Echelon Financial : First Quarter 2020 Consolidated Financial Statements

Unaudited Condensed Consolidated Interim Financial

Statements of

Echelon Financial Holdings Inc.

For three months ended March 31, 2020 and 2019

NOTICE OF NO AUDITOR REVIEW OF

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

In accordance with National Instrument 51-102 of the Canadian Securities Administrators, the Company discloses that its external auditors have not reviewed the unaudited condensed consolidated interim financial statements for the three months ended March 31,2020. These financial statements have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company.

ECHELON FINANCIAL HOLDINGS INC.

Consolidated Balance Sheet

(unaudited, in thousands of Canadian dollars)

		Note	March 31,	December 31,
			2020	2019
Assets
Cash and short-term deposits	7	70,252	70,932
Accounts receivable			9,306	10,020
Investments		7	44,948	48,019
Due from insurance companies		803	324
Deferred policy acquisition costs		4,004	4,209
Income taxes recoverable		1,222	1,184
Prepaid expenses and other assets		4,125	4,028
Reinsurers' share	- unearned premiums		632	1,031
	- provision for unpaid claims	8	2,959	3,268
Right of use asset			680	777
Deferred income taxes			131	228
Total assets			139,062	144,020
Liabilities
Accounts payable and accrued liabilities		3,738	4,528
Lease liability			636	712
Unearned premiums			17,501	18,749
Unearned commission			167	195
Provision for unpaid claims		8	25,691	26,629
Total liabilities			47,733	50,813
Equity
Share capital			2,794	2,794
Contributed surplus			1,507	1,507
Retained earnings			83,471	83,140
Accumulated other comprehensive income (loss)	12	(230)	2,034
Equity attributed to shareholders of the Company		87,542	89,475
Non-controlling interest		15	3,787	3,732
Total equity			91,329	93,207
Total liabilities and equity			139,062	144,020

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

ECHELON FINANCIAL HOLDINGS INC.

Consolidated Statement of Income and Comprehensive Income (unaudited, in thousands of Canadian dollars, except per share amounts)

		3 months ended
		March 31
Revenue	Note	2020	2019
Gross written and assumed premiums		8,037	6,957
Less premiums ceded to reinsurers		(427)	(456)
Net written and assumed premiums		7,610	6,501
Change in gross unearned premiums		1,248	1,303
Change in unearned premiums, reinsurers' share		(399)	(263)
Change in provision for unearned premiums		849	1,040
Net earned premiums		8,459	7,541
Investment income	7	(21)	555
Total revenue		8,438	8,096
Expenses
Gross claims incurred		4,322	4,936
Claims recoveries from reinsurers		64	(385)
Net incurred claims		4,386	4,551
Gross acquisition costs		1,907	1,681
Acquisition recoveries from reinsurers		(17)	(18)
Net acquisition costs		1,890	1,663
Operating costs	11	1,677	1,425
Total expenses		7,953	7,639
Income before taxes and discount rate impact on claims		485	457
Impact of change in discount rate on claims (1)		131	(171)
Income before interest expense and income taxes		616	286
Income tax expense	10	168	83
Net Income on continued operations		448	203
Net income (loss) on discontinued operations		-	(9,187)
Net income (loss)		448	(8,984)
Attributed to:
Shareholders of the Company - continued operations		331	82
Shareholders of the Company - discontinued operations	14	-	(9,187)
Non-controlling interest - continued operations	15	117	121
Net income (loss)		448	(8,984)
Other comprehensive income (loss), net of taxes that may be
classified subsequently to net income
Available-for-sale investments:
Change in net unrealized (losses) gains		(2,370)	1,808
Reclassification of net realized (gains) losses to net income		(65)	(33)
Tax impact		109	(120)
Other comprehensive (loss) income on continued operations		(2,326)	1,655
Other comprehensive income on discontinued operations	14	-	2,007
Other comprehensive (loss) income		(2,326)	3,662

ECHELON FINANCIAL HOLDINGS INC.

Consolidated Statement of Income and Comprehensive Income (unaudited, in thousands of Canadian dollars, except per share amounts)

		3 months ended
		March 31
	Note	2020	2019
Attributed to:
Shareholders of the Company - continued operations		(2,264)	1,588
Shareholders of the Company - discontinued operations	14	-	2,007
Non-controlling interest - continued operations	15	(62)	67
Other comprehensive (loss) income		(2,326)	3,662
Total comprehensive (loss) income		(1,878)	(5,322)
Attributed to:
Shareholders of the Company - continued operations		(1,933)	1,670
Shareholders of the Company - discontinued operations	14	-	(7,180)
Non-controlling interest - continued operations	15	55	188
Total comprehensive loss		(1,878)	(5,322)
Earnings per share attributable to shareholders of the Company	13
Earnings per share continued operations - basic		$0.03	$0.01
Earnings (loss) per share discontinued operations - basic		-	$(0.77)
Earning per share - basic		$0.03	$(0.76)
Earning per share continued operations - diluted		$0.03	$0.01
Earnings (loss) per share discontinued operations - diluted		-	$(0.77)
Earning per share - diluted		$0.03	$(0.76)

1. As interest rates may change each period, and have an impact to the incurred claims and therefore management believes it is beneficial to the users to see the impact of this change separately in order to understand the true movement in claims incurred.

