ANNUAL REPORT The Guarantee Company of North America 4950 Yonge Street, Suite 1400, Toronto, ON M2N 6K1

Transcription

1 ANNUAL REPORT 2015 The Guarantee Company of North America 4950 Yonge Street, Suite 1400, Toronto, ON M2N 6K1 Tel: / Fax: / theguarantee.com

2 ANNUAL REPORT TABLE OF CONTENTS 4

3 Message from Alister Campbell, President & CEO 6 Message from Stephen C. Ruschak, President & COO, USA 8 Delivering on our Commitments 10 Surety 10 GUARANTEE GOLD 11 Corporate Insurance 12 Personal Lines 12 Transportation 12 Trade Credit 12 Investing in the Community 14 United Way 14 Starlight Children s Foundation of Canada 14 Women in Insurance Cancer Crusade (WICC) 14 The Surety Foundation 14 Community Volunteer Program 15 Holiday Card Program 15 Shaw Festival 15 Read-a-thon Program 15 Second Harvest Consolidated Financial Statements 16 Role of the Actuary and the Auditors 36 Independent Auditors Report Year Review 38 Shareholder s Equity 38 Gross Premiums Written 39 Office Locations (Canada) 40 Office Locations (USA) 41 Directors & Officers (Canada) 42 Directors & Officers (USA) 42 5

4 ANNUAL REPORT Alister Campbell President & Chief Executive Officer THE GUARANTEE COMPANY OF NORTH AMERICA The past year has seen our Company make excellent progress on key objectives across our entire portfolio of specialty lines. We were able to achieve strong top-line premium growth better than industry averages in both Canada and the United States. Our continued underwriting rigour paid off in a challenging, competitive environment and we were able to generate one of the best underwriting results in the recent history of The Guarantee. Net profit before taxes was our highest ever. There are many areas that are worthy of specific mention in such a positive year of achievement. In particular, I would like to highlight the excellent results of our Surety operations in Canada and the United States, the continued improvement in our Public Entity book of business, as well as promising production trends in Trade Credit and Transportation the newest lines of business in our specialty portfolio. 6

5 We continue to invest in building what we refer to as our Platform of the Future. In 2015, we introduced Guidewire ClaimCentre Portal, our new claims management system for Personal Lines and Canadian Surety, and we also launched our new Data Warehouse. For a company of our size to deliver two significant I.T. projects of this scale, this is an accomplishment not to be underestimated. In 2016, we aim to pilot our new policy administration and billing system, which will mark another big milestone in the successful execution of our I.T. strategy. Our continued investments in product innovation also saw positive benefits in 2015: Our new GUARANTEE GOLD Mobile App saw excellent take-up by customers; we issued our first Headstart Performance Bond further evidence of our continued market leadership in the Canadian contract surety space; and we continued to build on our successful Corporate Insurance portfolio through the addition of capabilities in Miscellaneous Errors & Omissions. Of course, we know that in the types of business we focus on, nothing can be taken for granted, and the road ahead will continue to present new challenges. There is much more to do and many more objectives to achieve before we can confidently declare that we have fully aligned our organization with our ambitious vision and mission, but I believe the measurable progress across so many fronts is worthy of note. Our progress could not have come without tremendous effort and engagement from The Guarantee s passionate and professional group of dedicated employees who work hard every day to earn more business from our agents and brokers. I want to take this opportunity to thank them all for their hard work, as well as to thank our agents, brokers and customers for their support. 7

6 ANNUAL REPORT Stephen C. Ruschak President & Chief Executive Officer THE GUARANTEE COMPANY OF NORTH AMERICA, USA Five years ago, The Guarantee Company of North America, USA developed a strategic plan to transform our Company into a leading provider of middle-market surety products in the United States. We established a number of lofty, aspirational goals that were designed to increase our value to our producer partners, surety principals and shareholders. While we may not have achieved every single objective, The Guarantee USA has certainly now emerged as a company on the rise. 8

7 At the end of 2010, The Guarantee USA was only a $28 million gross written premium surety that did not consistently deliver an underwriting profit. Our main issue was that we lacked the requisite size to support the infrastructure of a monoline surety company. An expense ratio of 75% leaves little margin for error in a specialty line of business. It s a difficult task for an underwriter to find attractive opportunities at any point of the market cycle, let alone one that was increasingly competitive and facing economic headwinds as we were coming out of the Great Recession. Nevertheless, profitable growth is exactly what our team set out to accomplish. Our overall strategy to profitably grow was simple: Hire and retain the best local underwriting talent in our locations around the country; Support our underwriters efforts to build and strengthen relationships with the leading professional surety agents and brokers; Deliver common-sense underwriting solutions and meaningful capacity to our mutual customers; and Always remember that disciplined underwriting is needed as we grow. Our success is evident when we look at our talented team of underwriters who foster strong relationships with their producer partners. Our entire team is making positive contributions to our success; however, certain performances are particularly noteworthy: Our California team has delivered our best underwriting results over the last five years; The Guarantee USA is the fifth largest surety in the Utah region; Texas is now our largest state for Contract Surety premium; Our newly created Ohio Valley region has become one of our largest territories in less than two years; The Colorado, Illinois, Minnesota and New York regions are consistently profitable; Our Commercial Surety team has grown the segment into more than 20% of our total surety book; and We have opened a new branch office in Baltimore, Maryland to serve the Mid-Atlantic region. The Guarantee USA has much more work to do in 2016 and beyond to become a recognized industry leader like our Canadian Surety colleagues: We will continue to attract and retain the top talent; we will continue to strengthen partnerships with our agents; and we will provide common sense underwriting solutions for our surety principals. There is so much we can achieve together and we look forward to showcasing our accomplishments in future annual reports. 9

8 ANNUAL REPORT Delivering on our Commitments The Guarantee is committed to being an industry leader for surety and specialty insurance in the North American marketplace by strengthening our product lines, focusing on new product innovation, and offering our brokers, agents and customers locally-based decision-making from expert underwriters and claims management professionals. Surety 2015 was an outstanding year for our Canadian Surety line of business with significant profitable growth and the introduction of market leading product innovations in all areas of our business Contract, Commercial and Developer Surety. With the support of agents, The Guarantee also continued to profitability grow our Surety business in the United States. 10

