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					EGI FInancIal HoldInGs Inc. 2011




A Bright Road Ahead
Back on Track




egi recorded an exceptional improvement in operating performance in
2011, returning to underwriting profitability after negotiating a challenging
stretch of road for the property & casualty insurance industry. our quick
turnaround accelerated the timeline to achieve the goals included in our long-
term strategic plans. Combined with investment income, it pushed us to our
seventh consecutive year of profitability.


driving this improvement in operations has been our experienced management
team, who implemented initiatives in 2010 and 2011 to restore profitability
across egi’s lines of business. A disciplined approach to underwriting, along
with improving conditions in the ontario automobile insurance market,
contributed to a vast improvement in our claims experience – our loss ratio in
the fourth quarter of 2011 was its lowest since 2007.




Net Earned Premium                    Net Income                           Book Value
in millions of dollars                in millions of dollars               per share

                                                                     $20                              $16
                               $200




                                                                     15                               12
                               150




                                                                     10                               8
                               100




                               50                                    5                                4




                               0                                     0                                0
07     08     09     10   11          07     08     09     10   11         07    08    09   10   11
THE sTrEnGTH To GroW




Minimum Capital Test ratio        Now, we are seeing growth in newer lines of
Echelon General                   business and geographies. A new market cycle

238%                              in ontario automobile insurance bodes well for
                                  our core business. it’s an ideal time for us to use
                                  the platform we’ve built to explore profitable
A.M. Best financial strength
                                  new segments in specialized insurance.
rating Echelon General


b++                               to fund our growth plans, we have ensured we
                                  have financial strength and that our regulated
                                  entities are well-capitalized. our approach has
                                  always been to deploy our capital wisely and invest
                                  conservatively, to ensure returns can be achieved
                                  through all investment market conditions. in 2011,
                                  we recorded healthy investment income and grew
                                  our investment portfolio, despite historic lows in
                                  investment yields and a downturn in the volatile
                                  equity markets.




Investment Portfolio                             Asset Mix           Quality of Fixed Income


                                           Asset Mix                     Quality of Fixed Income



%404m                        Premium Financing
                                   Receivables

                               Common
                                                    Cash
                                                                           BBB
                                                                                 <BB




                                 Shares
                                                                     A
                               Preferred                                                           AAA
                                 Shares



                                                             Bonds
                                                                                  AA

                                                                             $294 million



                                                                                                   1
    pErsonal lInEs




    Focused on underwriting non-standard automobile and
    motorcycle insurance. the division also has a growing
    business insuring antique and classic vehicles, trailers,
    motor homes and recreation vehicles in Canada. in 2011,
    Personal Lines accounted for 72% of premium volume.




2   EGI Financial Holdings Inc.
our focus in the Personal Lines division is to ensure our core non-standard
automobile insurance business in ontario remains strong and profitable.
in 2011, this division recorded a $14 million improvement in underwriting
income, benefiting from both egi’s actions to return it to profitability and
provincial government reforms in ontario aimed at addressing the rapidly
escalating costs of automobile insurance claims. the division exceeded its
target profitability and recorded a significantly improved loss ratio. As part
of our strategic planning and analysis process, egi has moved to diversify
the division’s writings both geographically and by vehicle type.


2012 Growth Strategy                                Net Earned Premium
                                                    in millions of dollars

•	   Maintain our dominant position in higher                                      $150
     premium non-standard automobile insurance
     with a focus on rural ontario, Quebec                                         120
     and Nova Scotia
•	   Continue expansion into “grey” markets–
     the undefined segment between standard                                        90

     and non-standard risks
•	   diversify motorcycle, specialty vehicle and                                   60

     commercial auto insurance geographically
     in Alberta and Quebec                                                         30

•	   invest in sophisticated pricing analytics to
     enable more precise segmentation of risks                                     0
                                                    07      08     09    10   11




                                                                                          3
    nIcHE producTs




    designs and underwrites customized specialty programs,
    in consultation with distribution partners and in response
    to a niche market demand, in segments such as higher-
    premium property, primary and excess liability, legal expense
    and accident and health insurance. in 2011, Niche Products
    accounted for 26% of premium volume.




4   EGI Financial Holdings Inc.
our Niche Products division’s goal is to increase underwriting income by
working with producers to target new and innovative growth opportunities
in areas not covered by traditional insurers while we continue to keep focused
on our core operating principles – maintaining control of underwriting
and claims, closely monitoring results and reacting quickly to emerging
trends. Consistent with our philosophy of financial discipline, the division
cancelled a number of programs in 2011 due to unprofitability or a lack of
growth potential.



2012 Growth Strategy                               Net Earned Premium
                                                   in millions of dollars

•	   grow commercial Property & Casualty                                          $50
     insurance program business through
     managing general agents                                                      40
•	   expand service capabilities in the areas
     of underwriting, billing and policy
                                                                                  30
     administration
•	   grow Accident & health business by
                                                                                  20
     developing specialized solutions for
     small employer groups
                                                                                  10



                                                                                  0
                                                   07     08     09     10   11




                                                                                        5
    u.s. and InTErnaTIonal dIvIsIons




    the U.S. division is a start-up operation focused on writing
    non-standard automobile insurance in the southeastern United
    States, currently in Florida and texas.

    the international division comprises all business outside
    of Canada and the United States, which includes Qudos
    insurance, an insurance company domiciled in denmark and
    CiM reinsurance Company, the group’s captive reinsurance
    company domiciled in Barbados.




6   EGI Financial Holdings Inc.
in the second half of 2011, following a gradual and cautious entry into the
market, egi’s U.S. division began to write premiums approaching a material
level in Florida and texas. our U.S. initiative, led by a management team
with extensive experience in non-standard auto insurance in the region, is
a major step by egi in the execution of our diversification and expansion
strategies. the company continued that progress in the fourth quarter of 2011
when we began operations in europe through acquiring controlling interest
of the newly incorporated insurance company, Qudos. Qudos commenced
writing business in early 2012.

2012 Growth Strategy                              Direct Written Premiums
                                                  in millions of dollars

U.S Division                                                                $2.0


•	   Build profitable non-standard automobile
     insurance in Florida and texas                                         1.5
•	   Continue to seek acquisition opportunities
     that accelerate growth strategy
                                                                            1.0
International Division

•	   develop a portfolio of european niche
     insurance programs, similar to those                                   0.5
     underwritten by our Niche Products
     business in Canada
                                                                            0
•	   Utilize offshore reinsurance to generate     Q3 Q4 Q1 Q2 Q3 Q4
     tax and capital efficiencies                   2010             2011




                                                                                   7
    drIvInG ForWard




    our Mission

    to focus on targeted solutions where we can differentiate
    ourselves in the market and that require the high level of
    expertise of our organization. We will differentiate ourselves
    through optimum service and the sophisticated management
    of risk. We will operate in a responsible, ethical manner
    while generating high growth, strong underwriting results
    and a superior return on shareholders’ equity.



8   EGI Financial Holdings Inc.
our vIsIon




To be recognized as a leading global provider
of specialized insurance solutions.
EGI FINANCIAL HOLDINGS INC . 2011




Financial Review
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
and Consolidated Financial Statements
LETTER TO SHAREHOLDERS


2011 was an exceptional year for EGI. We achieved our                Along with Ontario Auto, the continued profitability of our
primary goal of returning to underwriting profitability thanks       Quebec, Nova Scotia, and specialty vehicle business also
to a remarkable improvement in our core business. At the same        contributed to the excellent underwriting results in our
time, we maintained our financial strength and continued             Personal Lines division. In 2011, the division produced an
to generate strong investment income despite a downturn              underwriting profit of $7.0 million compared to a loss of
in the equity markets and historically low fixed income              $7.0 million in 2010.
yields. Additionally, we pursued our strategy to diversify
geographically, both within Canada and the United States as          Our measures to restore profitability have also extended to
well as in Europe through our newly incorporated European            our Niche Products division. In 2011, we cancelled some of
insurance company.                                                   the division’s unprofitable programs and rehabilitated others,
                                                                     leading to a decline in the division’s loss ratio. These changes
Overall, 2011 marked our seventh consecutive year of                 were consistent with our previously stated plan to take a more
profitability, one in which net earned premiums were up, net         active approach to program management, including re-pricing
incurred claims were down significantly and net income per           or canceling programs that don’t meet our performance
diluted share increased 88 percent. We generated an overall          expectations, exercising greater financial discipline and taking
underwriting profit for the full calendar year, and we finished      a back-to-basics approach by renewing our focus on the
the year particularly strong. Our loss ratio for the fourth          division’s core operating principles. In 2012, we will continue
quarter of 2011 was the best we’ve seen in four years. These         this disciplined approach and work toward our goal of
achievements have placed us a full year ahead of the timeline        delivering consistent underwriting profitability.
set out in our long-term strategic plan.
                                                                     2011 was the first full year of operation for our U.S. division in
Our improvement has been the result of management                    its current form and we are pleased with its initial sales activity
initiatives which began in 2010 and continued last year to           and organic growth. The division recorded four consecutive
restore profitability across our lines of business. These remedial   quarters of increased premium volume, recording $1.9 million
actions have been assisted partially by improving conditions in      of written premiums in the fourth quarter. In the last half of
the Ontario auto insurance market, facilitated by the provincial     2011, we saw typical hardening market conditions in Florida.
government’s insurance reforms enacted in September 2010.            Regulators are allowing substantial rate increases, insurers
We believe that the combined impact of our initiatives and           are reducing their underwriting templates, companies are
improving market conditions put us in a strong position to           exiting certain regions and, in some cases, capital is leaving
achieve our goal of delivering consistent underwriting profits       the state. We expect these improving market conditions to
over the long term.                                                  provide benefits to EGI. The Company is a new entrant to
                                                                     the region and is not constrained by legacy pricing structures
I assumed the role of Chief Executive Officer with great             and underwriting templates. Texas remains a competitive
enthusiasm at the beginning of 2011, feeling privileged to lead      market but we continue to realize steady growth in our sales
a company with such a proud history of strong growth and             activity in that state also. Our plan for 2012 is to continue our
profitability. In my inaugural Letter to Shareholders last year,     momentum in premium growth in Florida and Texas through
I emphasized our commitment to ensuring our core Personal            the use of sophisticated pricing methodologies. Later, once
Lines business was strong and profitable. I’m very pleased to see    scale and profitability have been achieved, we will enter other
that this division exceeded its target profitability for the year.   southeastern states. Over the long term, we expect the U.S.
                                                                     business to be a significant contributor to our overall results.
Despite operating in an environment where claims costs are
improving but still high, we recorded an underwriting profit         Our International division comprises all business outside
in Ontario Auto, which accounts for close to half of our total       Canada and the United States. In the last quarter of 2011,
premium volume. We have been seeing positive results from            we launched our new European-based insurance company,
the Province of Ontario’s regulatory reforms and the continued       Qudos. In early 2012, the Company commenced underwriting
industry-wide fight against fraudulent and embellished claims.       operations, writing business in various European countries
We also benefited from significant premium rate increases over       that is very similar in nature to the business underwritten by
the past 18 to 24 months. Finally, we saw the positive impact of     our Niche Products division in Canada. Its business will be
the remedial actions we took to restore profitability, including     distributed through brokers and managing general agencies
reducing exposure in unprofitable areas with targeted rate           in Europe, where the non-life insurance industry comprises a
increases, terminating selected broker relationships and             market with premiums of €400 billion. Approximately one-
reducing broker commissions in selected jurisdictions, as well       third of Qudos’ business will be reinsured to EGI’s captive
as our judicious use of the industry’s Risk Sharing Pool. We         reinsurance company CIM Re, thereby retaining that portion
believe we are now ahead of many of our competitors and in           of the business within EGI. Our Vice-Chairman and former
a strong position to benefit from improved market conditions         CEO, Doug McIntyre, will serve as Chairman of Qudos and its
and a new market cycle.                                              Danish holding company.




                                                                                 EGI Financial Holdings Inc. – Annual Report 2011 1
EGI’s return to underwriting profitability in 2011 was               In closing, I would like to thank our Board of Directors
important in what was, and is expected to be for the                 for their counsel and oversight. I would also like to extend
foreseeable future, a difficult period for global capital markets.   my appreciation to our management and employees. It is
Bond yields are at historic lows and returns from the equities       their dedication and hard work, along with their experience
markets are volatile. Despite this environment, we recorded          and expertise, that resulted in a successful 2011 and has
healthy investment income of $14 million in 2011. Our                positioned us well for future success. Finally, I would like
Company is well capitalized and our balance sheet is strong.         to thank you, our shareholders, for your continued support.
We have a high quality investment portfolio, no goodwill             EGI is an organization committed to generating shareholder
and no debt. This strong financial footing will facilitate the       value through consistent, profitable growth. I look forward to
continued growth of our Company.                                     reporting our progress throughout 2012.

To summarize, I am extremely pleased with the current                Sincerely,
state of our business and our prospects for 2012. Our plan
is to ensure our momentum continues so we can deliver
consistent underwriting profits in both Personal Lines and
Niche Products over the long term. We will build upon this
increasingly solid foundation to grow as a company both
organically and by capitalizing on other specialty insurance         Steve Dobronyi
opportunities that present themselves in the market. EGI’s           CEO, EGI Financial Holdings Inc.
vision is not only to be the dominant provider of non-standard
auto insurance in Canada but to be recognized as a leading
global provider of specialized insurance solutions.




2 EGI Financial Holdings Inc. – Annual Report 2011
TABLE OF CONTENTS


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements ........................................................................................................................................4
Financial Highlights ......................................................................................................................................................................................................................5
2011 Financial Overview ............................................................................................................................................................................................................6
Company Overview ......................................................................................................................................................................................................................6
Outlook .............................................................................................................................................................................................................................................8
Strategy ............................................................................................................................................................................................................................................8
Competitive Strengths ................................................................................................................................................................................................................9
Personal Lines Division ............................................................................................................................................................................................................ 10
Niche Products Division .......................................................................................................................................................................................................... 10
U.S. Division ................................................................................................................................................................................................................................. 11
International Division ................................................................................................................................................................................................................ 11
Segmented Financial Information ....................................................................................................................................................................................... 12
Revenue ......................................................................................................................................................................................................................................... 13
Expenses ....................................................................................................................................................................................................................................... 13
Significant Transactions........................................................................................................................................................................................................... 14
Regulation ..................................................................................................................................................................................................................................... 14
Critical Accounting Estimates and Assumptions........................................................................................................................................................... 14
Summary of Quarterly Results.............................................................................................................................................................................................. 16
Quarter Ended December 31, 2011, Compared To Quarter Ended December 31, 2010............................................................................... 16
Insurance Operation.................................................................................................................................................................................................................. 17
Year Ended December 31, 2011 Compared to 2010 .................................................................................................................................................... 18
Insurance Operation.................................................................................................................................................................................................................. 18
Year Ended December 31, 2010 Compared to 2009 .................................................................................................................................................... 20
Balance Sheet Analysis ............................................................................................................................................................................................................ 22
Liquidity and Capital Resources........................................................................................................................................................................................... 26
Transactions with Related Parties ....................................................................................................................................................................................... 27
Risk Management....................................................................................................................................................................................................................... 27
Risk Factors .................................................................................................................................................................................................................................. 28
Corporate Governance ............................................................................................................................................................................................................. 31
Future Changes in Accounting Policies and Disclosure.............................................................................................................................................. 32
Controls and Procedures......................................................................................................................................................................................................... 33
Capital Resources ...................................................................................................................................................................................................................... 33
Glossary Of Selected Insurance Terms .............................................................................................................................................................................. 34


CONSOLIDATED FINANCIAL STATEMENTS
Management’s Responsibility for Financial Reporting ................................................................................................................................................ 35
Independent Auditor’s Report .............................................................................................................................................................................................. 36
Appointed Actuary’s Report.................................................................................................................................................................................................. 38
Consolidated Balance Sheets ............................................................................................................................................................................................... 39
Consolidated Statements of Income and Comprehensive Income ........................................................................................................................ 40
Consolidated Statements of Changes in Equity ............................................................................................................................................................ 41
Consolidated Statements of Cash Flows .......................................................................................................................................................................... 42
Notes to Consolidated Financial Statements ................................................................................................................................................................. 43
Shareholder Information ......................................................................................................................................................................................................... 68




                                                                                                                                                    EGI Financial Holdings Inc. – Annual Report 2011 3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and 12 month periods ended December 31, 2011


EGI Financial Holdings Inc. (“EGI” or “the Company”)               CAUTIONARY NOTE REGARDING
prepares its financial statements in accordance with
                                                                   FORWARD-LOOKING STATEMENTS
Canadian generally accepted accounting principles (GAAP)
as set out in the Handbook of the Canadian Institute of            EGI uses both IFRS and certain non-IFRS measures to assess
Chartered Accountants (CICA Handbook). In 2010, the                performance. Securities regulators require that companies
CICA Handbook was revised to incorporate International             caution readers about non-IFRS measures that do not have
Financial Reporting Standards (IFRS), and requires publicly        a standardized meaning under GAAP and are unlikely to be
accountable enterprises to apply such standards effective for      comparable to similar measures used by other companies.
years beginning on or after January 1, 2011. Accordingly, the      EGI analyzes performance based on operating income and
Company has commenced reporting on this basis in these             underwriting ratios such as combined, expense and loss ratios.
consolidated financial statements with an effective transition
date of January 1, 2010.                                           The following discussion contains forward-looking
                                                                   information that involves risk and uncertainties based on
In this Management Discussion & Analysis (MD&A), the               current expectations. This information includes, but is not
term Canadian GAAP refers to Canadian GAAP before the              limited to, statements about the operations, business, financial
adoption of IFRS. The consolidated financial statements for the    condition, priorities, targets, ongoing objectives, strategies and
years ended December 31, 2011, and 2010 have been prepared         outlook for EGI in 2012 and subsequent periods.
in accordance with IFRS applicable to the preparation of
financial statements, including IFRS 1. Subject to certain         This information is based upon certain material factors or
transition elections disclosed in note 5 of the consolidated       assumptions that were applied in drawing a conclusion or
financial statements, EGI has consistently applied the same        making a projection as reflected in the forward-looking
accounting policies in its opening IFRS statement of financial     information. By its nature, this information is subject to
position at January 1, 2010, and throughout all periods            inherent risks and uncertainties that may be general or specific.
presented, as if these policies had always been in effect.         A variety of material factors, many of which are beyond EGI’s
                                                                   control, affect the operations, performance and results of
Note 5 discloses the impact of the transition to IFRS on           EGI and its business and could cause actual results to differ
the Company’s reported financial position, financial               materially from the expectations expressed in any of this
performance and cash flows, including the nature and effect        forward-looking information (see “Risk Factors”).
of significant changes in accounting policies from those used
in EGI’s consolidated financial statements for the year ended      EGI’s actual results could differ materially from those
December 31, 2010. The policies applied in the consolidated        anticipated in this forward-looking information as a result of
financial statements are based on IFRS, issued and outstanding     various factors, including those discussed in this Management’s
as of December 31, 2011.                                           Discussion and Analysis. Forward-looking information is
                                                                   provided for the purpose of providing information about
The financial data for 2011 and 2010 in this discussion has been   management’s current expectations and plans relating to the
prepared in accordance with IFRS, and financial data prior to      future. Readers are cautioned that such information may not be
2010 has been prepared in accordance with Canadian GAAP.           appropriate for other purposes. Additional information about
                                                                   the risks and uncertainties about EGI’s business is provided
References to “EGI” or “the Company” in this Management’s          in its disclosure materials, including its annual information
Discussion and Analysis of Financial Condition and Results         form, filed with the securities regulatory authorities in Canada,
of Operations refer to EGI Financial Holdings Inc. on a            available at www.sedar.com. EGI does not undertake to update
consolidated basis, both now and in its predecessor forms.         any forward-looking information.
The following discussion should be read in conjunction with        Underwriting income and interest expense for 2007 in the
EGI’s audited consolidated financial statements and the related    following table has been restated to reflect the re-allocation
notes. The following commentary is current as of February          of interest expense, related to corporate indebtedness, as a
23, 2012. Additional information relating to EGI is available      separate line item after investment income in 2008. In 2011,
on SEDAR at www.sedar.com. Certain totals, subtotals and           premiums relating to the U.S. division have been shown
percentages may not reconcile due to rounding.                     separately, and accordingly the 2010 presentation has been
                                                                   changed to conform to the 2011 presentation. The restatement
                                                                   was made for comparative purposes only and does not affect
                                                                   net income after taxes.




4 EGI Financial Holdings Inc. – Annual Report 2011
FINANCIAL HIGHLIGHTS

                                                                                                                                      Year ended December 31
 ($ thousands except per share amounts)                                                 2011              2010             2009               2008              2007
 Revenue
 Direct written and assumed premiums
      Personal Lines/Auto                                                          126,220             134,041            117,291           121,410          109,870
      Niche Products                                                                44,678              51,423            46,571            49,320            48,065
      U.S. Division                                                                   3,994                207                   –                  –                  –
 Total direct written premiums                                                      174,892            185,671           163,862           170,730            157,935
 Net written premiums                                                               160,128           167,066            149,745            158,107            146,511
 Net earned premiums                                                               165,447            162,873            149,379            157,255           119,606
 Total underwriting revenue                                                        165,447            162,873            149,379            157,255           119,606
 Underwriting expenses
      Incurred claims                                                               107,258             119,130          108,194           105,837              71,179
      Acquisition costs                                                               37,178           35,834            34,429             37,026             26,143
      Operating expenses                                                            22,266               17,732           16,095             14,229            12,043
 Total underwriting expense                                                        166,702            172,696             158,718          157,092           109, 365
 Underwriting income (loss)                                                          (1,255)           (9,823)            (9,339)                163            10,241
 Investment income                                                                   13,867             17,465              17,771          10,009             12,954
 Interest expense                                                                           –              568               1,212             1,216                 259
 Income before income taxes                                                           12,612             7,074              7,220             8,956            22,936
 Income tax expense (recovery)
      Current                                                                          5,136              1,641             3,531             3,453                 7,839
      Deferred                                                                          (44)              1,281             (826)             (476)                   32
                                                                                      5,092              2,922             2,705              2,977                 7,871
 Net income                                                                           7,520               4,152             4,515             5,979            15,065
 Attributed to:
      Shareholders of the Company                                                      7,733              4,152             4,515             5,979            15,065
      Non-controlling interest                                                          (213)                  –                 –                  –                  –
                                                                                      7,520               4,152             4,515             5,979            15,065
 Earnings per share attributable to shareholders of the Company:
      Net income per share – basic                                                    $0.64              $0.35             $0.38              $0.57                 $1.56
      Net income per share − diluted                                                  $0.64              $0.34             $0.36              $0.53                 $1.45
 Book value per share                                                                $12.85              $12.14             $11.12           $10.16            $10.50
 Net operating income (loss)(1)                                                       8,585                939               (109)            9,807             12,921
 Net operating income per share – diluted(2)                                          $0.73             $0.08             $(0.01)             $0.87                 $1.24
 Net income                                                                           7,520               4,152             4,515             5,979            15,065
 Add impact of change in discount rate                                                 1,843               488                 (9)              924                    –
 Add (deduct) net realized loss (gain) on investments                                  (144)           (5,089)           (6,860)              4,833            (3,350)
 Fair value change on held-for-trading investments                                     (209)                 24                  –                  –                  –
 Tax impact                                                                            (425)             1,364             2,245             (1,929)                1,206
 Net operating income                                                                 8,585                939              (109)             9,807             12,921
(1) Net operating income is defined as net income plus or minus after-tax impact of change in discount rate on unpaid claims, realized losses or gains on sale of
    investments and unrealized fair value changes on held-for-trading investments.
(2) Net operating income is adjusted to that attributable to shareholders for per share calculation.




                                                                                                                    Management’s Discussion and Analysis 5
                                                                                                                                    Year ended December 31
 ($ thousands)                                                                         2011             2010             2009              2008               2007
 Balance Sheet Data
 Cash and short-term deposits                                                      30,839             17,033           46,885              29,111            22,785
 Investments                                                                      367,228           353,643          294,365            259,774             238,310
 Total assets                                                                     491,703           474,783          446,465           402,780              370,084
 Provision for unpaid claims                                                      254,519          239,036            207,220           185,255             169,091
 Unearned premiums                                                                 71,644            78,335            72,643             71,154             69,190
 Bank indebtedness                                                                         –                 –          19,550           19,550              19,550
 Total equity                                                                     154,820           146,366            133,431          118,604              101,671

The following table shows the Company’s selected financial ratios and return on equity (ROE) data. These ratios are defined in the
“Glossary of Selected Insurance Terms”.

                                                                                                                                    Year ended December 31
                                                                                       2011             2010             2009              2008               2007
 Selected Financial Ratios           (1)
                                           and Return on Equity (ROE) Data (%)
 Loss ratio                                                                           64.8               73.1             72.4              67.3               59.5
 Expense ratio                                                                        36.0              32.9              33.9              32.6               31.9
 Combined ratio                                                                      100.8             106.0             106.3              99.9               91.4
 ROE                                                                                    5.0               3.0               3.6               5.4               16.1
(1)   The underwriting ratios (the loss and expense ratios and the combined ratio) are all non-IFRS measures which are common insurance industry measures
      of performance.

2011 FINANCIAL OVERVIEW

                                                Full Year                                                                              Full Year
 ($ thousands)                                       2011               Q4                Q3               Q2                Q1            2010                 Q4
 Underwriting income (loss)                        (1,255)              852             (774)           (1,218)             (115)         (9,823)             2,057
 Net income (loss)                                  7,520            3,254              (171)            1,410            3,027             4,152             3,247


Net operating income, defined as net income (loss) plus or                           2011 includes net realized gains on the disposal of investments
minus after-tax impact of change in discount rate on unpaid                          of $0.1 million compared to net realized gains of $5.1 million
claims, realized losses or gains on sale of investments and                          in 2010. Included in net realized gains were impairment
unrealized fair value changes on held-for-trading investments,                       provisions of $6.6 million in 2011 (nil in 2010).
has significantly improved over the last two years; from a loss
of $0.1 million in 2009 to an income of $0.9 million in 2010                         Other comprehensive income (OCI) was $0.7 million, a
and $8.6 million in 2011. This reflects the partial recovery                         decrease of $7.5 million compared to $8.2 million in 2010.
of the markets in which the Company operates and, more                               OCI reflects the increase of the fair value of investments
importantly, the actions taken by management that began in                           classified as Available-for-Sale (AFS). Although a year-over-
the fourth quarter of 2010 to improve profitability. Accordingly,                    year decrease, the positive result reflects the strength of the
2011 underwriting income shows a significant improvement                             Company’s investment management.
over 2010.
                                                                                     At 2011 year end, total equity increased to $154.8 million
Net income after taxes for 2011 was $7.5 million, an increase                        compared to $146.4 million as at December 31, 2010.
of $3.4 million, or 81.1%, compared to net income of
$4.2 million in 2010. The large increase is attributable to a                        COMPANY OVERVIEW
significant improvement in underwriting performance with
                                                                                     EGI operates in the property and casualty (P&C) insurance
an underwriting loss of $1.3 million in 2011, comparing
                                                                                     industry in Canada, in the United States since 2007, and more
favourably to an underwriting loss of $9.8 million in 2010.
                                                                                     recently in Europe. The Company focuses primarily on non-
However, investment income, including realized gains (losses),
                                                                                     standard automobile insurance and other niche and specialty
decreased to $13.9 million from $17.5 million in 2010
                                                                                     general insurance products. Founded in 1997 as an insurance
coinciding with a downturn in the equities markets and the
                                                                                     and reinsurance broker and marketer, EGI has since developed
current low interest rate environment. Investment income in

6 EGI Financial Holdings Inc. – Annual Report 2011
its business to focus on underwriting opportunities not served       of total premiums underwritten in Ontario. The breakdown of
by many of the larger, standard insurers.                            direct written premiums by category of business and by region
                                                                     during 2011 is illustrated below.
EGI operates through two Strategic Business Units (SBUs) in
Canada, the Personal Lines division and the Niche Products           2011 Gross Written Premiums by Division
division. The Personal Lines division was created in 2006 to
                          Other 9.0%                                                         Niche Products 25.5%
transition the Automobile division into a multi-product, multi-
line SBU. Currently, the Personal Lines division focuses on the
                                Alberta 3.4%
underwriting of EGI’s non-standard automobile insurance, and
insurance for motorcycles, antique and classic vehicles, trailers,
                                  Nova Scotia 10.0%
motor homes and recreational vehicles. Through its Niche                                             U.S. 2.3%
Products division, EGI designs and underwrites specialized
insurance programs, such as higher premium property,
                                 Quebec 10.2%
primary and excess liability, legal expense and accident and
health insurance for a variety of businesses and consumers and
extended warranty coverage for homes, consumer products
                          Ontario 67.3%                                                        Personal Lines 72.2%
and heavy equipment.

In addition to the two SBUs in Canada, EGI formed its
                                                                     2011 Gross Written Premiums in Canada
International division in 2008 to leverage its strategy to expand
into the United States. In the fourth quarter of 2011, the U.S.                               Other 9.0%
operation, formerly the International division, was renamed
                                                                                                   Alberta 3.4%
the U.S. division. The International division now comprises all
business outside of Canada and the United States, including
Qudos Insurance A/S (Qudos), a newly-licensed (October                                               Nova Scotia 10.0%
2011) insurance company domiciled in Denmark and CIM
Reinsurance Company Ltd. (CIM Re), the group’s captive
reinsurance company domiciled in Barbados. The U.S. division                                       Quebec 10.2%
is focused on EGI’s personal lines business, predominantly
non-standard automobile insurance. As an interim step to
execute its strategy to expand into the United States, in 2007                               Ontario 67.3%
and 2008 EGI entered the U.S. non-standard auto insurance
market under reinsurance agreements with three arm’s-length
insurance companies that provide P&C insurance to the non-           74.5% of gross written premiums are attributed to the sale of
standard private passenger automobile segment of the industry        Personal Lines automobile policies (Canada and United States
and operate in several states in the south-eastern U.S. However,     combined). One of EGI’s diversification strategies is the growth
by early 2009 EGI had terminated the reinsurance agreements,         of its non-auto business in the Niche Products division, which
being dissatisfied with the results of these arrangements.           currently accounts for approximately 25.5% of gross written
Having acquired American Colonial Insurance Company in               premiums, and the growth of its U.S. and International divisions.
2010, EGI now intends to pursue its U.S. expansion exclusively
                                                                     The financial performance of EGI is determined by two main
as an insurer in its own right, as this enables it to implement
                                                                     factors: (i) the level of premiums earned in relation to claims
greater control over underwriting and claims.
                                                                     and operating costs incurred; and (ii) the returns generated
Qudos has recently commenced underwriting operations,                from its investment portfolio. Premiums collected are
writing business in various European countries, which is very        ultimately used to pay claims and operating expenses. There
similar in nature to the business underwritten by EGI’s Niche        is, however, a time lapse between the collection of premiums
Products division in Canada. Approximately one-third of              and the payment of claims and certain operating expenses.
Qudos’ business will be reinsured by CIM Re, thereby retaining       This allows EGI to invest premiums collected and earn an
that portion of the business within EGI. Approximately               investment return until claims and operating expenses are
72.2% of EGI’s written premium revenue in 2011 was from its          paid. EGI also earns an investment return on invested capital.
Personal Lines business in Canada with approximately 67.3%




                                                                                            Management’s Discussion and Analysis 7
OUTLOOK                                                            the combining or “stacking” of physical and psychological
                                                                   impairments in assessing “whole person impairment”. The
The instability of the automobile insurance market continues       ruling’s full impact will not be known for some time; (b) recent
to provide potential opportunities for non-standard and niche      rate filing approvals in Ontario have clearly started to slow
insurers such as EGI. Industry prices are generally inadequate,    as standard/direct writers see improving market conditions,
competitors are reviewing their strategies and the extended        due to reforms that have not fully played out. Many of these
soft market of the past number of years is showing signs of        insurers appear to be gearing up for market share drives.
hardening, a cycle where insurers become more stringent
in their underwriting. Through this long phase of market           In 2012, the U.S. division will continue its cautious and
contraction, EGI has preserved its capital and focused where       prudent approach to growing its operations organically
possible on profitable lines of business. EGI is now well          in Florida and Texas. EGI’s goal is to gradually enter the
positioned to take advantage of the opportunities that the         non-standard auto insurance business in select southeastern
changing market cycle may offer, as is outlined more fully in      U.S. markets. The Company will utilize its pricing analytics
“Personal Lines Division” on page 10. The objective is to ensure   to establish conservative prices and underwriting templates
that EGI’s core non-standard automobile insurance business         and will adjust rates in select areas over time, as experience
remains strong and profitable while the Company prepares for       emerges and market conditions evolve. Again, the focus will be
the gradual hardening of the market.                               on underwriting profits rather than growth.