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

ECHELON FINANCIAL HOLDINGS INC.

Consolidated Statement of Changes in Equity (unaudited, in thousands of Canadian dollars)

			Accumulated
			Other			Non-
	Share	Contributed	Comprehensive	Retained	Shareholders'	controlling	Total
	Capital	Surplus	Income	Earnings	Equity	Interest	Equity
Balance at	2,794	1,507	2,034	83,140	89,475	3,732	93,207
January 1, 2020
Net income	-	-	-	331	331	117	448
Other comprehensive	-	-	(2,264)	-	(2,264)	(62)	(2,326)
loss
Total comprehensive	-	-	(2,264)	331	(1,933)	55	(1,878)
loss
Balance at	2,794	1,507	(230)	83,471	87,542	3,787	91,329
March 31, 2020
			Accumulated
			Other			Non-
	Share	Contributed	Comprehensive	Retained	Shareholders'	controlling	Total
	Capital	Surplus	Income	Earnings	Equity	Interest	Equity
Balance at	71,997	303	(2,877)	76,244	145,667	3,842	149,509
January 1, 2019
Net loss	-	-	-	(9,105)	(9,105)	121	(8,984)
Other comprehensive	-	-	3,595	-	3,595	67	3,662
income
Total comprehensive	-	-	3,595	(9,105)	(5,510)	188	(5,322)
loss
Commons shares issued
on stock options	279	-	-	-	279	-	279
exercised
Stock options expense	-	-	-	-	-	-	-
Balance at	72,276	303	718	67,139	140,436	4,030	144,466
March 31, 2019

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

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

3 months ended

	March 31, 2020	March 31, 2019
Cash provided by (used in)
Operating activates
Net income from continued operations	448	203
Net income (loss) from discontinued operations	-	(9,187)
Adjusted for
Reinsurers' share of unearned premiums	399	262
Reinsurers' share of unpaid claims	309	39
Provision for unpaid claims	(938)	(851)
Unearned premiums	(1,248)	(1,303)
Deferred income taxes	97	(16)
Unearned commissions	(28)	(9)
Deferred policy acquisition costs	205	168
Amortization on leased assets	97	8
Amortization on property plant equipment and intangible assets	61	1
Amortization of premiums on bonds	6	4
Fair value change on FVTPL investments	802	(79)
Prepaid expenses & other assets	(128)	(27)
	(366)	(1,803)
Cash flow from changes in
Accounts receivable	714	784
Net realized gains	(53)	(13)
Income taxes recoverable	71	(746)
Due from insurance companies	(479)	(870)
Other liabilities	(790)	573
Cash used by continuing operating activities	(455)	(1,872)
Cash provided by discontinued operating activities	-	734
Cash outflow from operating activities	(455)	(1,138)
Financing activities
Proceeds from issuing of common shares for stock options	-	279
Payment of lease liabilities	(76)	-
Cash (used) provided by continuing financing activities	(76)	279
Cash (outflow) inflow from financing activities	(76)	279
Investing activities
Purchases of property, equipment and intangible assets	(30)	-
Purchases of investments	(7,923)	(5,220)
Sale/maturity of investments	7,804	6,498

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

3 months ended

	March 31, 2020	March 31, 2019
Cash (used) provided by continuing investing activities	(149)	1,278
Cash used by discontinued investing activities	-	(7,146)
Cash outflows from investing activities	(149)	(5,868)
Decrease in cash and short-term deposits	(680)	(6,727)
Cash and short-term deposits, beginning of year	70,932	129,604
Cash and short-term deposits, end of year	70,252	122,877
Supplementary information
Income taxes paid	-	2,111

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

1. Nature of operations

Echelon Financial Holdings Inc. ("the Company") was incorporated in Canada on August 18, 1997, under the Business Corporations Act (Ontario). The Company is domiciled in Canada and principally engaged, through its subsidiary, in property and casualty insurance in Canada. The Company's head office is located at 2800 Skymark Avenue, Suite 200, Mississauga, Ontario. The Company has a 75% owned subsidiary - The Insurance Company of Prince Edward Island ("ICPEI").