9 2015 GUARANTEE GOLD Mobile App In June 2015, GUARANTEE GOLD launched a mobile app to help high net worth clients protect their homes, vehicles and belongings directly from their smartphones. Users of the mobile app can get real-time weather alerts across North America, receive claims assistance, as well as report claims on-the-go. Additionally, users can make policy changes and access helpful resources. PleasureCraft in Quebec In March 2015, GUARANTEE GOLD began to offer PleasureCraft coverage in Quebec, expanding its initial coverage nationwide. Equipment Breakdown Extension Coverage In August 2015, enhancements were made to GUARANTEE GOLD s Equipment Breakdown Extension Coverage. These enhancements reinforce our commitment to delivering comprehensive insurance solutions and added protection to meet the needs of high net worth lifestyles. 11

10 ANNUAL REPORT Corporate Insurance In 2014, The Guarantee introduced Miscellaneous Errors and Omissions (Misc. E&O) insurance across Canada and in the year that it has been in the market, we have received great feedback. By the end of 2015, many brokers were accessing our Misc. E&O product along with our other Corporate Insurance products. While The Guarantee can write monoline accounts, we have been successful in providing our Misc. E&O as part of multi-line quotes to provide one-stop shopping and convenience for brokers. Personal Lines ClaimCentre Portal: In May 2015, The Guarantee adopted ClaimCentre Portal, a new claims management system for Personal Lines (Auto and Residential) and Canadian Surety to enhance the claims experience for brokers. Private Passenger Automobile Rate Change in Ontario: The Ontario Auto line of business has been a challenging one over the last few years. With the added complexity of direct rate actions being ordered by the government through the Financial Services Commission of Ontario (FSCO) and The Guarantee s less than desirable results in this area particularly for monoline Auto customers FSCO approved rate increases in 2015 for GUARANTEE GOLD and Guarantee SUPERIOR renewals and new business. Transportation In November 2015, The Guarantee partnered with Insurance Search Bureau of Canada (ISB Canada) and its sister companies, AFIMAC and ASAP Secured. As leaders in their fields of background screening, investigations and security services, this new partnership provides clients with preferred pricing and access to an enterprise suite of risk management products and services tailored to the transportation industry. Trade Credit The Guarantee expanded its team of Trade Credit underwriters in 2015 for the Guarantee Trade Credit Solutions (GTCS) segment. Working exclusively with our network of brokers, the highly specialized GTCS team provides credit risk management and accounts-receivable protection. Following the implementation of software by Tinubu Square, a leader in credit risk software solutions, we ve doubled our premium base in just three years. Winter Tire Discount in Ontario: In September 2015, FSCO approved The Guarantee s application for risk classification systems and rates. We announced that effective January 1, 2016, a 5% winter tire discount would be available for new and existing business in the Private Passenger Automobile category. 12

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12 ANNUAL REPORT Investing in the Community The Guarantee s support of registered charities demonstrates our aim to make a real difference in the lives of people in our communities. We do that in a number of ways to ensure we maximize the impact of our involvement. A few of the notable charities we supported in 2015 include: United Way In 2015, The Guarantee held an employee fundraising campaign for United Way, and along with a corporate match, donated $106,027. Our donations will help fund United Way programs and services in communities across Canada to support individuals and their families. Starlight Children s Foundation of Canada In 2015, Cambridge Memorial Hospital s pediatrics department received a new Starlight Fun Center to help brighten the lives of seriously ill children and their families also marked The Guarantee s third year supporting Starlight Children s Foundation Canada. We were once again a President s Level Sponsor at their annual Insurance Gala and in the past three years, pledged a total of $30,000 to the cause. The Guarantee also sponsored a Starlight Wish, which provided a unique once-in-a-lifetime experience to children between the ages of 4 to 18 years who are seriously ill. Women in Insurance Cancer Crusade (WICC) The Guarantee was proud to once again be a National Sponsor of WICC. Through our support at the WICC Gala Dinner, as well as participation and activity sponsorship for the WICC Ontario edition of the Canadian Cancer Society s Relay For Life, we continue to demonstrate our solidarity with the P&C insurance industry in the fight against cancer. The Surety Foundation In the US, a donation was also made to The Surety Foundation an organization that serves as the vehicle to fund internship and scholarship opportunities in the surety and fidelity industry, as well as educational and public service program initiatives. 14

13 2015 The Guarantee also partners with The Cowan Foundation sustained by the ongoing success of the Princeton Holdings group of companies, including The Guarantee. Below are some of the programs and initiatives funded through the foundation that we participated in during To learn more about The Cowan Foundation, visit cowanfoundation.ca. Community Volunteer Program The Community Volunteer Program distributes funds to Canadian charities chosen by volunteering employees. Those meeting the eligibility requirements, which include 50 hours of volunteer work in the program year, select a Canadian charity to receive $750. In 2015, the program donated over $36,000 to employeedirected charities. Holiday Card Program In 2015, in the spirit of giving during the holiday season, $50,000 was donated to YMCA Canada in support of programs that focus on children and youth. Shaw Festival In 2015, The Cowan Foundation supported the Shaw Festival s Tuesday Q&A Program through a $20,000 donation. The Q&A offered patrons an opportunity to learn more about the theatre production and its cast members. Our GUARANTEE GOLD line of business aligned with this donation by contributing an additional $5,000 to share the Shaw experience with key stakeholders. Read-a-thon Program The Read-a-thon Program s goal is to encourage reading and ongoing learning over the summer months for the children in our employee s lives, as well as foster philanthropic thinking in these children so they feel empowered to make a difference in the lives of others. Approximately $5,000 was raised in 2015 with the funds being directed towards Free the Children, an international charity and educational partner working to empower and enable youth to be agents of change. Specifically, the funds will help build a school in Ecuador so more children will have the opportunity to learn and create a life free from poverty and hunger. Second Harvest This year, The Cowan Foundation reached two significant milestones: 20 years of building community; and $20 million in donations. As part of that celebration, The Cowan Foundation donated an additional $20,000 to ten charitable organizations. One of those organizations was Second Harvest, the largest food rescue program in Canada. Since 1985, Second Harvest has been picking up donated surplus food, which would otherwise go to waste, and delivering that food to community agencies in Toronto. Employees from The Guarantee s Toronto office also demonstrated their support for Second Harvest by dedicating 126 hours of valued volunteer service, which included sorting 3,270 pounds of food in the warehouse, as well as rescuing and delivering 68,870 pounds of food with Second Harvest drivers. Employees also raised almost $3,000 by buying raffle tickets and through direct donations to Second Harvest. 15

