any significant changes in internal controls over financial reporting that are disclosed, or considered for disclosure, including those in the Company’s periodic regulatory filings;
    3. the Company’s fraud prevention and detection program, including deficiencies in internal controls that may impact the integrity of financial information, or may expose the Company to other significant internal or external fraud losses;
    4. any related significant issues and recommendations of the auditors together with management’s responses thereto, including the timetable for implementation of recommendations to correct weaknesses in internal controls over financial reporting and disclosure controls;
       
  • on a timely basis, consider and review with management and the auditors:
    1. the impact of any identified weaknesses in internal controls; and
    2. any material issues raised by any inquiry or investigation by the Company’s regulators affecting the Company’s financial disclosure;
       
  • periodically review with senior management the controls and procedures that have been adopted by the Company to confirm that financial information extracted or derived from the financial statements and other material information about the Company and its subsidiaries that is required to be publicly disclosed under applicable law or stock exchange rules is so disclosed in an accurate and timely manner;
  • gain reasonable assurance as to the quality, timeliness and accuracy of all public disclosure of financial information of the Company and that it is complete, fairly represents material information and complies with all applicable laws and stock exchange rules;
  • review reports to management by the internal and/or external auditors with respect to weaknesses or deficiencies in Internal Financial Controls, and review the adequacy and appropriateness of management’s responses to such external auditors’ recommendations; review any special audit steps adopted in light of material control deficiencies; and
  • require timely reports from management and the internal and external auditors on any indication or detection of fraud, including the corrective activity undertaken in respect thereto.

Taxation matters

The Committee will review with senior management the status of significant taxation matters of the Company.

Relations with senior management

Committee members will meet privately with senior management of the Company periodically and as frequently as the Committee feels is appropriate to fulfil its responsibilities, which will not be less frequently than annually, and to discuss any areas that are of concern to the Committee or senior management.

Other matters

The Committee will:

  • review, and upon agreement approve, the statement of mandatory responsibility and authority of the CFO concerning oversight functions, or any changes thereto;
  • review, and upon agreement approve, the statement of mandatory responsibility and authority of the Chief Actuary concerning oversight functions, or any changes thereto;
  • annually assess the sufficiency of the Company’s accounting and financial personnel;
  • review such investments and transactions that could adversely affect the well-being of the Company as the external auditor or any officer of the Company may bring to the attention of the Committee;
  • obtain quarterly reports from management as to compliance with remittance obligations under tax, employment and similar laws and regulations;
  • receive a report on expense reimbursements for the CEO;
  • prepare, review and approve any audit committee disclosures required by Applicable Requirements in the Company’s disclosure documents; and
  • provide oversight over the corporate policies delegated to the Committee by the Board from time to time.

Complaints Procedure

The Committee will establish policies and procedures for the receipt, retention and treatment of complaints received by the Company and its subsidiaries regarding accounting or auditing matters, internal controls with respect to financial reporting and disclosure controls and procedures.

The Committee will also establish procedures for the confidential, anonymous submission by employees of the Company and its subsidiaries of concerns regarding questionable accounting or auditing matters, internal controls with respect to financial reporting and disclosure controls and procedures.

Any such complaints or concerns that are received shall be reviewed by the Audit Committee and, if the Committee determines that the matter requires further investigation, it will direct the Chair of the Committee who may engage outside advisors, as necessary or appropriate, to investigate the matter and will work with management (including internal counsel) where appropriate to reach a satisfactory conclusion. The Committee will receive periodic reports from the Committee chair regarding complaints and concerns made under such procedures, if any.

Reporting

The Committee will regularly report to the Board on, among other matters:

  • the independence of the external auditor;
  • the performance of the external auditor and the Committee’s recommendations regarding its reappointment or termination;
  • the adequacy of the Company’s internal controls and disclosure controls;
  • its recommendations regarding the annual and interim financial statements of the Company, including any issues with respect to the quality or integrity of the financial statements;
  • its review of the annual and interim management’s discussion and analysis;
  • the Company’s compliance with legal and regulatory requirements related to financial reporting;
  • the effectiveness of the external audit process; and
  • all other significant matters it has addressed and with respect to such other matters that are within its responsibilities.

Assessment

At least annually, the Corporate Governance Committee will review the effectiveness of the Committee in fulfilling the responsibilities and duties set out in this mandate, in accordance with the evaluation process approved by the Board.

The Committee will review and assess the adequacy of this mandate at least once every three years and submit it to the Corporate Governance Committee for approval together with amendments as it deems necessary and appropriate. The Corporate Governance Committee will review this mandate and submit it to the Board for approval with such further amendments as it deems necessary and appropriate. Minor technical amendments to this mandate may be made by the corporate secretary of the Company, who will report any such amendments to the Board at its next regular meeting.

Access to Records and Outside Advisors; Reliance on Experts

In carrying out its responsibilities, the Committee:

  • is empowered to investigate any matter with full and unrestricted access to all books, records, facilities and personnel of the Company and its subsidiaries;
  • may retain, remove, instruct and pay any outside advisor, including independent counsel, at the expense of the Company without Board approval at any time;
  • has the sole authority to determine such advisor’s fees and other retention terms;
  • may communicate directly and privately with the internal auditor, the external auditor and any other advisor engaged by the Committee at any time;
  • shall be entitled to rely in good faith upon:
    • financial statements of the Company, or any other report of the Company represented to him or her by an officer of the Company or in a written report of the external auditor to present fairly the financial position of the Company in accordance with the accounting and financial reporting standards applicable to the Company,
    • a report or advice of an officer or employee (including the appointed actuary) of the Company, where it is reasonable in the circumstances to rely on the report or advice, and
    • a report of an actuary, lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by such a person.

No Rights Created

This mandate is a statement of broad policies and is intended as a component of the flexible governance framework within which the Board, assisted by its committees, directs the affairs of the Company. While it should be interpreted in the context of all applicable laws, regulations and listing requirements (if any), as well as in the context of the Company’s letters patent and bylaws, it is not intended to establish any legally binding obligations.