2. COVID-19 pandemic

The rapid spread of the COVID-19 virus, which was declared by the World Health Organization to be a pandemic on March 11, 2020, and actions taken in Canada and globally in response to COVID-19, have significantly disrupted business activities. ICPEI implemented its emergency operational plan which included transitioning most employees to work from home and only a small number of staff in the office to perform functions which could not be performed remotely. Although the office was closed to the public, claim services and support for brokers continued during this time. Since May 4, 2020, ICPEI has begun a partial reopening of its office in Charlottetown.

ICPEI has provided a number of accommodations to its policyholders if they experience hardship because of COVID-19 and adjust their auto premiums due to reduction of use . ICPEI has only experienced a very minor increase in the number of customer defaults and very few requests to lower monthly premiums based on lower usage of vehicles. These did not have a significant impact on the results of the Company in the first quarter of 2020 as it recorded a provision of $200.

The number of motor vehicle claims decreased significantly in the month of March and its impact is reflected in the lower claims expense in the first quarter of 2020. The experience for April is similar to March of this year. ICPEI suspended a recently approved auto rate increase in New Brunswick which was to be effective June 1, 2020 and filed for a slight reduction in auto rates in the Halifax Nova Scotia territory.

The effects on the Company's development of critical estimates during the first quarter of 2020 are described below:

Investment valuation

The Company's valuation technique and recognition of impairment remain unchanged. The Company's investments are valued at fair value using Level 1 or Level 2 inputs that are primarily based on quoted market prices. The Company has no Level 3 investments that require more assumptions and judgement in their valuation. As a result of the market volatility in March, the Company recorded a loss in investment of $749 in its profit and loss and $2,370 of unrealized loss

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

in its other comprehensive loss. Market volatility continued and in April the Company recovered some of those losses.

Provision for unpaid claims

ICPEI does not provide insurance coverage specifically for pandemic risk. However, in its commercial property policies, it offers coverage for business interruption. Based on outside legal counsel review and Insurance Bureau of Canada guidance, ICPEI does not believe that business interruption claims from pandemic Covid-19 are covered perils. No provision has been made. ICPEI will monitor all developments.

Credit risk

During the first quarter of 2020, the Company's exposure to credit risk increased primarily due to the potential effects of COVID-19 pandemic on the Company's reinsurers, insurance contract receivables from customers, and issuers of the Company's investments in bonds. There were no significant changes used in the first quarter of 2020 to monitor and evaluate credit risks. There was no downgrade of reinsurers' credit rating and there were no significant delinquent payments from customers. Valuation of investment bonds is based on observable market values which already reflect the associated credit risks associated with the issuers.

3. Basis of preparation

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. The condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2019, which have been prepared in accordance with IFRS.

These consolidated financial statements have been authorized for issue by the Board of Directors on May 26, 2020.

4. Summary of significant accounting policies

The accounting policies adopted are consistent with those of the previous financial year-end.

Standards, amendments and interpretations not yet adopted or effective

IFRS 9, Financial Instruments

In July 2014, the IASB published the complete version of IFRS 9 which is effective for annual periods beginning on or after January 1, 2018, with retrospective application. The new standard includes requirements on the classification and measurement of financial assets and liabilities, an expected credit loss model that replaces the existing incurred loss impairment model, and new hedge accounting guidance. The Company has evaluated and meets the requirements to defer the adoption of IFRS 9, since the percentage of liabilities connected with insurance contracts over total liabilities meets the 90% threshold. The company has deferred adoption, until the new insurance contracts standard is adopted effective January 1, 2023.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

IFRS 17, Insurance Contracts

In May 2017, the IASB published IFRS 17 with effective date delayed to January 1, 2023, with retrospective application. The standard replaces IFRS 4. The standard is comprehensive in scope and addresses recognition, measurement, presentation and disclosure for insurance contracts. The standard requires the entity to recognize a group of insurance contracts it issues from the earliest of the following:

1. the beginning of the coverage period of the group of contracts; (b) the date when the first payment from a policyholder in the group becomes due; and (c) for a group of onerous contracts, when the group becomes onerous. The measurement approach is based on the following building blocks: (i) a current, unbiased probability-weighted estimate of future cash flows expected to arise as the insurer fulfills the contract; (ii) the effect of the time value of money; (iii) a risk adjustment that measures the effects of uncertainty about the amount and timing of future cash flows; and (iv) a contractual service margin which represents the unearned profit in a contract (that is recognized in net earnings as the insurer fulfills its performance obligations under the contract). Estimates are required to be re-measured each reporting period. In addition, a simplified measurement approach is permitted for short-duration contracts in which the coverage period is approximately one year or less. The Company is currently evaluating the impacts of IFRS 17 on its consolidated financial statements.