14 ANNUAL REPORT The Guarantee Company of North America Consolidated Statement of Financial Position As at December 31, 2015 (in thousands of Canadian dollars) Notes Assets Cash and cash equivalents 95,406 81,650 Investments 5 898, ,803 Accounts receivable 6 120, ,347 Deferred premium acquisition costs 11 58,664 55,944 Provision for recoverable portion of unpaid claims 178, ,853 Unearned premiums - ceded 40,219 37,208 Deferred income tax asset 7 25,264 10,769 Property and equipment 8 2,799 2,577 Intangible assets and goodwill 9 9,883 9,165 1,429,906 1,399,316 Liabilities and shareholder s equity Liabilities Accounts payable and accrued liabilities 10 54,174 38,381 Deferred commissions 13,106 12,002 Deferred income tax liability 7 2,110 2,418 Unpaid claims - gross , ,162 Unearned premiums - gross , , , ,454 Shareholder s equity Capital stock Contributed surplus Accumulated other comprehensive (loss) income (9,599) 20,522 Retained earnings 519, ,593 See accompanying notes to the Consolidated Financial Statements Approved on behalf of the Board of Directors: 511, ,862 1,429,906 1,399,316 Director Maureen Cowan Chairman of the Board Director Alister Campbell President & Chief Executive Officer 16

15 The Guarantee Company of North America Consolidated Statement of Comprehensive Income For the year ended December 31, 2015 (in thousands of Canadian dollars, except net income and comprehensive income per common share) Notes Gross premiums written 462, ,330 Ceded premiums written 121, ,052 Net premiums written 4 340, ,278 Gross premiums earned 452, ,312 Ceded premiums earned 119, ,378 Net premiums earned 332, ,934 Net investment income 5 54,858 26,360 Revenue 387, ,294 Expenses Claims incurred, gross 219, ,986 Less claims incurred, ceded 63,576 48,007 Claims incurred, net , ,979 Commissions, net of reinsurance 86,455 77,936 Premium taxes 10,904 9,783 Other underwriting and administrative 58,669 55, , ,252 Earnings (loss) before income tax expense (recovery) 75,539 (1,958) Income tax expense (recovery) Current 6,508 (2,772) Deferred 10,958 (2,906) 7 17,466 (5,678) Net earnings 58,073 3,720 Other comprehensive (loss) income Items that may be reclassified subsequently to net earnings Unrealized investment (losses) gains, net of income taxes (71,328) 3,551 Unrealized foreign exchange gains on consolidation 41,207 14,100 (30,121) 17,651 Items that will not be reclassified subsequently to net earnings Remeasurement of the net defined benefit liability, net of income taxes (945) (784) (945) (784) Other comprehensive (loss) income, net of income taxes (31,066) 16,867 Comprehensive income 27,007 20,587 Net income per common share ($) Comprehensive income per common share ($) See accompanying notes to the Consolidated Financial Statements 17

16 ANNUAL REPORT The Guarantee Company of North America Consolidated Statement of Changes in Shareholder s Equity For the year ended December 31, 2015 Accumulated other Capital Contributed comprehensive Retained (in thousands of Canadian dollars) stock surplus (loss) income earnings Total Balance as at December 31, , , ,948 Changes in equity for the year Net income ,720 3,720 Dividends paid (7,673) (7,673) Unrealized investment gains, net of $1,290 tax expense - - 3,551-3,551 Unrealized foreign exchange gains on consolidation ,100-14,100 Remeasurement of the net defined benefit liability, net of $282 tax recovery (784) (784) Balance as at December 31, , , ,862 Changes in equity for the year Net income ,073 58,073 Dividends paid (7,673) (7,673) Unrealized investment losses, net of $25,890 tax recovery - - (71,328) - (71,328) Unrealized foreign exchange gains on consolidation ,207-41,207 Remeasurement of the net defined benefit liability, net of $338 tax recovery (945) (945) Balance as at December 31, (9,599) 519, ,196 See accompanying notes to the Consolidated Financial Statements Accumulated other comprehensive (loss) income is comprised of foreign exchange gains and losses arising from currency translation from functional currencies into the Company s presentation currency and unrealized gains and losses, net of related income taxes, arising from recording available-for-sale investments at fair value. Included in the December 31, 2015 accumulated other comprehensive (loss) income balance is income tax recovery of $14,784 (December 31, 2014 income tax expense of $11,106). 18

17 The Guarantee Company of North America Consolidated Statement of Cash Flows For the year ended December 31, 2015 (in thousands of Canadian dollars) Cash flows provided by (used in) Operating activities Receipts (payments) of Premiums - net of commissions 355, ,985 Interest and dividends 34,476 34,269 Sale of investments 266, ,390 Purchase of investments (270,652) (421,838) Purchase of equipment (2,380) (1,895) Claims - net of salvage and subrogation (242,008) (202,004) Reinsurance premiums - net of claims paid (41,085) (49,433) Expenses (62,498) (61,799) Income taxes (1,448) 1,768 Other taxes (14,992) (14,230) 21,429 (37,787) Financing activities Dividends paid (7,673) (7,673) Increase (decrease) in cash and cash equivalents 13,756 (45,460) Cash and cash equivalents - beginning of year 81, ,110 Cash and cash equivalents - end of year 95,406 81,650 See accompanying notes to the Consolidated Financial Statements 19