In 2011, the automobile insurance industry had improved            With a partial recovery in the Canadian auto insurance market
results over 2010 but the industry continued to operate at high    underway and having taken actions to successfully return
loss ratios and the market remains very competitive. A low         the non-standard and auto business to profitability, EGI will
interest rate environment has limited the investment income of     continue to focus on profitable organic growth opportunities
all insurance companies, which has created a greater emphasis      by expanding on its existing business. It will shift some of its
on underwriting results. The impact of past actions taken by       focus to geographic diversification and growth strategies and
standard insurers seems to have reversed somewhat with signs       seek out and consider acquisition opportunities that accelerate
of tighter underwriting by those insurers towards the end of       its strategic direction in Canada and the United States.
the year. Because auto insurance rate increases are regulated,
standard auto insurance companies are usually limited in           The International division is expected to write business and
the amount they can increase their rates at any one time.          grow at a healthy rate in 2012.
Therefore tighter underwriting is their only option to fully
restore profitability and achieve their desired underwriting       STRATEGY
margin. This market hardening has compounding effects
                                                                   EGI’s business strategies and actions are guided by its vision: “be
that can benefit EGI. Firstly, as standard insurers tighten
                                                                   recognized as a leading global provider of specialized insurance
their underwriting, EGI’s sales tend to increase as marginal
                                                                   solutions”. EGI’s objective is to deliver an ROE superior to the
risks naturally flow to non-standard insurers. Secondly, these
                                                                   average of the Canadian P&C insurance industry through a
so-called “grey market” risks tend to be more profitable, as
                                                                   comprehensive specialized insurance offering.
EGI collects non-standard premiums on risks that formerly
qualified as standard. Thirdly, EGI should retain the best         The Company does not strive to compete on price. EGI’s
risks in its renewal book of business, since tighter industry      goal is to target niches that are currently underserved by the
underwriting will restrict EGI’s policyholders’ options to         market and which require the high level of expertise of its
find alternative coverage with EGI’s competitors. The auto         organization. EGI’s strategic focus is to: i) increase the level of
insurance reform that took effect in Ontario in September          sophistication in the selection and management of risk; and ii)
of 2010 appears to have improved results of the industry           improve service and ease of doing business with its producers.
according to industry analysis. It is not known with certainty
at this time what the ultimate impact of these reforms will be;    For 2012, EGI’s strategic goals remain focused on driving
however, the reforms are designed and expected to have some        profitable business growth by leveraging and building on its
positive effect on claims costs, while curtailing large premium    strengths and expanding its business outside of Canada.
rate increases to consumers.
                                                                   In order to achieve this objective, EGI will:
Overall, EGI is uniquely positioned to capitalize on its
strong capital base, the state of the auto insurance market        Protect the core. EGI concentrates on what it considers to be the
and the changing strategies of its competitors. This is a          best segments of the non-standard automobile insurance market,
rare opportunity to shape industry rates and rules, explore        which has resulted in above-average underwriting margins over
profitable new segments and emerge from 2011 as the pre-           the long term. EGI will ensure that its core non-standard auto
eminent provider of non-standard automobile insurance              insurance businesses in Canada remain strong and profitable.
in Canada. There are, however, two caveats: (a) the Ontario        The Company is investing in sophisticated pricing analytics,
Court of Appeal ruling in the Kusnierz v. Economical case          which is expected to assist in achieving profitability and growth
has negative implications for the industry as it permits           through more precise segmentation of risk. While considering
                                                                   take-all-comers through its producer appointments, the Company

8 EGI Financial Holdings Inc. – Annual Report 2011
will continue to limit offering of risks in the Greater Toronto Area   COMPETITIVE STRENGTHS
where claims costs are high; closely monitor the impact of Ontario
reforms; and continue to expand cautiously into the “grey”             EGI believes that it is uniquely positioned to be the market
markets of its most profitable segments.                               leader in the specialty P&C insurance industry for the
                                                                       following reasons:
Diversify by product. Brokers need specialty insurers to cover
all of their customers’ insurance requirements and EGI’s Niche         Comprehensive specialized insurance offering. EGI offers
Products division is well positioned to respond to these market        its producers a comprehensive line of insurance products
opportunities.                                                         comprised of non-standard and specialty vehicle automobile
                                                                       insurance and specialized non-auto insurance products and
Working closely with producers, EGI will continue to pursue            programs. Responding to a market need, EGI thoroughly
new and innovative growth opportunities that are not offered           researches a product opportunity and develops underwriting
by traditional insurers. The Company will remain focused               procedures and ratings that can both meet the customers’
on its core operating principles—maintaining control of                requirements and earn an attractive ROE for EGI. The Company
underwriting and claims, closely monitoring results and                then arranges for distribution through its distribution channels.
reacting quickly to emerging trends.
                                                                       Entrepreneurial culture. EGI fosters a responsive, entrepreneurial
Diversify geographically. EGI has been writing non-standard            environment which encourages experimentation and innovation
auto insurance in select U.S. markets. The U.S. initiative is a        in the development of new niche programs and the flexibility to
major step by the Company in pursuing its diversification and          allow for unique, tailor-made solutions to meet market demand.
expansion strategies. EGI’s management team has extensive
past experience with the acquisition and operation of U.S.             Strong customer service focus. EGI believes that its
non-standard auto carriers. It will use sophisticated pricing          strong reputation for customer service with its producers
methodologies to grow in select areas of the Texas and Florida         and policyholders is a differentiating factor from both an
markets and begin to enter certain southeastern states. The            underwriting and a claims standpoint. Automobile policies
Company will also be monitoring other Canadian jurisdictions           are typically issued in five business days or less from receipt of
for opportunities in underdeveloped and underserved markets.           the completed application. In the last published Automobile
                                                                       Claims Satisfaction Survey (2005) of insurers, EGI ranked
In the fourth quarter of 2011, EGI started operations in Europe        highest among its non-standard auto competitors. Because
by way of a 51% ownership of QIC Holdings ApS (QIC). QIC is            of limited competition in niche markets, EGI believes that its
a newly-formed Danish holding company with a wholly-owned              strong customer-service focus provides stability to the existing
subsidiary, Qudos Insurance A/S (Qudos), a newly-incorporated          business and future growth opportunities with existing and
insurance company, based in Denmark. QIC had no assets or              new producers.
liabilities prior to this transaction.
                                                                       Financial strength. EGI has a strong capital base relative to its
Expertly service producers. EGI strives to provide an                  current underwriting commitments, as evidenced by the strong
optimum level of service at the right cost to its policyholders        Minimum Capital Test (MCT) ratio of its main insurance
and producers. The Company is investing in technology that             subsidiary. Echelon General Insurance Company’s (Echelon)
will provide seamless interaction with brokers. EGI has created        MCT ratio as at December 31, 2011, was 238% compared to
and implemented written service standards in all departments           the P&C insurance industry average MCT ratio of 233% (as
interfacing with policyholders or producers. Staff members             per the Office of the Superintendent of Financial Institutions’
in these departments are thoroughly trained in the delivery            (OSFI) third-quarter 2011 information). EGI’s net Premiums-
of quality service to achieve these standards at a minimum.            to-Capital ratio is a conservative 1.1:1. It has a high quality
This service commitment ensures that its policyholders and             investment portfolio—over 88.9% of its fixed income portfolio
producers continue to be served by knowledgeable employees             is investment grade. It has no debt on its balance sheet, no
in a responsive manner. In order to maintain this standard             goodwill and intangible assets consisting of computer software.
of service, EGI continuously invests in the development of             Echelon has an A.M. Best financial strength rating of B++
processes, tools and technology to facilitate easier pathways          (Good). EGI intends to preserve and grow its underwriting
to transact business, which encourage producers to do more             capital through appropriate pricing, underwriting discipline
business with EGI.                                                     and conservative accounting and loss reserving practices.

Invest in people and tools. EGI recognizes that its success            Experienced management team. EGI has a seasoned group
is dependent on a strong organization of good people and               of owner-managers who have worked together successfully
sophisticated tools and technology. The Company concentrates           for years. With an average of over 20 years of experience in
on attracting, developing and retaining talent in an interesting       senior positions within the insurance industry, the executive
and challenging work environment. EGI will align investments           management team has extensive knowledge in non-standard
in technology with the goals of its business—to enhance risk           and niche insurance products together with an entrepreneurial
selection and improve service.                                         thrust and a decisive, collegial management style.



                                                                                              Management’s Discussion and Analysis 9
PERSONAL LINES DIVISION                                            In recent years, EGI has focused on appointing brokers and
                                                                   agents in rural and smaller urban centres as experience has
As part of its strategic planning and analysis process, EGI has    shown that these areas are consistently more profitable. This
moved to diversify its writings—both geographically and by         strategy has resulted in enhanced underwriting margins that,
product line, including the creation, development, marketing       on average, exceed the industry average.
and processing of new personal lines product offerings.
                                                                   As part of the strategy to develop business in other vehicle
These new offerings, in conjunction with the Company’s core,       types, EGI entered into an exclusive arrangement with
non-standard automobile product, will provide distributors         a specialist broker (in the first quarter of 2006) to write
with a wider array of personal lines products (which have          motorcycle business in Ontario. Direct written premiums
historically been underserved by the standard market). This        from this arrangement, along with producers of motorcycle
will be accomplished by utilizing the same niche underwriting      business in other jurisdictions, totaled $16.7 million in 2011
philosophy and discipline that has been the hallmark of            and $15.9 million in 2010.
EGI’s activities.
                                                                   EGI will maintain and grow its Personal Lines division
Although the non-standard automobile segment remains the           business by employing the following strategies:
largest, single component of EGI’s activities, the additional
personal lines products will facilitate additional production      •	 Protect its dominant position in targeted non-standard auto
and diversification, making the Company an even more                  markets. Monitor the impact of recent government reforms
important partner for its distributors. In this manner, the non-      aimed at further reducing claims costs, which may allow EGI
standard automobile segment will continue to form the critical,       to increase its business activities in certain urban markets.
but not sole, component of the Personal Lines division.
                                                                   •	 Continue its careful entry into targeted “grey” market
The non-standard automobile segment currently targeted by             segments.
EGI’s Personal Lines division is high-premium insurance for        •	 Continue to build the Company’s profitable personal and
drivers who, because of inexperience or a poor driving record,         commercial auto lines of business in the province of
are not able to obtain insurance from standard insurers. EGI           Quebec. Quebec personal lines production in 2011 totaled
provides coverage for private passenger vehicles as well as            $10.9 million. Quebec remains a critical territory in EGI’s
single commercial vehicles and small commercial and farm               efforts to diversify geographically.
fleets. Management believes that EGI’s underwriting discipline,
                                                                   •	 Use existing expertise to increase business in other lines
claims expertise, strict controls and experienced management
                                                                      of specialty auto insurance products such as coverage for
team, who are well-versed in the nuances of non-standard
                                                                      motorcycles, snowmobiles, all terrain vehicles, antique autos
auto, enable the Company to select those drivers in the
                                                                      and recreational vehicles.
higher premium categories who have a proportionally lower
potential claims risk. Concurrently, the Company has steadily      •	 Continue to develop its predictive analytics capabilities.
expanded its reach into targeted, “grey” market segments. To       •	 Provide seamless interaction with brokers.
date, these efforts have produced profitable results and reduced
dependence on purely non-standard risks (although the latter       •	 Continue to monitor and participate in the review of Alberta’s
still represent the bulk of auto writings).                           grid rating system by the Alberta Automobile Insurance Rate
                                                                      Board, with a view to reactivating distribution of EGI’s private
For applicants paying the higher premiums for non-standard            passenger automobile insurance coverages in that province
automobile insurance, price is the single most important              (should a viable opportunity be proven).
consideration. EGI provides selected drivers with a lower          •	 Continue to expand non-standard auto writings in
premium option than the higher premium coverage offered               jurisdictions where EGI earlier withdrew or restricted its
by the Facility Association (or the Groupement in Quebec),            premium writing—such as Nova Scotia, Prince Edward
the industry-operated pools that serve as the “markets of last        Island and New Brunswick.
resort.” EGI targets drivers most likely to be “reformers” not
“repeaters”. These non-standard auto risks fall between Facility   NICHE PRODUCTS DIVISION
Association and the applicants normally targeted by standard
                                                                   EGI’s Niche Products division, established in 2003, provides
market insurers. The likely reformer expresses concern with
                                                                   specialized commercial and personal insurance products and
respect to his or her poor driving record and will exhibit
                                                                   programs. This division works with P&C insurance brokers,
a sincere desire to improve (so as to re-enter the standard
                                                                   managing general agencies (MGAs), benefit consultants,
market at standard rates). EGI trains its brokers and agents to
                                                                   warranty product distributors and third-party administrators
select qualifying risks. EGI then employs the experience of its
                                                                   (TPAs) to design insurance and warranty product solutions
underwriting personnel to ensure that complete and accurate
                                                                   that respond to unique distribution opportunities and gaps in
underwriting and rating information has been developed.
                                                                   the insurance market created by traditional insurers’ focus on
                                                                   standardized coverage. The Niche Products division is focused



10 EGI Financial Holdings Inc. – Annual Report 2011
on satisfying its distributors’ need for customized consumer         •	 Strategically grow its Accident & Health business through an
oriented solutions that differentiate them from the product             investment in technology and commitment to service.
offerings provided by standard market insurers. Staffed with         •	 Ensure that the Niche Products division grows organically
experienced insurance professionals, the division researches            by continuing to provide unique expertise and superior
and designs specialty insurance programs in response to                 service in response to all business inquiries.
market demand. These programs are then distributed and
administered by the initiating broker, MGA, TPA or other             •	 Develop systems, processes and administrative capabilities
intermediary who has worked closely with the Niche Products             that ease the administrative burden of its distributors.
division to design the insurance solution.                           •	 Attract high quality profitable program business by offering
                                                                        a unique opportunity for distribution partners to enter into
EGI has identified niche market segments within five product            risk-sharing arrangements with EGI.
areas that offer opportunities for profitable growth: property
insurance; commercial general liability and professional             •	 Seek opportunities for the Niche Products division to grow
liability insurance; casualty insurance; accident and health            through select acquisitions of books of business, distributors,
insurance; and warranty products. Within each of these                  administrators or an insurance company.
areas, EGI concentrates its underwriting within the sub-
segments where the risk characteristics of the business offer        U.S. DIVISION
an opportunity to obtain a higher rate relative to the specific
                                                                     In the fourth quarter of 2011, the U.S. operations, formerly
exposure than would be available within the broader segment
                                                                     the International division, was renamed the U.S. division. The
of that niche market. This focus allows EGI to seek a per-risk
                                                                     International division now encompasses all business outside of
margin that exceeds what is available in the standard market.
                                                                     Canada and the United States.
An important component of the niche products market is the
                                                                     In 2008, EGI formed the International division to focus on its
degree to which significant expertise often resides at the broker
                                                                     strategy to expand into the U.S. On March 1, 2010, Echelon
and distributor level. The distribution partners EGI selects have
                                                                     Insurance Company of America acquired and merged with
highly specialized knowledge of the product and the market
                                                                     another Florida-domiciled insurer, American Colonial
and have administration systems to service the customer before
                                                                     Insurance Company, and continues to operate under the
and after the sale. They provide highly effective distribution
                                                                     American Colonial name. American Colonial is licensed to
capability for EGI’s programs. Their market knowledge and
                                                                     transact business in Florida, Georgia, Alabama and Louisiana.
technical design capability are used in product design and,
                                                                     EGI accesses Texas business via a fronting arrangement.
combined with EGI’s expertise in pricing, underwriting
                                                                     EGI has established an MGA in Florida to transact and
structures and financial management, create a sustainable
                                                                     manage business on behalf of the insurance company. EGI’s
product offering. Many of its distribution partners are interested
                                                                     management team has past experience with the successful
in sharing in future underwriting profits through retention of
                                                                     acquisition and operation of U.S. non-standard auto carriers.
risk. Accordingly, in certain circumstances, EGI will enter into a
risk-sharing agreement with a distribution partner.                  In 2012, EGI will continue its gradual and cautious entry
                                                                     into non-standard auto insurance in select U.S. markets. The
In response to the growth experienced in the Niche Products
                                                                     Company is currently focused on Texas and Florida but also
division, the ADAPT® system was developed to enable the
                                                                     plans to expand into Georgia, Alabama and Louisiana at a
administrator of each program to provide customer information
                                                                     future date. It will use its sophisticated pricing methodologies
to EGI in an electronic format on contracts and policies sold
                                                                     to establish conservative prices and underwriting templates
by the distributor. The ADAPT® system software allows the
                                                                     and will adjust its rates over time as experience emerges and
distributors to use their own internal systems to supply the
                                                                     market conditions evolve.
required information to EGI rather than being forced to re-enter
data on EGI’s systems. Once the data transfer is received, EGI
is able to immediately create customer policy records on the         INTERNATIONAL DIVISION
ADAPT® system and can use the claims portion of the ADAPT®           Beginning in the fourth quarter of 2011, EGI began operations
system to manage claims and provide customer service.                in Europe through its investment in Qudos. No premiums were
                                                                     reported in this division as of December 31, 2011.
EGI intends to maintain and grow the Niche Products division
by employing the following strategies:




                                                                                           Management’s Discussion and Analysis 11
SEGMENTED FINANCIAL INFORMATION

                                     For the three months ended December 31, 2011                         For the three months ended December 31, 2010
                                                                          Canada                                                                Canada
                                                                                           U.S. and                                                       U.S. and
                                      Personal            Niche                               Inter-       Personal            Niche                         Inter-
 ($ thousands)                           Lines         Products               Total        national           Lines         Products              Total   national
 Underwriting revenue                   32,576              8,812           41,388               987          32,429              9,610         42,039          82
 Underwriting income
 (loss) (1)                               2,765                 61           2,826           (1,695)              508             1,977          2,485       (222)
 Loss ratio                              60.8%             53.3%            59.2%             N/A   (2)
                                                                                                                71.8%            39.3%           64.4%      N/A(2)
 Expense ratio                           30.7%            46.0%             33.9%             N/A(2)           26.6%             40.1%           29.7%      N/A(2)
 Combined ratio                           91.5%            99.3%             93.1%            N/A   (2)
                                                                                                               98.4%             79.4%           94.1%      N/A(2)
(1) Underwriting results by division are net of corporate and other expenses of $0.3 million and $0.2 million in 2011 and 2010, respectively.
(2) Due to the minimal earned premium in the U.S. and International divisions, the ratios are not meaningful


The segmented information for the fourth quarter of 2011                                 rate increases, termination of selected broker relationships,
shows that both the Personal Lines and Niche Products                                    judicious use of the industry’s Risk Sharing Pool and reduction
divisions recorded underwriting income of $2.8 million                                   of broker commissions in selected jurisdictions.
and $0.1 million, respectively. The U.S. division recorded
an underwriting loss of $1.3 million and the International                               The underwriting income in the quarter of $0.1 million for the
division recorded expenses of $0.4 million in the period.                                Niche Products division compares to an underwriting income
                                                                                         of $2.0 million recorded in the final quarter of 2010. The
The fourth quarter 2011 Personal Lines result represents                                 significant decrease was primarily due to the increase in the
a $2.3 million increase in underwriting income of $2.8                                   loss ratio to 53.3% in 2011, compared to 39.3% for the same
compared to underwriting income of $0.5 million in the                                   period in 2010. The increase in the loss ratio in the quarter was
fourth quarter of 2010. This was primarily due to a decrease in                          due to a few large losses in some core lines of business in the
the loss ratio to 60.8% in the 2011 period compared to 71.8%                             Niche Products division even though there was a $0.2 million
for the final quarter of 2010. The significant decline in the                            positive development of prior year claims.
loss ratio is the result of several factors, but specifically the
positive impact of management initiatives that began in the                              The underwriting loss of $1.3 million recorded in the U.S.
fourth quarter of 2010 and continued in 2011. These included                             division was the result of ongoing start up costs associated
the reduction of exposure in unprofitable areas with targeted                            with the development of the U.S. operation.

                                                                                                2011                                                         2010
                                                                          Canada                                                                Canada
                                                                                           U.S. and                                                       U.S. and
                                      Personal            Niche                               Inter-       Personal            Niche                         Inter-
 ($ thousands)                           Lines         Products               Total        national           Lines         Products              Total   national
 Underwriting revenue                  128,970            34,201           163,171            2,276          123,525            39,190          162,715        158
 Underwriting income
 (loss) (1)                               5,507           (1,548)            3,959           (3,721)           (7,461)               181        (7,280)     (1,316)
 Loss ratio                              66.3%             57.5%            64.5%             N/A(2)           78.3%             59.9%           73.8%      N/A(2)
 Expense ratio                           29.4%             47.0%             33.1%            N/A(2)            27.7%            39.6%           30.6%      N/A(2)
 Combined ratio                          95.7%           104.5%             97.6%             N/A(2)          106.0%             99.5%          104.4%      N/A(2)

(1) Underwriting results by division are net of corporate and other expenses of $1.5 million and $1.2 million in 2011 and 2010, respectively.
(2) Due to the minimal earned premium in the U.S. and International divisions, the ratios are not meaningful


For the full year 2011 the Personal Lines division recorded                              claims development related to prior year claims continued
an underwriting income of $5.5 million, the Niche Products                               for Personal Lines products in 2011, with total net positive
division an underwriting loss of $1.5 million, and the                                   development of $3.9 million. This positive development was
U.S. division an underwriting loss of $3.3 million and the                               higher than the positive development of $1.7 million in 2010.
International division an expense of $0.4 million.                                       The Personal Lines division’s expense ratio increased to 29.4%
                                                                                         compared to 27.7% in 2010 primarily due a performance
The Personal Lines division recorded a decrease in its loss                              incentive accrued in 2011.
ratio to 66.3% in 2011 from 78.3% in 2010. Favourable



12 EGI Financial Holdings Inc. – Annual Report 2011
The Niche Products loss ratio decreased to 57.5% in 2011            Net earned premiums increased $2.6 million, or 1.6% in 2011, to
compared to 59.9% in 2010. In 2011, positive prior year loss        $165.4 million from $162.9 million last year, as the decrease in
development of $1.8 million and a lower incidence of claims         written premiums, stemming from a change to six-month policy
in most core lines of business were the primary factors             terms in Ontario Auto, had no impact on earned premium.
contributing to the improved result. The Niche Products
division’s expense ratio increased to 47.0% in 2011, compared       The second largest source of revenue was investment income,
to 39.6% in 2010, primarily due to increases in acquisition         which constituted approximately 7.7% of EGI’s total revenue
expenses as a result of a change in the mix of business in 2011     in 2011. EGI recognizes investment revenue from interest,
compared to 2010.                                                   dividends, realized gains and losses on the invested assets, fair
                                                                    value change in investments classified as held-for-trading,
The underwriting loss of $3.3 million recorded in the U.S.          and foreign exchange gains and losses. Market fluctuations
division was the result of ongoing start up costs and a higher      in interest rates affect EGI’s returns on, and the market value
than expected loss ratio associated with the development of the     of, fixed income and short-term investments. The fair market
U.S. operation in order to get it up to scale.                      value of EGI’s exposure to preferred and common shares and
                                                                    other equity investments fluctuates as a result of changes in the
REVENUE                                                             overall level of the equity markets. Net realized and unrealized
                                                                    gains on invested assets totaled $0.4 million compared to gains
Revenue reflected in the consolidated financial statements          of $5.1 million last year. Impairment provisions of $6.6 million
includes net earned premiums, investment income, realized           were booked in 2011, included in realized gains, while no
gains and losses on the sale of investments, and other revenue.     impairment provisions were recorded in 2010. Foreign exchange
                                                                    gains of $0.2 million recorded in 2011, due to the weakening
 ($ thousands)                                2011        2010      Canadian dollar relative to the U.S. dollar, arose primarily from
 Gross premiums written                   174,892       185,671     cash balances held in U.S. dollars used to fund claims liabilities
 Net premiums written                     160,128       167,066     and other operating requirements and translating of U.S. dollar
                                                                    investments classified as available-for-sale.
 Net premiums earned                      165,447       162,873
 Net interest and dividends                13,334        12,789     EXPENSES
 Realized and unrealized gains
 on investments                               353         5,065     EGI’s expenses consist of incurred claims, acquisition costs and
                                                                    operating expenses.
 Foreign exchange gains (losses)              180         (389)
 Total revenue                            179,314      180,338       ($ thousands)                                 2011         2010

The main source of revenue was earned premiums from                  Expenses
the sale of insurance policies. Gross written premiums               Incurred claims                           107,258        119,130
totaled $174.9 million, a decrease of 5.8% compared to the           Acquisition expense                         37,178       35,834
$185.7 million level last year. The decrease in gross premium was
                                                                     Operating expense                          22,266         17,732
primarily due to the decision to write six-month policy terms in
the Ontario automobile line of business (Ontario Auto), though                                                 166,702       172,696
it had no impact on earned premiums. Ontario Auto recorded a
decrease of $12.5 million, or 14.4% in direct premiums written                                                     2011         2010
in 2011 compared to 2010, largely the result of the change
in policy terms and cancellation of policies and brokers by          Selected Underwriting Ratios
management, moves made to improve underwriting results.              Incurred claims ratio                       64.8%         73.1%
                                                                     Acquisition expense ratio                   22.5%        22.0%
This decrease in Ontario was partially offset by an increase in
                                                                     Operating expense ratio                     13.5%         10.9%
premium volume in the Atlantic provinces of $17.2 million
in 2011 compared to $13.1 in 2010.                                   Combined ratio                            100.8%        106.0%

The U.S. division began to generate premium volume and              The combined ratio for EGI decreased in 2011 to 100.8% from
recorded earned premium of $2.3 million and written                 106.0% in 2010. The loss ratio decreased to 64.8% in 2011
premium of $4.0 million in the year.                                compared to 73.1% in 2010. In the Personal Lines division,
                                                                    the auto line of business loss ratio decreased to 65.8% in 2011
The Niche Products division also recorded a decrease in gross       from 78.6% in 2010 due to actions initiated by management
written premiums of $6.7 million, or 13.1%, in 2011 compared        to improve underwriting results and Government of Ontario
to 2010 which resulted from decreases in business written and       auto reforms that took effect in September of 2010. The Niche
cancelled programs in the commercial auto and errors and            Products division also recorded a decline in the loss ratio to
omissions liability lines of business.                              57.5% in 2011 compared to 59.9% in 2010. As noted earlier,



                                                                                          Management’s Discussion and Analysis 13
this improved result was due to a lower incidence of claims in       costs of automobile insurance claims were enacted to apply to
the core Niche lines of business and positive development of         coverages issued on and after September 1, 2010. It is not known
prior year claims reserves.                                          with certainty at this time what the impact of these reforms will
                                                                     be on claims costs; however, the impact is expected to be positive
Incurred claims, also referred to as losses, are the amounts         for insurers.
payable under insurance policies relating to insured events. Loss
adjustment expenses, also referred to as claim expenses, are the     CRITICAL ACCOUNTING ESTIMATES
expenses of settling claims, including allocated (i.e. external)
loss adjustment expenses and unallocated (i.e. internal) loss        AND ASSUMPTIONS
adjustment expenses (together, LAE). Achieving profitable results    EGI’s significant accounting policies are disclosed in note 3
depends on EGI’s ability to manage future claims and other costs     to the consolidated financial statements for the years ended
through innovative product design, strict underwriting criteria      December 31, 2011 and 2010. The preparation of EGI’s
and efficient claims management.                                     financial statements in accordance with IFRS requires EGI
                                                                     to make estimates and assumptions that affect the amounts
Acquisition costs consist mainly of commissions and premium
                                                                     reported in the financial statements. These estimates and
taxes which are directly related to the acquisition of premiums.
                                                                     assumptions principally relate to the establishment of reserves
Commissions are the amounts paid to producers for selling
                                                                     for claims and expenses, impairments of investment securities,
insurance policies. The amount of commission is generally
                                                                     amounts recoverable from reinsurers and certain other assets.
a percentage of the premium of the insurance policy sold or
                                                                     As more information becomes known, these estimates and
renewed. Contingent commissions are paid to brokers and
                                                                     assumptions could change and impact future results. The most
MGAs on an annual basis if they meet certain targets. In
                                                                     significant estimates and assumptions made in preparing
general, these producers have to meet or exceed certain criteria,
                                                                     the financial statements are in respect of policy liabilities,
including written premium targets and profitability, on average
                                                                     investments, reinsurance and income taxes.
over three years, to qualify for this compensation. Premium
taxes are paid by EGI to provincial and state governments,           POLICY LIABILITIES
calculated as a percentage of direct written premiums.
                                                                     Policy liabilities consist of provisions for claim liabilities and
Operating expenses are the non-commission selling,                   unearned premium liabilities.
underwriting and administrative expenses incurred to support
EGI’s business. A significant portion of these expenses is           Claim liability reserves are maintained to cover the Company’s
related to employee compensation and benefits. The effective         estimated ultimate liability for unpaid losses and loss
control and management of these expenses can enhance                 adjustment expenses with respect to reported and unreported
the underwriting results from the operation. The increase            claims incurred as of the end of each accounting period. The
in operating expenses in 2011 compared to 2010 was due to            provision for unpaid claims and adjustment expenses is first
additional performance incentive accrued in 2011 and costs           determined on a case-by-case basis as claims are reported and
relating to investment in infrastructure to support future           then reassessed as additional information becomes known. The
strategic initiatives.                                               provision also accounts for the future development of these
                                                                     claims, including claims incurred but not reported (IBNR).
SIGNIFICANT TRANSACTIONS                                             Reserves do not represent an exact calculation of liability,
                                                                     but instead represent estimates developed using projection
EXPANSION IN EUROPE                                                  techniques in accordance with Canadian accepted actuarial
                                                                     practice. These reserve estimates are expectations of the
On October 24, 2011, the Company invested approximately
                                                                     ultimate cost of settlement and administration of claims based
Euro 7.5 million by acquiring all of the preference shares and
                                                                     on the Company’s assessment of facts and circumstances then
51% of the voting shares of QIC Holdings ApS (“QIC”). QIC
                                                                     known, its review of historical settlement patterns, estimates
is a newly-formed Danish holding company with a wholly-
                                                                     of trends in claims severity and frequency, legal theories of
owned subsidiary, Qudos Insurance A/S (“Qudos”), a newly-
                                                                     liability and other factors. The appointed actuary of EGI’s
incorporated insurance company, based in Denmark. QIC had
                                                                     subsidiaries, using appropriate actuarial techniques, evaluates
no assets or liabilities prior to this transaction. This structure
                                                                     the adequacy of the policy liabilities.
was set up to enable EGI to expand its insurance business
model in Europe.                                                     Variables in the reserve estimation process can be affected
                                                                     by both internal and external events, such as changes in
REGULATION                                                           claims handling procedures, economic inflation, legal trends
                                                                     and legislative changes. Many of these items are not directly
The industry in which EGI operates is regulated for the sale of
                                                                     quantifiable, particularly on a prospective basis. Additionally,
P&C insurance. Changes in these regulations may significantly
                                                                     there may be significant reporting lags between the occurrence
affect the operations and financial results of EGI. Government
                                                                     of the insured event and the time it is actually reported to the
reforms in Ontario aimed at addressing the rapidly escalating
                                                                     insurer. Reserve estimates are refined in a systematic ongoing


14 EGI Financial Holdings Inc. – Annual Report 2011
process as historical loss experience develops and additional          Factors considered by the Company include but are not limited to:
claims are reported and settled. Because the establishment of          a) significant financial difficulty of the issuer or obligor;
reserves is an inherently uncertain process involving estimates,
current reserves may not be sufficient. Adjustments to reserves,       b) a breach of contract, such as a default or delinquency in
both positive and negative, are reflected in the statement of             interest or principal payments;
income for the period in which such estimates are updated.             c) the lender, for economic or legal reasons relating to the
                                                                          borrower’s financial difficulty, granting to the borrower a
The provision for unpaid claims and adjustment expenses is                concession that the lender would not otherwise consider;
discounted to take into account the time value of money. In
2011, the discount rate used was 1.9% (2010 – 2.55%). Changes          d) it becoming probable that the borrower will enter
in market interest rates are the primary factors influencing the          bankruptcy or other financial reorganization;
discount rate. Based on the net provision for unpaid claims and        e) the disappearance of an active market for that financial asset
adjustment expenses as at December 31, 2011, a 1% increase                because of financial difficulties; or
in the discount rate would result in a decrease in the net
                                                                       f) observable data indicating that there is a measurable
provision of $5.1 million and a 1% decrease in the discount
                                                                          decrease in the estimated future cash flows from a group of
rate would increase the net provision by $5.4 million. It also
                                                                          financial assets since the initial recognition of those assets,
includes a provision for adverse deviation, as required by
                                                                          although the decrease cannot yet be identified with the
Canadian accepted actuarial practice.
                                                                          individual financial assets in the group, including:
The unearned premium reserve is considered adequate when                   (i) adverse changes in the payment status of borrowers
the unearned premium reserve (after deducting any deferred                     in the group (e.g., an increased number of delayed
acquisition cost assets) is at least equal to the present value,               payments or an increased number of credit card
at the balance sheet date, of the cash flow of claims, expenses,               borrowers who have reached their credit limit and are
investment income and taxes to be incurred after that date on                  paying the minimum monthly amount); or
account of the policies in force at that date or at an earlier date.
                                                                           (ii) national or local economic conditions that correlate with
Deferred acquisition costs are comprised of commissions and
                                                                                defaults on the assets in the group (e.g., an increase in
premium taxes directly related to the acquisition of premiums.
                                                                                the unemployment rate in the geographical area of the
These costs are deferred to the extent that they are recoverable
                                                                                borrowers, a decrease in property prices for mortgages
from unearned premiums, after considering the related
                                                                                in the relevant area, a decrease in oil prices for loan
anticipated claims, expenses and investment income in respect
                                                                                assets to oil producers, or adverse changes in industry
of these premiums. Deferred acquisition costs are amortized
                                                                                conditions that affect the borrowers in the group).
on the same basis as the premiums are recognized in income.