5. Critical accounting estimates and assumptions

The preparation of the Company's condensed consolidated interim financial statements requires management to use estimates and judgements that affect the amounts reported in the financial statements. These estimates and judgements principally relate to the establishment of reserves for claims and expenses, impairments of investment securities, amounts recoverable from re-insurers, and income taxes. As more information becomes known, these estimates and judgements could change and impact futureresults.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying accounting policies and the key sources of estimation uncertainty were the same as those applied to the annual 2019 consolidated financial statements.

6. Seasonality

The P&C insurance business is seasonal in nature. While net earned premiums reflect the premium volume from quarter to quarter, net underwriting income can be driven by weather conditions, which may vary significantly by quarter.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

7. Investments

The following table provides a breakdown of the investment portfolio:

	Fair values
Available for sale	As at	As at
	March 31, 2020 December 31, 2019
Fixed income
Canadian
Federal	4,650	5,053
Provincial	3,191	2,771
Corporate	4,388	4,336
Total fixed income	12,229	12,160
Corporate value pooled fund	4,953	5,320
Money market pooled funds	772	604
Short-term fixed income and mortgage pooled funds	13,767	13,550
Total pooled funds	19,492	19,474
Common shares
Canadian	1,149	1,798
Foreign	1,606	2,057
Global Equity Pooled Fund	7,549	8,784
Total common shares	10,304	12,639
Total available for sale	42,025	44,273
Fair value through profit or loss
Preferred shares	2,923	3,746
Total preferred shares	2,923	3,746
Total investments	44,948	48,019
Cash and short-term deposits	70,252	70,932
Total investments including cash and short-term deposits	115,200	118,951

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

Fair value

The Company is responsible for determining the fair value of its investment portfolio by utilizing market- driven fair value measurements from active markets, where available, by considering other observable and unobservable inputs, and by employing valuation techniques which make use of current market data. The technique employed has remained the same from December 31, 2019. The Company uses a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. A description of the inputs used in the valuation of financial instruments is as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of the Company's common and preferred shares is determined based on quoted prices in active markets obtained from external pricing sources.

Level 2 - Inputs, other than quoted prices, that are observable for the investment either directly or indirectly. These inputs include quoted prices for similar instruments exchanged in active markets; quoted prices for identical or similar instruments exchanged in inactive markets; inputs other than quoted prices that are observable for the instruments, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates where available; and inputs that are derived principally from or corroborated by observable market data and correlation or other means.

The Company's investments in government securities (including federal, provincial and municipal bonds), corporate securities, commercial mortgage pooled funds, money market pooled funds and infrequently traded securities are priced using publicly traded, over-the-counter prices or broker-dealer quotes which are based on market observable inputs. Observable inputs such as benchmark yields, reported trades, broker dealer quotes, issuer spreads and bids are available for these investments.

Level 3 - Inputs that are not based on observable market data. Management is required to use assumptions regarding unobservable inputs as there is little, if any, market activity in these investments or related observable inputs that can be 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 rationality 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.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

The following table provides the classification of the Company's investments within the fair value hierarchy, as outlined, as at March 31, 2020 and December 31, 2019:

March 31, 2020

	Level 1	Level 2	Total
Fixed income	-	12,229	12,229
Corporate value pooled funds	-	4,953	4,953
Money market pooled funds	-	772	772
Short-term fixed income and mortgage	-	13,767	13,767
pooled funds
Global equity pooled funds	-	7,549	7,549
Common Shares	2,755	-	2,755
Preferred Shares	2,923	-	2,923
	5,678	39,270	44,948
December 31, 2019
	Level 1	Level 2	Total
Fixed income	-	12,160	12,160
Corporate value pooled funds	-	5,320	5,320
Money market pooled funds	-	604	604
Short-term fixed income and mortgage	-	13,550	13,550
pooled funds
Global equity pooled funds	-	8,784	8,784
Common Shares	3,855	-	3,855
Preferred Shares	3,746	-	3,746
	7,601	40,418	48,019

The Company's policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. There were no transfers from the existing portfolio for the quarter ended March 31, 2020 or December 31, 2019.

The fair values of cash and short-term deposits, account receivables and financial liabilities approximate their carrying values due to their short-term nature.

The Company has interests in unconsolidated structured entities, through investments in pooled funds, which are included in investments on the balance sheet. These entities are not controlled by the Company. The carrying value of pooled funds and maximum exposure to loss as of March 31, 2020 was $27,041 (December 31, 2019 - $28,258). Investments in pooled funds consist of units invested in underlying money market and mortgage securities managed by third-party managers in addition to units invested in a Global Equity Pooled Fund. The pooled funds are perpetual private trusts created under trust agreements. Financing is only provided to the pooled funds through the purchase of units and is therefore limited to the investment made.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

Impaired assets and provisions for losses

A gross unrealized loss of $1,265 on Available for Sale (AFS) investments at March 31, 2020 (December 31, 2019 - $395) is recorded, net of tax, in the amount of $1,066 (December 31, 2019 - $292) in Accumulated Other Comprehensive Income.