18 ANNUAL REPORT The Guarantee Company of North America Notes to the Consolidated Financial Statements (the Financial Statements ) December 31, 2015 (Unless otherwise stated, all amounts are in thousands of Canadian dollars) 20

19 1. REPORTING ENTITY The Guarantee Company of North America and its wholly owned subsidiary, The Guarantee Company of North America USA, (the Company ) underwrite property and casualty insurance in both Canada and the United States of America. The Guarantee Company of North America is a wholly owned indirect subsidiary of Princeton Holdings Limited, an Ontario, Canada based company. 2. BASIS OF PREPARATION Statement of compliance These consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These Financial Statements and the accompanying notes were authorized for issue in accordance with a resolution of the Board of Directors on February 24, Basis of measurement All assets and liabilities are presented on a fair value basis except for property and equipment, intangible assets, and certain financial instruments which are measured at historical or depreciated cost. Functional and presentation currency Transactions recorded in the Financial Statements of each company are measured using the currency of the primary economic environment in which each company operates (the functional currency ). All amounts in these consolidated Financial Statements are presented in Canadian dollars, which is the parent s functional currency. Use of estimates and judgements Preparation of Financial Statements in conformity with IFRS requires that management make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. All estimates and underlying assumptions are reviewed annually, and any revisions to accounting estimates are recognized prospectively. Reported claims liabilities, deferred premium acquisition costs, deferred income taxes and post-employment benefits require the use of estimates and judgements to determine the amount reported. 3. SIGNIFICANT ACCOUNTING POLICIES Unless otherwise indicated, the accounting policies set out below have been applied consistently to all periods presented in these consolidated Financial Statements. Basis of consolidation An entity is considered a subsidiary of the Company if the Company has the power over the relevant activities of the investee, and is exposed or has the rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The results and cash flows relating to subsidiaries acquired or disposed of in the year are included in the consolidated statement of comprehensive income and the consolidated statement of cash flows from the date of acquisition or up to the date of disposal. All inter-company transactions, balances and profits are eliminated. Business combinations are accounted for using the acquisition method. The acquisition method requires that the acquirer recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date. Acquisition costs directly attributable to the acquisition are expensed in the year. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value at the date of the acquisition, irrespective of the extent of any non-controlling interest. Contingent consideration is also measured at fair value. The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. After initial acquisition, goodwill is measured at cost less any accumulated impairment losses. 21

20 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign currency The assets and liabilities of foreign operations are translated from their functional currencies into the Company s presentation currency using year end exchange rates, and their revenue and expenses using average exchange rates for the year. Exchange differences arising from the translation of the net investment in foreign operations are taken to the currency translation reserve within equity. On disposal of a foreign operation, such exchange differences are transferred out of this reserve and are recognized in the consolidated statement of comprehensive income as part of the gain or loss on sale. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. Exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognized in the consolidated statement of comprehensive income. Intangible assets and goodwill On acquisition of a subsidiary, the Company records as goodwill the excess of the cost of an acquiree over the fair value of the Company s share of net identifiable assets acquired. Subsequently, the value of goodwill is tested annually for impairment and adjusted accordingly through net earnings. On acquisition, licences are recorded at their fair value. Subsequently, licenses are measured at cost less all impairment losses. The value of licenses is tested annually for impairment and appropriate adjustments are recorded through net earnings. Such adjustments are never reversed. Computer software is carried at historical cost less accumulated depreciation. The value of computer software is depreciated over a useful life of between three and five years, using the straight-line method beginning when software is put into use. The depreciation charge for the period is included in net earnings within other underwriting and administrative expenses. Property and equipment On acquisition, property and equipment are recorded at cost. Subsequently, depreciation is provided over the useful lives of the depreciable assets using the declining balance or straight-line methods at rates ranging from 4% to 33%. Depreciation methods, useful lives and residual values are reviewed at each financial year end and are adjusted if appropriate. The value of land is not depreciated. Financial instruments Cash and cash equivalents include cash on hand, deposits with banks, other short-term, highly liquid investments with original maturities of three months or less from the date of acquisition and bank overdrafts. Cash, cash equivalents and short-term money market instruments with maturities up to one year from the date of issue are classified as fair value through profit or loss (FVTPL) and are recorded on the consolidated statement of financial position at fair value with all related gains and losses recorded in net earnings. Loans, receivables, accounts payable and accrued liabilities are measured at cost which approximates fair value. Management has designated all other financial assets as available-for-sale. Available-for-sale financial assets, with quoted prices in an active market, are carried at fair value on the consolidated statement of financial position from the trade date. Changes in fair value of equities are recorded, net of income taxes, in other comprehensive income until the financial asset has been sold, after which time the full amount of gain or loss is recorded in net earnings. 22

21 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments (continued) Changes in the difference between the fair value of available-for-sale bonds and the amortized value of such bonds is recorded, net of income taxes, in other comprehensive income until the financial asset has been sold, after which time the full amount of gain or loss is recorded in net earnings. The amortization of premiums and discounts on the purchase of bonds is calculated using the effective interest rate method. When an asset classified as available-for-sale is sold, the accumulated fair-value adjustments recognized in accumulated other comprehensive income are reclassified to net earnings and a corresponding adjustment, net of income taxes, is made to other comprehensive income. The Company s financial instruments are priced using quoted, unadjusted bid prices in active markets for identical assets or liabilities. Interest income is recognized on an accrual basis and dividend income is recognized on the ex-dividend date. Impairment of financial assets A financial asset not designated as FVTPL is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. The debt model is used to assess impairments for all debt securities, preferred shares that are redeemable at the option of the holder, and perpetual preferred shares which have been purchased with the intent of holding for the long-term. Objective evidence that financial assets are impaired include default or delinquency by the debtor, indications that the issuer of a security will enter bankruptcy, economic conditions that correlate with defaults or the disappearance of an active market for a security, or a significant or prolonged decline in fair value of an equity security below its cost. Impairment losses on available-for-sale financial assets are recognized by reclassifying losses accumulated in other comprehensive income to net recognized losses included in net investment income. The cumulative loss that is reclassified from accumulated other comprehensive income to net earnings is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously in net earnings. Changes in impairment provisions attributable to the application of the effective interest rate method are reflected as a component of investment income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized in net earnings, then the impairment loss is reversed, with the amount of the reversal recognized in net earnings. Any subsequent recovery in fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. Income taxes Income tax expense (recovery) comprises current and deferred tax. Income tax is recognized in net earnings except to the extent that it relates to items recognized in other comprehensive income or directly in equity. Current income tax expense (recovery) is based on net earnings for the year as adjusted for items that are not taxable or not deductible. Current income tax is calculated using income tax rates and laws that were enacted or substantively enacted at the end of the reporting period. Deferred income taxes are provided in respect of assets and liabilities for which book values differ from tax values at rates expected to be enacted or substantively enacted when differences reverse. They result principally from provisions of the Income Tax Act (Canada) requiring discounting of claims and permitting application of prior year losses against taxable income of future years. 23