A premium deficiency would be recognized immediately by a              REINSURANCE
charge to the statement of income as a reduction of deferred           Reinsurance recoverables include amounts for expected recoveries
acquisition costs to the extent that the unearned premium              related to provision for unpaid claims as well as the portion of
reserve, plus anticipated investment income, is not adequate           the reinsured premiums which has not yet been earned by the
to recover all deferred acquisition costs and related claims           reinsurer. Amounts recoverable from reinsurers are estimated in
and expenses. If the premium deficiency was greater than               a manner consistent with claim and claim adjustment expense
unamortized deferred acquisition costs, a liability would be           reserves and are reported in the consolidated balance sheet. The
accrued for the excess deficiency.                                     ceding of an insurance liability to a reinsurer does not discharge
                                                                       the Company’s primary liability to the policyholders. The
INVESTMENTS                                                            Company’s policy is to record an estimated allowance for doubtful
EGI obtains values for all publicly traded securities in its           accounts on the basis of periodic evaluations of balances due from
investment portfolio from external pricing services.                   reinsurers, reinsurer solvency, credit ratings of reinsurers, collateral
                                                                       held by the Company, management’s experience and current
The Company considers an impairment if there is objective              economic conditions.
evidence that an available-for-sale financial asset is impaired,
including in the case of equity investments classified as              The Company is exposed to disputes on, and defects in, contracts
available-for-sale, or a significant or prolonged decline in           with reinsurers and the possibility of default by reinsurers.
the fair value of the security below its cost. Considerable
judgement may be required in interpreting market data used to          INCOME TAXES
develop the estimates of fair value. Accordingly, the estimates        Judgement is used in determining provision for income taxes
presented in these consolidated financial statements are not           and the recording of current and deferred income taxes.
necessarily indicative of the amounts that could be realized in        Amounts are determined based on income tax laws and rates in
a current market exchange.                                             effect or substantively enacted at the reporting date. Unforeseen
                                                                       future changes to income tax laws and rates may impact the



                                                                                               Management’s Discussion and Analysis 15
reported value of future income taxes and adjustments may             or non-deductible for income tax purposes, which cause
need to be made which will affect future reporting periods.           the income tax provision to differ from what it would be if
                                                                      based on statutory rates. Recoverability of deferred tax assets
Deferred income taxes, accumulated as a result of temporary           is primarily based on current and expected profitability
differences, which are probable to reverse, are included in           applicable to operating companies and their ability to utilize
the consolidated balance sheet. In addition, the consolidated         any recorded tax assets taking into consideration tax planning
statement of income contains items that are non-taxable               strategies and the expiry date of tax losses.

SUMMARY OF QUARTERLY RESULTS

                                                                                     2011                                            2010
 ($ thousands except per share data)             Q4            Q3         Q2             Q1      Q4         Q3              Q2         Q1
 Direct written and assumed premiums         44,324     46,967        52,751      30,850      37,054     48,636       55,991       43,990
 Total revenues (excluding
 investment income)                          42,375      41,672       41,057      40,343      42,121     42,149      40,379        38,224
 Underwriting income (loss)                     852       (774)       (1,218)        (115)    2,058      (2,897)      (3,178)      (5,805)
 Income (loss) before income taxes            6,097            165     2,062       4,287      5,669        1,313       2,612       (2,520)
 Net income (loss)                            3,254           (171)    1,410       3,027       3,247       705         2,016        (1,816)
 Earnings per adjusted share
     (a) Basic                                $0.29     $(0.01)        $0.12       $0.25      $0.27      $0.06         $0.17        $(0.15)
     (b) Diluted                              $0.29     $(0.01)        $0.12       $0.25      $0.27      $0.06         $0.17        $(0.15)
 Selected financial ratios (%)
     Loss ratio                                60.6           66.0       67.1        65.7       63.3       73.6            73.3       83.4
     Expense ratio                              37.4          35.9      35.9        34.6        31.8       33.3            34.6       31.8
     Combined                                  98.0       101.9        103.0        100.3       95.1      106.9        107.9         115.2



QUARTER ENDED DECEMBER 31, 2011, COMPARED TO QUARTER ENDED DECEMBER 31, 2010
The following financial information compares the results for the fourth quarter 2011 with the fourth quarter 2010.

                                                                                   Q4            Q4          Variance             Variance
 ($ thousands)                                                                    2011          2010                $                    %
 Direct written and assumed premiums                                            44,324         37,054              7,270            19.6%
 Net written premiums                                                           40,630         33,571              7,059            21.0%
 Net earned premiums                                                            42,375          42,121              254              0.6%
 Claims incurred                                                                25,683         26,667              (984)            (3.7%)
 Acquisition costs                                                               9,296          8,793               503              5.7%
 Operating expenses                                                              6,544          4,603              1,941            42.2%
 Underwriting income                                                              852           2,058          (1,206)             (58.6%)
 Investment income                                                               5,245           3,611             1,634            45.3%
 Net income before income taxes                                                  6,097          5,669               428              7.5%
 Income taxes                                                                    2,843          2,422               421              17.4%
 Net income                                                                      3,254          3,247                 7              0.2%
 Net Operating Income                                                            2,436          3,282              (846)           (25.8%)




16 EGI Financial Holdings Inc. – Annual Report 2011
INSURANCE OPERATION                                                  The loss ratio of the Personal Lines division was 60.8% in the
                                                                     three-month period ended December 31, 2011, compared to
WRITTEN PREMIUMS                                                     71.8% in the same period of 2010. The decrease in the loss
In the fourth quarter of 2011, direct written premiums               ratio, compared to 2011, was due to the lower incidence of
increased $7.3 million, or 19.6%, to $44.3 million compared to       claims in the quarter compared to the same period in 2010
$37.1 million in the same period last year. The increase was the     resulting from the management initiatives taken, noted earlier,
result of increases in premiums generated by the Personal Lines      to improve the loss ratio. The Personal Lines division recorded
division and the increase in premiums in the U.S. division.          a $1.5 million positive development of prior year claims in the
                                                                     final quarter of 2011 compared to nominal development in the
In the Personal Lines division, written premiums increased by        same period in 2010.
$4.6 million in the fourth quarter of 2011 or 17.2% compared to
the same period in 2010. The increase was in the non-standard        The Niche Products division’s loss ratio was 53.3% in the last
line of business and was the result of management’s initiative       three months of 2011 compared to 39.3% in the same period
to write and renew all Ontario private passenger automobile          last year. Niche Products also recorded favourable development
polices with a six-month policy term effective November 1,           of prior year claims of $0.2 million in the final quarter of 2011.
2010, for new business and December 1, 2010, for renewals. As a
                                                                     The U.S. division recorded positive development of prior year
result, written premiums decreased in the fourth quarter of 2010
                                                                     claims of $0.1 million from the run-off of cancelled external
due to the shorter policy term, compared to issuing policies with
                                                                     reinsurance arrangements.
a twelve-month term; however earned premiums for the period
were not affected. This impact was fully absorbed during the first   On a consolidated basis, net favourable development of prior
half of the year and the fourth quarter of 2011 was not affected.    year claims of $1.9 million was recorded in the fourth quarter
This initiative was undertaken to more efficiently implement         of 2011 compared to unfavourable development of $0.6 million
premium rate increases at time of renewal and to increase            in the same period in 2010.
administrative fee income associated with six-month policies.
                                                                     Acquisition Costs
The Niche Products division showed an increase of
                                                                     Net acquisition costs, which consist mainly of commissions and
$1.0 million or 9.4% in direct written premiums in the final
                                                                     premium taxes, increased $0.5 million or 5.7% to $9.3 million in
quarter of 2011 compared to the same period in 2010. The
                                                                     the quarter ended December 31, 2011, compared to $8.8 million
premium increases were the result of rate increases and
                                                                     in the same period in 2010. The increase is higher than the
product mix. The U.S. division, still in the start up phase,
                                                                     increase in net earned premiums of 0.6% due to changes in the
recorded $1.9 million of written premiums in the fourth
                                                                     mix of business in 2011 compared to 2010.
quarter of 2011, an increase of $1.7 million over the same
period in 2010 as it is slowly building up the business.             Operating Expenses
For the three months ended December 31, 2011, net written            For the fourth quarter of 2011, operating expenses were
premiums increased $7.1 million or 21.0% to $40.6 million            $6.5 million compared to $4.6 million in the same period in
compared to $33.6 million for the last quarter of 2010. This         2010, an increase of 42.2%. The increase is due primarily to
increase was consistent with the increase in direct written and      an additional performance incentive expense in 2011 and an
assumed premiums noted above.                                        increase in IT related expenses.

Earned Premiums                                                      Underwriting Income
Net earned premiums for the three months ended December 31,          Underwriting results reflect the revenues from net earned
2011, were $42.4 million, an increase of $0.3 million, or 0.6%,      premiums less claims, acquisition and operating expenses. The
compared to the fourth quarter of 2010. The increase in net          quarter ended December 31, 2011, earned an underwriting
earned premiums was much less than the increase in net written       income of $0.8 million, compared to an underwriting income
premiums because the change to six-month policies noted above        of $2.1 million in the same quarter of 2010. As detailed above,
had no impact on earned premiums.                                    the significant decrease was attributable to the increase in the
                                                                     expense ratio in the Canadian division.
Incurred Claims Expense
For the quarter ended December 31, 2011, net claims expense          INVESTMENT INCOME
decreased $1.0 million or 3.7% to $25.7 million compared to          In the final quarter of 2011, income from investments
$26.7 million for the fourth quarter of 2010. This resulted in       increased to $5.2 million compared to $3.6 million in the
a loss ratio of 60.6% for the three months ended December            final quarter of 2010. The increase was due to an increase in
31, 2011 compared to 63.3% for the same period in 2010. The          the realization of net gains, on the disposal of investments,
significant decrease was attributable to decreases in the loss       to $1.8 million in the quarter compared to net realized gains
ratios in the quarter for the Personal Lines division as well as     of $0.4 million in the final quarter of 2010. A provision for
positive claims development in prior year reserves.                  impairment loss of $1.9 million was recorded and charged


                                                                                           Management’s Discussion and Analysis 17
against realized gains in the quarter ended December 31, 2011;     NET INCOME BEFORE INCOME TAXES
no impairment provisions were recorded in 2010.
                                                                   For the quarter ended December 31, 2011, income before
Foreign exchange gains of $0.1 million were recorded in the        income taxes was $6.1 million compared to $5.7 million for
last quarter of 2011. The losses resulted from the strengthening   the final quarter of 2010. This increase was largely the result of
of the U.S. dollar in relation to the Canadian dollar in the       an increase in investment income to $5.2 million compared to
period, which decreased the value of bank balances held in         $3.6 million in the same period in 2010 offset mostly by a lower
U.S. dollars. As at December 31, 2011, EGI held US$1.2 million     underwriting income compared to the same period in 2010.
which was used to fund claims liabilities and other operating
purposes. Short-term investments denominated in U.S. dollars       INCOME TAXES
were also held at various times during 2011.                       For the quarter ended December 31, 2011, the provision for
                                                                   income taxes reflects an expense of $2.8 million compared to
Income from interest and dividends totaled $3.3 million in         an expense of $2.4 million for the same period last year. The
the fourth quarter of 2011 compared to $3.4 million in the         approximate effective tax rate was 46% for the last quarter
same period in 2010, reflecting the decrease in yield in 2011      of 2011 and 43% for the same period last year. The increase
compared to 2010.                                                  was due to the recognition of a write down of $0.5 million in
                                                                   Deferred Income Taxes associated with the loss carry-forward
                                                                   balance in the U.S. operation.

YEAR ENDED DECEMBER 31, 2011 COMPARED TO 2010
The following financial information compares results for the full year 2011 and 2010.

                                                                                                           Variance         Variance
 ($ thousands)                                                                2011            2010                $                %
 Direct written premiums                                                  174,892          185,671          (10,779)          (5.8%)
 Net written premiums                                                     160,128          167,066           (6,938)          (4.2%)
 Net earned premiums                                                     165,447           162,873            2,574             1.6%
 Claims incurred                                                          107,258           119,130          (11,872)        (10.0%)
 Acquisition costs                                                          37,178          35,834            1,344             3.8%
 Operating expenses                                                        22,266            17,732           4,534           25.6%
 Underwriting income (loss)                                                (1,255)          (9,823)           8,568            87.2%
 Investment income (loss)                                                  13,867           17,465           (3,598)         (20.6%)
 Interest expense                                                                −             568             (568)            N/A
 Net income before income taxes                                             12,612           7,074            5,538           78.3%
 Income taxes                                                               5,092            2,922            2,170           74.3%
 Net income                                                                 7,520             4,152           3,368            81.1%
 Net operating income                                                       8,585              939            7,646          814.3%



INSURANCE OPERATION                                                actions taken in 2011 by cancelling policies and brokers to
                                                                   improve underwriting results. Non-standard automobile
WRITTEN PREMIUMS                                                   premiums in 2011 decreased to $105.6 million compared to
                                                                   $114.8 million in the prior year, while motorcycle premiums
Direct written and assumed premiums decreased $10.8 million
                                                                   increased to $16.7 million in 2011 compared to $15.9 million
or 5.8% to $174.9 million for the year ended December 31,
                                                                   in 2010. The remaining premiums for the Personal Lines
2011 compared to $185.7 million for 2010. The Personal Lines
                                                                   division are from other vehicle types.
and Niche Products divisions recorded decreases in premiums
in 2011 of $7.8 and $6.7 million, respectively, compared to the    The Niche Products division recorded a decrease in direct
prior year; while the U.S. division, in start up mode, recorded    written premiums of $6.7 million to $44.7 million compared to
written premium of $4.0 million in 2011. The decrease in           $51.4 million in 2010. The Commercial Auto line of business
Personal Lines premiums written was the result of the division     accounted for $5.6 million of the decrease as the program was
beginning to issue six- months policies for Ontario Auto in the    discontinued in the beginning of 2011, as part of management’s
fourth quarter of 2010 that had the effect of reducing written     decision to cancel unprofitable programs to improve the
premium in the first six months of 2011 when compared to           underwriting results.
the same period in 2010. This is also the result of management

18 EGI Financial Holdings Inc. – Annual Report 2011
As noted earlier, the U.S. division is slowly building up the         and costs relating to investment in infrastructure to support
business. As a result, direct written premiums of $4.0 million        future strategic initiatives.
were recorded in 2011.
                                                                      Underwriting Income
Net written premiums decreased $6.9 million or 4.2%                   Underwriting results reflect the revenues from net earned
to $160.1 million for the year ended December 31, 2011,               premiums less claims, acquisition and operating expenses.
compared to $167.0 million for the same period last year. The         The overall underwriting loss improved by $8.6 million to a
decrease in net written premiums was consistent with the              loss of $1.3 million for the year ended December 31, 2011,
decrease in gross written premiums.                                   compared to an underwriting loss of $9.8 million for 2010. The
                                                                      underwriting results for 2011 and 2010 were net of corporate
EARNED PREMIUMS                                                       and other expenses of $1.5 million and $1.2 million in 2011
Net earned premiums for 2011 were $165.4 million, an                  and 2010, respectively.
increase of $2.6 million or 1.6% from 2010. As noted earlier,
the decrease in written premiums due to the change to                 The Personal Lines division recorded underwriting income
six-month policies in Ontario Auto has no impact on earned            of $5.5 million for the year ended December 31, 2011,
premiums. The Personal Lines division increased its rates             representing an improvement of $13.0 million compared to a
in the third quarter of 2010 and the second quarter of 2011,          loss of $7.5 million for 2010. Its combined ratio decreased to
which offset management actions to cancel some of its policies        95.7% in 2011 compared to 106.0% in 2010. This is the result
resulting in increase in earned premiums.                             of management actions taken as stated earlier to improve
                                                                      underwriting results.
Incurred Claims Expense
                                                                      The underwriting loss from the Niche Products division for the
Net incurred claims expense decreased $11.9 million or 10.0%
                                                                      year ended December 31, 2011, was $1.5 million, compared to
to $107.3 million for 2011, compared to $119.1 million for 2010.
                                                                      income of $0.2 million in 2010. This result was primarily due
The resulting loss ratio of 64.8% for 2011 represents a significant
                                                                      to an increase in acquisition costs due to the change in mix of
improvement of 8.3% over the 2010 loss ratio of 73.1%.
                                                                      business. This was offset partially by improved claims experience
The Personal Lines division recorded a decrease in its loss           as the division discontinued its commercial auto line.
ratio to 66.3% compared to 78.3% in 2010. Lower claims
                                                                      The U.S. division incurred an underwriting loss of $3.3 million,
costs, particularly in Auto, was the primary factor leading
                                                                      which includes start-up expenses from EGI Insurance Services,
to year-over-year improved results. In addition favourable
                                                                      Inc., compared to a loss of $1.3 million in 2010.
claims development related to prior year claims continued
for Personal Lines products in 2011, with total net positive          INVESTMENT INCOME
development of $3.9 million, being higher than the positive
development of $1.7 million in 2010.                                  Investment income decreased by $3.6 million, to $13.9 million
                                                                      in 2011 compared to $17.5 million in 2010.
The Niche Products division’s loss ratio decreased to 57.5% for the
year compared to 59.9% in 2010. This result was primarily due to      The decrease in investment income compared to 2010
cancellation of the largest program in the Commercial Auto line       resulted from a decline in net realized gains of $5.0 million.
in the first quarter of 2011 due to unprofitable performance.         Net gains on investments totaled $0.1 million in 2011
                                                                      compared to $5.1 million in 2010. Impairment provisions of
On a Company-wide consolidated basis, net favourable                  $6.6 million charged to net realized gains were recorded in
development of prior year claims of $6.4 million was recorded         2011 with none booked in 2010. Partially offsetting the net
in 2011 compared to favourable development of $4.1 million            gains on investments in 2011 were foreign exchange gains
in 2010.                                                              of $0.2 million, compared to losses of $0.4 million in 2010,
                                                                      derived from funds held in U.S. currency and the impact of
Acquisition Costs                                                     the weaker Canadian dollar and fair value gain on investments
Net acquisition costs, consisting mainly of commissions and           classified as held for sale.
premium taxes, increased $1.3 million or 3.8% to $37.2 million
for 2011, compared to $35.8 million in 2010. The increase             Income from interest and dividends was $15.0 million in 2011
is higher than the increase in net earned premiums of 1.6%            compared to $14.1 million in 2010. The result reflected the
compared to 2010, primarily due to the change in mix of               impact of higher invested assets in 2011 compared to 2010. The
business in the Niche Products division.                              total fair value of the investment portfolio as at December 31,
                                                                      2011, (including cash and short term and premium financing
Operating Expenses                                                    receivable) was $404.1 million compared to $391.8 million as
Operating expenses, increased $4.5 million or 25.6% to                at December 31, 2010.
$22.3 million compared to $17.7 million for 2010. The increase
was due to additional performance incentive accrued in 2011



                                                                                           Management’s Discussion and Analysis 19
INTEREST EXPENSE                                                   comprised income before income taxes of $12.6 million.
                                                                   This is compared to an underwriting loss of $9.8 million
During 2011, no interest expense related to bank indebtedness
                                                                   plus investment income of $17.5 million, reduced by interest
was incurred compared to $0.6 million in 2010. In October
                                                                   expense of $0.6 million in 2010, which comprised income
2007, EGI entered into a non-revolving term loan facility with
                                                                   before income taxes of $7.1 million in 2010.
a major Canadian bank in the amount of $19.5 million. During
the three-year term of the facility, interest of 6.2% per annum
                                                                   INCOME TAXES
was to be paid monthly. The loan facility was repaid in full
during 2010, utilizing internal funds. The Company had no          The provision for income taxes for the year ended December
bank indebtedness as at December 31, 2010.                         31, 2011, was $5.1 million compared to $2.9 million for 2010.
                                                                   The approximate effective tax rate decreased to 40% for 2011
INCOME BEFORE INCOME TAXES                                         from 41% for the previous year as corporate tax rates in
                                                                   Canada decreased in 2011.
Income before income taxes was $12.6 million in 2011,
compared to $7.1 million in 2010.
                                                                   NET OPERATING INCOME
For the year ended December 31, 2011, an underwriting loss         Net operating income increased $7.7 million to $8.6 million in
of $1.3 million plus investment income of $13.9 million, with      2011 from $0.9 million in 2010.
no reduction from interest expenses on bank indebtedness,

YEAR ENDED DECEMBER 31, 2010 COMPARED TO 2009
The following financial information compares results for the full year 2010 and 2009.

                                                                                                        Variance        Variance
 ($ thousands)                                                              2010           2009                $               %
 Direct written premiums                                                  185,671        163,862          21,809             13.3
 Net written premiums                                                     167,066        149,745           17,321            11.6
 Net earned premiums                                                      162,873        149,379          13,494             9.0
 Claims incurred                                                           119,130        108,194         10,936             10.1
 Acquisition costs                                                         35,834         34,429            1,405             4.1
 Operating expenses                                                         17,732        16,095            1,637            10.2
 Underwriting (loss)                                                       (9,823)        (9,339)           (484)            (5.2)
 Investment income                                                         17,465           17,771          (306)            (1.7)
 Interest expense                                                             568            1,212          (644)           (53.1)
 Net income before income taxes                                             7,074           7,220           (146)           (2.0)
 Income taxes                                                               2,922          2,705              217            8.0
 Net income                                                                 4,152           4,515           (363)           (8.0)


 Net operating income                                                         939           (109)           1,048           961.5



Written Premiums                                                   in spite of the switch to six-month policies for Ontario
Direct written and assumed premiums increased $21.8 million        Auto in the last quarter of 2010. Non-standard automobile
or 13.3% to $185.7 million for the year ended December 31,         premiums in 2010 increased to $114.8 million compared to
2010, compared to $163.9 million for 2009. The Personal Lines      $100.4 million in the prior year. Motorcycle premiums also
and Niche Products divisions recorded increases in premiums        increased to $15.9 million in 2010 compared to $15.3 million
in 2010 of $16.0 and $4.9 million, respectively, compared          in 2009. The remaining premiums for the Personal Lines
to 2009, while the U.S. division, in start up mode, recorded       division are from other vehicle types.
written premium of $0.2 million in 2010. The increase in
                                                                   The Niche Products division recorded an increase in direct
Personal Lines premiums written was the result of premium
                                                                   written premiums of $4.8 million to $51.4 million compared
growth in the non-standard automobile line of business, a
                                                                   to $45.6 million in 2009. The majority of this increase came
reflection of EGI’s strengthening competitive position in the
                                                                   from the Commercial Auto line of business in addition to
non-standard market. Total Personal Lines division gross
                                                                   an increase in the Personal Property line of business which
written premiums were $134.0 million in 2010 compared
                                                                   includes Warranty business.
to $118.0 million in 2009, reflecting a growth rate of 13.6%

20 EGI Financial Holdings Inc. – Annual Report 2011
The U.S. division was in start up mode and management was               to $16.1 million for 2009. The increase was in line with
approaching this new division with a view towards cautiously            the increase in net earned premiums despite an amount of
building a sustainable, profitable operation in the U.S. As a result,   $2.5 million attributable to start-up costs incurred by EGI’s
direct written premiums of $0.2 million were recorded in 2010.          U.S. operations.