Management has reviewed currently available information regarding those financial assets where estimated fair values are less than amortized cost. For those investments that are considered impaired, the Company records the difference between the amortized cost of the financial assets and its fair value as an impairment which reduces investment income recorded in the year.

An impairment of $124 on AFS investments was recognized for the period ended March 31, 2020 (March 31, 2019- Nil).

Investment income

The table below provides additional details on net investment income.

	3 months ended
	March 31
	2020	2019
Interest income	692	424
Dividend income	103	100
Net realized gains (losses)	177	13
Fair value change on FVTPL investments	(802)	79
Impairment loss recognized on AFS Investment	(124)	-
Investment expenses	(67)	(61)
Investment income	(21)	555

8. Provision for unpaid claims

The fair value of the provision for unpaid claims approximates the carrying value determined in accordance with generally accepted actuarial methods in Canada, which discounts future cash flows and includes a margin for adverse deviation.

The Company determines the discount rate based on the expected return on its investment portfolio of assets with appropriate assumptions for interest rates relating to reinvestment of maturing investments. The investment portfolio has experienced an increase in yields compared to December 31, 2019. The Company discounts its best estimate as follows, which is for all lines of business within the reporting entity:

Entity	March 31, 2020	December 31, 2019
ICPEI	2.83%	2.5%

The Company recorded a $427 reduction, as at March 31, 2020, to the net provision for unpaid claims relating to favourable development in prior years' estimates (March 31, 2019 - $499 unfavourable).

To recognize the uncertainty in establishing these best estimates, to allow for possible deterioration in experience, and to provide greater comfort that the actuarial liabilities are adequate to pay future claims, the Company includes provisions for adverse deviations (PFADs) in some assumptions relating to claims development, reinsurance recoveries, and future investment income. The PFADs selected are in the midrange of those recommended by the Canadian Institute of Actuaries. The aggregate impact of the provision for adverse deviation is to increase the provision for unpaid claims on a net basis by $1,535 as at March 31, 2020 (December 31, 2019 - $1,595).

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

Claims development

Provision for unpaid claims analysis	March 31, 2020	March 31, 2019
Unpaid claims, beginning of year, net	23,361	19,201
(Favourable) unfavourable prior year claims development	(427)	499
Net claims incurred in current year	4,682	4,223
Paid on claims occurring during
Current year	(1,991)	(2,493)
Prior year	(2,893)	(3,039)
Unpaid claims, end of year, net	22,732	18,391
Reinsurers' share	2,959	4,850
Gross unpaid claims	25,691	23,241

The development of insurance liabilities provides a measure of the Company's ability to estimate the ultimate value of claims.

Assumptions used to develop the provision estimate for unpaid claims and adjustment expenses are selected by class of business and geographic location. Consideration is given to the characteristics of the risks, historical trends, and the amount of data available on individual claims, inflation and any other pertinent factors. Some assumptions require a significant amount of judgement such as the expected impacts of future judicial decisions and government legislation. The diversity of these considerations results in it not being practical to identify and quantify all individual assumptions that are more likely than others to have a significant impact on the measurement of the Company's insurance contracts. There were no new assumptions identified in the year as having a potential or identifiable material impact on the overall claims estimate.

9. Risk management

As a provider of insurance products, effective risk management is fundamental to the Company's ability to protect the interests of its customers and shareholders. The Company is exposed to 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 Company is also exposed to potential loss from various risks, including interest rate risk, equity market fluctuation risk, credit risk, liquidity risk, and foreign exchange risk.

The Company has written principles for overall risk management, as well as written policies covering specific areas such as underwriting, reinsurance, foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments and investment of excess liquidity.

Insurance risk

The risk under any one insurance contract is the possibility that the event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, the risk is random and therefore unpredictable. The principal risk that the Company faces under its insurance contract is that the actual claims payments exceed the carrying amount of the insurance liabilities. This could occur because claims frequency or severity is greater than estimated. Insurance events are random and the actual number and amount of claims will vary from year-to-year from the estimate.

The concentration of insurance risk by product line, country, province or state, and underlying currency, will also impact financial results depending on the nature and location of events.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

Interest rate risk

Fluctuations in interest rates have a direct impact on the fair valuation and future cash flow of the Company's fixed income investment portfolio. Generally, the Company's investment income will be reduced during sustained periods of lower interest rates, as higher yielding fixed income investments mature or are sold and the proceeds are reinvested at lower rates. During periods of rising interest rates, the fair value of the Company's existing fixed income investments will generally decrease, and gains on fixed income securities will likely be reduced.