22 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Insurance and reinsurance contracts The Company s business comprises short-term, non-participating property and casualty contracts that transfer significant risk. The Company accepts and transfers significant risk in the normal course of business at varying retention limits. Gross premiums written comprise premiums assumed from other insurers and premiums received directly from insured parties in respect of risks incepting during the financial year. Premiums are stated before the deduction of brokerage and commission but net of taxes and duties paid by the insured. Estimates are included for premiums recorded after period-end in respect of contracts incepting during the accounting period and an allowance is also made for cancellations. Premiums are recognized as revenue (premiums earned) proportionally over the period of coverage. The portion of premium receivable or received in respect of in-force contracts that relates to unexpired risks at the consolidated statement of financial position date is reported as unearned premium liability which represents the Company s obligation to settle losses that will occur during the unexpired portion of the policy period. Premiums ceded to reinsurers are accounted for using the same rules of revenue recognition adopted for gross premiums. Deferred premium acquisition costs, including primarily brokers commissions and premium taxes are, to the extent that they are considered recoverable, deferred and amortized over the terms of the related premiums. If, in the estimation of management, unearned premiums and investment income on those premiums are insufficient to meet the policy obligations expected in respect of unexpired policies at period-end, the shortfall is deducted from deferred premium acquisition costs. Reinsurance commissions give rise to deferred commission revenue which is accounted for in the same way as deferred premium acquisition costs. Liabilities for unpaid claims include the Company s estimates of loss and adjustment expenses for reported and unreported claims less estimated recoveries expected on these claims. These estimates are calculated in accordance with accepted, current actuarial practice for Canadian property and casualty insurers and are based upon past claims experience modified for current trends as well as prevailing economic, legal and social conditions. They are discounted at rates, presently 4.8% ( %), that are determined by reference to the Company s rate of return on its investments, which adjustment reduces the stated liability by approximately 17.0% ( %), and increased by actuarially determined provisions intended to allow for uncertainty inherent in the estimation process which adjustment increases the stated liability by approximately 14.5% ( %). Such estimates are continually reviewed and updated and all resulting adjustments, which can be material, are reflected in current operating results. Methods of estimation have been used which the Company believes produce reasonable results given current information. All movements in claims assets and liabilities are recorded through net earnings. Post-employment benefits The Company maintains pension plans for the benefit of its employees. Every three years, and most recently in respect of the 2013 year end, the Company obtains an actuarial valuation for these plans and the Company administers and invests the plan assets primarily in equities and fixed income securities. The Company revises these valuations, using up-to-date estimates of plan yields and discount rates, at each of the two subsequent year ends. The pension costs are assessed using the projected unit credit method whereby the cost of providing pensions is charged to the consolidated statement of comprehensive income so as to spread the regular cost over the service lives of employees. At each fiscal year end, the Company estimates the present value of all plan obligations and calculates its net pension liability by subtracting the fair value of assets in the plans from the value of all obligations. The present value of all obligations is determined as the present value of all future inflows of employee contributions and outflows of plan benefits and expenses, discounted using rates of return consistent with those earned on high quality commercial bonds. When the calculation results in a potential asset for the Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. Any minimum funding requirements are considered when calculating the present value of economic benefits. 24

23 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Post-employment benefits (continued) Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized in other comprehensive income and then recognized immediately in retained earnings on the consolidated statement of financial position as they will not be reclassified to net earnings in subsequent periods. The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligations at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Past service costs, which are a result of a plan amendment or curtailment, are recognized in Other underwriting and administrative expenses in the consolidated statement of comprehensive income when the amendment or curtailment has occurred. Net interest expense and other expenses related to defined benefit plans are recognized in the consolidated statement of comprehensive income. Comprehensive income Comprehensive income comprises net earnings and other comprehensive income and includes all changes in equity during the year, except those resulting from investments by and distributions to owners. Changes in unrealized gains and losses on available-for-sale investments are recorded in other comprehensive income and in accumulated other comprehensive income on the consolidated statement of financial position until such time as the underlying asset is sold, at which time the appropriate balances are transferred to net earnings and to retained earnings. The changes in valuation of assets held by the Company s foreign subsidiaries that occur as a result of translation of these amounts into Canadian currency are recorded in other comprehensive income and in accumulated other comprehensive income. New standards and interpretations not yet adopted Financial Instruments: Classification and Measurement IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 sets out the requirements for recognizing and measuring financial assets, liabilities and some contracts to buy or sell non-financial items. The provisions of this standard will apply to Financial Statements for accounting periods beginning on or after January 1, Retrospective application is required with certain exceptions. Proposed amendments to IFRS 4 Insurance Contracts: Recognition and Measurement, with an effective date for accounting periods beginning on or after January 1, 2018, propose an optional temporary exemption from applying IFRS 9 Financial Instruments. Such a proposal permits deferral of IFRS 9 application until annual periods beginning on or after January 1, 2021 or until the new insurance contract standard becomes effective if this is the earlier date. The impact of the above new standard and amendments on the Financial Statements has not yet been determined. 25