Net written premiums increased $17.3 million or 11.6%                   Underwriting Income
to $167.0 million for the year ended December 31, 2010,                 Underwriting results reflect the revenues from net earned
compared to $149.7 million for the same period last year. The           premiums less claims, acquisition and operating expenses.
increase in net written premiums was consistent with the                The overall underwriting loss increased $0.5 million to a
percentage increase in gross written premiums noted above.              loss of $9.8 million for the year ended December 31, 2010,
Earned Premiums                                                         compared to an underwriting loss of $9.3 million for 2009. The
                                                                        underwriting results for 2010 and 2009 were net of corporate
Net earned premiums for 2010 were $162.9 million, an increase           and other expenses of $1.2 million and $1.3 million in 2010
of $13.5 million or 9% from 2009. This increase was slightly            and 2009, respectively.
lower than the increase in net written premiums due to the
lag in earning of policy premiums in periods of increasing              The Personal Lines division recorded an underwriting loss
written premiums.                                                       for the year ended December 31, 2010, of $7.5 million,
                                                                        representing an increase in the loss of $6.8 million compared
Incurred Claims Expense                                                 to a loss of $0.7 million for 2009. This result was due to an
Net incurred claims expense increased $10.9 million or 10.1%            increase in the combined ratio to 106.0% in 2010 compared to
to $119.1 million for 2010, compared to $108.2 million for              100.7% in 2009.
2009. The resulting loss ratio of 73.1% for 2010 represents a
slight increase of 0.7% over the 2009 loss ratio of 72.4%.              The underwriting income from the Niche Products division for
                                                                        the year ended December 31, 2010, was $0.2 million, compared
The Personal Lines business segment recorded an increase                to a loss of $3.4 million in 2009. This result was primarily due
in its loss ratio to 78.3% compared to 72.0% in 2009. Higher            to the decrease in the loss ratio caused by improved claims
claims costs, particularly in Ontario Auto, was the primary             experience in the liability line of business which resulted in a
factor leading to the increase in the year-over-year result.            decrease in the combined ratio to 99.5% in 2010 compared to
While favourable claims development related to prior year               108.7% in 2009.
claims continued for Personal Lines products in 2010,
with total net positive development of $1.7 million, this               The U.S. division incurred an underwriting loss of $1.3 million,
positive development, however, was lower than the positive              which included start-up expenses from EGI Insurance Services,
development of $3.7 million in 2009.                                    Inc., compared to a loss of $3.9 million in 2009. As noted earlier,
                                                                        the start-up costs of $2.4 million were partially offset by the
The Niche Products division’s loss ratio decreased to 59.9% for         positive development of prior year claims in 2010.
the year compared to 66.3% in 2009. This result was primarily
due to an improvement in the liability line of business partially       INVESTMENT INCOME
offset by adverse claims experience in Commercial Auto.                 Investment income decreased by $0.3 million, to $17.5 million
                                                                        in 2010 compared to $17.8 million in 2009.
As noted earlier, the U.S. division recorded positive development
of prior claims totaling $1.1 million on the run-off of terminated      The decrease in investment income compared to 2009 resulted
external reinsurance arrangements.                                      from a decline in net gains of $1.8 million recorded in 2010
                                                                        on the sale of investments. Net gains on investments totaled
On a Company-wide consolidated basis, net favourable
                                                                        $5.1 million in 2010 compared to $6.9 million in 2009.
development of prior year claims of $4.1 million was recorded
                                                                        No impairment provisions were recorded in 2010 or 2009.
in 2010 compared to favourable development of $0.7 million
                                                                        Partially offsetting the net gains on investments in 2010 were
in 2009.
                                                                        foreign exchange losses of $0.3 million, compared to losses of
Acquisition Costs                                                       $1.1 million in 2009, derived from funds held in U.S. currency
                                                                        and the impact of the stronger Canadian dollar.
Net acquisition costs, consisting mainly of commissions and
premium taxes, increased $1.4 million or 4.1% to $35.8 million          Income from interest and dividends was $14.1 million in
for 2010, compared to $34.4 million in 2009. The increase               2010 compared to $13.1 million in 2009. The result reflected
was lower than the increase in net earned premiums of 9.0%              the impact of higher fixed income yields in 2010 compared
as compared to 2009, primarily due to the change in mix of              to 2009 and an increase in invested assets in the year. The
business in the Niche Products division.                                total fair value of the investment portfolio as at December 31,
                                                                        2010, (including cash and short-term and premium financing
Operating Expenses
                                                                        receivable) was $397.5 million compared to $368.2 million as
Operating expenses, excluding interest expense in 2010,                 at December 31, 2009.
increased $1.6 million or 10.2% to $17.7 million compared

                                                                                              Management’s Discussion and Analysis 21
INTEREST EXPENSE                                                      Each of EGI’s investment managers operates under an investment
                                                                      management agreement which provides the investment manager
During 2010, interest expense of $0.6 million related to bank
                                                                      with a discretionary mandate to hold one or more types of
indebtedness was incurred compared to $1.2 million in 2009.
                                                                      securities and/or cash. The investment manager receives an
In October 2007, EGI entered into a non-revolving term
                                                                      annual fee (payable quarterly) based on a negotiated percentage of
loan facility with a major Canadian bank in the amount of
                                                                      the market value of the portfolio being managed. The investment
$19.5 million. During the three-year term of the facility, interest
                                                                      manager’s engagement is subject to immediate cancellation by
of 6.2% per annum was to be paid monthly. The loan facility
                                                                      EGI, without penalty, upon giving written notice.
was repaid in full during 2010, utilizing internal funds. The
Company had no bank indebtedness as at December 31, 2010.             EGI’s investment portfolio is invested in well-established, active
                                                                      and liquid markets in Canada and the United States. Fair value
NET INCOME BEFORE INCOME TAXES                                        for most investments is determined by reference to quoted
Net income before income taxes was $7.1 million in 2010,              market prices. The external investment managers invest on a
compared to $7.2 million in 2009.                                     total return basis, viewing realized gains and losses as important
                                                                      and recurring components of the return on investments and,
For the year ended December 31, 2010, an underwriting loss of         consequently, of income. The timing of the realization of gains
$9.8 million plus investment income of $17.5 million, reduced         and losses may be unpredictable, and changes in the overall
by interest expenses on bank indebtedness of $0.6 million,            levels of fixed income or equity markets generally result in
comprised net income before income taxes of $7.1 million.             corresponding changes in realized gains and losses.
This is compared to an underwriting loss of $9.3 million
plus investment income of $17.8 million, reduced by interest          FAIR VALUE OF INVESTMENTS
expense of $1.2 million in 2009.
                                                                      The following table provides a comparison as at December 31,
                                                                      2011, and December 31, 2010
INCOME TAXES
The provision for income taxes for the year ended December 31,                                                     As at December 31
2010, was $2.9 million compared to $2.7 million for 2009.
                                                                                                                     2011         2010
The approximate effective tax rate increased to 41% for 2010           ($ thousands)                           Fair value    Fair value
compared to 37% for the previous year, primarily due to the
                                                                       Bonds
recognition of a valuation allowance of $0.8 million of Deferred
Income Taxes associated with the loss carry-forward balance in         Canadian
the U.S. operation.                                                        Federal                                97,337        91,664
                                                                           Provincial                             62,483        48,130
NET OPERATING INCOME
                                                                           Municipal                              10,357         5,855
Net operating income increased $1.0 million to $0.9 million in
                                                                           Corporate                              111,046       111,789
2010 from a loss of $0.1 million in 2009.
                                                                                                                 281,223       257,438
BALANCE SHEET ANALYSIS                                                 United States
                                                                           Federal                                 2,635         3,585
INVESTMENTS
                                                                           Corporate                               10,395         8,377
EGI has an investment policy that seeks to provide a stable
                                                                                                                  13,030         11,962
income base to support EGI’s liabilities without incurring an
undue level of investment risk. All investment decisions are           Total Bonds                               294,253      269,400
made with this risk-return tradeoff in mind. The two most              Preferred shares                               917        2,000
important methods used to reduce the level of risk without
                                                                       Common shares
reducing the rate of return in EGI’s portfolio are diversification
and the use of proven investment professionals.                            Canadian                                57,591       69,535
                                                                           United States                            1,443         1,254
EGI’s Board of Directors has established an Investment
                                                                                                                  59,034        70,789
Committee to develop and implement detailed strategies
consistent with EGI’s objectives and to report regularly to the        Total Available for Sale                 354,204        342,189
Board of Directors on its activities. EGI has outsourced all           Held for Trading
buy/sell decisions on individual securities to a small number          Preferred shares                           10,854         9,373
of reputable professional investment managers. Using the
                                                                       Investment income due
“prudent person” approach, the Investment Committee monitors           and accrued                                  2,170         2,081
the performance of each manager, measuring his or her
                                                                       Total investments at fair value           367,228      353,643
performance against an appropriate market index benchmark.



22 EGI Financial Holdings Inc. – Annual Report 2011
EGI’s portfolio is constructed in a manner that seeks to ensure      f) observable data indicating that there is a measurable
that its objectives of producing a competitive rate of return are       decrease in the estimated future cash flows from a group of
met, while at the same time protecting and enhancing statutory          financial assets since the initial recognition of those assets,
underwriting capital on a long-term basis. This is achieved             although the decrease cannot yet be identified with the
through diversification principles that ensure each asset class         individual financial assets in the group, including;
has limited exposure by region, industry, issuer and type of             (i) adverse changes in the payment status of borrowers
underlying security. Target ranges are set for each asset class              in the group (e.g., an increased number of delayed
and economic sector and are monitored by the Investment                      payments or an increased number of credit card
Committee to ensure that EGI’s investment managers comply                    borrowers who have reached their credit limit and are
with these guidelines. Each manager is required to satisfy EGI’s             paying the minimum monthly amount); or
liquidity needs while adhering to all regulatory requirements.
                                                                         (ii) national or local economic conditions that correlate with
IMPAIRED ASSETS AND PROVISIONS                                                defaults on the assets in the group (e.g., an increase in
FOR LOSSES                                                                    the unemployment rate in the geographical area of the
                                                                              borrowers, a decrease in property prices for mortgages
The Board of Directors has established a policy to write down                 in the relevant area, a decrease in oil prices for loan
or make a provision for any investment with objective evidence                assets to oil producers, or adverse changes in industry
that the value of the investment is impaired.                                 conditions that affect the borrowers in the group).
Management has reviewed currently available information              Impairment provisions of $6.6 million were recorded by EGI
and the advice of its investment managers regarding those            in 2011 and none in 2010.
investments whose estimated fair values are less than
amortized cost. For those securities whose decline in fair           A gross unrealized loss of $5.5 million on investments held as
value was considered to be objective evidence that the value         at December 31, 2011, is recorded, net of tax, in the amount
of the investment is impaired, the Company recorded the              of $3.8 million (2010 – $1.4 million) in Accumulated Other
difference between the carrying amount of the investment and         Comprehensive Income. The Company has concluded based
its amortized cost as an impairment which reduces investment         on its review that these fair value deficiencies do not meet
income in the year recorded.                                         the criteria for impairment and they will be monitored on an
                                                                     ongoing basis.
The Company considers an impairment if there is objective
evidence that an available-for-sale financial assets is impaired,    FIXED INCOME SECURITIES
including in the case of equity investments classified as
available-for-sale, a significant or prolonged decline in the fair   EGI holds fixed income securities to provide a steady,
value of the security below its cost. Considerable judgement         predictable level of income and reasonable liquidity
may be required in interpreting market data used to develop          with minimum risk of loss and a fixed sum at maturity.
the estimates of fair value. Accordingly, the estimates presented    EGI’s portfolio is diversified by selecting various types of
in these consolidated financial statements are not necessarily       government and corporate bonds. Constraints on types of
indicative of the amounts that could be realized in a current        issuers take liquidity, diversification and risk into account by
market exchange.                                                     limiting the portfolio mix by issuer.

Factors considered by the Company include but are not limited to:    EGI’s portfolio maintains a high overall credit quality level as
                                                                     measured by Dominion Bond Rating Service (DBRS). Constraints
a) significant financial difficulty of the issuer or obligor;        are placed on the percentage of bonds which can be held in the
b) a breach of contract, such as a default or delinquency in         rating classes as follows: Class A or better – no maximum; Class
   interest or principal payments;                                   BBB or lower – maximum 10%. EGI’s policy is to purchase only
                                                                     corporate bond issues which are rated BBB or better at the time of
c) the lender, for economic or legal reasons relating to the
                                                                     purchase. In the event of subsequent downgrades, the Investment
   borrower’s financial difficulty, granting to the borrower a
                                                                     Committee will consider whether to continue to hold the bonds.
   concession that the lender would not otherwise consider;
                                                                     As at December 31, 2011, class BBB or lower Bonds constituted
d) it becoming probable that the borrower will enter                 11% of the fixed income portfolio which exceeded the 10% limit
   bankruptcy or other financial reorganization;                     as set out in the investment policy.
e) the disappearance of an active market for that financial asset
   because of financial difficulties; or




                                                                                           Management’s Discussion and Analysis 23
The following table sets forth EGI’s fixed income portfolio by       Recoverable from Reinsurers
credit quality according to DBRS as at December 31, 2011,                                                         As at December 31
and 2010.
                                                                                                                    2011         2010
FIXED INCOME PORTFOLIO                                                Reinsurers’ share of unpaid claims         33,269         36,152
                                                                      Reinsurers’ share of unearned
                                              As at December 31
                                                                      premiums                                    5,089          6,471
                                   2011                     2010
                                                                      Total                                      38,358        42,623
                                    % of                      % of
 ($ thousands)   Fair value   Fair value   Fair value   Fair value   As at December 31, 2011, the amount recoverable from
 AAA               117,434           40       113,197          42    reinsurers decreased by $4.3 million, or 10%, to $38.4 million
                                                                     from $42.6 million at December 31, 2010. The decrease was due
 AA                 57,302           19      68,438            25
                                                                     to reduced reliance on reinsurance particularly for the last three
 A                  86,918           30       72,602           27    policy years. All reinsurers, with balances due, have a rating
 BBB               26,266             9       12,708             5   of A− or above as determined by Standard &Poor’s and A.M.
 BB                  4,285            2          962             –   Best, except for several Niche Products distributors who share
                                                                     a portion of the risk with EGI, for whom EGI holds deposits.
 B                   1,245            –         1,183            1
 CCC                  803             –          310             –   ACCOUNTS RECEIVABLES
 Total            294,253           100     269,400           100
                                                                                                                  As at December 31
                                                                      ($ thousands)                                 2011         2010
COMMON SHARES
                                                                      Premium financing receivables               17,518       26,692
Common shares are a key component of EGI’s portfolio
                                                                      Facility Association                         (348)          (154)
to enhance the capital appreciation opportunities of EGI’s
invested assets. Using a conservative approach to equity              Agents and brokers                           4,872        4,984
selection, EGI’s investment managers ensure that equities of          Other                                        1,835           190
companies with a reputation for strong management and a               Total                                      23,877         31,712
proven track record of success are selected for EGI’s portfolio.
Diversification by industry sector also reduces the overall risk     Premium financing receivables was the largest component of
level inherent in EGI’s common share portfolio.                      this asset as at December 31, 2011, representing approximately
                                                                     73.4% of total receivables. Premium financing receivables
EGI generally limits its total exposure to common shares             decreased to $17.5 million at December 31, 2011, from
to a maximum of 16% of the total of its invested assets and          $26.7 million at December 31, 2010, due to the move to six-
premium financing receivables.                                       month policy terms. The majority of the automobile business is
                                                                     billed directly to policyholders and remitted on a monthly basis.
CANADIAN COMMON SHARE PORTFOLIO
Restrictions as to the amount of common shares held in               PROVISION FOR UNPAID CLAIMS
any industry sector are also part of EGI’s risk diversification      EGI establishes loss reserves to provide for future amounts
methodology. The following table outlines EGI’s Canadian             required to pay claims related to insured events that have
common share exposure to industry sectors as at December 31,         occurred and been reported but have not yet been settled, as well
2011, and 2010.                                                      as for those related to events that have occurred but have not
                                                                     yet been reported to the insurer. Claims provisions (i.e. reserves
                                              As at December 31
                                                                     for claims liability) are established at the individual file level
                                   2011                     2010     by the “case method” as claims are reported. The provisions are
                       Fair                      Fair                subsequently adjusted as additional information affecting the
                 value and                 value and                 estimated amount of a claim becomes known during the course
                  carrying     % of fair    carrying     % of fair   of its settlement. With the assistance of EGI’s consulting actuary,
 ($ thousands)     amount        value       amount        value     a reserve provision is also made for management’s calculation
 Energy             15,002           26       20,001           29    of factors affecting the future development of claims, including
 Financial                                                           a provision for IBNR claims, based on the volume of business
 services           13,913           24        15,102          22    currently in force and the historical experience on claims.
 Materials          14,325           25        14,341           21   Reserves are also established for the estimated internal and
                                                                     external loss adjustment expenses which will be incurred during
 Other              14,351           25       20,091           28
                                                                     the claims settlement process.
 Total              57,591          100       69,535          100




24 EGI Financial Holdings Inc. – Annual Report 2011
The provision for unpaid claims and adjustment expenses is                            Provision for unpaid claims consists of the gross amount of
discounted to take into account the time value of money as                            individual case reserves established and management’s estimate
required by EGI’s primary insurance regulator. It also includes                       of claims incurred, but not reported, based on the volume of
a provision for adverse deviation as required by accepted                             business currently in force and historical claims experience. In
Canadian actuarial practice. EGI’s consulting actuary reports on                      order to ensure that EGI’s provision for unpaid claims (often
the adequacy of EGI’s claims reserves on a quarterly basis. As                        called “reserves”) is adequate, management has retained the
time passes, more information about the claims becomes known                          services of an independent consulting actuary. EGI strives to
and provisional estimates are appropriately adjusted upward or                        establish adequate provisions at each quarter-end.
downward. Adjustments to reserves are reflected in the results of
operations in the periods in which the estimates are changed.                         EGI estimates its reserves on a quarterly basis and this is
                                                                                      supported by quarterly assessments by the independent
The development of the provision for claims is shown by the                           consulting actuary. Every quarter, for each line of business,
difference between estimates of reserves as of the initial year-                      EGI compares actual and expected claims development. To the
end and the re-estimated liability at each subsequent year-end.                       extent that actual results differ from expected development,
This is based on actual payments in full or partial settlement of                     assumptions are re-evaluated and new estimates are derived.
claims, plus re-estimates of the reserves required for claims still                   Although EGI believes its overall provision levels to be
open or claims still unreported. Favourable development means                         adequate to satisfy its obligations under existing policies, actual
that the original reserve estimates were higher than subsequently                     losses may deviate, perhaps substantially, from the amounts
indicated. Unfavourable development means that the original                           reflected in EGI’s financial statements. To the extent provisions
reserve estimates were lower than subsequently indicated.                             prove to be inadequate, EGI would have to increase such
                                                                                      provisions and incur a charge to earnings in the future.
For further discussion of EGI’s reserving methods and
underlying assumptions, see “Critical Accounting Estimates                            The table below shows the development of the provision
and Assumptions – Policy Liabilities”.                                                for claims reserves including loss adjustment expenses as at
                                                                                      December 31 in each year of the six-year periods and for the
                                                                                      year ended December 31, 2011.

                                                                                                                                   Years ended December 31
 ($ thousands)                                                                   2010           2009            2008           2007            2006           2005
 Reserve Carried (actuarial present value basis)              (1)
                                                                             239,036         207,220         185,255         169,091         146,101         129,173
 Reserve at December 31, 2006                                                                                                                                87,984
 Cumulative paid to December 31, 2006                                                                                                                        25,855
 Cumulative Redundancy (Deficiency)                                                                                                                          15,334
 Reserve at December 31, 2007                                                                                                               107,992          67,408
 Cumulative paid to December 31, 2007                                                                                                        30,491         46,409
 Cumulative Redundancy (Deficiency)                                                                                                             7,618        15,356
 Reserve at December 31, 2008                                                                                                118,675          81,249         50,014
 Cumulative paid to December 31, 2008                                                                                        44,790          53,520          62,210
 Cumulative Redundancy (Deficiency)                                                                                            5,626           11,332        16,949
 Reserve at December 31, 2009                                                                                 133,213        89,063          59,530          31,595
 Cumulative paid to December 31, 2009                                                                         53,253          73,853         74,402          78,562
 Cumulative Redundancy (Deficiency)                                                                             (1,211)         6,175          12,169         19,016
 Reserve at December 31, 2010                                                                146,455          96,526          58,723         36,349           17,619
 Cumulative paid to December 31, 2010                                                          57,465         92,567        105,567          97,824          92,958
 Cumulative Redundancy (Deficiency)                                                            3,300          (3,838)          4,801          11,928         18,596
 Reserve at December 31, 2011                                                172,768         108,477          67,956          37,423         20,582           9,446
 Cumulative paid to December 31, 2011                                         59,704          92,567         118,473        124,429          111,078        98,202
 Cumulative Redundancy (Deficiency)                                             6,564           6,176          (1,174)         7,239          14,441         21,525

(1)   Amounts include Provision for Adverse Deviation (PfAD) of $22,414 for 2010; $22,688 for 2009; $20,102 for 2008; $17,401 for 2007; $14,756 for 2006 and $12,473
      for 2005.




                                                                                                                 Management’s Discussion and Analysis 25
The uncertainties regarding EGI’s reserves could result in a         2010, such coverage was for a total of $23 million. Other than
liability exceeding the reserves by an amount that would be          general liability, coverages for the programs of the Niche
material to EGI’s financial condition or results of operations       Products division are reinsured on a program-by-program
in a future period. Future development could be significantly        basis when necessary.
different from the past, due to many unknown factors (see
“Risk Factors”).                                                     Using reinsurance, EGI’s policy is to limit its loss exposure in
                                                                     any one claim to not more than 2% of its shareholders’ equity.
REINSURANCE
                                                                     EGI depends upon the financial stability of its reinsurers in the
EGI has reinsurance treaties with several unaffiliated reinsurers,   same way that EGI’s insureds rely upon EGI. Accordingly, EGI
all of whom are selected on the basis of their creditworthiness.     carefully selects its reinsurers and only deals with creditworthy
EGI purchases reinsurance to reduce its exposure to the              reinsurers. EGI’s Reinsurance Committee is responsible for
insurance risks that it assumes in writing business. For 2011, the   evaluating and approving companies to which EGI cedes
maximum net retention on a single risk was $1.5 million (2010        reinsurance. The committee consults with AON Benfield
– $1.5 million).                                                     Canada regarding the financial ratings of EGI’s reinsurers.
                                                                     Reinsurers are selected based on their financial strength
In accordance with industry practice, EGI’s reinsurance
                                                                     ratings, services, reputation and prices offered on the required
recoverables with Canadian licensed reinsurers are generally
                                                                     reinsurance. EGI’s reinsurance broker reported that all
unsecured because Canadian regulations require these
                                                                     reinsurers providing coverage under EGI’s 2012 excess of loss
reinsurers to maintain minimum asset and capital balances
                                                                     and catastrophe treaties were rated A− or better by A.M. Best
in Canada to meet their Canadian obligations. However,
                                                                     as at December 2011.
policy liabilities rank in priority to any subordinate creditors
a reinsurer may have. For reinsurance recoverables with non-         As EGI’s insurance and reinsurance company subsidiaries
licensed reinsurers, EGI maintains security against reinsurance      increase their equity (and therefore regulatory capital), they
recoverables in the form of cash, letters of credit and/or           can retain more insurance business for their own account and
assets held in trust accounts. At December 31, 2011, EGI             therefore purchase less reinsurance. The marginal return on
was the assigned beneficiary of such trust accounts totaling         this new capital can be very substantial. Each dollar of new
$5.2 million (December 31, 2010 – $5.8 million) in guarantees        equity allows EGI to retain up to two and one-half dollars of
from unlicensed reinsurers.                                          additional premium (and the potential downside risk thereon)
                                                                     each year for its own account.
Excess of loss and catastrophe reinsurance is used to limit
an insurer’s exposure to a maximum dollar value per claim            EGI believes that there is currently adequate reinsurance
and per occurrence. Quota share is a form of proportional            capacity in the marketplace for those classes of business which
reinsurance often used by an insurer to build a book of              the Company underwrites, and management is not aware of any
business larger than can be supported by the insurer’s own           developments that might cause a serious shortage of capacity in
capital. When used on established, profitable lines of business,     the future. EGI believes that, through its reinsurance program, it
quota share is an expensive substitute for equity capital. The       is adequately protected against major underwriting losses arising
insurer is essentially borrowing capital from the reinsurer by       from a large claim under a single policy or claims under a group
transferring unearned premium and claims liabilities from            of policies arising from a single event.
its books to the books of the reinsurer. Within the range of
expected loss ratios, this transfer is done at a direct cost to      SHARE CAPITAL
the insurer, which happens through the ceding commission
                                                                     As of February 23, 2012, there were 12,066,013 common shares
(expense allowance) paid by the reinsurer.
                                                                     issued and outstanding. See also note 14 to the consolidated
The ceding commission paid to the insurer by the reinsurer           financial statements.
varies depending on the gross loss ratio. As the gross loss ratio
increases, the amount of ceding commission decreases, subject        LIQUIDITY AND CAPITAL RESOURCES
to agreed upon limits. Above the maximum loss ratio on the
                                                                     The purpose of liquidity management is to ensure there is
ceding commission scale, there is full risk transfer (i.e. the
                                                                     sufficient cash to meet all of EGI’s financial commitments and
potential to lose money) to the reinsurer. Below the minimum
                                                                     obligations as they come due. The Company has suspended
loss ratio on the ceding commission scale, the reinsurer’s profit
                                                                     quarterly dividends to its common shareholders, to assist in
increases. The reinsurer also retains the investment income on
                                                                     building a stronger capital base to support future growth.
the cash balances that develop between the dates premiums are
                                                                     EGI believes that it has the flexibility to obtain, from internal
received and the dates claims are paid.
                                                                     sources, the funds needed to fulfill its cash requirements,
EGI purchases renewable excess of loss and catastrophe               during the following financial year and to satisfy regulatory
reinsurance from third-party reinsurers, covering its                capital requirements.
automobile and general liability business. In both 2011 and



26 EGI Financial Holdings Inc. – Annual Report 2011
Contractual obligations include operating leases, for which             exchange rates, and other relevant market rate or price changes.
$1.3 million is due in less than a year and $5.9 million is due         Market risk is directly influenced by the volatility and liquidity
over the next nine years.                                               in the markets in which the related underlying assets are traded.

EGI is primarily a holding company and, as such, has limited            The primary market risk to the investment portfolio is the
direct operations of its own. EGI’s principal assets are the            interest rate risk associated with investments in fixed income
shares of its insurance, reinsurance and insurance management           securities. The Company’s exposure to unhedged foreign
subsidiaries. Accordingly, its future cash flows depend in              exchange risk is not significant. For EGI’s investment portfolio,
part upon the availability of dividends and other statutorily           there were no significant changes in 2011 in the primary
permissible distributions from the insurance subsidiaries.              market risk exposures or in how those exposures are managed
The ability to pay such dividends and to make such other                compared to the year ended December 31, 2010. Management
distributions is limited by applicable laws and regulations             does not currently anticipate significant changes in EGI’s
of the jurisdictions in which the insurance subsidiaries                primary market risk exposures or in how those exposures
are domiciled, which subject the insurance subsidiaries to              are managed in future reporting periods based upon what is
significant regulatory restrictions. These laws and regulations         known or expected to be in effect in future reporting periods.
require, among other things, that the insurance subsidiaries
maintain minimum solvency requirements and may also limit               INTEREST RATE AND EQUITY MARKET
the amount of dividends that the insurance subsidiaries can             FLUCTUATION
pay to EGI.
                                                                        Movements in short and long-term interest rates, as well as
                                                                        fluctuations in the value of equity securities, affect the level
TRANSACTIONS WITH RELATED PARTIES                                       and timing of recognition of gains and losses on securities
EGI has entered into transactions with two related parties,             EGI holds, and cause changes in realized and unrealized gains
The Co-operators Group Limited (Co-operators) and Purves                and losses. Generally, the Company’s investment income will
Redmond Limited (Purves Redmond). These transactions                    be reduced during sustained periods of lower interest rates as
are carried out in the normal course of operations and                  higher yielding fixed income securities are called, mature, or
are measured at cost which approximates fair value. The                 are sold and the proceeds are reinvested at lower rates. During
transactions involving Co-operators, which is a significant             periods of rising interest rates, the market value of EGI’s
shareholder of EGI, principally consist of an agent distribution        existing fixed income securities will generally decrease and the
channel, support services and investment management. Purves             realized gains on fixed income securities will likely be reduced.
Redmond is involved in arranging insurance coverage for the             Realized losses will be incurred following significant increases
companies within the EGI group. Robert Purves, a shareholder            in interest rates.
and director of EGI, is also a shareholder and the Chairman of
                                                                        Generally, declining interest rates result in unrealized gains in
Purves Redmond.
                                                                        the value of the fixed income securities EGI continues to hold,
                                                                        as well as realized gains to the extent the relevant securities are
RISK MANAGEMENT                                                         sold. General economic conditions, political conditions and
EGI has developed a comprehensive process of risk management            many other factors can also adversely affect the stock markets
and internal control which emphasizes the proactive                     and, consequently, the value of the equity securities EGI owns.
identification of risks facing the organization and the effective
management and control of these risks. The foundation of                CREDIT RISK
the process is the ongoing thorough operational analysis by             Credit risk is the possibility that counterparties may not be
senior management committees and a structured oversight                 able to meet payment obligations when they become due. EGI
process undertaken by the Board of Directors and appointed              assumes counterparty credit risk in many forms. A counterparty
committees. Underlying this structure are internal control              is any person or entity from which cash or other forms of
procedures which are designed to safeguard EGI’s assets and             consideration are expected to extinguish a liability or obligation
protect the organization and its stakeholders from risk.                to the Company. The credit risk exposure is concentrated
                                                                        primarily in the fixed income and preferred share investment
As a provider of insurance products, effective risk management          portfolios and, to a lesser extent, in reinsurance recoverables.
is fundamental to EGI’s ability to protect the interests of EGI’s
customers and shareholders. EGI is exposed to potential loss            EGI’s risk management strategy and investment policy is to
from various market risks, including interest rate and equity           invest in debt instruments of high credit quality issuers and
market fluctuation risk, credit risk, liquidity risk and, to a lesser   to limit the amount of credit exposure with respect to any one
extent, foreign currency risk.                                          issuer. The Company attempts to limit its credit exposure by
                                                                        imposing fixed income portfolio limits on individual corporate
MARKET RISK                                                             issuers based upon credit quality (see “Investments” – “Fixed
Market risk is the risk of loss arising from adverse changes in         Income Securities” and “Reinsurance” sections.
market rates and prices, such as interest rates, foreign currency


                                                                                              Management’s Discussion and Analysis 27
FOREIGN EXCHANGE RISK                                               in conducting the business of a federally regulated insurance
                                                                    company, OSFI may direct the insurance company to refrain
Foreign exchange risk is the possibility that changes in exchange
                                                                    from a course of action or to perform acts necessary to remedy
rates may produce an unintended effect on earnings and equity
                                                                    the situation. In certain circumstances, OSFI may take control
when measured in domestic currency. This risk is largest when
                                                                    of the assets of an insurance company or take control of the
asset backing liabilities are payable in one currency and are
                                                                    company itself. More restrictive laws, rules or regulations
invested in financial instruments of another currency.
                                                                    may be adopted in the future that could make compliance
EGI is exposed to foreign exchange risk, through its U.S.           more difficult and/or expensive. Specifically, recently adopted
operation with the commencement of an insurance and                 legislation addressing privacy issues, among other matters,
management services company in Florida. As at December              is expected to lead to additional regulation of the insurance
31, 2011, EGI has provided capital of US $12.7 million to its       industry in the coming years, which could result in increased
Florida-based insurance company.                                    expenses or restrictions on EGI’s operations.