The sensitivity analysis for interest rate risk as set out in the table below illustrates the impact of changes in interest rates on other comprehensive income ("OCI") relating to the fixed income investment portfolio as at March 31, 2020, and December 31, 2019, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments.

Change in interest rates	Fair value of fixed	Hypothetical change	Effect on OCI
As at March 31, 2020	income	on fair value	net of tax
200 basis point rise	30,054	(5)%	(1,161)
100 basis point rise	30,887	(3)%	(581)
No change	31,721	-	-
100 basis point decline	32,554	3%	581
200 basis point decline	33,387	5%	1,161

Change in interest rates	Fair value of fixed	Hypothetical change	Effect on OCI
As at December 31, 2019	income	on fair value	net of tax
200 basis point rise	30,081	(5)%	(1,082)
100 basis point rise	30,858	(2%)	(541)
No change	31,634	-	-
100 basis point decline	32,410	2%	541
200 basis point decline	33,187	5%	1,082

Liquidity risk

Liquidity risk is the risk that the Company may not have sufficient liquid financial resources to meet its obligations when they fall due, or would have to incur excessive costs to do so. The Company's liquidity management strategy is to ensure that there is sufficient cash to meet its financial commitments as they become due. To manage cash flow requirements, the Company maintains a portion of invested assets in liquid investments.

The maturity profile of bonds is as follows, as at March 31, 2020 and December 31, 2019:

March 31, 2020	Less than	1 - 3 years	3 - 5 years	Greater than	Total
	1 year			5 years
Bonds	553	3,746	4,136	3,794	12,229
Cash and cash equivalents	70,252	-	-	-	70,252
Accounts receivable	9,306	-	-	-	9,306
Total	80,111	3,746	4,136	3,794	91,787
Percentage of total	87%	4%	5%	4%	100%

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

December 31, 2019	Less than	1 - 3 years	3 - 5 years	Greater than	Total
	1 year			5 years
Bonds	227	3,664	3,335	4,934	12,160
Cash and cash equivalents	70,932	-	-	-	70,932
Accounts receivable	10,020	-	-	-	10,020
Total	81,179	3,664	3,335	4,934	93,112
Percentage of total	87%	4%	4%	5%	100%

The following tables summarize the expected timing of cash flows arising from insurance obligations, on an undiscounted basis, as at March 31, 2020 and December 31, 2019:

March 31, 2020	Less than	1 - 3 years	3 - 5 years	Greater than	Total
	1 year			5 years
Gross claim liabilities	10,768	8,424	3,419	2,506	25,117
(undiscounted)
Less: Reinsurance recoverable	1,609	987	193	115	2,904
(undiscounted)
Net actuarial liabilities	9,159	7,437	3,226	2,391	22,213

December 31, 2019	Less than	1 - 3 years	3 - 5 years	Greater than	Total
	1 year			5 years
Gross claim liabilities	11,414	8,410	3,488	2,530	25,842
(undiscounted)
Less: Reinsurance recoverable	1,655	1,093	265	159	3,172
(undiscounted)
Net actuarial liabilities	9,759	7,317	3,223	32,371	22,670

Equity price risk

Fluctuations in the value of equity investments affect the level and timing of recognition of gains and losses on securities held, and cause changes in realized and unrealized gains and losses. General economic conditions, political conditions, and many other factors can also adversely affect the stock and bond markets and, consequently, the value of the equity and fixed income investments held.

The Company has policies to limit and monitor its exposure to individual issuers and classes of issuers of equity securities.

The table below summarizes the potential impact of a 10% change in the value of the equity securities (common and preferred shares) on net income and OCI for the three months ended March 31, 2020, and the year ended December 31, 2019. Certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the assumption that all equity holdings increased/decreased by 10% with all other variables held constant.

	Effect on net income (loss)
Change in equity holdings	net of tax	Effect on OCI net of tax
	March	December	March	December
	31, 2020	31, 2019	31, 2020	31, 2019
10% rise	204	261	752	923
10% decline	(204)	(261)	(752)	(923)

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

Credit risk

The Company is exposed to credit risk principally through its investment securities and balances receivable from policyholders and reinsurers. The Company has policies to limit and monitor its exposure to individual issuers and classes of issuers of investment securities which do not carry the guarantee of a national or Canadian provincial government. The Company's credit exposure to any one individual policyholder is not material. The Company has policies that limit its exposure to individual reinsurers and regular review processes to assess the creditworthiness of reinsurers, with whom it transacts business.