24 ANNUAL REPORT 4. RISK MANAGEMENT Objectives and policies for mitigating business risk The Company has identified the following risk areas: insurance, market, credit, liquidity, currency, and capital management. The Company has various procedures in place to manage these exposures. These procedures have been embedded into decision making processes and the culture of the business. They include an overall risk management framework together with a set of clearly defined risk policies which articulate the Company s risk appetite. Insurance risk Insurance risk is the risk that the total cost of claims and adjustment expenses will exceed premiums received. The Company has identified pricing, concentration and reserving as the most significant sources of insurance risk. Underwriting and pricing controls are in place, underpinned by sound analysis, market expertise, guidelines, policies and procedures. The Company manages risks to limit severity through its underwriting strategy, a comprehensive reinsurance program, and proactive claims handling. Pricing risk arises when actual claims experience differs from the assumptions included in pricing calculations. The Company focuses on profitable underwriting using a combination of experienced underwriting staff, underwriting risk tolerance guidelines and price adequacy models. The Company s pricing is designed to ensure an appropriate return on capital while also providing long-term stability. Concentrations of risk arise when the Company issues policies to many insureds within groups that are exposed to loss from single events. The Company mitigates concentration risk by diversifying its underwriting across many geographical areas and different lines of business. The Company also maintains a comprehensive programme of proportional and excess of loss reinsurance. Distribution of gross and net premiums Gross Net Gross Net Surety and corporate insurance 174, , , ,086 Property 127, , ,314 94,292 Auto 104,034 87,024 99,407 84,796 Liability 55,435 28,974 53,357 26, , , , ,278 Reserving risk arises when actual ultimate incurred claims and adjustment expenses differ from the amounts estimated at the end of prior accounting periods. Claims settlements arising from liability lines of business are difficult to predict. The inherent risk in setting reserves is influenced by external factors such as economic inflation, medical inflation, court interpretations of coverage, the regulatory environment and changes in legislation and jurisprudence. These factors lead to uncertainty as to when a claim will be settled, and with respect to the amount and timing of any payments. Late notification of claims necessitates holding provisions for events that are unknown to the insurer when the provisions are established. 26

25 4. RISK MANAGEMENT (CONTINUED) Insurance risk (continued) Minimum reserves for certain types of claims, periodic review of all reserves, and an annual actuarial review of the outstanding reserves are among the controls used to mitigate reserving risk. The Company considers the liability for unpaid claims and adjustment expenses to be adequate; however, given the inherent uncertainty in setting reserves, actual experience will differ from the expected outcome. Reserve changes associated with claims from prior years are recognized in net earnings. A 5.0% increase/decrease in the net average claims severity would have a corresponding $22,828 change in net claims liabilities. The changes would be recorded in the claims incurred, gross in the consolidated statement of comprehensive income. The following loss development tables show the development of undiscounted claims arising from all lines of business except development associated with industry-administered risk sharing pools and unallocated loss adjustment expenses. Accident Years Gross ultimate claims Estimate of gross ultimate claims at end of : First accident year 236, , , , , , , , ,972 Most recent 236, , , , , , , , ,518 accounting year Net ultimate claims Estimate of net ultimate claims at end of : First accident year 169, , , , , , , , ,114 Most recent accounting year 169, , , , , , , , ,254 Market risk The value of the Company s investments fluctuates with credit spreads and movements in interest rates, equity markets, and prices of foreign currencies. The Company mitigates these risks by adopting a conservative asset mix and holding a well diversified portfolio. The Company owns operations in the United States of America and consolidates these operations. The value of these investments fluctuates depending on the relative value of Canadian and US dollars. This risk is mitigated by the fact that the Company s operations in the United States and all its obligations from operations are denominated in US dollars. Should the relevant composite index increase/decrease by 100 basis points, the Company s portfolio of equity instruments will increase/decrease in value by between nil and $1,723, net of tax, with any change going to other comprehensive income. Should the yield curve for investment quality, fixed-income securities shift upward/downward by 100 basis points, the Company s debt instruments would suffer a temporary decrease/increase in value of between nil and $10,709, net of tax, with this change going to other comprehensive income. Any change would gradually dissipate, again through other comprehensive income, as the Company s existing debt instruments mature during the next five years. The same upward shift in the yield curve would enhance the yield on short-term money-market instruments, adding between nil and $1,309 before tax, to net earnings each year. Additionally a 100 basis point increase or decrease in interest rates would have an ($19,475), $19,870 change in net claims liabilities, respectively due to the change in the discount rate. The change would be recorded in claims incurred in the consolidated statement of comprehensive income. 27

26 ANNUAL REPORT 4. RISK MANAGEMENT (CONTINUED) Credit risk The Company is exposed to the risk of credit losses, that is the failure of its debtors to pay amounts owed when due, on its investment portfolio and on amounts owed to it by its policyholders, reinsurers, and intermediaries. In order to mitigate this risk, management regularly reviews the Company s investment portfolio to ensure that it complies with the Company s investment policy which includes appropriate concentration limits and requirements for diversification, including a prohibition against holding more than 5% of its assets in the securities of any one issuer. Management also regularly assesses the creditworthiness of its principal debtors, including its reinsurers. The Company s exposure to credit losses from any one individual policyholder or related group of policyholders is not material. The Company estimates its aggregate exposure to credit risk as the sum of its reported fixed-income investments, accrued investment income, and insurance balances owing from policyholders and reinsurers as recorded on the consolidated statement of financial position. The aggregate gross credit exposure at December 31, 2015 was $397,751 ($444,981 at December 31, 2014). All investment securities held by the Company at year end are rated investment grade or better. The following table summarizes the ratings of all bonds held by the Company as of December 31, as determined by Standard & Poor s: AAA 9.8% 23.4% AA or better 28.3% 22.9% A or better 20.3% 31.2% A- 14.4% 3.5% BBB- or better 27.2% 19.0% 100.0% 100.0% Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet obligations associated with financial liabilities. The Company mitigates this risk by holding sufficient cash and cash equivalents to meet its ongoing claims and other obligations, the maturities of which are disclosed in Note 5. The Company estimates that its financial liabilities at December 31 will be paid or otherwise discharged according to the following schedule: Within 1 year 213, , years 284, , years 122, , or more years 68,105 75, , ,543 28