EGI is also exposed to foreign exchange risk through its            COMPETITION
international division with the commencement of operations          The P&C insurance business is highly competitive with pricing
in Europe. However, as at December 31, 2011 this is minimal.        being a primary means of competition. Other elements of
                                                                    competition include availability and quality of products,
RISK FACTORS                                                        quality and speed of service, financial strength, distribution
                                                                    systems and technical expertise.
Careful consideration should be given to the following
factors, which must be read in conjunction with the detailed        EGI competes with many other insurance companies. Certain
information appearing elsewhere in this report. Any of the          of these competitors are larger and have greater financial
matters highlighted in these risk factors could have a material     resources than EGI has.
adverse effect on EGI’s results of operations, business prospects
or financial condition.                                             In addition, certain competitors have from time to time decreased
                                                                    their prices in an apparent attempt to gain market share.
NATURE OF THE INDUSTRY
                                                                    As competitors introduce new products and as new
The P&C insurance business in Canada is affected by many
                                                                    competitors enter the market, the Company and its insurance
factors which can cause fluctuations in the results of operations
                                                                    subsidiaries may encounter additional and more intense
of EGI. Many of these factors are beyond EGI’s control. An
                                                                    competition. There can be no assurance that EGI will continue
economic downturn in those jurisdictions in which EGI writes
                                                                    to increase revenues or be profitable. To a large degree, future
business could result in less demand for insurance and lower
                                                                    revenues of EGI are dependent upon its ability to continue
policy amounts. As a P&C, EGI is subject to claims arising out
                                                                    to develop and market its products and to enhance the
of catastrophes, which may have a significant impact on its
                                                                    capabilities of its products to meet changes in customer needs.
results of operations and financial condition. These factors,
together with the industry’s historically cyclical competitive      EGI expects to encounter competition from other entities
pricing, could result in fluctuations in the underwriting results   having a business objective similar to that of EGI. Many
and net income of EGI. A significant portion of the earnings        of these entities are well established and have extensive
of insurance companies is derived from the income from their        experience in connection with identifying and effecting
investment portfolios. EGI’s investment income will fluctuate       business acquisitions directly or through affiliates. Many of
depending on the returns and values of securities in its            these competitors possess greater financial resources, technical
investment portfolio.                                               personnel and other resources than EGI and there can be no
                                                                    assurance that EGI will have the ability to compete successfully.
REGULATION                                                          EGI’s financial resources will be relatively limited when
EGI is subject to the laws and regulations of the jurisdictions     contrasted with those of many of its competitors. Although
in which it carries on business. These laws and regulations         EGI’s business strategy assumes that the industry will generate
cover many aspects of its business, including premium rates         competition, there can be no assurance on how any level of
for automobile insurance; the assets in which it may invest; the    competition may impact the future revenues of EGI.
levels of capital and surplus and the standards of solvency that
it must maintain; and the amount of dividends which it may          CYCLICALITY
declare and pay.                                                    Historically, the results of companies in the P&C insurance
                                                                    industry have been subject to significant fluctuations and
Changes to laws or regulations are impossible to predict and
                                                                    uncertainties. The profitability of P&C insurers can be affected
could materially adversely affect EGI’s business, results of
                                                                    significantly by many factors, including regulatory regimes,
operations and financial condition. Where OSFI is concerned
                                                                    developing trends in tort and class action litigation, adoption
about an unsafe course of conduct or an unsound practice
                                                                    of consumer initiatives regarding rates or claims handling



28 EGI Financial Holdings Inc. – Annual Report 2011
procedures, and privacy and consumer protection laws that            groups or the media may focus attention on EGI’s products
prevent insurers from assessing risk, or factors that have a high    and services, thereby subjecting its industry to periodic
correlation with risks considered, such as credit scoring.           negative publicity. EGI also may be negatively impacted if its
                                                                     industry engages in practices resulting in increased public
The financial performance of the P&C insurance industry has          attention to its business. Negative publicity may also result in
historically tended to fluctuate in cyclical patterns of “soft”      increased regulation and legislative scrutiny of practices in the
markets characterized generally by increased competition,            P&C insurance industry as well as increased litigation. Such
resulting in lower premium rates and underwriting standards,         consequences may increase EGI’s costs of doing business and
followed by “hard” markets characterized generally by                adversely affect EGI’s profitability by impeding its ability to
lessening competition, stricter underwriting standards and           market its products and services or increasing the regulatory
increasing premium rates. EGI’s profitability tends to follow        burdens under which EGI operates.
this cyclical market pattern with profitability generally
increasing in hard markets and decreasing in soft markets.           RELIANCE ON BROKERS
These fluctuations in demand and competition could produce
                                                                     EGI distributes its products primarily through a network of
underwriting results that would have a negative impact on
                                                                     brokers. These brokers sell EGI’s competitors’ products and
EGI’s results of operations and financial condition.
                                                                     may stop selling EGI products altogether. Strong competition
UNPREDICTABLE CATASTROPHIC EVENTS                                    exists among insurers for brokers with demonstrated ability
                                                                     to sell insurance products. Premium volume and profitability
Catastrophes can be caused by various natural and unnatural          could be materially adversely affected if there is a material
events. Natural catastrophic events include hurricanes,              decrease in the number of brokers that choose to sell EGI
windstorms, earthquakes, hailstorms, explosions, severe winter       products. In addition, some P&C insurance companies offer
weather and fires. Unnatural catastrophic events include             their products through dedicated, captive sales organizations.
hostilities, terrorist acts, riots, crashes and derailments.         If the number of such P&C insurance companies increases,
The incidence and severity of catastrophes are inherently            EGI’s revenues may decrease, which could have a material
unpredictable. The extent of losses from a catastrophe is a          adverse effect on EGI’s business, financial condition and
function of both the total amount of insured exposure in             results of operations. EGI’s strategy of distributing through
the area affected by the event and the severity of the event.        Co-operators’ agent channel may also adversely impact its
Most catastrophes are restricted to small geographic areas;          relationship with brokers who distribute EGI products.
however, hurricanes, windstorms and earthquakes may
produce significant damage in large, heavily populated areas.        PRODUCT AND PRICING
Catastrophes can cause losses in a variety of P&C insurance
                                                                     EGI prices its products taking into account numerous factors,
lines. For example, the ice storm in eastern Canada in 1998
                                                                     including claims frequency and severity trends, product line
caused P&C insurance losses in several lines of business,
                                                                     expense ratios, special risk factors, the capital required to
including business interruption, personal property, automobile
                                                                     support the product line, and the investment income earned
and commercial property. Claims resulting from natural or
                                                                     on that capital. EGI’s pricing process is designed to ensure
unnatural catastrophic events could cause substantial volatility
                                                                     an appropriate return on capital and long-term rate stability,
in EGI’s financial results for any fiscal quarter or year and
                                                                     avoiding wide fluctuations in rate unless necessary. These
could materially reduce EGI’s profitability or harm EGI’s
                                                                     factors are reviewed and adjusted periodically to ensure they
financial condition. EGI’s ability to write new business also
                                                                     reflect the current environment.
could be affected. EGI may experience an abrupt interruption
of activities caused by unforeseeable and/or catastrophic            However, pricing for automobile insurance must be submitted
events. EGI’s operations may be subject to losses resulting from     to each provincial government regulator and in certain
such disruptions. Losses can relate to property, financial assets,   provinces pre-approved by the regulator. It is possible that,
trading positions and also to key personnel. If EGI’s business       in spite of EGI’s best efforts, regulator decisions may impede
continuity plans cannot be put into action or do not take such       automobile rate increases or other actions that EGI may wish
events into account, losses may further increase.                    to take. Also, during periods of intense competition for any
                                                                     product line to gain market share, EGI’s competitors may
INTEREST RATES                                                       price their products below the rates EGI considers acceptable.
An increase in interest rates may result in lower values for         Although EGI may adjust its pricing up or down to maintain
EGI’s bond portfolio and increased costs of borrowing for EGI        EGI’s competitive position, EGI strives to ensure its pricing
on future debt instruments or credit facilities. Such increased      will produce an appropriate return on invested capital. There
costs would negatively affect EGI’s operating results.               is no assurance that EGI will not lose market share during
                                                                     periods of intense pricing competition.
NEGATIVE PUBLICITY IN THE INDUSTRY
EGI’s products and services are ultimately distributed to
individual consumers. From time to time, consumer advocacy



                                                                                           Management’s Discussion and Analysis 29
UNDERWRITING AND CLAIMS                                            to appropriately apply funds that it holds for its customers on
                                                                   a fiduciary basis. It is not always possible to prevent or detect
EGI is exposed to losses resulting from the underwriting of
                                                                   errors and omissions, and the precautions EGI takes may not
risks being insured and the exposure to financial loss resulting
                                                                   be effective in all cases.
from greater than anticipated adjudication, settlement
and claims costs. EGI’s success depends upon its ability to        EGI’s business, financial condition and/or results may be
accurately assess the risks associated with the insurance          negatively affected if in the future its errors and omissions
policies that EGI writes.                                          insurance coverage proves to be inadequate or unavailable.
                                                                   In addition, errors and omissions claims may harm EGI’s
EGI’s underwriting objectives are to develop business within
                                                                   reputation or divert management resources away from
EGI’s target markets on a prudent and diversified basis and to
                                                                   operating the business.
achieve profitable underwriting results (i.e. a combined ratio
below 100%). EGI underwrites automobile business after a           EGI maintains liability insurance covering errors or omissions
review of the applicant’s driving record reports and claims        that may occur while acting in its role as an insurance
experience. There can be no assurances that EGI will properly      consultant. This coverage has an aggregate limit of liability
assess the risks associated with the insurance policies that it    of $2 million.
writes and may, therefore, experience increased adjudication,
settlement and claims costs.                                       INVESTMENTS
LOSS RESERVES AND CLAIMS MANAGEMENT                                EGI’s investment assets are exposed to any combination of
                                                                   risks related to interest rates, foreign exchange rates and
The amounts established and to be established by EGI for           changing market values.
loss and loss adjustment expense reserves are estimates of
future costs based on various assumptions, including actuarial     EGI’s investment portfolio consists of diversified investments
projections of the cost of settlement and the administration       in fixed-income securities and preferred and common
of claims, estimates of future trends in claims severity and       stocks. Investment returns and market values of investments
frequency, and the level of insurance fraud. Most or all of        fluctuate from time to time. A decline in returns could reduce
these factors are not directly quantifiable, particularly on a     the overall profitability of EGI. A change in interest rates,
prospective basis, and the effects of these and unforeseen         market values or foreign exchange rates may affect Echelon’s
factors could negatively impact EGI’s ability to accurately        regulatory strength tests.
assess the risks of the policies that it writes. In addition,
future adjustments to loss reserves and loss adjustment            REINSURANCE
expenses that are unanticipated by management could have           Consistent with industry practice, EGI utilizes reinsurance to
an adverse impact upon the financial condition and results of      manage its claims exposure and diversifies its business by types
operations of EGI. Although EGI’s management believes its          of insurance and geographic area. The availability and cost of
overall reserve levels as at December 31, 2011, are adequate       reinsurance are subject to prevailing market conditions that are
to meet its obligations under existing policies, actual losses     generally beyond the control of EGI and may affect EGI’s level
may deviate, perhaps substantially, from the reserves reflected    of business and profitability. There can be no assurance that
in EGI’s financial statements. To the extent reserves prove to     developments may not occur in the future which might cause
be inadequate, EGI would have to increase such reserves and        a shortage of reinsurance capacity in those classes of business
incur a charge to earnings.                                        which EGI underwrites, which could result in the curtailment
                                                                   of issuing of policies in a certain line of business or containing
ERRORS AND OMISSIONS CLAIMS
                                                                   limits above a certain size.
Where EGI acts as a licensed insurance agency, it is subject
to claims and litigation in the ordinary course of business        REINSURER CREDIT RISK
resulting from alleged errors and omissions in placing             EGI’s reinsurance arrangements are with a limited number
insurance and handling claims. The placement of insurance          of reinsurers. This reinsurance may cause an adverse effect
and the handling of claims involve substantial amounts of          on EGI’s results of operations if one or more of its reinsurers
money. Since errors and omissions claims against EGI may           are unable to meet its financial obligations. Although all of its
allege EGI’s potential liability for all or part of the amounts    reinsurers were rated A- or higher by A.M. Best at the time of
in question, claimants may seek large damage awards and            entering into the reinsurance arrangements, these ratings are
these claims can involve significant defense costs. Errors         subject to change and may be lowered.
and omissions could include, for example, EGI’s employees
or sub-agents failing, whether negligently or intentionally,       Although reinsurance makes the assuming reinsurers liable
to place coverage or file claims on behalf of customers, to        to EGI to the extent of the risk each reinsurer assumes, EGI is
appropriately and adequately disclose insurer fee arrangements     not relieved of its primary liability to its insureds as the direct
to its customers, to provide insurance providers with complete     insurer. As a result, EGI bears credit risk with respect to its
and accurate information relating to the risks being insured or    reinsurers. EGI cannot ensure that its reinsurers will pay all


30 EGI Financial Holdings Inc. – Annual Report 2011
reinsurance claims on a timely basis or at all. EGI evaluates          EGI’s Board of Directors has established the following
each reinsurance claim based on the facts of the case, historical      committees to ensure that risks are effectively identified,
experience with the reinsurer on similar claims, and existing          monitored, controlled and reported on:
law and includes in its reserve for uncollectible reinsurance
any amounts deemed uncollectible. The inability to collect             Audit and Risk Committee: This committee of directors of
amounts due to EGI under reinsurance arrangements would                the Company reviews all financial information, monitors
reduce EGI’s net income and cash flow.                                 internal controls and provides oversight of management’s risk
                                                                       control processes, specifically focusing on financial related
TECHNOLOGY                                                             risks. Echelon also has an Audit and Risk Committee of its
                                                                       directors in accordance with the requirements of the Insurance
EGI is heavily dependent on systems technology to process
                                                                       Companies Act (Canada).
large volumes of transactions and there would be a risk if
the technology employed is inadequate or inappropriate to              Conduct Review & Compensation Committee: The Conduct
support current and future business needs and objectives. EGI          Review & Compensation Committee of directors of the
continues to implement new computer applications as part of a          Company monitors related party transactions affecting EGI and
comprehensive approach to improve systems technology. EGI              reviews and approves officer compensation and benefit plans.
regularly tests and improves its Business Recovery Emergency           The Conduct Review Committee of directors of Echelon is
Plan to protect itself, its producers and policyholders in the         responsible for the identification and reporting of related party
event of a technology failure; however, there is no assurance          transactions to Echelon’s board of directors and the monitoring
that EGI will be able to respond to technology failures                of regulatory compliance and market conduct programs put in
effectively and with minimal disruption.                               place by management to ensure their effectiveness.

LIQUIDITY                                                              Investment Committee: This committee, composed of
EGI manages its cash and liquid assets in an effort to                 directors and supported by senior executives, ensures that risks
ensure there is sufficient cash to meet all of EGI’s financial         associated with the investment of corporate and policyholder
obligations as they fall due. As a federally regulated insurance       funds are effectively managed to accomplish EGI’s investment
company, Echelon is required to maintain an asset base                 objectives of prudent, conservative management of funds
comprised of liquid securities that can be used to satisfy its         and compliance with regulatory restrictions while achieving
ongoing commitments. EGI believes that internally generated            competitive rates of return.
funds provide the financial flexibility needed to fulfill cash
                                                                       Reinsurance Committee: This committee of senior executives
commitments on an ongoing basis. EGI has no material
                                                                       works closely with AON Benfield Canada, EGI’s reinsurance
commitments for capital expenditures. However, there can be
                                                                       brokers, to ensure that effective reinsurance programs are in
no assurances that EGI’s cash on hand and liquid assets will be
                                                                       place, which facilitate the desired growth of EGI’s business
sufficient to meet any future obligations that may come due.
                                                                       and provide EGI with protection against the occurrence of
                                                                       significant and unusual claims risk and development.
FUTURE CAPITAL REQUIREMENTS
EGI’s future capital requirements will depend upon many                In addition to these committees, management has formed a
factors, including the expansion of EGI’s sales and marketing          number of working committees which have been assigned
efforts and the status of competition. There can be no assurance       the responsibility of identifying and managing specific
that financing will be available to EGI on acceptable terms, or        corporate risks, including (i) a strategic initiatives committee
at all. If additional funds are raised by issuing equity securities,   to consider the strategic risks faced by EGI; (ii) underwriting
further dilution to the existing stockholders will result. If          and claims committees to manage the risks associated with
adequate funds are not available, EGI may be required to delay,        the development and pricing of EGI’s products, claims
scale back or eliminate its programs. Accordingly, the inability       adjudication and reserving; (iii) a technology committee and
to obtain such financing could have a material adverse effect on       a system prioritization committee to implement effective
EGI’s business, financial condition and results of operations.         technology solutions; and (iv) a compliance committee to
                                                                       ensure that the appropriate processes and procedures are
CORPORATE GOVERNANCE                                                   in place to ensure compliance with all applicable regulatory
                                                                       requirements. EGI has also established a Business Recovery
Active oversight remains a priority for the Board of Directors. The    Emergency Plan with the objectives of protecting life, securing
board is directly involved, through its committees, in overseeing      critical infrastructure and facilities from a catastrophic event
all aspects of EGI’s operation. The objective of the board is to       and resuming business operations in a timely effective manner
meet or exceed best practices in corporate governance. There           thus minimizing loss to the organization.
is independent oversight from the board and the respective
committees to key corporate functions such as financial reporting,
compliance, risk assessment and management, as well as human
resources and succession planning.



                                                                                             Management’s Discussion and Analysis 31
FUTURE CHANGES IN ACCOUNTING                                        IFRS 13 Fair Value Measurement
POLICIES AND DISCLOSURE                                             In May 2011, the IASB published IFRS 13, a comprehensive
                                                                    standard on how to measure and disclose fair values. IFRS 13
ACCOUNTING STANDARDS ISSUED BUT NOT                                 applies to IFRSs that require or permit fair value measurement,
YET APPLIED                                                         but does not address when to measure fair value or require
Amendment to IAS 1 Presentation of Financial                        additional use of fair value. The new standard requires
Statements                                                          disclosures similar to those in IFRS 7 Financial Instruments:
                                                                    Disclosures, but applies to all assets and liabilities measured
In June 2011, the International Accounting Standards
                                                                    at fair value, whereas IFRS 7 applied only to financial assets
Board (IASB) issued an amendment to IAS 1 that changes
                                                                    and liabilities measured at fair value. IFRS 13 is effective
the presentation of items in the consolidated statement
                                                                    for annual periods beginning on or after January 1, 2013, is
of comprehensive income. This amendment requires the
                                                                    applied prospectively as of the beginning of the annual period
components of other comprehensive income to be presented
                                                                    in which it is adopted, with early adoption permitted. The
in two separate groups, based on whether or not the
                                                                    Company is currently evaluating the impact of this standard
components may be recycled to the consolidated statement
                                                                    on its consolidated financial statements.
of earnings in the future. Companies will continue to have
a choice of whether to present components of OCI before             New and revised Reporting Entity standards
or after tax. Those that present components of OCI before
                                                                    In May 2011 the IASB published a package of five new and
tax will be required to disclose the amount of tax related to
                                                                    revised standards that address the scope of the reporting entity.
the two groups separately. This amendment is effective for
                                                                    The new standards in the package are IFRS 10 Consolidated
annual periods beginning on or after July 1, 2012, is applied
                                                                    Financial Statements, IFRS 11 Joint Arrangements and IFRS 12
retrospectively, with early adoption permitted. The Company is
                                                                    Disclosure of Interests in Other Entities. The revised standards
currently evaluating the impact of this amendment to IAS 1 on
                                                                    are IAS 28 Investments in Associates and Joint Ventures and
its consolidated financial statements.
                                                                    Joint Ventures and IAS 27 Separate Financial Statements.
IFRS 9 Financial Instruments
                                                                    The requirements contained in the package of five standards
In November 2009 the IASB published IFRS 9. It addresses            are effective for annual periods beginning on or after January
classification and measurement of financial assets and              2013, with early adoption permitted so long as the entire
liabilities and replaces the multiple category and measurement      package is early adopted together. The five standards are
models in IAS 39 for debt instruments with a new mixed              described below. The Company is currently evaluating the
measurement model having only two categories: Amortized             impact of these new and revised standards on its consolidated
cost and fair value through profit or loss. IFRS 9 also replaces    financial statements.
the models for measuring equity instruments and such
instruments are either recognized at fair value through profit      IFRS 10 Consolidated Financial Statements
or loss or at fair value through other comprehensive income.        IFRS 10 introduces a single consolidation model that uses
Where such equity instruments are measured at fair value            the same criteria to determine control for entities of all types,
through other comprehensive income, dividends, to the extent        irrespective of whether the investee is controlled by voting
not clearly representing a return of investment, are recognized     rights or other contractual arrangements. The principle that
in profit or loss; however, other gains and losses (including       a consolidated entity presents a parent and its subsidiaries
impairments) associated with such instruments are never             as a single entity remains unchanged, as do the mechanics of
recycled to profit and loss, but accumulated gains or losses can    consolidation. IFRS 10 supersedes existing guidance under IAS
be transferred within shareholder’s equity.                         27 Consolidated and Separate Financial Statements and SIC-12
                                                                    Consolidation – Special Purpose Entities.
Requirements for financial liabilities were added in October
2010 and they largely carried forward existing requirements in      IFRS 11 Joint Arrangements
IAS 39, Financial Instruments – Recognition and Measurement,
except that fair value changes due to credit risk for liabilities   IFRS 11 establishes principles for financial reporting by
designated at fair value through profit and loss would generally    parties to a joint arrangement, and only differentiates
be recorded in other comprehensive income.                          between joint operations and joint ventures. The option to
                                                                    apply proportionate consolidation when accounting for joint
This standard is required to be applied for accounting periods      ventures has been removed; equity accounting is now applied
beginning on or after January 1, 2013, with earlier adoption        in accordance with IAS 28 Investments in Associates and Joint
permitted. The Company has not yet assessed the impact of the       Ventures. IFRS 11 supersedes existing guidance under IAS 31
standard or determined whether it will adopt the standard early.    Interests in Joint Ventures and SIC-13 Jointly Controlled Entities
                                                                    – Non Monetary Contributions by Venturers.




32 EGI Financial Holdings Inc. – Annual Report 2011
IFRS 12 Disclosure of Interests in Other Entities                    control over financial reporting. Based on that evaluation,
                                                                     the Chief Executive Officer and the Chief Financial Officer
IFRS 12 sets out the disclosure requirements under IFRS 10
                                                                     concluded that the internal control over financial reporting
Consolidated Financial Statements, IFRS 11 Joint Arrangements
                                                                     was effective as at December 31, 2011, and provided reasonable
and IAS 28 Investments in Associates and Joint Ventures. The
                                                                     assurance regarding the reliability of financial reporting and
enhanced disclosures in the new standard are intended to
                                                                     the preparation of financial statements for external purposes in
help financial statement readers evaluate the nature, risks
                                                                     accordance with IFRS.
and financial effects of an entity’s interests in subsidiaries,
associates, joint arrangements and unconsolidated structured         There have been no changes in the Company’s internal
entities. Entities are permitted to incorporate any of the           control over financial reporting during the year ended
disclosure requirements in IFRS 12 into their financial              December 31, 2011, that have materially affected or are
statements without early adopting IFRS 12.                           reasonably likely to materially affect the Company’s internal
IAS 28 Investments in Associates and Joint                           control over financial reporting.
Ventures
                                                                     CAPITAL RESOURCES
IAS 28 has been amended in line with the changes to
accounting for joint arrangements in IFRS 11. The amended            The total capitalization of EGI at December 31, 2011, was
standard prescribes the accounting for investments in                $154.8 million compared to $146.4 million at December 31,
associates and provides guidance on the application of the           2010. The elements that increased equity consist of net income
equity method when accounting for investments in associates          of $7.5 million, the increase in common share and contributed
and joint ventures.                                                  surplus of $0.2 million and comprehensive income of
                                                                     $0.7 million in 2011, reflecting (i) an increase in the fair value
IAS 27 Separate Financial Statements
                                                                     of investments designated as available-for-sale investments
IAS 27 has been amended to provide guidance on the accounting        of $1.5 million, net of income tax, (ii) a reclassification for
and disclosure requirements for investments in subsidiaries,         gains realized in 2011 of $1.0 million, net of income tax, to net
associates and joint ventures when an entity prepares separate       income in the year, and (iii) unrealized losses of $0.2 million
financial statements. The amended standard requires an entity        on translation of financial statements whose functional
preparing separate financial statements to account for investments   currency was not Canadian dollars.
at cost or in accordance with IFRS 9 Financial Instruments.
                                                                     The continued growth in capitalization reflects the strengthening
CONTROLS AND PROCEDURES                                              of EGI’s balance sheet and provides for better capital adequacy
                                                                     as a P&C insurance underwriter. A common measure of capital
DISCLOSURE CONTROLS AND PROCEDURES                                   adequacy is the net written premium ratio to surplus or equity).
EGI’s disclosure controls and procedures are designed to             This ratio was 1.0:1 as at December 31, 2011, compared to 1.1:1
provide reasonable assurance that information required to            in 2010. This level of leverage continues to be well below the
be disclosed by EGI is recorded, processed, summarized               2.5:1 ratio which management feels is fully leveraged capital.
and reported in a timely manner. This includes controls and          Therefore, EGI’s current capitalization provides it with adequate
procedures that are designed to ensure that information is           financial resources for planned growth.
accumulated and communicated to management, including the            Equity
Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.                                                                   As at December 31
                                                                      ($ thousands)                              2011            2010
As of December 31, 2011, an evaluation was carried out,
under the supervision of the Chief Executive Officer and              Common shares                            69,133          69,087
Chief Financial Officer, of the effectiveness of the Company’s                                           (12,066,013      (12,059,582
disclosure controls and procedures as defined under National                                                  shares)          shares)
Instrument 52-109. Based on that evaluation, the Chief                Retained earnings                        71,410          63,677
Executive Officer and the Chief Financial Officer concluded           Contributed surplus                         724             545
that the design and operation of these disclosure controls and
                                                                      Accumulated other
procedures was effective.
                                                                      comprehensive income (loss)              13,766           13,057
Internal Controls over Financial Reporting                            Non-controlling Interest                   (213)               −
As at the financial year ended December 31, 2011, the Chief           Total capitalization                   154,820          146,366
Executive Officer and the Chief Financial Officer evaluated the
design and operating effectiveness of the Company’s internal




                                                                                             Management’s Discussion and Analysis 33
GLOSSARY OF SELECTED                                                     “Minimum Capital Test” means the OSFI’s Minimum Capital
                                                                         Test Guideline under which a federally regulated insurer is
INSURANCE TERMS
                                                                         measured for the adequacy of its capital.
“Case method” means establishing a reserve liability equal to the
most probable expected outcome for an individual claim.                  “Net earned premiums” of an insurer means the portion of the
                                                                         written premium equal to the expired portion of the time for
“Cede” means the act of an insurer transferring or assigning             which insurance or reinsurance was in effect.
part or all of the risk on an insurance policy written by it to a
reinsurer by purchasing insurance from such reinsurer to cover           “Net written premiums” of an insurer means direct written
the risk or part thereof.                                                premiums less amounts ceded to reinsurers.

“Combined ratio” of an insurer for any period means the sum of           “Producers” refers to, collectively, insurance brokers, agents and
the loss ratio and the expense ratio of the insurer for such period.     managing general agencies.

“Direct written premiums” of an insurer for any period                   “Quota share” means a type of reinsurance where the reinsurer
means the total premiums on insurance, including assumed                 agrees to assume the risk on a fixed portion of a specified line of
reinsurance, written by the insurer during such period.                  business in return for the same portion of the ceding company’s
                                                                         premium for that line of business.
“Expense ratio” for any period means the sum of expenses,
including commissions, premium taxes and operating expenses              “Reinsurance” means an arrangement in which an insurance
incurred, expressed as a percentage of net earned premiums.              company, the reinsurer, agrees to indemnify another insurance
                                                                         or reinsurance company, the ceding company, against all or a
“Facility Association” or “Facility” refers to an organization of the    portion of the insurance or reinsurance risks underwritten by
Canadian automobile insurance industry which exists to ensure            the ceding company under one or more policies.
that all drivers can obtain basic insurance, even if their application
fails to meet the criteria of individual insurance companies.            “Retention” means the amount of liability for which an
                                                                         insurance company will be responsible after it has completed its
“Groupement” refers to a Quebec organization of the automobile           reinsurance arrangements.
insurance industry which exists to ensure that all drivers in
Quebec can obtain basic insurance, even if their application fails       “Return on equity” or “ROE” for a period means net income
to meet the criteria of individual insurance companies.                  expressed as a percentage of the average total equity in that period.

“Loss adjustment expenses” or “LAE” means the expense of                 “Risk” means a person or thing insured on an insurance policy.
settling claims, including certain legal and other fees and the
                                                                         “Underwriting” means the assumption of risk for designated loss
expense of administering the claims adjustment process.
                                                                         or damage by issuing a policy of insurance in respect thereof.
“Loss ratio” for any period means the sum of claims and claims
                                                                         “Unearned premiums” means the portion of premiums received
adjustment expenses incurred, net of reinsurance, expressed as a
                                                                         relating to the period of risk in subsequent accounting periods
percentage of net earned premiums.
                                                                         and which is deferred to such subsequent accounting periods.




34 EGI Financial Holdings Inc. – Annual Report 2011
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING


Roles of Management, Board of Directors
and Audit and Risk Committee
Management is responsible for the preparation and fair presentation of the consolidated financial statements, management’s
discussion and analysis and other information in the annual report. The consolidated financial statements of EGI Financial
Holdings Inc. (the Company) were prepared in accordance with International Financial Reporting Standards. Where necessary,
these consolidated financial statements reflect amounts based on the best estimates and judgment of management.

In meeting its responsibility for the reliability of the consolidated financial statements, management maintains the necessary
system of internal controls. These controls are designed to provide management with reasonable assurance that the financial
records are reliable for preparing consolidated financial statements and other financial information, assets are safeguarded against
unauthorized use or disposition and liabilities are recognized. The Audit and Risk Committee, composed of directors who are not
officers or employees of the Company, meets, as required, with management, the Appointed Actuary and the external auditor to
review actuarial, accounting, reporting and internal control matters. The Audit and Risk Committee is responsible for reviewing
the consolidated financial statements and management’s discussion and analysis and recommending them to the Board of
Directors for approval.

Role of Appointed Actuary
The actuary is appointed by the Board of Directors, pursuant to the Insurance Companies Act. The Appointed Actuary is responsible
for ensuring that the assumptions and methods used in the valuation of policy liabilities are in accordance with accepted actuarial
practice, applicable legislation and associated regulations or directives. The Appointed Actuary is also required to provide an opinion
regarding the appropriateness of the policy liabilities to meet all policyholder obligations of the Company at the consolidated balance
sheet dates. Examination of supporting data for accuracy and completeness and consideration of the Company’s assets are important
elements of the work required to form this opinion. The Appointed Actuary uses the work of the external auditor in verifying data
used for valuation purposes. Policy liabilities include unearned premiums, provision for unpaid claims, reinsurers’ share of unearned
premiums and provision for unpaid claims and deferred policy acquisition costs.

Role of External Auditor
PricewaterhouseCoopers LLP, external auditor, has been appointed by the shareholders to conduct an independent audit of the
consolidated financial statements of the Company in accordance with Canadian generally accepted auditing standards and report
to the shareholders regarding the fairness of the annual consolidated financial statements. The external auditor considers the work
of the Appointed Actuary in respect of policy liabilities included in the consolidated financial statements, on which the Appointed
Actuary has rendered an opinion.

Toronto, Ontario
February 23, 2012




Steve Dobronyi                        Hemraj Singh
Chief Executive Officer               Chief Financial Officer




                                                                                                Consolidated Financial Statements 35
February 23, 2012



Independent Auditor’s Report


To the Shareholders of
EGI Financial Holdings Inc.


We have audited the accompanying consolidated financial statements of EGI Financial Holdings Inc. and
its subsidiaries, which comprise the consolidated balance sheets, as at December 31, 2011 and 2010 and
January 1, 2010 and the consolidated statements of income and comprehensive income, changes in equity
and cash flows for the years ended December 31, 2011 and 2010 and the related notes, which comprise a
                                                                   information.
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
                                                                 Standards,                      co
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.

Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
                                               requirements
standards require that we comply with ethical requirements and plan and perform the audits 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 disclosdisclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s 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
                                                                                        purpose of expressing
to design audit procedures that are appropriate in the circumstances, but not for the pur
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 in our audits is sufficient and appropriate to provide a
basis for our audit opinion.




                              ,
PricewaterhouseCoopers LLP, Chartered Accountants
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2
T: +1 416 863 1133, F: +1 416 365 8215, www.pwc.com/ca

                                                                         partnership.
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partn
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of EGI Financial Holdings Inc. and its subsidiaries as at December 31, 2011 and 2010 and
                                                                               years
January 1, 2010 and their financial performance and their cash flows for the years ended December 31,
2011 and 2010 in accordance with International Financial Reporting Standards.




Chartered Accountants, Licensed Public Accountants
APPOINTED ACTUARY’S REPORT


To the Shareholders of EGI Financial Holdings Inc.:

I have valued the policy liabilities of the subsidiary insurance operations of EGI Financial Holdings Inc. for its consolidated
balance sheets as at December 31, 2011 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 policyholder obligations and the financial
statements fairly present the results of the valuation.




Joe S. Cheng, FCIA
J. S. Cheng & Partners Inc.

Toronto, Ontario
February 23, 2012




38 EGI Financial Holdings Inc. – Annual Report 2011
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)



                                                                                    December 31      December 31      January 1
                                                                                          2011             2010           2010
 Assets
 Cash and short-term deposits                                                             30,839          17,033        46,885
 Accounts receivable                                                                       23,877          31,712       32,950
 Investments (note 6)                                                                     367,228       353,643       294,365
 Due from insurance companies                                                               3,777          7,352         5,545
 Deferred policy acquisition costs (note 8)                                                15,566         15,979        14,807
 Income taxes recoverable                                                                    435               −             −
 Prepaid expenses and other assets                                                          2,417           1,361        2,947
 Reinsurers’ share
     Unearned premiums (note 7)                                                            5,089           6,471         4,972
     Provision for unpaid claims (note 9)                                                  33,269         36,152        38,736
 Property and equipment (note 12)                                                            688             414           838
 Intangible assets (note 13)                                                               4,369             531           468
 Deferred income taxes (note 17)                                                            4,149          4,135         3,952
                                                                                          491,703        474,783      446,465
 Liabilities
 Bank indebtedness (note 19)                                                                    −              −        19,550
 Income taxes payable                                                                           −         2,394           4,151
 Accounts payable and accrued liabilities                                                   7,685         4,824           6,312
 Payable to insurance companies                                                             1,550         2,093           1,829
 Other liabilities                                                                           456           1,007           816
 Unearned premiums (note 7)                                                                71,644         78,335        72,643
 Unearned commission                                                                        1,029            728           513
 Provision for unpaid claims (note 9)                                                     254,519       239,036        207,220
                                                                                          336,883        328,417       313,034
 Equity
 Share capital (note 14)                                                                   69,133        69,087         68,618
 Contributed surplus (note 15)                                                               724            545            416
 Retained earnings                                                                         71,410         63,677        59,525
 Accumulated other comprehensive income                                                    13,766         13,057         4,872
 Equity attributed to shareholders of the company                                         155,033        146,366        133,431
 Non-controlling interest                                                                    (213)             −             −
                                                                                          491,703        474,783      446,465


The accompanying notes are an integral part of these consolidated financial statements.