Fixed income portfolio

A breakdown of the fixed income portfolio by credit rating is shown below as at March 31, 2020 and December 31, 2019:

	As at March 31, 2020		As at December 31, 2019
	Fair value	%	Fair value	%
AAA	5,682	46%	5,940	49%
AA	2,209	18%	2,321	19%
A	3,760	31%	2,861	23%
BBB	578	5%	1,038	9%
Total	12,229	100%	12,160	100%

Preferred share portfolio

A breakdown of the preferred shares portfolio by credit rating is shown below as at March 31, 2020 and December 31, 2019:

		As at March 31, 2020		As at December 31, 2019
		Fair value	%	Fair value	%
	P2	2,590	89%	3,305	88%
	P3	333	11%	441	12%
	Total	2,923	100%	3,746	100%
	10. Income taxes
	The income tax is as follows:
				3 months ended March 31
				2020	2019
	Current			70	99
	Deferred			98	(16)
				168	83

The effective income tax rates are different from the combined federal and provincial income tax rates.

The consolidated statements of income and comprehensive income contain items that are non-taxable or non-deductible for income tax purposes, which cause the income tax expense to differ from what it would have been if based on statutory rates.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

The difference is broken down as follows:

3 months ended March 31

	2020	2019
Income tax expense calculated on statutory rates	27%	27%
Increase (decrease) in income tax rates resulting from:
Non-taxable dividend income	(4.6%)	0.1%
Statutory rate difference	3.7%	(0.2%)
Other	1.2%	-%
Effective income tax rate	27.3%	26.9%

11. Operating costs by nature

The table below presents operating costs by major category.

3 months ended March 31

	2020	2019
Salaries and benefits	703	536
Systems costs	115	90
Professional fees	82	258
Directors' and Regulatory Filing fees	54	146
Occupancy and lease cost	149	47
Printing and postage	34	44
Facility	112	72
Other expenses	428	232
	1,677	1,425

12. Accumulated other comprehensive income

A breakdown of the accumulated other comprehensive income is shown below as at March 31, 2020 and December 31, 2019:

	As at March	As at December
	31, 2020	31, 2019
Gross unrealized losses	(407)	1,938
Foreign currency translation adjustments	-	-
Tax impact	177	96
Ending balance	(230)	2,034

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

13. Earnings per share

Earnings per share are calculated in the following table:

3 months ended March 31

Earnings per share on Continued Operations	2020	2019
Basic earnings per share on continued operations:
Net (loss) income available to shareholders	331	82
Average number of common shares	12,007	11,943
Basic (loss) earnings per share on continued operations	$0.03	$0.01
Diluted earnings per share:
Average number of common shares	12,007	11,943
Average number of dilutive common shares under employee stock
compensation plan	-	351
Average number of diluted common shares	12,007	12,294
Diluted (loss) earnings per share on continued operations	$0.03	$0.01
	3 months ended March 31
Earnings per share on Discontinued Operations	2020	2019
Basic (loss) per share on discontinued operations:
Net income (loss) available to shareholders	-	(9,187)
Average number of common shares	12,007	11,943
Basic earnings (loss) per share on discontinued operations	$0.00	$(0.77)
Diluted earnings per share:
Average number of common shares	12,007	11,943
Average number of dilutive common shares under employee stock
compensation plan	-	351
Average number of diluted common shares	12,007	12,294
Diluted earnings (loss) per share on discontinued operations	$0.00	$(0.77)
Total Earnings per Share	2020	2019
Basic earning per share:
Net income available to shareholders	331	(9,105)
Average number of common shares	12,007	11,943
Basic earnings per share	$0.03	$(0.76)
Diluted earnings per share:
Average number of common shares	12,007	11,943
Average number of dilutive common shares under employee stock
compensation plan	-	351
Average number of diluted common shares	12,007	12,294
Diluted earnings per share	$0.03	$(0.76)

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

14. Net income (loss) from discontinued operations

The table below presents results of discontinued operations for the period ended March 31, 2020 and March 31, 2019:

	3 months ended
	March 31
	2020	2019
Revenue
Gross written and assumed premiums	-	91,965
Net written premium	-	87,658
Decrease in provision for unearned premium	-	(13,538)
Net earned premiums	-	74,120
Investment Income	-	3,137
Total revenue	-	77,257
Expenses
Net incurred claims	-	56,768
Net acquisition costs	-	18,303
Operating costs	-	8,623
Severance	-	10
Transaction costs from sale	-	3,099
Total expenses	-	86,803
Profit (loss) before income taxes	-	(9,545)
Impact of change in discount rate on claims	-	(2,570)
Income tax recovery	-	(2,928)
Net loss on discontinued operations	-	(9,187)
Revaluation of the net assets of disposal group held for sale	-	-
Net loss on discontinued operations	-	(9,187)
Other comprehensive income on discontinued operations	-	2,007
Comprehensive loss on discontinued operations	-	(7,180)

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

15. Non-controlling interest

The Company has non-controlling interests attributable to the subsidiary of ICPEI. Please refer to Note 1. The following tables summarize the comprehensive income attributable to the non-controlling shareholders:

	3 months ended
	March 31
	2020	2019
Revenue
Gross written and assumed premiums	2,009	1,739
Net earned premiums	2,115	1,885
Investment Income (loss)	(82)	110
Total revenue	2,033	1,995
Expenses
Net incurred claims	1,064	1,181
Net acquisition costs	473	416
Operating costs	334	230
Total expenses	1,871	1,827
Income before income taxes	163	168
Income tax expense (recovery)	46	47
Net income attributable to NCI	117	121
Other comprehensive loss attributable to NCI	(62)	67
Comprehensive income attributable to NCI	55	188

The following tables summarize the net assets of the non-controlling shareholders as at March 31, 2020 and December 31, 2019:

	March 31	December 31
	2020	2019
Assets
Cash and investments	9,704	10,019
Other assets	5,592	5,881
Total assets	15,296	15,900
Liabilities
Unearned premium	4,375	4,687
Unpaid claims	6,423	6,657
Other liabilities	711	824
Total liabilities	11,509	12,168
Equity
AOCI	(109)	(47)
Retained earnings	3,896	3,779
Total equity	3,787	3,732
Total liabilities and equity	15,296	15,900

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

	As at March	As at December
	31 2020	31 2019
Cash flow from operating activities	(18)	893
Cash flow from investing activities	(76)	(44)
Cash flow from financing activities	(19)	(99)
Net (decrease) increase in cash and short-term deposits	(113)	750

16. Segmented information

The Company operates through two segments: Personal Lines and Commercial Lines businesses. Through its Personal Lines segment, the Company is engaged primarily in the underwriting of automobile insurance and personal property.

Through its Commercial Lines, the Company designs and underwrites commercial property, commercial automobile. Discontinued Canadian Operations are excluded.

The effect of reinsurance is reflected in the revenue and results of each segment. The investment activities consist of managing the investment portfolio for the Company as a whole. Investment income is shown net of investment expenses. The corporate and other activities include holding company expenses not attributable to a division.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

The following table summarizes the net income before interest and income taxes by Personal and Commercial Lines:

3 months ended March 31

		2020	2019
Revenue
Net earned premiums
-	Personal Lines	5,976	5,085
-	Commercial Lines	2,483	2,456
Total net earned premium	8,459	7,541
Net claims incurred
-	Personal Lines	2,851	3,314
-	Commercial Lines	1,535	1,237
Net claims	4,386	4,551
Net expenses
-	Personal Lines	2,180	1,650
-	Commercial Lines	1,047	935
Total	3,227	2,585
Total net expenses	7,613	7,136
Underwriting income (loss) before income taxes
-	Personal Lines	945	121
-	Commercial Lines	(99)	284
Total	846	405
Corporate and other	(340)	(503)
Underwriting (loss)	506	(98)
Impact of change in net claims discount rate	131	(171)
Investment income	(21)	555
Total income before interest expense and income taxes	616	286

17. Contingencies

From time to time, in connection with its insurance operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the outcome, such actions have generally been resolved with minimal damage or expense in excess of amounts provided as policy liabilities. The Company does not believe that it will incur any significant additional loss or expense in connection with such actions.

New Nordic Advisors Limited (NNA) filed a Statement of Claim with the Danish Institute of Arbitration in October 2018. The Claim seeks €45.8 million in damages arising from the sale of 100% of EFH's interest in QIC Holdings ApS to New Nordic Odin Denmark Ltd in March of 2017. The Statement of Claim alleges breach of contract and willful misrepresentation. On July 16, 2019 the claim was dismissed with costs (approx. C$ 365,000) payable to EFH. There is no right to an appeal.

ECHELON FINANCIAL HOLDINGS INC.

Notes to the Consolidated Financial Statements (continued) (unaudited, in thousands of Canadian dollars, except per share amounts)

On August 2, 2019 New Nordic Odin Denmark (NNOD) filed a Statement of Claim with the Danish Institute of Arbitration. The Claim is essentially the same claim made by NNA but with a different plaintiff. The Claim seeks €45.8 million in damages arising from the sale of 100% of EFH's interest in QIC ECHELON FINANCIAL HOLDINGS INC. Consolidated Statement of Cash Flows (in thousands of Canadian dollars) 41 Holdings ApS to NNOD in March of 2017. The Statement of Claim alleges breach of contract and willful misrepresentation with respect to the amount of required reserves for Qudos claim liabilities and the overall value of Qudos. It is alleged that officers of Qudos and EFH were aware of the underfunded reserves and failed to disclose to NNOD. A preliminary defence has been filed by EFH, pleading that NNOD has no legal right to bring the claim and seeking an order for security for costs. EFH is preparing to file a substantive defence and expects the case will proceed in the 4th quarter of 2020. EFH does not believe there is any merit to the claim.