27 4. RISK MANAGEMENT (CONTINUED) Management of capital The Company is subject to regulatory supervision by the Canadian Office of the Superintendent of Financial Institutions (OSFI). OSFI imposes on all property and casualty insurers a capital management regime called the Minimum Capital Test, which requires the Company to determine its available capital, required capital, and excess capital, being the difference between available and required capital. The Company monitors these measures quarterly and consistently maintains its excess capital at levels in excess of 150% of required capital. 5. INVESTMENTS Available-for-sale FVTPL Total Short-term investments - 45,707 45,707 Bonds and debentures Maturing within one year 123, ,313 Maturing in one to five years 82,211-82,211 Maturing in greater than five years 73,678 73,678 Shares Preferred 342, ,972 Common 230, ,819 Balance at December 31, ,993 45, ,700 Short-term investments - 32,712 32,712 Bonds and debentures Maturing within one year 158, ,658 Maturing in one to five years 145, ,068 Maturing in greater than five years 37,402 37,402 Shares Preferred 359, ,307 Common 193, ,656 Balance at December 31, ,091 32, ,803 The Company reviewed currently available information for available-for-sale investments with unrealized pre-tax losses amounting to $98,015 ( $31,263), of which $98,015 ( $18,253) in losses have already been charged to other comprehensive income, net-of-tax, and determined that these declines in value do not represent impairments in value. Available for sale assets currently have unrealized gains of $44,489 ( $58,750). The Company uses a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. The categories established under IFRS are use of quoted market prices, internal models using observable market information as inputs, and internal models without observable market information as inputs. The Company s equity investments and bonds were priced using quoted, unadjusted bid prices in active markets for identical or similar assets. There were no transfers between categories of the fair value hierarchy during 2015 or

28 ANNUAL REPORT 5. INVESTMENTS (CONTINUED) Net investment income and gains on investments recorded through net earnings are as follows: Available-for-sale FVTPL Total 2015 Interest income 5,712 1,653 7,365 Dividend income 24,377-24,377 Investment expenses (1,087) - (1,087) Investment income 29,002 1,653 30,655 Net recognized gains 23, ,203 Net investment income 52,567 2,291 54, Interest income 5, ,278 Dividend income 27,082-27,082 Investment expenses (933) - (933) Investment income 31, ,427 Net recognized losses (6,260) 193 (6,067) Net investment income 25, , ACCOUNTS RECEIVABLE Brokers and policyholders 72,896 70,845 Taxes recoverable 2,390 6,493 Self-insured retentions 13,088 12,714 Other insurers 24,801 13,527 Accrued investment income and other 7,765 6, , , INCOME TAXES Effective tax rate reconciliation Income (loss) before income tax expense (recovery) 75,539 (1,958) Statutory income tax rate - Canada 26.50% 26.50% Provision for (recovery of) income taxes at statutory income tax rate 20,018 (519) Increase (decrease) in income tax expense (recovery) due to: Dividend income (6,234) (5,554) Difference in tax rate on investment gains transferred from accumulated other comprehensive income (3) 118 Impact of US operation 1, Other 2, Income tax expense (recovery) 17,466 (5,678) 30

29 7. INCOME TAXES (CONTINUED) Components of deferred income taxes Deferred tax arising from: Consolidated statement of Consolidated statement of financial position comprehensive income Claims liabilities discount 5,920 6, (753) Losses available for carryforward 19,386 4,080 (15,005) (2,167) Property and equipment and other 3,490 2,394 (715) 3 Unrealized investment gains in US operation (6,222) (5,954) (881) 182 Accrued pension liability (271) Total deferred tax 23,154 8,351 (15,270) (3,006) Deferred tax asset 25,264 10,769 Deferred tax liability (2,110) (2,418) 23,154 8,351 Included in: Net income 10,958 (2,906) Other comprehensive income (26,228) (100) 8. PROPERTY AND EQUIPMENT Property Equipment Total Cost Balance at December 31, ,024 7,195 11,219 Acquisitions Disposals - (26) (26) Foreign exchange movement Balance at December 31, ,309 7,863 12,172 Accumulated depreciation Balance at December 31, ,445 6,197 8,642 Depreciation for the year Disposals - (26) (26) Foreign exchange movement Balance at December 31, ,693 6,680 9,373 Carrying amount Balance at December 31, , ,577 Balance at December 31, ,616 1,183 2,799 31

30 ANNUAL REPORT 9. INTANGIBLE ASSETS AND GOODWILL Cost Software and licenses Goodwill Total Balance at December 31, ,312 2,618 9,930 Acquisitions Foreign exchange movement ,501 Balance at December 31, ,631 3,123 11,754 Accumulated depreciation Balance at December 31, Depreciation for the year 1,012-1,012 Foreign exchange movement Balance at December 31, ,871-1,871 Carrying amount Balance at December 31, ,547 2,618 9,165 Balance at December 31, ,760 3,123 9, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accrued liabilities 3,424 3,355 Reinsurance payable 15,371 9,662 Income taxes payable 1,805 1,394 Accrued pension liability 2,175 3,596 Deposits payable 8,399 7,205 Other 23,000 13,169 54,174 38, POLICY LIABILITIES Unearned premiums Gross Net Gross Net Unearned premiums - opening 200, , , ,667 Written premiums 462, , , ,278 Earned premiums (452,089) (332,800) (410,312) (304,934) Foreign exchange movement 4,174 3,469 1,611 1,272 Unearned premiums - closing 214, , , ,283 32