On Behalf of the Board of Directors:




Paul F. Little                         Robert Purves
Director                               Director



                                                                                            Consolidated Financial Statements 39
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
for the years ended December 31 (in thousands of Canadian dollars, except per share amounts)



                                                                                              2011      2010
 Revenue
 Gross written and assumed premiums                                                       174,892    185,671
 Less: Premiums ceded to reinsurers                                                       (14,764)   (18,605)
 Net written and assumed premiums                                                         160,128    167,066
 (Increase) decrease in gross unearned premiums                                             6,701     (5,692)
 Increase (decrease) in unearned premiums, reinsurers’ share                               (1,382)     1,499
 Change in provision for unearned premiums                                                  5,319     (4,193)
 Net earned premiums                                                                      165,447    162,873
 Investment income (note 6)                                                                13,867     17,465
 Total revenue                                                                            179,314    180,338


 Expenses
 Gross claims incurred                                                                     112,197   128,774
 Less: claims recoveries from reinsurers                                                  (4,939)    (9,644)
 Net incurred claims                                                                      107,258     119,130
 Gross acquisition costs                                                                   41,491    40,082
 Less: acquisition cost recoveries from reinsurers                                         (4,313)   (4,248)
 Net acquisition costs                                                                     37,178    35,834
 Operating costs (note 18)                                                                22,266      17,732
 Interest                                                                                       −       568
 Total expenses                                                                           166,702    173,264
 Income before income taxes                                                                12,612      7,074
 Income tax expense (note 17)                                                               5,092      2,922
 Net income                                                                                 7,520      4,152
 Attributed to:
    Shareholders of the Company                                                             7,733      4,152
    Non-controlling interest                                                                 (213)         −
                                                                                            7,520      4,152
 Earnings per share attributable to shareholders of the Company (note 24)
    Net income per share – basic                                                           $0.64       $0.35
    Net income per share – diluted                                                         $0.64      $0.34
 Net income                                                                                 7,520      4,152
 Other comprehensive income (loss), net of taxes (note 17)
 Available-for-sale securities:
    Change in net unrealized gains                                                          1,482     12,264
    Reclassification of net realized (gains) losses to net income                           (956)     (3,487)
 Cumulative translation gain (loss)                                                           183      (592)
 Other comprehensive income                                                                  709       8,185
 Total comprehensive income                                                                 8,229     12,337
 Attributed to:
    Shareholders of the Company                                                             8,442     12,337
    Non-controlling interest                                                                 (213)         −
                                                                                            8,229     12,337


The accompanying notes are an integral part of these consolidated financial statements.

40 EGI Financial Holdings Inc. – Annual Report 2011
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the years ended December 31 (in thousands of Canadian dollars)


                                                            Accumulated
                                                                    Other                                       Non-
                                    Share    Contributed    Comprehen-       Retained     Shareholders’   controlling     Total
                                   Capital       Surplus     sive Income     Earnings           Equity       interest    Equity
 Balance at January 1, 2011        69,087            545           13,057      63,677          146,366             −    146,366


 Net income (loss)                       –              –                –       7,733            7,733         (213)     7,520
 Other comprehensive income              –              –             709            –             709                      709


 Common shares issued                  46               –                –           –              46             –         46


 Stock options
    - expense                            –           179                 –           –              179            –        179
 Balance at December 31, 2011      69,133            724           13,766       71,410         155,033          (213)   154,820




                                                            Accumulated
                                                                    Other                                       Non-
                                    Share    Contributed    Comprehen-       Retained     Shareholders’   controlling     Total
                                   Capital       Surplus     sive Income     Earnings           Equity       interest    Equity
 Balance at January 1, 2010         68,618           416            4,872      59,525           133,431            −     133,431


 Net income                              –              –                –       4,152            4,152            −       4,152
 Other comprehensive income              –              –            8,185           –            8,185            −       8,185


 Common shares issued                 469               –                –           –             469             −        469


 Stock options
    - expense                            –           263                 –           –             263             −        263
    - exercised                          –          (134)                –           –            (134)            −       (134)
 Balance at December 31, 2010      69,087            545           13,057      63,677          146,366             −    146,366




The accompanying notes are an integral part of these consolidated financial statements.




                                                                                             Consolidated Financial Statements 41
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31 (in thousands of Canadian dollars)



                                                                                               2011       2010
 Cash provided by (used in):
 Operating activities
    Net income                                                                               7,520       4,152
    Items not involving cash
      Amortization                                                                            966          953
      Amortization of premiums on bonds                                                      1,226        900
      Realized and unrealized (gains) losses on investments                                  (444)      (4,949)
      (Increase) in accrued investment income                                                  (89)       (135)
      Other                                                                                    109        394
                                                                                             9,288        1,315
 Cash flow from changes in
    Reinsurers’ share of unearned premiums                                                   1,382      (1,499)
    Reinsurers’ share of unpaid claims                                                       2,883       2,584
    Accounts receivable                                                                      7,835       1,238
    Due from insurance companies                                                             3,575      (1,807)
    Accounts payable and accrued liabilities                                                 2,068        (818)
    Provision for unpaid claims                                                             15,483       31,816
    Unearned premiums                                                                       (6,691)      5,692
    Income taxes payable/recoverable                                                        (2,573)     (5,690)
    Deferred income taxes                                                                      (14)       (183)
    Prepaid expenses and other assets                                                       (1,056)      1,586
    Deferred policy acquisition costs                                                          413       (1,172)
 Cash provided by operating activities                                                      32,593      33,062
 Financing activities
    Repayment of bank indebtedness                                                               −     (19,550)
    Issue of common shares                                                                      46         242
    Common share dividends                                                                       −            –
 Cash provided by (used in) financing activities                                                46     (19,308)
 Investing activities
    Acquisition of subsidiary, net of cash acquired                                              −          22
    Purchases of property and equipment and intangible assets                               (5,078)      (592)
    Purchase of investments                                                               (486,702)   (382,899)
    Sale/maturity of investments                                                           472,947     339,863
 Cash (used in) investing activities                                                       (18,833)   (43,606)
 Increase in cash and short-term deposits                                                   13,806     (29,852)
 Cash and short-term deposits, beginning of year                                            17,033      46,885
 Cash and short-term deposits, end of year                                                  30,839      17,033
 Supplementary information
    Income taxes paid                                                                        8,248       9,095
    Interest paid                                                                              123        684


The accompanying notes are an integral part of these consolidated financial statements.




42 EGI Financial Holdings Inc. – Annual Report 2011
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


1  ORGANIZATION AND BASIS                                           International Financial Reporting Standards. The Company has
                                                                    consistently applied the same accounting policies used in the
   OF PRESENTATION
                                                                    preparation of its opening IFRS balance sheet as at January 1,
EGI Financial Holdings Inc. (the Company) was incorporated          2010, throughout all periods presented, as if these policies
on August 18, 1997, under the Business Corporations Act             had always been in effect. Note 5 discloses the impact of the
(Ontario) and is incorporated and domiciled in Canada. The          transition to IFRS on the Company’s reported equity as at
Company is principally engaged, through its subsidiaries, in        January 1 and December 31, 2010, and comprehensive income
property and casualty insurance in Canada, U.S. and Denmark.        for the year ended December 31, 2010, including the nature
The Company’s head office is located at 2680 Matheson Blvd.         and effect of significant changes in accounting policies from
East, Suite 300, Mississauga, Ontario.                              those used in the Company’s previously issued consolidated
                                                                    financial statements for the year ended December 31, 2010.
The Company’s wholly-owned subsidiaries are EGI Insurance
Managers Inc., Echelon General Insurance Company                    3  SUMMARY OF SIGNIFICANT
(Echelon), EGI Insurance Services, Inc., American Colonial
Insurance Company (ACIC), EGI Insurance Services (Florida),
                                                                       ACCOUNTING POLICIES
Inc., and CIM Reinsurance Company Ltd. (CIM Re).                    BASIS OF MEASUREMENT
The Company purchased American Colonial Insurance                   The consolidated financial statements have been prepared
Company (ACIC) in 2010 for a purchase price of $4,541.              under the historical cost convention, except for the revaluation
Effective March 31, 2010, Echelon Insurance Company of              of certain financial assets to fair value, including available-for-
America (EICA) and ACIC were amalgamated into one entity            sale (AFS) investments.
and continue to operate under the name ACIC. EGI Insurance
Services, Inc., ACIC and EGI Insurance Services (Florida), Inc.,    BALANCE SHEET PRESENTATION
are U.S.-based subsidiaries.                                        The Company does not classify its assets and liabilities as
                                                                    current and non-current on its balance sheets. As a financial
In the fourth quarter of 2011, the Company commenced
                                                                    institution, the Company provides insurance services over
operations in Europe through QIC Holdings ApS (QIC), a
                                                                    a period of years, rather than within a clearly identifiable
newly-formed Danish holding company with a wholly-owned
                                                                    short-term operating cycle. Classification of assets and
subsidiary, Qudos Insurance A/S, a newly-incorporated
                                                                    liabilities in the balance sheet as current or non-current does
insurance company based in Denmark. The Company acquired
                                                                    not provide relevant information. The maturity profile of the
all of the preference shares and 51% of the voting shares of
                                                                    investment portfolio is described in note 11. The estimated
QIC for Euro 7.5 million. QIC had no assets or liabilities prior
                                                                    payment period for insurance claims, less related reinsurance
to this transaction.
                                                                    recoverable, is provided in note 11. Property and equipment
These consolidated financial statements have been authorized        assets are charged to expense over their estimated useful lives
for issue by the Board of Directors, on February 23, 2012.          of up to three years. Cash and cash equivalents, accounts
                                                                    receivables, due from insurance companies, income taxes
                                                                    payable, accounts payable, accrued liabilities and amounts due
2  BASIS OF PREPARATION AND
                                                                    to and from related parties are expected to be recovered or
   ADOPTION OF INTERNATIONAL                                        settled within twelve months of the end of fiscal year.
   FINANCIAL REPORTING STANDARDS
                                                                    CONSOLIDATION
The Company prepares its consolidated financial statements
in accordance with Canadian generally accepted accounting           The consolidated financial statements of the Company
principles as set out in the Handbook of the Canadian Institute     consolidate the accounts of EGI Financial Holdings Inc. and
of Chartered Accountants (“CICA Handbook”). In 2010, the            its subsidiaries. All intercompany transactions, balances and
CICA Handbook was revised to incorporate International              unrealized gains and losses from intercompany transactions
Financial Reporting Standards as issued by the international        are eliminated on consolidation.
accounting standards board (IFRS), and requires publicly
                                                                    Subsidiaries are those entities, including special purpose
accountable enterprises to apply such standards effective for
                                                                    entities, which EGI Financial Holdings Inc. controls by having
years beginning on or after January 1, 2011. Accordingly, the
                                                                    the power to govern the financial and operating policies. The
Company has commenced reporting on this basis in these
                                                                    existence and effect of potential voting rights that are currently
consolidated financial statements. In these financial statements,
                                                                    exercisable or convertible are considered when assessing
the term “Canadian GAAP” refers to Canadian GAAP before
                                                                    whether EGI Financial Holdings Inc. controls another entity.
the adoption of IFRS.
                                                                    Subsidiaries are fully consolidated from the date on which
These consolidated financial statements have been prepared          control is obtained by EGI Financial Holdings Inc. and are
in accordance with IFRS and IFRS 1, First-time Adoption of          de-consolidated from the date that control ceases.




                                                                                               Consolidated Financial Statements 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


Non-controlling interests represent equity interests in                  QIC’s functional currency is Danish Krone and is subject to
subsidiaries owned by outside parties. The share of net assets           foreign currency translation adjustments upon consolidation.
of subsidiaries attributable to non-controlling interests is             EGI Insurance Services, Inc., ACIC and EGI Insurance
presented as a component of equity. Changes in the parent                Services (Florida), Inc., are U.S.-based subsidiaries whose
company’s ownership interest in subsidiaries that do not result          functional currency is U.S. dollars. Each U.S. subsidiary
in a loss of control are accounted for as equity transactions.           operating outside of Canada is subject to foreign currency
                                                                         translation adjustments upon consolidation.
BUSINESS COMBINATIONS
                                                                         When an entity disposes of its entire interest in a foreign
Consideration transferred in a business combination is
                                                                         operation, or loses control, joint control, or significant
measured at fair value at the date of acquisition and includes
                                                                         influence over a foreign operation, the foreign currency
any cash paid plus the fair value of assets given, liabilities
                                                                         gains or losses accumulated in other comprehensive
incurred and equity instruments issued by the company.
                                                                         income related to the foreign operation are recognized
The consideration transferred also includes contingent
                                                                         in the income statement. If an entity disposes of part
consideration arrangements, if any, recorded at fair value.
                                                                         of an interest in a foreign operation which remains a
Directly attributable acquisition-related costs are expensed in
                                                                         subsidiary, a proportionate amount of foreign currency
the current period and reported within operating expenses.
                                                                         gains or losses accumulated in other comprehensive
At the date of acquisition, the Company recognizes the
                                                                         income related to the subsidiary are reallocated between
identifiable assets acquired, the liabilities assumed and
                                                                         controlling and non-controlling interests.
any non-controlling interest in the acquired business. The
identifiable assets acquired and the liabilities assumed            (ii) Transactions and balances
are initially recognized at fair value. The excess of the
consideration paid over the fair value of net assets acquired            Foreign currency transactions are translated into the
is recorded as goodwill. Where the fair value of consideration           functional currency using the exchange rates in effect
paid is less than the fair value of net assets acquired, the             at the date the transactions occurred. Foreign exchange
difference is recognized in the income statement. Any pre-               gains and losses resulting from the settlement of foreign
existing equity interests in an acquiree are re-measured to fair         currency transactions and from the translation at period-
value at the date of the business combination and any resulting          end exchange rates of monetary assets and liabilities are
gain or loss is recognized in the income statement.                      recognized in investment income in the consolidated
                                                                         statements of income. Exchange gains and losses related
FOREIGN CURRENCY TRANSLATION                                             to non-monetary investments classified as AFS are
(i) Functional and presentation currency                                 recorded in OCI.

    Items included in the financial statements of each              CASH AND SHORT-TERM DEPOSITS
    consolidated entity of the Company are measured using           Cash and short-term deposits include cash-on-hand, cash
    the currency of the primary economic environment in             balances with banks and short-term investments maturing in
    which the entity operates (the “functional currency”).          90 days or less from the date of acquisition. These financial
    The consolidated financial statements are presented in          assets are classified as loans and receivables and are recorded
    Canadian dollars, which is the Company’s functional and         at an amortized cost which approximates fair value.
    presentation currency.
                                                                    FINANCIAL INSTRUMENTS
    The financial statements of entities that have a functional
    currency different from the presentation currency of            Financial assets and liabilities are recognized when the
    the Company (“foreign operations”) are translated into          Company becomes a party to the contractual provisions of the
    Canadian dollars as follows: assets and liabilities – at the    instrument. Financial assets are derecognized when the rights
    closing rate at the date of the balance sheet, and income       to receive cash flows from the assets have expired or have been
    and expenses – at the average rate of the period (as this is    transferred and the Company has transferred substantially all
    considered a reasonable approximation to actual rates). All     risks and rewards of ownership.
    resulting changes are recognized in other comprehensive
                                                                    Financial assets and liabilities are offset and the net amount
    income (OCI) as cumulative translation adjustments.
                                                                    reported in the balance sheet when there is a legally
    The Company’s Barbados-based subsidiary, CIM Re, changed        enforceable right to offset the recognized amounts and there
    its functional currency from U.S. dollars to Canadian dollars   is an intention to settle on a net basis, or realize the asset and
    effective January 1, 2010. The change was accounted for on      settle the liability simultaneously.
    a prospective basis and, as a result, CIM Re’s opening 2010
                                                                    At initial recognition, the Company classifies its financial
    balance sheet was translated into Canadian dollars using the
                                                                    instruments in the following categories depending on the
    rate of exchange as at January 1, 2010.
                                                                    purpose for which the instruments were acquired:



44 EGI Financial Holdings Inc. – Annual Report 2011
(i) Financial assets and liabilities at fair value through                 at fair value, net of any transaction costs incurred,
    profit or loss (FVTPL): A financial asset or liability is              and subsequently at amortized cost using the effective
    classified in this category if acquired principally for the            interest method.
    purpose of selling or repurchasing in the short-term,
    or if it is designated at fair value through profit or loss       IMPAIRMENT OF FINANCIAL ASSETS
    by management. The Company has designated as fair                 The Company determines, at each reporting date, whether
    value through profit and loss under the fair value option         there is objective evidence that a financial asset is impaired.
    financial assets which contain embedded derivatives that          The criteria used to determine if objective evidence of an
    significantly alter the cash flows of the underlying asset.       impairment loss include:
    Financial instruments in this category are recognized             1)   significant financial difficulty of the obligor;
    initially and subsequently at fair value. Transaction costs
    are expensed in the consolidated statements of income.            2)   delinquencies in interest or principal payments; and
    Gains and losses arising from changes in fair value are
    presented in the consolidated statement of income within          3)   it becomes probable that the borrower will enter
    investment income in the period in which they arise.                   bankruptcy or other financial reorganization.

(ii) Available-for-sale investments: Available-for-sale               For equity securities, a significant or prolonged decline in the
     investments are non-derivative financial assets that are         fair value of the security below its cost is also evidence that the
     either designated in this category or not classified in any      assets are impaired.
     of the other categories. The Company’s available-for-sale
     assets comprise marketable securities and investments in         If such evidence exists, the Company recognizes an
     debt and common equity securities.                               impairment loss, as follows:

    Available-for-sale investments are recognized initially                AFS: The impairment loss is the difference between
    at fair value plus transaction costs and are subsequently              the amortized cost of the asset and its fair value at the
    carried at fair value. Gains or losses arising from changes            measurement date, less any impairment losses previously
    in fair value are recognized in OCI.                                   recognized in the consolidated statement of income. This
                                                                           amount represents the cumulative loss in accumulated
    Interest on available-for-sale investments, calculated                 other comprehensive income that is reclassified to the
    using the effective interest method, is recognized in the              consolidated statements of income.
    consolidated statements of income within investment
    income. Dividends on available-for-sale equity instruments             Financial assets carried at amortized costs: The loss is the
    are recognized in the consolidated statements of income                difference between the amortized cost of the loan and
    as part of investment income when the Company’s right to               receivables and the present value of the estimated future
    receive payment is established. When an available-for-sale             cash flows, discounted using the instrument’s original
    investment is sold or impaired, the accumulated gains or               effective interest rate. The carrying amount of the asset
    losses are moved from accumulated other comprehensive                  is reduced by this amount either directly or indirectly
    income to the consolidated statements of income and                    through the use of an allowance account.
    included within investment income.
                                                                      Impairment losses on financial assets carried at amortized cost
(iii) Loans and receivables: Loans and receivables are non-           are reversed in subsequent periods if the amount of the loss
      derivative financial assets with fixed or determinable          decreases and the decrease can be related objectively to an event
      payments that are not quoted in an active market. The           occurring after the impairment was recognized. If, in a subsequent
      Company’s loans and receivables are comprised of                period, the fair value of an AFS debt instrument increases and the
      accounts receivables, due from insurance companies,             increase can be objectively related to an event occurring after the
      reinsurers’ share of unearned premiums and provisions           impairment loss was recognized in the consolidated statements of
      for unpaid claims and cash and cash equivalents. Loans          income, the impairment loss is reversed through the consolidated
      and receivables are initially recognized at fair value plus     statement of income. In contrast, impairment losses on AFS equity
      transaction costs. Subsequently, loans and receivables are      instruments are not reversed.
      measured at amortized cost using the effective interest
      method less any provision for impairment.                       INSURANCE CONTRACTS
                                                                      Insurance contracts are those contracts that transfer significant
(iv) Financial liabilities at amortized cost: Financial liabilities   insurance risk at the inception of the contract. Insurance risk
     at amortized cost include accounts payable, and accrued          arises when the Company agrees to compensate a policyholder
     liabilities and bank indebtedness. Accounts payable are          if a specified uncertain future event adversely affects the
     initially recognized at fair value. Subsequently, accounts       policyholder. Significant risk is defined as the possibility
     payable are measured at amortized cost using the effective       of having to pay significantly more in a scenario where the
     interest method. Bank indebtedness is recognized initially       insured event occurs than when it does not occur.

                                                                                                 Consolidated Financial Statements 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


PROVISION FOR UNPAID CLAIMS                                        IMPAIRMENT OF NON-FINANCIAL ASSETS
Provision for unpaid claims, including adjustment expenses,        Property, plant and equipment and intangible assets are tested
represents the estimated amounts required to settle all            for impairment when events or changes in circumstances
outstanding and unreported claims incurred to the end of the       indicate that the carrying amount may not be recoverable.
period. Unpaid claims liabilities are discounted to take into      For the purpose of measuring recoverable amounts, assets
account the time value of money. It also includes a provision      are grouped at the lowest levels for which there are separately
for adverse deviation. Expected reinsurance recoveries on          identifiable cash flows (cash-generating units or ‘CGUs’).
unpaid claims and adjustment expenses, net of any required         Recoverable amount is the higher of an asset’s fair value less
provision for doubtful amounts, are recognized as assets at        costs to sell and value in use (being the present value of the
the same time, using principles consistent with the Company’s      expected future cash flows of the relevant asset or CGU, as
method for establishing the related liability.                     determined by management).

REINSURANCE                                                        The Company evaluates impairment losses, for potential reversals
                                                                   when events or circumstances warrant such consideration.
The Company reflects third party reinsurance balances on
the consolidated balance sheets on a gross basis to indicate       EMPLOYEE BENEFITS
the extent of credit risk related to third party reinsurance and
its obligations to policyholders and on a gross basis in the       The Company contributes to a group registered savings
consolidated statements of income to indicate the results of       plan for employees as services are incurred. Contributions
direct and ceded premiums written and the portion of gross         are charged to operating expenses. There are no other post-
claims expense that is recoverable from reinsurers.                employment benefit expenses.

REVENUE RECOGNITION                                                INCOME TAXES
Insurance premiums written are deferred as unearned premiums       Income taxes are recognized in the consolidated statements of
and recorded in income as the premium is earned pro rata           income except to the extent that it relates to items recognized
primarily over the terms of the underlying policies. The portion   in OCI or directly in equity. In those cases, the related taxes are
of the premiums related to the unexpired term of the policy at     also recognized in OCI or directly in equity, respectively.
the end of the period is reflected in unearned premiums.
                                                                   The Company follows the asset and liability method of
DEFERRED POLICY ACQUISITION COSTS                                  accounting for income taxes, whereby deferred income tax
                                                                   assets and liabilities are recognized for the future income
Commissions and premium taxes incurred in the writing              tax consequences attributable to differences between the
of premiums are deferred only to the extent that they are          carrying values of existing assets and liabilities and their
expected to be recovered from unearned premiums and are            respective income tax bases and taxable losses and tax credit
amortized to income as the related premiums are earned. If         carry-forwards. Deferred income tax assets and liabilities are
unearned premiums are not sufficient to pay expected claims        measured using enacted or substantively enacted income tax
and expenses, including policy maintenance expenses and            rates expected to apply to taxable income in the years in which
unamortized policy acquisition costs, a premium deficiency is      those temporary differences are expected to be recovered or
said to exist. Premium deficiency is recognized by a charge to     settled. The effect of a change in income tax rates on future
income initially by writing down deferred policy acquisition       income tax assets and liabilities is recognized in income or
costs. If the premium deficiency is greater than the deferred      other comprehensive income in the year which includes the
policy acquisition costs, a liability would be accrued for the     date of enactment or substantive enactment. Deferred income
excess deficiency.                                                 tax assets are recognized only to the extent the realization
                                                                   of such assets is probable. Deferred income tax assets and
PROPERTY AND EQUIPMENT                                             liabilities are offset when there is a legally enforceable right
Property and equipment are recorded at cost less accumulated       to offset current tax assets against current tax liabilities and
amortization. Amortization is provided over the estimated          when the deferred income tax assets and liabilities relate to
useful lives of the assets using the straight-line method over     income taxes levied by the same taxation authority on either
the following terms:                                               the taxable entity or different taxable entities where there is
                                                                   intention to settle the balances on a net basis.
   Furniture and equipment            3 years
   Computer hardware                  3 years                      STOCK-BASED COMPENSATION
                                                                   The Company has a stock option plan that provides for the
INTANGIBLE ASSETS
                                                                   issuance of shares of the Company’s common stock not
Intangible assets, comprised primarily of computer software, are   exceeding 10% of the total issued and outstanding shares
recorded at cost less accumulated amortization and impairment.     (on a diluted basis) and shares reserved for issuance under
Amortization is provided over the estimated useful life of the     the employee stock option plans, options for services and
asset (2-3 years) using the straight-line method.                  employee stock purchase plans.

46 EGI Financial Holdings Inc. – Annual Report 2011
The compensation cost of stock options granted is measured          Where such equity instruments are measured at fair value
at estimated fair value at the grant date and recognized as an      through other comprehensive income, dividends, to the extent
expense over the vesting period with a corresponding offset to      not clearly representing a return of investment, are recognized
contributed surplus.                                                in profit or loss; however, other gains and losses (including
                                                                    impairments) associated with such instruments are never
Stock options which contain a graded vesting feature (the           recycled to profit and loss, but accumulated gains or losses can
total options granted vest on a graded basis such as annually       be transferred within shareholder’s equity.
over 5 years) are accounted for separately based on the date
of vesting. At the time the options are granted, expected           Requirements for financial liabilities were added in October
forfeiture rates are estimated and used to reduce the amount        2010 and they largely carried forward existing requirements in
expensed over the life of the options. The estimated forfeiture     IAS 39, Financial Instruments – Recognition and Measurement,
rate is adjusted to actual forfeiture experience as information     except that fair value changes due to credit risk for liabilities
becomes available.                                                  designated at fair value through profit and loss would generally
                                                                    be recorded in other comprehensive income.
PROVISIONS
                                                                    This standard is required to be applied for accounting periods
Provisions for restructuring costs, warranties and legal claims,
                                                                    beginning on or after January 1, 2015, with earlier adoption
where applicable, are recognized as liabilities when the
                                                                    permitted. The Company has not yet assessed the impact of the
Company has a present legal or constructive obligation as a
                                                                    standard or determined whether it will adopt the standard early.
result of past events; it is more likely than not that an outflow
of resources will be required to settle the obligation, and the     IFRS 13 Fair Value Measurement
amount can be reliably estimated. Provisions are measured
                                                                    In May 2011, the IASB published IFRS 13, a comprehensive
at management’s best estimate of the expenditure required to
                                                                    standard on how to measure and disclose fair values. IFRS 13
settle the obligation at the end of the reporting period, and are
                                                                    applies to IFRSs that require or permit fair value measurement,
discounted to present value where the effect is material. The
                                                                    but does not address when to measure fair value or require
Company performs evaluations to identify onerous contracts
                                                                    additional use of fair value. The new standard requires
and, where applicable, records provisions for such contracts.
                                                                    disclosures similar to those in IFRS 7 Financial Instruments:
ACCOUNTING STANDARDS ISSUED                                         Disclosures, but applies to all assets and liabilities measured
                                                                    at fair value, whereas IFRS 7 applied only to financial assets
BUT NOT YET APPLIED
                                                                    and liabilities measured at fair value. IFRS 13 is effective
Amendment to IAS 1 Presentation of Financial                        for annual periods beginning on or after January 1, 2013, is
Statements                                                          applied prospectively as of the beginning of the annual period
In June 2011, the IASB issued an amendment to IAS 1                 in which it is adopted, with early adoption permitted. The
that changes the presentation of items in the consolidated          Company is currently evaluating the impact of this standard
statements of comprehensive income. This amendment                  on its consolidated financial statements.
requires the components of other comprehensive income to be
                                                                    New and Revised Reporting Entity Standards
presented in two separate groups, based on whether or not the
components may be recycled to the consolidated statements           In May 2011 the IASB published a package of five new and
of earnings in the future. Companies will continue to have          revised standards that address the scope of the reporting entity.
a choice of whether to present components of OCI before             The new standards in the package are IFRS 10 Consolidated
or after tax. Those that present components of OCI before           Financial Statements, IFRS 11 Joint Arrangements and IFRS 12
tax will be required to disclose the amount of tax related to       Disclosure of Interests in Other Entities. The revised standards
the two groups separately. This amendment is effective for          are IAS 28 Investments in Associates and Joint Ventures and IAS
annual periods beginning on or after July 1, 2012, is applied       27 Separate Financial Statements.
retrospectively, with early adoption permitted. The Company is
currently evaluating the impact of this amendment to IAS 1 on       The requirements contained in the package of five standards
its consolidated financial statements.                              are effective for annual periods beginning on or after January
                                                                    2013, with early adoption permitted so long as the entire
IFRS 9 Financial Instruments                                        package is early adopted together. The five standards are
In November 2009 the IASB published IFRS 9. It addresses            described below. The Company is currently evaluating the
classification and measurement of financial assets and              impact of these new and revised standards on its consolidated
liabilities and replaces the multiple category and measurement      financial statements.
models in IAS 39 for debt instruments with a new mixed              IFRS 10 Consolidated Financial Statements
measurement model having only two categories: Amortized
cost and fair value through profit or loss. IFRS 9 also replaces    IFRS 10 introduces a single consolidation model that uses
the models for measuring equity instruments and such                the same criteria to determine control for entities of all types,
instruments are either recognized at fair value through profit      irrespective of whether the investee is controlled by voting
or loss or at fair value through other comprehensive income.        rights or other contractual arrangements. The principle that


                                                                                               Consolidated Financial Statements 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


a consolidated entity presents a parent and its subsidiaries         judgements made in preparing the financial statements are in
as a single entity remains unchanged, as do the mechanics of         respect of policy liabilities, impairments of financial assets,
consolidation. IFRS 10 supersedes existing guidance under IAS        reinsurance and income taxes.
27 Consolidated and Separate Financial Statements and SIC-12
Consolidation – Special Purpose Entities.                            POLICY LIABILITIES
IFRS 11 Joint Arrangements                                           Policy liabilities consist of provisions for unpaid claims and
                                                                     unearned premium liabilities.
IFRS 11 establishes principles for financial reporting by
parties to a joint arrangement, and only differentiates              Claim liability reserves are maintained to cover the Company’s
between joint operations and joint ventures. The option to           estimated ultimate liability for unpaid losses and loss
apply proportionate consolidation when accounting for joint          adjustment expenses with respect to reported and unreported
ventures has been removed; equity accounting is now applied          claims incurred as of the end of each accounting period. The
in accordance with IAS 28 Investments in Associates and Joint        provision for unpaid claims and adjustment expenses is first
Ventures. IFRS 11 supersedes existing guidance under IAS 31          determined on a case-by-case basis as claims are reported and
Interests in Joint Ventures and SIC-13 Jointly Controlled Entities   then reassessed as additional information becomes known. The
– Non Monetary Contributions by Venturers.                           provision also accounts for the future development of these
                                                                     claims, including claims incurred but not reported (IBNR).
IFRS 12 Disclosure of Interests in Other Entities                    Reserves do not represent an exact calculation of liability,
IFRS 12 sets out the disclosure requirements under IFRS 10           but instead represent estimates developed using projection
Consolidated Financial Statements, IFRS 11 Joint Arrangements        techniques in accordance with Canadian accepted actuarial
and IAS 28 Investments in Associates and Joint Ventures. The         practice. These reserve estimates are expectations of the
enhanced disclosures in the new standard are intended to             ultimate cost of settlement and administration of claims based
help financial statement readers evaluate the nature, risks          on the Company’s assessment of facts and circumstances then
and financial effects of an entity’s interests in subsidiaries,      known, its review of historical settlement patterns, estimates
associates, joint arrangements and unconsolidated structured         of trends in claims severity and frequency, legal theories of
entities. Entities are permitted to incorporate any of the           liability and other factors. The appointed actuary of EGI’s
disclosure requirements in IFRS 12 into their financial              subsidiaries, using appropriate actuarial techniques, evaluates
statements without early adopting IFRS 12.                           the adequacy of the policy liabilities.

IAS 28 Investments in Associates and                                 Variables in the reserve estimation process can be affected
Joint Ventures                                                       by both internal and external events, such as changes in
IAS 28 has been amended in line with the changes to accounting       claims handling procedures, economic inflation, legal trends
for joint arrangements in IFRS 11. The amended standard              and legislative changes. Many of these items are not directly
prescribes the accounting for investments in associates and          quantifiable, particularly on a prospective basis. Additionally,
provides guidance on the application of the equity method when       there may be significant reporting lags between the occurrence
accounting for investments in associates and joint ventures.         of the insured event and the time it is actually reported to the
                                                                     insurer. Reserve estimates are refined in a systematic ongoing
IAS 27 Separate Financial Statements                                 process as historical loss experience develops and additional
IAS 27 has been amended to provide guidance on the                   claims are reported and settled. Because the establishment of
accounting and disclosure requirements for investments in            reserves is an inherently uncertain process involving estimates,
subsidiaries, associates and joint ventures when an entity           current reserves may not be sufficient. Adjustments to reserves,
prepares separate financial statements. The amended standard         both positive and negative, are reflected in the consolidated
requires an entity preparing separate financial statements to        statements of income for the period in which such estimates
account for investments at cost or in accordance with IFRS 9         are updated.
Financial Instruments.
                                                                     The unearned premium reserve is considered adequate when
                                                                     the unearned premium reserve (after deducting any deferred
4  CRITICAL ACCOUNTING ESTIMATES
                                                                     acquisition cost assets) is at least equal to the present value,
   AND ASSUMPTIONS                                                   at the balance sheet date, of the cash flow of claims, expenses,
                                                                     investment income and taxes to be incurred after that date
The preparation of the Company’s consolidated financial
                                                                     on account of the policies in force at that date or at an earlier
statements requires management to use estimates and
                                                                     date. Deferred acquisition costs comprise commissions and
judgements that affect the amounts reported in the financial
                                                                     premium taxes directly related to the acquisition of premiums.
statements. These estimates and judgements principally relate
                                                                     These costs are deferred to the extent that they are recoverable
to the establishment of reserves for claims and expenses,
                                                                     from unearned premiums, after considering the related
impairments of investment securities, amounts recoverable
                                                                     anticipated claims, expenses and investment income in respect
from reinsurers and certain other assets. As more information
                                                                     of these premiums. Deferred acquisition costs are amortized
becomes known, these estimates and judgements could change
                                                                     on the same basis as the premiums are recognized in income.
and impact future results. The most significant estimates and

48 EGI Financial Holdings Inc. – Annual Report 2011
A premium deficiency would be recognized immediately by a            REINSURANCE
charge to the consolidated statements of income as a reduction
                                                                     Reinsurance recoverables include amounts for expected recoveries
of deferred acquisition costs to the extent that the unearned
                                                                     related to provision for unpaid claims as well as the portion of
premium reserve, plus anticipated investment income, is not
                                                                     the reinsured premiums which has not yet been earned by the
adequate to recover all deferred acquisition costs and related
                                                                     reinsurer. Amounts recoverable from reinsurers are estimated in
claims and expenses. If the premium deficiency was greater
                                                                     a manner consistent with claim and claim adjustment expense
than unamortized deferred acquisition costs, a liability would
                                                                     reserves and are reported in the consolidated balance sheet. The
be accrued for the excess deficiency.
                                                                     ceding of an insurance liability to a reinsurer does not discharge
                                                                     the Company’s primary liability to the policyholders. The
IMPAIRMENT OF FINANCIAL ASSETS
                                                                     Company’s policy is to record an estimated allowance for doubtful
The Company considers an impairment if there is objective            accounts on the basis of periodic evaluations of balances due
evidence that an available-for-sale financial asset is impaired,     from reinsurers, reinsurer solvency, credit ratings of reinsurers,
including in the case of equity investments classified as            collateral held by the Company, management’s experience and
available-for-sale, a significant or prolonged decline in the fair   current economic conditions.
value of the security below its carrying value. Considerable
judgement may be required in interpreting market data used to        The Company is exposed to disputes on, and defects in, contracts
develop the estimates of fair value. Accordingly, the estimates      with reinsurers and the possibility of default by reinsurers.
presented in these consolidated financial statements are not
necessarily indicative of the amounts that could be realized in      INCOME TAXES
a current market exchange.                                           Judgement is used in determining the provision for income
                                                                     taxes and the recording of current and deferred income
Factors considered by the Company include but are not limited to:
                                                                     taxes. Amounts are determined based on income tax laws
a)   significant financial difficulty of the issuer or obligor;      and rates in effect or substantively enacted at the reporting
                                                                     date. Unforeseen future changes to income tax laws and rates
b)   a breach of contract, such as a default or delinquency in       may impact the reported value of future income taxes and
     interest or principal payments;                                 adjustments may need to be made which will affect future
                                                                     reporting periods.
c)   the lender, for economic or legal reasons relating to the
     borrower’s financial difficulty, granting to the borrower a     Deferred income taxes, accumulated as a result of temporary
     concession that the lender would not otherwise consider;        differences, which are probable to reverse, are included in
                                                                     the consolidated balance sheet. In addition, the consolidated
d)   it becoming probable that the borrower will enter               statements of income contains items that are non-taxable
     bankruptcy or other financial reorganization;                   or non-deductible for income tax purposes, which cause
                                                                     the income tax provision to differ from what it would be if
e)   the disappearance of an active market for that financial        based on statutory rates. Recoverability of deferred tax assets
     asset because of financial difficulties; or                     is primarily based on current and expected profitability
                                                                     applicable to the Company and its ability to utilize any
f)   observable data indicating that there is a measurable
                                                                     recorded tax assets taking into consideration of tax planning
     decrease in the estimated future cash flows from a group
                                                                     strategies and the expiry date of tax losses.
     of financial assets since the initial recognition of those
     assets, although the decrease cannot yet be identified with
     the individual financial assets in the group, including:        5 TRANSITION TO IFRS
                                                                     The effect of the Company’s transition to IFRS, described in
     (i) adverse changes in the payment status of borrowers
                                                                     note 2, is summarized in this note as follows:
         in the group (e.g., an increased number of delayed
         payments or an increased number of credit card
                                                                     (i)   TRANSITION ELECTIONS
         borrowers who have reached their credit limit and are
         paying the minimum monthly amount); or                      The Company has applied the mandatory transition exceptions
                                                                     and the following optional exemptions to full retrospective
     (ii) national or local economic conditions that                 application of IFRS.
          correlate with defaults on the assets in the group                                                            As described
          (e.g., an increase in the unemployment rate in the                                                             in note 5(ii)
          geographical area of the borrowers, a decrease in           Cumulative translation adjustment                      (b)
          property prices for mortgages in the relevant area, a
                                                                      Business combinations                                  (e)
          decrease in oil prices for loan assets to oil producers,
          or adverse changes in industry conditions that affect       Insurance contracts                                    (f)
          the borrowers in the group).                                Classification and measurement of
                                                                      previously recognized financial instruments            (g)


                                                                                               Consolidated Financial Statements 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


(ii) RECONCILIATION OF EQUITY AND COMPREHENSIVE INCOME AS PREVIOUSLY REPORTED
     UNDER CANADIAN GAAP TO IFRS
                                                                                                    December 31,        January 1,
                                                                                           Notes          2010              2010
 Equity
 Equity as reported under Canadian GAAP                                                                 $146,366         $133,431
 IFRS adjustments increase (decrease):
 Adjustment to AOCI - unrealized foreign exchange gains and losses related to
 investments designated as available-for-sale.                                                (a)             166              85
 Adjustment to AOCI- election re cumulative translation adjustment account                    (b)             678             678
 Adjustment to contributed surplus- stock
 options- graded vesting adjustment                                                           (c)              13                13
 Adjustments to retained earnings                                                       (a)(b)(c)           (857)            (776)
 Equity as reported under IFRS                                                                          $146,366         $133,431



                                                 Year ended           to zero at the date of transition to IFRS. An adjustment
                                               December 31,           of $678 to reduce retained earnings and increase
                                          Note         2010           accumulated other comprehensive income has been
 Comprehensive income                                                 recorded as at January 1, 2010, and December 31, 2010.
 As reported under Canadian GAAP                       $12,337    (c) Under IFRS, the Company accrues the cost of employee
 (Decrease) in net income for:                                        stock options over the vesting period using the graded
 Unrealized foreign exchange loss on                                  method of amortization rather than the straight-line
 AFS investments                          (a)              (81)       method, which was the Company’s policy under Canadian
                                                                      GAAP, and estimates the expected forfeit rate. An
                                                                      adjustment of $13 to increase contributed surplus and
Increase in other comprehensive
                                                                      decrease retained earnings was made to reflect stock
income for:
                                                                      options granted and outstanding as at January 1, 2010.
 Unrealized foreign exchange loss on                                  There were no additional adjustments for the year ended
 AFS investments                          (a)               81
                                                                      December 31, 2010.
 As reported under IFRS                                $12,337
                                                                  (d) Under IFRS, available-for-sale equity investments not
Explanatory notes                                                     quoted in an active market must be measured at fair value,
                                                                      unless fair value cannot be reliably measured. Under
(a) Under IFRS, changes in unrealized foreign exchange gains
                                                                      Canadian GAAP, such assets were measured at cost.
    and losses related to investments designated as available-
                                                                      Preferred shares purchased in the first quarter of 2010 are
    for-sale are recorded in net income in the current period.
                                                                      recorded at fair value of $2,000 as at December 31, 2010.
    Under Canadian GAAP, these unrealized gains and losses
                                                                      There was no financial statement impact on transition.
    were recorded in OCI. Gross unrealized gains of $123
    ($85 net of income tax) and $239 ($166 net of income          (e) In accordance with IFRS transitional provisions, the
    tax), related to bonds denominated in U.S. dollars held           Company elected to apply IFRS relating to business
    at January 1, 2010, and December 31, 2010, have been              combinations prospectively from January 1, 2010. As
    reflected as an adjustment to reduce retained earnings and        such, Canadian GAAP balances relating to business
    increase AOCI as at January 1, 2010, and December 31,             combinations entered into before that date, including
    2010, respectively. Gross unrealized losses of $116 ($81          goodwill, have not been retrospectively restated and have
    net of income tax) have been recorded as adjustments to           been carried forward without adjustment.
    decrease investment income and increase OCI for the year
    ended December 31, 2010.                                      (f) The Company has elected to apply the transitional
                                                                      provisions in IFRS 4 Insurance Contracts, and disclose
(b) In accordance with IFRS transitional provisions, the              only six years of data in its claim development tables, as
    Company has elected to reset the cumulative translation           permitted by IFRS 4. The disclosure will be increased in
    adjustment account, which includes unrealized gains and           each succeeding additional year, until the full ten years of
    losses arising from the translation of foreign operations,        information is included.




50 EGI Financial Holdings Inc. – Annual Report 2011
(g) In accordance with IFRS transitional provisions, the          The following table provides a comparison as at December 31,
    Company has elected to reclassify cash and cash equivalents   2011 and December 31, 2010 and January 1, 2010:
    as loans and receivables. Previously, under Canadian GAAP,
    cash and cash equivalents were classified as held-to-                                                  Carrying and fair values
    maturity investments. There was no financial statement                                    December      December
    impact related to the reclassification.                                                          31           31      January 1
                                                                                                   2011         2010          2010
(iii) ADJUSTMENTS TO THE STATEMENT                                 Available-for-sale
      OF CASH FLOWS
                                                                   Bonds
The transition from Canadian GAAP to IFRS had no                      Canadian
significant impact on cash flows generated by the Company.
                                                                        Federal                   97,337        91,664      83,777
Under Canadian GAAP, cash flows relating to interest
payments were classified as operating. IFRS provides an                 Provincial               62,483         48,130     44,696
accounting policy choice of classifying interest as operating,          Municipal                 10,357         5,855       6,254
investing or financing depending on the nature of the
                                                                        Corporate                111,046        111,789    90,024
underlying cash flows. Classification must remain consistent
from period to period. The Company has chosen to classify                                        281,223      257,438      224,751
cash flows relating to interest payments as operating.                United States
                                                                        Federal                    2,635         3,585           −
6 INVESTMENTS                                                           Corporate                 10,395         8,377       6,819
The Company’s policy is to utilize the prudent person                                            13,030         11,962       6,819
approach to asset management, as required by the Insurance         Total bonds                  294,253       269,400      231,570
Companies Act. An investment policy is in place and
                                                                   Preferred shares                  917        2,000            −
its application is monitored by the Board of Directors.
Diversification techniques are employed to minimize risk.          Common shares
Policies limit investments in any entity or group of related          Canadian                    57,591       69,535       52,210
entities to a maximum of 5% of the Company’s assets.                  United States                1,443         1,254       1,072
Limitations are also placed on the quality of investments,
                                                                                                 59,034        70,789       53,282
particularly relating to investment grade bonds.

                                                                   Total available-for-sale     354,204        342,189    284,852


                                                                   Held for trading
                                                                      Preferred shares            10,854         9,373       7,567
                                                                   Investment income
                                                                   due and accrued                 2,170         2,081       1,946
                                                                   Total investments            367,228       353,643     294,365




                                                                                              Consolidated Financial Statements 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


FAIR VALUE                                                           The following table provides the classification of the Company’s
                                                                     investments within the fair value hierarchy, as outlined above, as
The Company is responsible for determining the fair value
                                                                     at December 31, 2011, December 31, 2010, and January 1, 2010:
of its investment portfolio by utilizing market-driven fair
value measurements from active markets, where available, by                                                 Investments at fair value
considering other observable and unobservable inputs and by                                  Level 1    Level 2     Level 3      Total
employing valuation techniques which make use of current              December 31, 2011
market data. The Company uses a fair-value hierarchy to
                                                                      Bonds                        −   293,449        804     294,253
categorize the inputs used in valuation techniques to measure
fair value. A description of the inputs used in the valuation of      Equities              69,888            −        917     70,805
financial instruments is as follows:                                                        69,888     293,449        1,721   365,058

Level 1 – Unadjusted quoted prices in active markets for
identical assets or liabilities. The fair value, of the Company’s                                           Investments at fair value
common and preferred shares, except for preferred shares
                                                                                             Level 1    Level 2     Level 3      Total
classified as available for sale, is determined based on quoted
prices in active markets obtained from external pricing sources.      December 31, 2010
                                                                      Bonds                        –   269,090         310    269,400
Level 2 – Inputs, other than quoted prices, that are observable
                                                                      Equities               80,162           –     2,000       82,162
for the investment either directly or indirectly. These inputs
include quoted prices for similar instruments exchanged                                      80,162    269,090       2,310    351,562
in active markets; quoted prices for identical or similar
instruments exchanged in inactive markets; inputs other than
                                                                                                            Investments at fair value
quoted prices that are observable for the instruments, such as
interest rates and yield curves, volatilities, prepayment speeds,                            Level 1    Level 2     Level 3      Total
loss severities, credit risks and default rates where available;      January 1, 2010
and inputs that are derived principally from or corroborated
                                                                      Bonds                        –    231,120       450     231,570
by observable market data and correlation or other means.
                                                                      Equities              60,849            –           –    60,849
The Company’s investments in government securities                                          60,849      231,120       450     292,419
(including federal, provincial and municipal bonds), corporate
securities, private placements and infrequently traded               The fair value of the Company’s investments, determined
securities are priced using publicly traded, over-the-counter        without the use of observable market information as inputs is
prices or broker-dealer quotes which are based on market             approximately 0.5% (December 31, 2010 – 0.6%; January 1, 2010
observable inputs. Observable inputs such as benchmark               − 0.1%) of the total investment portfolio required to be measured
yields, reported trades, broker dealer quotes, issuer spreads and    at fair value, consists of corporate bonds and preferred shares
bids are available for these investments.                            with a fair value of $804 (December 31, 2010 – $310; January 1,
Level 3 – Inputs that are not based on observable market             2010 − $450) and $917 (December 31, 2010 – $2,000; January 1,
data. Management is required to use assumptions regarding            2010 − $0) respectively.
unobservable inputs as there is little, if any, market activity      During the year ended December 31, 2011 and 2010, there
in these investments or related observable inputs that can be        were no transfers of investments between levels.
corroborated at the measurement date. Unobservable inputs
require management to make certain projections and assumptions
about the information that would be used by market participants
in pricing assets. To verify pricing, the Company assesses the
reasonability of the fair values by comparing to industry-accepted
valuation models, to movements in credit spreads and to recent
transaction prices for similar assets where available.




52 EGI Financial Holdings Inc. – Annual Report 2011
A reconciliation of Level 3 investment for the years ended         A provision for impairments on investments of $5,881 was
December 31, 2011, and 2010, with the use of significant           recognized in 2011 (nil − 2010).
unobservable inputs from January 1 to December 31 follows:
                                                                   A remaining gross unrealized loss of $5,492 on investments
                                              2011       2010      held as at December 31, 2011 (December 31, 2010 – $1,958) is
                                                                   recorded, net of tax, in the amount of $3,799 (December 31,
 Balance at beginning of year                2,310        450
                                                                   2010 – $1,352) in AOCI.
 Add: Additions during period
    − preferred shares                           −      2,000      INVESTMENT INCOME
    − bonds                                   520              −   Investment income was derived from the following:
 Less: Disposals and write-down
                                                                                                                                  2011         2010
 during period
                                                                    Interest income                                            12,793        12,454
    − preferred shares                      (1,083)            −
                                                                    Dividend income                                              2,199         1,669
    − bonds                                      −       (309)
                                                                    Net realized gains (including
 Net unrealized gains (losses) included
                                                                    impairments)                                                   144        5,089
 in other comprehensive income                (26)        169
                                                                    Fair value change on HFT investments                          209            (24)
 Balance at end of year                       1,721      2,310
                                                                    Unrealized foreign exchange gain
                                                                    (loss) on AFS investments                                         91         (116)
IMPAIRED ASSETS AND PROVISIONS
                                                                    Foreign exchange gain (loss)            (1)
                                                                                                                                      89        (273)
FOR LOSSES
                                                                    Investment expenses                                        (1,658)       (1,334)
Management has reviewed currently available information
                                                                                                                               13,867         17,465
regarding those investments where estimated fair values
are less than carrying values. For those investments that are      (1)   The foreign exchange gain of $89 [2010 – $(273)] arises primarily from
considered impaired, the Company has recorded the difference             cash balances and available-for-sale securities held during the period,
                                                                         denominated in U.S. dollars, used to fund claims liabilities, denominated
between the cost, or amortized cost, of the investment and its           in U.S. dollars.
fair value as an impairment, which reduces investment income
recorded in the period.

7 UNEARNED PREMIUMS

                                                       December 31, 2011                December 31, 2010                        January 1, 2010
                                                       Gross       Ceded                Gross            Ceded              Gross             Ceded
 Personal Lines:
    Automobile
    – accident benefits                               13,471             890           16,802              1,220             17,471             1,100
    – liability                                       23,605         1,483             28,130             1,900            24,901               1,499
    – other                                           10,720             155            12,219               185             11,776                  167
 Total Personal Lines                                 47,796         2,528              57,151            3,305             54,148             2,766
 Niche Products:
    Property
    – commercial                                       5,889         1,290              4,683               1,316            4,376              1,105
    – personal                                        12,953        1,004               9,883                841             6,627                   551
    Liability                                         4,045              246            5,073                491             5,180               539
    Accident and sickness                                161                1             236                     2            502                    11
    Commercial auto                                     292              20               958                516               452                    –
    Other                                               508                –               351                    –          1,358                    –
 Total Niche Products                                 23,848         2,561              21,184             3,166            18,495             2,206
                                                      71,644        5,089             78,335               6,471           72,643              4,972




                                                                                                      Consolidated Financial Statements 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


Reconciliation of unearned premium at the end of the period:
                                                                                     December 31, 2011           December 31, 2010
                                                                                    Gross         Ceded          Gross         Ceded
 Unearned premium at the beginning of the period                                   78,335          6,471        72,643          4,972
 Premium written and ceded during the period                                      174,892        14,764        185,672         18,606
 Premium earned in income                                                         181,583         16,146       179,980          17,107
 Unearned premium at the end of the period                                         71,644         5,089         78,335          6,471


Beginning in the fourth quarter of 2010, the Company issued          The Company discounts its best estimate of claim provisions
policies with maximum six-month policy terms in the Ontario          at a rate of interest of 1.90% (2010 – 2.55%) for all lines of
automobile line of business. This resulted in a decrease in          business. The Company determines the discount rate based
premiums written for the period compared to 2010.                    on the expected return on its investment portfolio of assets
                                                                     with appropriate assumptions for interest rates relating to
8  DEFERRED POLICY ACQUISITION COSTS                                 reinvestment of maturing investments.

Reconciliation of deferred acquisition costs as at December 31:      The Company recorded a $6,370 reduction to the net provision
                                                                     for unpaid claims relating to redundancies in prior years’
                                                 2011       2010     estimates (2010 – $4,091).
 Balance at the beginning of the period        15,979      14,807
                                                                     To recognize the uncertainty in establishing these best estimates,
 Acquisition costs incurred during                                   to allow for possible deterioration in experience, and to provide
 the period                                    38,501     39,443
                                                                     greater comfort that the actuarial liabilities are adequate to pay
 Amortization of acquisition costs                                   future claims, the Company includes provisions for adverse
 during the period                             38,914      38,271    deviations (PFADs) in some assumptions relating to claim
 Acquisition costs deferred at end of                                development, reinsurance recoveries and future investment
 the period                                    15,566      15,979    income. The PFADs selected are in the mid-range of those
                                                                     recommended by the Canadian Institute of Actuaries. The
9 PROVISION FOR UNPAID CLAIMS                                        aggregate impact of the provision for adverse deviation is to
                                                                     increase the provision for unpaid claims on a gross basis by
The fair value of the provision for unpaid claims approximates the   $28,291 as at December 31, 2011 (December 31, 2010 − $25,560;
carrying value determined in accordance with generally accepted      January 1, 2010 − $22,688)
actuarial methods in Canada, which discount estimated future
cash flows and include a margin for adverse deviation.               The provision for unpaid claims on an actuarial present value
                                                                     (APV) gross and ceded basis by line of business is as follows:

                                                          December 31, 2011         December 31, 2010                January 1, 2010
 APV basis                                               Gross       Ceded          Gross         Ceded          Gross         Ceded
 Personal Lines:
     Accident benefits                                   95,612      16,925        101,194         21,274       86,805         19,290
     Liability                                          115,946      12,017        97,692          6,378         92,311         15,169
     Other                                                4,411           13        4,052            422          3,914           667
 Total Personal Lines                                   215,969      28,955       202,938         28,074       183,030         35,126
 Niche Products:
 Property
     Commercial                                           4,169         167         4,098            640          3,278           266
     Personal                                              437            12          367             78           307            109
 Liability                                              24,533        1,547        22,338          2,670         16,291         2,903
 Accident and sickness                                    3,195        890           2,647           696          3,222           332
 Commercial auto                                          4,991       1,608          5,774         3,994              –               –
 Other                                                    1,225          90           874               –         1,092               –
 Total Niche Products                                   38,550        4,314        36,098          8,078         24,190         3,610
                                                        254,519      33,269       239,036         36,152       207,220         38,736



54 EGI Financial Holdings Inc. – Annual Report 2011
CLAIMS DEVELOPMENT

 Provision for unpaid claims analysis                                                   December 31, 2011        December 31, 2010
 Unpaid claims, beginning of year, net                                                             202,884                    168,484
    Change in undiscounted estimates for losses of prior years                                       (7,864)                   (4,258)
    Change in discount rate                                                                            1,843                      488
    Change in PFADs                                                                                  (5,704)                   (5,971)
 Interest cost                                                                                        5,355                     5,650
 Provision for claims occurring in current year (including paid)                                    113,627                   123,003
 Paid on claims occurring during
    Current year                                                                                   (36,465)                  (38,296)
    Prior year                                                                                     (52,426)                   (46,216)
 Unpaid claims, end of year, net                                                                    221,250                  202,884
 Reinsurers’ share                                                                                   33,269                    36,152
                                                                                                    254,519                  239,036

The development of insurance liabilities provides a measure of     The tables also reconcile the most recent estimate of ultimate
the Company’s ability to estimate the ultimate value of claims.    gross claims incurred and estimate of reinsurers’ share of ultimate
                                                                   claims incurred to the claims liability and reinsurers’ share of the
The tables below illustrate how the Company’s estimate of          claims liability recognized on the financial statements.
ultimate gross claims incurred and estimate of reinsurers’
share of ultimate claims incurred for each accident year have
changed at successive year-ends.




                                                                                               Consolidated Financial Statements 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)



As at December 31                                      2005       2006       2007        2008         2009        2010         2011
Gross Basis
Provision for claims including LAE                129,173       146,101    169,091     185,255     207,220     239,036     254,519
 Cumulative payments as of:
    One year later                                25,855         30,491     44,790      53,253      57,465      59,704
    Two years later                               46,409        53,520      73,853      92,567       92,155
    Three years later                                 62,210    74,402     105,567      118,473
    Four years later                              78,562        97,824     124,429
    Five years later                              92,958         111,078
    Six years later                               98,202
Reserve re-estimated as of:
    One year later                                113,839       138,483    163,465     186,446     203,920     232,472
    Two years later                                   113,817   134,769     162,916    189,093     201,044
    Three years later                             112,224       133,932    164,290     186,429
    Four years later                                  110,157   134,173     161,852
    Five years later                              110,577       131,660
    Six years later                               107,647
Favourable (unfavourable) Development                 21,526     14,441       7,239      (1,174)      6,176       6,564
Ceded Basis
Provision for claims including LAE                54,043        48,385      48,461       41,901     38,736       36,152     33,269
 Cumulative payments as of:
    One year later                                    10,017     9,649        11,178     10,353       11,157      7,275
    Two years later                                   19,481     19,489     20,454       21,313       17,141
    Three years later                             27,606         28,514     31,334       27,170
    Four years later                              36,352        39,379       37,147
    Five years later                              44,320        44,492
    Six years later                               47,409
Reserve re-estimated as of:
    One year later                                50,779         52,757     47,935      43,805      39,527      35,955
    Two years later                                   53,124    53,570      49,956       45,113     38,393
    Three years later                                 54,518    54,462      51,695      43,505
    Four years later                              54,063        56,379      50,585
    Five years later                               55,252       54,782
    Six years later                                   53,765
(Favourable) unfavourable Development                    278    (6,397)      (2,124)    (1,604)         343          197
 Net favourable (unfavourable) development            21,248    20,838       9,363         430        5,833       6,367


10  UNDERWRITING POLICY AND                                        During 2011, the Company followed the policy of underwriting
                                                                   and reinsuring contracts of insurance, which limits the net
    REINSURANCE CEDED                                              exposure of the Company to a maximum amount on any
In the normal course of business, the Company seeks to             one loss to $1,500 (2010 – $1,500). In addition, the Company
reduce the loss that may arise from catastrophes or other          obtained catastrophe reinsurance which limits the loss from a
events that cause unfavourable underwriting results by             series of claims arising from a single occurrence to $2,000 (2010
purchasing reinsurance to share all or part of the insurance       – $2,000), to a maximum coverage of $23,000 (2010 – $23,000).
risks originally accepted by the Company in writing premiums.
                                                                   The Company places all its automobile reinsurance with
This reinsurance does not relieve the Company of its primary
                                                                   Canadian registered reinsurers. There are non-registered
obligation to policyholders.
                                                                   reinsurers participating in the specialty property and casualty


56 EGI Financial Holdings Inc. – Annual Report 2011
program business. The Company has access to trust funds that,       Included in gross reinsurance recoverable is reinsurers’ share
in the Company’s judgment, are adequate to secure the liabilities   of unearned premiums of $5,089 (December 31, 2010 – $6,471;
that the Company has ceded to non-registered reinsurers.            January 1, 2010 − $4,972), reinsurers’ share of provision for
                                                                    unpaid claims of $33,269 (December 31, 2010 – $36,152;
Failure of reinsurers to honour their obligations could result      January 1, 2010 − $38,736), and receivables from reinsurers
in losses to the Company. Consequently, the Company                 presented as due from insurance companies of $2,844
continually evaluates the financial condition of its reinsurers     (December 31, 2010 – $3,800; January 1, 2010 − $2,083). No
and monitors concentrations of credit risk to minimize its          balances due from reinsurers are considered past due as at
exposure to significant losses. There have been no defaults         December 31, 2011 and 2010.
and no provision made in the accounts for defaults based on
management’s review of the creditworthiness of its reinsurers.      11 RISK MANAGEMENT
REINSURANCE RECOVERABLES                                            As a provider of insurance products, effective risk management
The following tables summarize the balances outstanding from        is fundamental to the Company’s ability to protect the interests
reinsurers as at December 31, 2011, December 31, 2010 and           of its customers and shareholders. The Company is exposed to
January 1, 2010, by risk rating:                                    risks of loss pertaining to insurance products. These include
                                                                    risks surrounding product and pricing, underwriting and claims,
                                                                    catastrophic exposure, and matching of assets and liabilities. The
 December 31, 2011
                                                                    Company is also exposed to potential loss from various risks,
                            Gross          Less:                    including interest rate risk, equity market fluctuation risk, credit
                      reinsurance       Deposits            Net
                                                                    risk, liquidity risk, and to a lesser extent foreign exchange risk.
 Credit rating        recoverable          held        exposure
 A                         38,031               –        38,031     The Company has written principles for overall risk
 Not rated                   3,171          5,181              –    management, as well as written policies covering specific
                                                                    areas such as underwriting, reinsurance, foreign exchange
                           41,202           5,181        38,031
                                                                    risk, interest rate risk, credit risk, use of derivative financial
                                                                    instruments and non-derivative financial instruments and
 December 31, 2010
                                                                    investment of excess liquidity.
                            Gross          Less:
                      reinsurance       Deposits            Net     INSURANCE RISK
 Credit rating        recoverable          held        exposure
 A                         41,936               –        41,936
                                                                    The risk under any one insurance contract is the possibility
                                                                    that the event occurs and the uncertainty of the amount of the
 Not rated                  4,487          5,845               –    resulting claim. By the very nature of an insurance contract,
                           46,423          5,845         41,936     the risk is random and therefore unpredictable. The principal
                                                                    risk that the Company faces under its insurance contract is that
 January 1, 2010                                                    the actual claims payments exceed the carrying amount of the
                            Gross          Less:                    insurance liabilities. This could occur because the frequency or
                      reinsurance       Deposits            Net     the severity of the claims is greater than estimated. Insurance
 Credit rating        recoverable          held        exposure     events are random and the actual number and amount of
 A                         44,590               –       44,590      claims will vary from year to year from the estimate.
 Not rated                   1,201         4,637               –    The concentration of insurance risk by product line, country,
                            45,791         4,637        44,590      province or state, and underlying currency, will also impact
                                                                    financial results depending on the nature and location of events.