31 11. POLICY LIABILITIES (CONTINUED) Deferred premium acquisition costs Gross Net Gross Net Balance deferred - opening 55,944 43,942 53,502 42,062 Acquisition costs incurred 128,121 97, ,928 89,725 Acquisition costs recognized in net earnings (125,401) (95,835) (115,486) (87,845) Balance deferred - closing 58,664 45,558 55,944 43,942 Claims liabilities Gross Net Gross Net Unpaid claims - opening 654, , , ,465 Current accounting-year losses incurred on current accident year 241, , , ,286 Discounting on current-year losses (21,416) (13,239) (19,245) (12,601) Provision for adverse deviation on currentyear losses 18,787 12,791 18,851 13,542 Current accounting-year losses incurred on prior accident years (4,058) (4,583) 21,518 23,918 Change in discounting on prior-year losses 10,982 7,782 13,499 10,384 Change in provision for adverse deviation on prior-year losses (25,048) (19,651) (13,617) (10,550) Total losses incurred 220, , , ,979 Paid losses on prior accident years 162, , , ,224 Paid losses on current accident year 78,146 68,298 72,921 60,911 Total paid losses 240, , , ,135 Unpaid claims - closing 634, , , , CAPITAL STOCK Authorized Unlimited number of preferred shares Unlimited number of common shares Issued 187,147 common shares

32 ANNUAL REPORT 13. RELATED PARTY TRANSACTIONS The Company conducts normal business transactions through related insurance intermediaries. All such business is transacted on a basis consistent with other similar intermediaries and represents net premiums written of $70,042 ( $77,054). The Company participates in a cost sharing arrangement with its parent and affiliated companies to obtain management and administrative services as a group amounting to $3,106 ( $2,811). Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including directors of the Company and its subsidiaries. Total compensation recognized for key management personnel in the year was $7,929 ( $7,974). 14. POST-EMPLOYMENT BENEFITS Present value of future pension obligations 28,421 28,638 Less: fair value of plan assets 26,246 25,042 Accrued pension liability in accounts payable and accrued liabilities 2,175 3,596 Movement in post-employment benefit expense and other comprehensive class income: Service cost (958) 1,863 Net interest on the net defined benefit liability Remeasurements of the net defined benefit liability 1,283 1,066 Net pension plan costs recognized 390 3,089 Movement in present value of future defined-benefit pension obligations: Benefit obligation - opening 28,638 24,294 Cost of benefits 1,418 1,597 Interest on benefit obligation 1,140 1,278 Actuarial (gain) loss (1,674) 2,116 Benefits paid (1,101) (647) Benefit obligation - closing 28,421 28,638 Assumptions: Discount rate 4.0% 4.3% Expected annual yield on plan assets 4.3% 5.0% Future annual salary increases 3.5% 3.5% Life expectancy for male pensioners 85.9 yrs 85.9 yrs Life expectancy for female pensioners 88.4 yrs 88.4 yrs 34

33 14. POST-EMPLOYMENT BENEFITS (CONTINUED) Composition of pension plan assets, at fair value: % 10.6% Debt instruments 33.4% 32.0% Equities 57.7% 57.4% 100.0% 100.0% Cash and cash equivalents Total 15. RATE REGULATION Automobile insurance, which accounts for approximately 21.8% ( %) of the Company s net written premium volume, is subject to rate regulation for all insurers in most jurisdictions. With respect to individually rated, private-passenger, automobile insurance, the Company is subject to provincial, prior-approval rate regulation that could result in the imposition of government mandated, retrospective rate reductions or modifications to standard policy terms and conditions. 16. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform with the presentation adopted in the current year. 35

34 ANNUAL REPORT Role of the Actuary and the Auditors The actuary is appointed by the Board of Directors. With respect to the preparation of the annual Financial Statements, the actuary is required to carry out a valuation of the policy liabilities and to report thereon to the policyholders and shareholders. The valuation is carried out in accordance with accepted actuarial practice in Canada and regulatory requirements. The scope of the valuation encompasses the policy liabilities as well as any other matter specified in any direction that may be made by the Superintendent of Financial Institutions. The policy liabilities consist of a provision for unpaid claims and adjustment expenses on the expired portion of policies and of future obligations on the unexpired portion of policies. In performing the valuation of the liabilities for these contingent future events, which are by their very nature inherently variable, the actuary makes assumptions as to future rates of claim frequency and severity, inflation, reinsurance recoveries, expenses and other contingencies, taking into consideration the circumstances of the Company and the nature of the insurance policies. The valuation is necessarily based on estimates, and consequently, the final values may vary significantly from those estimates. The actuary also makes use of management information provided by the Company and relies on the work of the auditors with respect to the verification of the underlying data used in the valuation. The external auditors are appointed by the shareholder pursuant to the Insurance Companies Act (Canada). Their responsibility is to conduct an independent and objective audit of the Financial Statements in accordance with Canadian generally accepted auditing standards and report thereon to the shareholder regarding the fairness of presentation of the Company s Consolidated Financial Statements in accordance with International Financial Reporting Standards. In carrying out their audit, the auditors make use of the work of the actuary and the actuary s report on the claim and premium liabilities. The auditors report outlines the scope of their audit and their opinion. Opinion of the Actuary I have valued the policy liabilities of The Guarantee Company of North America for its consolidated balance sheet at December 31, 2015 and their change in the consolidated statement of income for the year then ended in accordance with accepted actuarial practice in Canada, including selection of appropriate assumptions and methods. In my opinion, the amount of policy liabilities makes appropriate provision for all policy obligations and the Consolidated Financial Statements fairly present the results of the valuation. Signature of the Actuary André Racine, FCAS, FCIA Printed name of Actuary February 23, 2016 Date opinion was rendered FCIA 36

35 Independent Auditors Report To the Shareholder of The Guarantee Company of North America We have audited the accompanying Consolidated Financial Statements of The Guarantee Company of North America, which comprise the Consolidated Statement of Financial Position as at December 31, 2015 and the consolidated statements of comprehensive income, changes in shareholder s equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these Consolidated Financial Statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Consolidated Financial Statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the Consolidated Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the Consolidated Financial Statements 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of The Guarantee Company of North America as at December 31, 2015 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Kitchener, Canada February 24, 2016 Chartered Professional Accountants Licensed Public Accountants 37