                                                                                                Consolidated Financial Statements 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


SENSITIVITY TO INSURANCE RISK
                                                                                          2011                                    2010
                                                              Net income                              Net income
                                                           before income       Shareholders’       before income        Shareholders’
 Sensitivity Factor                                                 taxes            equity                 taxes             equity
 Increase of 1% to loss ratio                                        1,654               1,180               1,629                 1,112
 Increase of 1% to claims settlement costs                           2,213              1,578               2,029                1,385

PRODUCT AND PRICING                                                  independent appointed actuary. Every quarter, for each line
                                                                     of business, the Company compares actual and expected
The Company prices its products taking into account numerous
                                                                     claims development. To the extent that actual results differ
factors, including claims frequency and severity trends, product
                                                                     from expected development, assumptions are re-evaluated
line expense ratios, special risk factors, the capital required to
                                                                     and new estimates are derived. Although the Company
support the product line, and the investment income earned on
                                                                     believes its overall provision levels to be adequate to satisfy its
that capital. The Company’s pricing process is designed to ensure
                                                                     obligations under existing policies, actual losses may deviate,
an appropriate return on capital and long-term rate stability
                                                                     perhaps substantially, from the amounts reflected in the
avoiding wide fluctuations in rates, unless necessary. These
                                                                     Company’s consolidated financial statements. To the extent
factors are reviewed and adjusted periodically to ensure they
                                                                     provisions prove to be inadequate, the Company would have to
reflect the current environment.
                                                                     re-evaluate such provisions and may incur a charge to earnings
Pricing for automobile insurance must be submitted to each           in the future.
provincial government regulator and, in certain provinces,
pre-approved by the regulator. Regulatory decisions may              UNPREDICTABLE CATASTROPHIC EVENTS
impede automobile rate increases or other actions that the           Catastrophes can be caused by various natural and unnatural
Company may wish to take. Also, during periods of intense            events. Natural catastrophic events include hurricanes,
competition for any product line, to gain market share, the          windstorms, earthquakes, hailstorms, explosions, severe winter
Company’s competitors may price their products below                 weather and fires. Unnatural catastrophic events include
the rates the Company considers acceptable. Although the             hostilities, terrorist acts, riots, crashes and derailments.
Company may adjust its pricing up or down to maintain a              The incidence and severity of catastrophes are inherently
competitive position, the Company strives to ensure its pricing      unpredictable. The extent of losses from a catastrophe is a
will produce an appropriate return on invested capital. There        function of both the total amount of insured exposure in the
is no assurance that the Company will not lose market share          area affected by the event and the severity of the event. Most
during periods of pricing competition.                               catastrophes are restricted to small geographic areas; however,
                                                                     hurricanes, windstorms and earthquakes may produce
UNDERWRITING AND CLAIMS                                              significant damage in large, heavily populated areas.
The Company is exposed to loss resulting from the underwriting
                                                                     Catastrophes can cause losses in a variety of business lines.
of risks being insured and the exposure to financial loss
                                                                     Claims resulting from natural or unnatural catastrophic
resulting from greater than anticipated adjudication, settlement
                                                                     events could cause substantial volatility in the Company’s
and claims costs.
                                                                     financial results and could materially reduce the Company’s
The Company’s underwriting objectives are to develop                 profitability or harm the Company’s financial condition. The
business within target markets on a prudent and diversified          Company manages the impact of losses which may result
basis and to achieve profitable underwriting results. The            from catastrophic events by purchasing excess of loss and
Company underwrites automobile business after a review of            catastrophe reinsurance to share all or part of the insurance
the applicant’s driving record and claims experience. Specialty      risks originally accepted by the Company.
commercial and personal risks are selected by the Company,
                                                                     The Company’s ability to write new business also could be
working with its external brokers, after consideration of
                                                                     affected. The Company may experience an abrupt interruption
various risk factors associated with these lines of business.
                                                                     of activities caused by unforeseeable and/or catastrophic
Despite its best efforts, and consideration of all known risk
                                                                     events. The Company’s operations may be subject to losses
factors, there can be no assurance that all risks associated
                                                                     resulting from such disruptions. Losses can relate to property,
with the insurance policies that it writes can be identified
                                                                     financial assets, trading positions and to key personnel. The
and assessed, and the Company may, therefore, experience
                                                                     Company has developed business continuity plans designed
increased adjudication, settlement and claims costs.
                                                                     to allow the Company to continue operations in case of a
The Company estimates its claims reserves on a quarterly             catastrophic event; however, if these plans cannot be put into
basis and this is supported by quarterly assessments by the          action or do not take such events into account, losses may
                                                                     further increase.



58 EGI Financial Holdings Inc. – Annual Report 2011
ASSET AND LIABILITY MATCHING                                             Risk management is carried out by the Investment Committee
                                                                         under policies approved by the Board of Directors.
The Company is exposed to:

•	 changes in the value of its fixed income investments and              INTEREST RATE RISK
   policy liabilities to the extent that market interest rates change;   Fluctuations in interest rates have a direct impact on the fair
•	 equity price fluctuations, which affect the fair values of            valuation and future cash flow of the Company’s fixed income
   equities held by the Company;                                         investment portfolio. Generally, the Company’s investment
                                                                         income will be reduced during sustained periods of lower interest
•	 the risk of losses to the extent that the sale of an investment       rates as higher yielding fixed income investments mature or
   prior to its maturity is required to provide liquidity to satisfy     are sold and the proceeds are reinvested at lower rates. During
   policyholder and other cash outflows;                                 periods of rising interest rates, the fair value of the Company’s
•	 the risk that future inflation of policyholder cash flows             existing fixed income investments will generally decrease and
   exceed returns on long-term investments; and                          gains on fixed income securities will likely be reduced.
•	 foreign exchange risks with respect to investments, receivables       The sensitivity analysis for interest rate risk as set out in the
   and policy liabilities denominated in foreign currencies.             table below illustrates the impact of changes in interest rates
The Company’s exposures are monitored on a regular basis                 on OCI relating to the fixed income investment portfolio as
and actions are taken to balance investment positions when               at December 31, based on parallel 200 basis point shifts in
approved risk tolerance limits are exceeded.                             interest rates up and down in 100 basis point increments.

                                                                                                       Hypothetical
                                                                          Fair value of fixed            change on                   Effect
 Change in interest rates                                                  income portfolio               fair value                on OCI
 As at December 31, 2011
 200 basis point rise                                                                263,040                    (11%)              (21,038)
 100 basis point rise                                                                277,893                    (6%)                (11,026)
 No change                                                                           294,253                        –                        –
 100 basis point decline                                                             312,340                      6%                  12,191
 200 basis point decline                                                             330,947                     12%                24,732
 As at December 31, 2010
 200 basis point rise                                                                240,205                    (11%)              (20,194)
 100 basis point rise                                                                254,069                    (6%)               (10,604)
 No change                                                                           269,400                        –                        –
 100 basis point decline                                                             286,394                      6%                  11,755
 200 basis point decline                                                             305,208                     13%                24,768
 As at January 1, 2010
 200 basis point rise                                                                209,222                   (10%)               (14,302)
 100 basis point rise                                                                 219,883                    (5%)                (7,830)
 No change                                                                            231,570                       −                        −
 100 basis point decline                                                             244,428                      6%                  8,615
 200 basis point decline                                                              258,510                    12%                 18,050

As discussed in note 9, the discount rate used in the determination      on the discount rate used in the valuation of the net provision
of the provision for unpaid claims is based on the expected return       for unpaid claims. The table below shows the potential impact of
of assets on its investment portfolio with appropriate assumptions       interest rate fluctuations on the net provision for unpaid claims
for interest rates relating to reinvestment of maturing investments.     and income statement:
Fluctuations in market interest rates will therefore have an impact




                                                                                                    Consolidated Financial Statements 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)



                                                                           Net provision for          Hypothetical             Effect on
 Change in discount rates                                                    unpaid claims          change in value          net income
 As at December 31, 2011
 100 basis point rise                                                               216,106                    (2%)               3,467
 No change                                                                          221,250                       –                   –
 100 basis point decline                                                           226,663                       2%              (3,648)
 As at December 31, 2010
 100 basis point rise                                                               198,267                     (2%)               3,193
 No change                                                                         202,884                        –                   –
 100 basis point decline                                                            207,752                      2%              (3,367)
 As at January 1, 2010
 100 basis point rise                                                               164,529                     (2%)              2,650
 No change                                                                          168,484                       −                   −
 100 basis point decline                                                             172,691                     2%              (2,819)

LIQUIDITY RISK
Liquidity risk is the risk that the entity will have difficulty        to meet its financial commitments as they become due. To
raising cash to meet its obligations. The Company’s liquidity          manage cash flow requirements, the Company maintains a
management strategy is to ensure that there is sufficient cash         portion of invested assets in liquid investments.

The maturity profile of bonds as at December 31, 2011, December 31, 2010 and January 1, 2010 are as follows:

                                                           Less than                                         Greater than
 December 31, 2011                                            1 year         1 – 3 years       3 – 5 years        5 years          Total
 Bonds                                                        24,042            39,484            63,769         166,958       294,253
 Percentage of total                                                 8%             13%              22%               57%        100%


                                                           Less than                                         Greater than
 December 31, 2010                                            1 year         1 – 3 years       3 – 5 years        5 years          Total
 Bonds                                                            15,613         45,563            53,853         154,371      269,400
 Percentage of total                                                 6%             17%              20%               57%        100%


                                                           Less than                                         Greater than
 January 1, 2010                                              1 year         1 – 3 years       3 – 5 years        5 years          Total
 Bonds                                                            16,796        36,058             61,473         117,243       231,570
 Percentage of total                                                 7%             16%              26%               51%        100%




60 EGI Financial Holdings Inc. – Annual Report 2011
The following tables summarize the expected timing of cash flows arising from insurance obligations, on an undiscounted basis, as
at December 31, 2011, December 31, 2010 and January 1, 2010:

                                                             Less than                                      Greater than
 December 31, 2011                                              1 year        1 – 3 years    3 – 5 years         5 years           Total
 Actuarial liabilities (undiscounted)                               73,211        89,616          50,991          30,167        243,985
 Less: Reinsurance recoverable                                      11,001        11,760           5,462           2,901          31,124
 Net actuarial liabilities                                      62,210            77,856         45,529           27,266         212,861


                                                             Less than                                      Greater than
 December 31, 2010                                              1 year        1 – 3 years    3 – 5 years         5 years           Total
 Actuarial liabilities (undiscounted)                           73,607            82,892          46,518          29,214         232,231
 Less: Reinsurance recoverable                                      12,412        13,073           5,868           2,805          34,158
 Net actuarial liabilities                                          61,195        69,819         40,650          26,409          198,073


                                                             Less than                                      Greater than
 January 1, 2010                                                1 year        1 – 3 years    3 – 5 years         5 years           Total
 Actuarial liabilities (undiscounted)                           62,995             71,130        39,645           27,687         201,457
 Less: Reinsurance recoverable                                      12,815        12,879           6,934           3,750          36,378
 Net actuarial liabilities                                          50,180        58,251           32,711         23,937         165,079


All other financial liabilities are for a duration of one year or        CREDIT RISK
less. The contractual maturities for lease commitments are
                                                                         The Company is exposed to credit risk principally through
listed in note 20.
                                                                         its investment securities and balances receivable from
EQUITY PRICE RISK                                                        policyholders and reinsurers. The Company has policies to
                                                                         limit and monitor its exposure to individual issuers and classes
Fluctuations in the value of equity investments affect the level         of issuers of investment securities which do not carry the
and timing of recognition of gains and losses on securities              guarantee of a national or Canadian provincial government. The
held, and cause changes in realized and unrealized gains and             Company’s credit exposure to any one individual policyholder is
losses. General economic conditions, political conditions and            not material. The Company has policies that limit its exposure to
many other factors can also adversely affect the stock and bond          individual reinsurers and regular review processes to assess the
markets and, consequently, the value of the equity and fixed             creditworthiness of reinsurers with whom it transacts business.
income investments held.
                                                                         The Company’s maximum exposure to credit risk, without
The Company has policies to limit and monitor its exposure to            taking into account amounts held as collateral, is $357,974 (2010
individual issuers and classes of issuers of equity securities.          – $332,598) comprised of $294,253 (2010 – $269,400) of bonds,
                                                                         $38,031 (2010 – $41,936) of gross reinsurance recoverables, nil
The table below summarizes the potential impact of a 20%
                                                                         (2010 – $2,518) of amounts due from insurance companies,
change in the value of the equity securities (common and
                                                                         $6,360 (2010 – $5,174) of accounts receivables and $19,330
preferred shares) on net income and OCI for the years ended
                                                                         (2010 – $13,570) in structured settlements.
December 31, 2011 and 2010. Certain shortcomings are
inherent in the method of analysis presented, as the analysis is         The following table sets forth the Company’s fixed income
based on the assumptions that all equity holdings increased/             securities portfolio by credit quality according to DBRS as at
decreased by 20% with all other variables held constant.                 December 31, 2011, December 31, 2010 and January 1, 2010.

 Change in                        Effect on                 Effect
 equity holdings                Net Income                 on OCI
                             2011     2010        2011       2010
 20% rise                    1,552    1,297      8,574       9,793
 20% decline             (1,552)     (1,297)   (8,574)     (9,793)




                                                                                                   Consolidated Financial Statements 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


FIXED INCOME PORTFOLIO
                                                              As at                                  As at                             As at
                                                   December 31, 2011                    December 31, 2010                   January 1, 2010
                                            Fair value       Fair value          Fair value      Fair value      Fair value            Fair value
 AAA                                           117,433             40%               113,197           42%           111,702                48%
 AA                                            57,302                 20%           68,438             25%          64,446                  28%
 A                                             86,918                 30%           72,602             27%          48,090                   21%
 BBB                                           26,266                 9%             12,708             5%              6,882                 3%
 BB                                             4,285                  1%               962               –                 –                  –
 B                                               1,245                  –               1,183            1%                 –                  –
 CCC                                              229                   –                310              –                 –                  –
 Unrated                                           575                  –                  −              −                −                   −
 Total                                       294,253             100%             269,400             100%          231,570                100%

FOREIGN EXCHANGE RISK
                                                                             Change in                     Effect on                       Effect
Foreign exchange risk is the possibility that changes in foreign             equity holdings             Net Income                       on OCI
exchange rates produce an unintended effect on earnings and                                           2011      2010            2011        2010
equity when measured in Canadian dollars, the Company’s
                                                                             10% rise                (456)        (57)     (1,100)         (1,217)
functional currency. The Company is exposed to foreign
currency risk through transactions conducted in currencies                   10% decline              456          57       1,100           1,217
other than Canadian dollars, and through its investments in
subsidiaries that have a functional currency other than the                 CAPITAL MANAGEMENT
Canadian dollar.                                                            Capital is comprised of the Company’s total equity. As at
                                                                            December 31, 2011, the Company’s equity was $154,820
A portion of the Company’s premiums are written in U.S.                     (December 31, 2010 – $146,366; January 1, 2010 − $133,431).
dollars and a portion of loss reserves are also in U.S. dollars.            The Company’s objectives when managing capital are to
A portion of the Company’s cash and investments is also held                maintain capital above minimum regulatory levels, above
in U.S. dollars. The Company also commenced operations                      internally determined risk management levels, for financial
in Europe in the fourth quarter of 2011 but the impact of                   strength and protect its claims paying abilities, to maintain
currency risk is immaterial since it has not written any                    creditworthiness and to maximize returns to shareholders over
premiums at the end of 2011.                                                the long term.
In general, the Company attempts to manage foreign exchange                 A common measure of capital adequacy in the property
risk on liabilities by investing in financial instruments                   and casualty industry used by management is the ratio of
denominated in the same currency as the financial liabilities               net premiums to surplus (or equity). A lower ratio implies a
which they back. The Company may, nevertheless, from time to                higher measure of capital adequacy. The Company’s ratio as
time experience losses resulting from fluctuations in the value             at December 31, 2011, was 1.0:1 (2010 – 1.1:1). This level is
of the U.S. dollar, which could adversely affect operating results.         well below the 2.5:1 ratio considered by management to be the
                                                                            maximum acceptable ratio.
The table below illustrates the expected impact on net income
and OCI of a 10% change in the Canadian dollar (“CAD”)                      The Company’s Canadian insurance subsidiary, Echelon, is
compared to the U.S. dollar (“USD”) as at December 31,                      required to maintain minimum capital levels as required by
2011 and 2010. Computations of the prospective effects of                   the Office of the Superintendent of Financial Institutions. As at
hypothetical foreign exchange changes are based on numerous                 December 31, 2011, December 31, 2010 and January 1, 2010, the
assumptions, including the maintenance of the existing level                Company exceeded the minimum regulatory capital requirement.
and composition of financial assets and financial liabilities, and          Legislation applicable to insurance companies imposes certain
should not be relied on as indicative of actual or future results.          restrictions on the Company’s ability to pay dividends.




62 EGI Financial Holdings Inc. – Annual Report 2011
12 PROPERTY AND EQUIPMENT
                                                                                             Accumulated
                                                                                Cost         amortization                    Net
 December 31, 2011
 Furniture and equipment                                                       1,879                 1,760                    119
 Computer hardware                                                             1,056                   487                   569
                                                                              2,935                  2,247                   688
 December 31, 2010
 Furniture and equipment                                                       1,835                 1,456                   379
 Computer hardware                                                               418                   383                    35
                                                                               2,253                 1,839                   414
 January 1, 2010
 Furniture and equipment                                                       1,806                 1,043                   763
 Computer hardware                                                               415                  340                     75
                                                                               2,221                 1,383                   838


13 INTANGIBLE ASSETS
                                                                                             Accumulated
 Computer software                                                              Cost         amortization                    Net
 December 31, 2011                                                             7,607                 3,238                 4,369
 December 31, 2010                                                            3,498                  2,967                   531
 January 1, 2010                                                               2,938                 2,470                   468


14 SHARE CAPITAL
                                                                       December 31           December 31               January 1
                                                                             2011                  2010                    2010
 Authorized
    Unlimited common shares
    Unlimited special shares issuable in Series
 Issued
 12,066,013 common shares (December 31, 2010 – 12,059,582
 common shares; January 1, 2010 – 12,000,582 common shares)                   69,133               69,087                 68,618


During 2011 no common shares were issued from exercise of       options for services and employee stock purchase plan are not
stock options, and in 2010, 47,000 common shares were issued    to exceed 10% of the total issued and outstanding shares (on
for an average cost of $8.00 per share. In 2011, 6,431 common   a non-diluted basis). The Board of Directors determines the
shares (2010 – 12,000) were issued pursuant to the share unit   terms and conditions of the awards under the stock option
plan for eligible employees.                                    plan as well as any award allocations.

15 EMPLOYEE STOCK OPTION PLAN                                   For the year ended December 31, 2011, the Company recorded a
                                                                compensation expense of $179 (2010 – $263), with an offsetting
The Company sponsors a stock option plan that provides for      credit to contributed surplus. All stock options granted are for a
the issuance of shares of the Company’s common stock. Shares    term of five years with varying vesting periods.
reserved for issuance under the employee stock option plan,




                                                                                          Consolidated Financial Statements 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


The following is a continuity schedule of stock options outstanding as at December 31 2011 and December 31, 2010.

                                                                                                                     Weighted average
                                                                        Number of options                       exercise price per share
                                                               2011                    2010                    2011                2010
 Outstanding, beginning of year                           848,875                  788,500                    10.20               10.94
 Granted during year                                      163,000                   143,125                    7.35                8.14
 Exercised during year                                             −               (47,000)                      −                8.00
 Cancelled during year                                   (147,750)                 (35,750)                   10.22               10.65
 Outstanding, end of year                                  864,125                 848,875                    9.66                10.20


As at December 31, 2011, the outstanding stock options consist         KEY MANAGEMENT
of the following:
                                                                       Key management comprises directors and senior management
                                       Average         Number          of the Company. Key management includes named executive
 Stock Option                        Remaining       of options        officers and directors. Compensation of and loans to these
 price per share      Number     contractual life   exercisable        individuals are summarized in the following table:
 $14.01 − $15.00       74,750          1.3 years        16,000
                                                                       Compensation
 $12.01 − $13.00        71,750          1.0 year        52,000
 $11.01 − $12.00       36,750           1.0 year       24,000                                                           2011      2010

 $10.01 − $11.00     229,375           3.2 years        61,000          Salaries, directors’ fees and other
                                                                        short-term benefits                            1,726      1,658
 $9.01 − $10.00        72,750           1.1 years       53,250
                                                                        Equity-settled and cash-settled
 $8.01 − $9.00         163,750         3.3 years        12,000          compensation benefits                             162       115
 $7.00 − $8.00       215,000           4.9 years         2,000                                                         1,888      1,773

The fair values of the stock options issued in 2011 were
                                                                       17 INCOME TAXES
determined using the Black-Scholes option pricing model with
the following assumptions: (i) risk-free rate of 1.1%; (ii) life
expectancy of 2-5 years; and (iii) estimated volatility of 26%.        The income tax expense (recovery) is as follows:
The grant-date fair value of total options granted is estimated
at $1,699. The weighted average grant-date fair value per share                                                         2011      2010
option to date is $1.97.                                                Current                                         5,136     1,641
                                                                        Deferred                                         (44)      1,281
16 RELATED PARTY TRANSACTIONS                                                                                          5,092      2,922
The Co-operators Group Limited and Co-operators General
Insurance Company (collectively Co-operators), significant             The provision for income taxes reflects an effective rate, which
shareholders of the Company, provide services to the Company,          differs from the corporate tax rate as follows:
including but not limited to product distribution and investment
management services. Direct written premiums derived                                                                    2011      2010
from Co-operators’ agents were $11,121 (2010 – $11,065),                Combined basic federal
commissions paid were $1,279 (2010 – $1,273) and investment             and provincial income tax rate                 28.5%     29.8%
management fees were $271 (2010 – $249).                                Income tax expense at statutory rates          3,602      2,108
The Company holds deposits of $304 (December 31, 2010                   Permanent differences                           (372)     (397)
– $493; January 1, 2010 − $1,126) under the terms of a 2001             Future income tax rate changes                   107       665
100% Quota Share reinsurance treaty with Co-operators                   Write down of deferred tax asset                 502          −
General Insurance Company, with income resulting from the
investment of these deposits for their account. Reinsurers’             Tax benefit not recognized on losses             684          −
share of unpaid claims includes a recoverable of $395                   Other                                            569       546
(December 31, 2010 – $900, January 1, 2010 − $1,690) from                                                              5,092      2,922
Co-operators General Insurance Company. The payable
to insurance companies balance includes amounts due
to Co-operators General Insurance Company of $304
(December 31, 2010 – $604; January 1, 2010 − $1,126).


64 EGI Financial Holdings Inc. – Annual Report 2011
Deferred income taxes are comprised of the following:                  20 LEASE COMMITMENTS

                         December 31 December 31 January 1             The Company is committed under lease agreements for office
                               2011        2010      2010              premises and computer equipment with minimum lease
 Losses carried
                                                                       payments of $7,227 as follows:
 forward                          235              502        1,083
                                                                        2012                                                         1,309
 Provision for
 unpaid claims                  3,678            3,349       3,083      2013                                                         1,264
 Investments                     (107)            (196)       (336)     2014                                                          1,130
 Deferred policy                                                        2015                                                          1,112
 acquisition costs                373              310            −     2016                                                          1,114
 Property and                                                           2017 and thereafter                                          1,298
 equipment and
 intangible assets                (30)             170          122                                                                  7,227

                                4,149            4,135       3,952
                                                                       21 STRUCTURED SETTLEMENTS
INCOME TAXES INCLUDED IN OCI                                           In the normal course of claims adjudication, the Company may
The amounts included in the consolidated statements of                 settle certain long-term losses through the purchase of annuities
comprehensive income for the years ended December 31 are               (structured settlements) from life insurance companies. The fair
shown net of the following tax benefit:                                estimated value of these annuity contracts amounts to $19,330
                                                                       (December 31, 2010 – $13,570; January 1, 2010 − $9,668) using
                                                   2011       2010     a discount rate of 2.5% (December 31, 2010 – 3.61%; January 1,
 Change in unrealized gains                         174      5,534
                                                                       2010 − 4.09%). It is the policy of the Company to purchase
                                                                       annuities from life insurers with proven financial stability. The
 Reclassification to net income
                                                                       net risk to the Company is the credit risk related to the life
 of (gains) and losses                               82      (1,601)
                                                                       insurance companies and this risk is reduced to the extent of
 Total income tax expense included in OCI           256      3,933     coverage provided by Assuris, the life insurance compensation
                                                                       insurance plan. The Company has determined that no credit risk
Income taxes payable are expected to be settled within one             provision is required.
year of the financial statement date.
                                                                       22 CONTINGENCIES
18 OPERATING COSTS BY NATURE
                                                                       From time to time, in connection with its insurance operations,
                                                   2011       2010     the Company is named as a defendant in actions for damages
                                                                       and costs allegedly sustained by the plaintiffs. While it is not
 Salaries and benefits                          15,542        11,761
                                                                       possible to estimate the outcome, such actions have generally
 Systems costs                                    3,276      2,735     been resolved with minimal damage or expense in excess of
 Professional fees                                1,785        1,192   amounts provided as policy liabilities. The Company does
 Printing and postage                              1,119       1,153   not believe that it will incur any significant additional loss or
                                                                       expense in connection with such actions.
 Other expenses                                    544          891
                                                22,266       17,732    23 RATE REGULATIONS
19 BANK INDEBTEDNESS                                                   The Company writes business subject to rate regulation,
                                                                       including non-standard automobile and motorcycle insurance,
On October 11, 2007, the Company entered into a non-revolving,         which comprises approximately 74% of net premiums written.
term loan facility with a major Canadian bank in the amount of         The Company’s automobile insurance premiums can be
$19,550. The facility had a term of three years, bearing an interest   impacted by mandatory rate rollbacks and mandatory rate
rate of 6.20%. During the term of the loan, monthly payments           assessments as legislated by provincial law and by regulation
included interest only and on maturity a balloon payment of            in certain provinces. This could result in lower future premium
$19,550 was to be made to settle the principal amount.                 rates or reductions to premium rates charged by the Company
                                                                       in prior years. In addition, the Company is required, under
In the second quarter of 2010, the loan was repaid in full, using      certain provincial legislation, to participate in risk sharing pools,
internal funds. The Company had no bank indebtedness as at             which may impact positively or negatively on underwriting
December 31, 2011.                                                     results. Certain benefit payments are also subject to provincial
                                                                       government regulation, including automobile accident benefits.



                                                                                                   Consolidated Financial Statements 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, except per share amounts)


The Company is not aware of any proposed or pending rate        25 SEGMENTED INFORMATION
rollbacks related to prior years.
                                                                The Company operates through four segments: Personal Lines
24 EARNINGS PER SHARE                                           and Niche Products divisions in Canada, and non-standard
                                                                automobile markets in the U.S. and Europe. Through its
                                              2011     2010     Personal Lines division, the Company is engaged primarily in
                                                                the underwriting of high premium, non-standard automobile
Basic earnings per share:
                                                                insurance. Through its Niche Products division, the Company
    Net income available to shareholders     7,733     4,152    designs and underwrites specialized non-auto insurance
    Average number of common shares                             programs, such as higher premium property, primary and
    (in thousands)                         12,060     12,032    excess liability, legal expense, accident and health insurance
Basic earnings per share                    $0.64     $0.35     and warranty coverage.
Diluted earnings per share:
                                                                The effect of reinsurance is reflected in the revenue and results
    Average number of common shares                             of each segment. The investment activities consist of managing
    (in thousands)                         12,060     12,032    the investment portfolio for the Company as a whole.
    Average number of dilutive common                           Investment income is shown net of investment expenses.
    shares under employee stock option                          The corporate and other activities include holding company
    plan (in thousands)                         92         32   expenses not attributable to a division. Interest expense
    Average number of diluted common                            represents interest on bank indebtedness.
    shares (in thousands)                   12,152    12,064
Diluted earnings per share                  $0.64     $0.34




66 EGI Financial Holdings Inc. – Annual Report 2011
                                                                 Year ended December 31
                                                                2011                 2010
Revenue
   Earned premiums and other revenue
   Property and casualty insurance
     Canada – Personal Lines                                128,970               123,525
                – Niche Products                             34,201                39,190
                                                             163,171               162,715
     U.S. and Europe                                          2,276                   158
                                                            165,447               162,873
   Interest and dividends, net of investment expense         13,334                12,789
   Realized investment gains                                    144                 5,089
   Fair value decrease on HFT investments                       209                   (24)
   Foreign exchange gains (losses)                              180                 (389)
Total revenue                                               179,314               180,338
Income (loss) before income taxes
   Property and casualty insurance
     Canada – Personal Lines                                  5,507                 (7,461)
                – Niche Products                             (1,548)                   181
                                                              3,959                (7,280)
     U.S. and Europe                                          (3,721)               (1,316)
   Corporate and other                                       (1,493)               (1,227)
   Underwriting                                              (1,255)               (9,823)
   Interest and dividends, net of investment expense         13,334                12,789
   Realized investment gains                                    144                 5,089
   Fair value decrease on HFT investments                       209                   (24)
   Foreign exchange gains (losses)                              180                  (389)
   Interest expense                                                −                (568)
Total income before income taxes                              12,612                7,074




                                                       Consolidated Financial Statements 67
SHAREHOLDER INFORMATION


HEAD OFFICE
2680 Matheson Blvd. E., Suite 300
Mississauga, ON L4W 0A5
Tel: 905-214-7880
Fax: 905-214-8028

TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, ON M5J 2Y1

STOCK EXCHANGE LISTING
Toronto Stock Exchange
Trading Symbol “EFH”

COMMON SHARES OUTSTANDING
12,066,013 (as at December 31, 2011)

GENERAL COUNSEL
Blake, Cassels & Graydon LLP

APPOINTED ACTUARY
J.S. Cheng & Partners Inc.

AUDITORS
PricewaterhouseCoopers LLP

INVESTOR RELATIONS
Kathy Shulman, Investor Relations Manager

WEBSITE
www.egi.ca




68 EGI Financial Holdings Inc. – Annual Report 2011
2680 Matheson Blvd. East, Suite 300
Mississauga, Ontario L4W 0A5

www.egi.ca

				
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