Fourth Quarter 2023 MD&A

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Business profile

Business background

Sagen is the largest private-sector residential mortgage insurer in Canada and has been providing mortgage default insurance in the country since 1995. The Company has built a broad underwriting and distribution platform across the country that provides customer-focused products and support services to the vast majority of Canada's residential mortgage lenders and originators. Sagen underwrites mortgage insurance for residential properties in all provinces and territories of Canada and has the leading market share among private-sector mortgage insurers. The Canada Mortgage and Housing Corporation ("CMHC"), a crown corporation, and Canada Guaranty Mortgage Insurance Company, a private mortgage insurer, are the Company's main competitors.

Federally regulated lenders are required to purchase transactional mortgage insurance in respect of a residential mortgage loan whenever the loan-to-value ratio exceeds 80%. The Company offers both transactional and portfolio mortgage insurance. The Company's transactional mortgage insurance covers default risk on mortgage loans secured by residential properties to protect lenders from any resulting losses on claims. By offering insurance for transactional mortgages, the Company plays a significant role in providing access to homeownership for Canadian residents. Homebuyers who can only afford to make a smaller down payment can, through the benefits provided by mortgage insurers such as Sagen, obtain mortgages at rates comparable to buyers with more substantial down payments.

The Company also provides portfolio mortgage insurance to lenders for loans with loan-to-value ratios of 80% or less. Portfolio mortgage insurance is beneficial to lenders as it provides the ability to manage capital and funding requirements and mitigate risk. The Company views portfolio mortgage insurance as an extension of its relationship with existing transactional insurance customers. Therefore, the Company carefully manages the level of its portfolio mortgage insurance relative to its overall mortgage insurance business. Premium rates on portfolio mortgage insurance have historically been lower than those on transactional mortgage insurance due to the lower risk profile associated with portfolio loans.

Seasonality

The transactional mortgage insurance business is seasonal. Business volumes vary each quarter, while interest and dividend income, net of investment expenses, and administrative expenses tend to be relatively stable from quarter to quarter. The variations in business volumes are driven by mortgage origination activity, which typically peak in the spring and summer months. Strong housing demand throughout the second half of 2020 and 2021 impacted the typical seasonal variations in transactional premiums written in 2020 and 2021. In 2022, rising interest rates and strained housing affordability led to a weaker housing market starting in the Spring of 2022, which continued throughout 2023.

Losses on claims vary from quarter to quarter, primarily as the result of prevailing economic conditions, changes in employment levels and characteristics of the outstanding insured mortgage balances, such as size, age, seasonality and geographic mix of delinquencies. Typically, losses on claims increase during the winter months, primarily due to an increase in new delinquencies, and decrease during the spring and summer months. The COVID-19 pandemic and actions taken by lenders and mortgage insurers in respect of mortgage payment deferrals impacted the typical seasonal patterns of mortgage delinquencies in 2020 and 2021. During 2022, the cumulative favourable impact of home price appreciation from 2020 and 2021 in most regions of Canada resulted in relatively low levels of losses on claims and largely muted the typical seasonal pattern, which continued throughout 2023.

The Company's business volumes from portfolio mortgage insurance varies from period to period based on a number of factors including the amount of portfolio mortgages lenders seek to insure, the competitiveness of the Company's pricing, underwriting guidelines and credit enhancement for portfolio insurance, and the Company's risk appetite for such mortgage insurance.

Distribution and marketing

The Company works with lenders, mortgage brokers and real estate agents across Canada to make homeownership more accessible for first- time homebuyers. Mortgage insurance customers consist of originators of residential mortgage loans, such as banks, mortgage loan and trust companies, credit unions and other lenders. These lenders typically determine which mortgage insurer they will use for the placement of mortgage insurance written on loans originated by them. The five largest Canadian chartered banks have historically been the largest residential mortgage originators in Canada.

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Impact of rising interest rates

Starting March of 2022 and through 2023, the Bank of Canada has increased the overnight lending rate ten times, resulting in cumulative increases in the overnight lending rate of 475 basis points. The overnight lending rate as at December 31, 2023 was 5.00% as compared to 4.25% at December 31, 2022 and 0.25% at January 31, 2022.

Higher interest rates have resulted in a decline in the fair value of the Company's bonds and other fixed income securities during 2022, which has resulted in unrealized losses recognized in accumulated other comprehensive income. Conversely, higher interest rates have also resulted in higher interest income due to higher reinvestment interest rates, higher interest income on the Company's floating rate invested assets, and run-off of lower yielding investments. Due to declines in bond yields in 2023, the fair value of the Company's bond portfolio partially recovered during the year.

Adoption of new accounting standards

On January 1, 2023, the Company adopted IFRS 17: Insurance contracts ("IFRS 17") and IFRS 9: Financial instruments ("IFRS 9") for the first time. IFRS 17 and IFRS 9 were applied to the Company's financial statements retrospectively, and comparative information was restated. IFRS 17, which replaced IFRS 4: Insurance contracts ("IFRS 4"), has had a material impact on the Company's consolidated financial statements in 2023. Despite this impact, the Company's business model and related risks are not affected by these changes in accounting policies.

Adoption of IFRS 17:

Insurance liabilities under IFRS 17 consist of the following components:

• Liability for Remaining Coverage ("LRC") which replaces Unearned Premiums and Deferred Policy Acquisition Costs; and
• Liability for Incurred Claims ("LIC") which replaces Loss Reserves and Subrogation Recoverable.

LRC is comprised of the following:

1. Fulfilment cash flows ("FCF") consisting of:
2. 1. A current, unbiased probability-weighted estimate of future cash flows expected to fulfill the insurance contracts;
   2. The effect of the time value of money; and
   3. A risk adjustment for non-financial risk that represents the compensation for bearing risk related to uncertainty about the amount and timing of future cash flows; and
3. A contractual service margin ("CSM") which represents the unearned profit of the insurance contracts to be recognized in profit or loss over time as the insurance coverage is provided.

Given the Company's single upfront premium model, premiums written and insurance acquisition expenses are incurred concurrently with the origination of the insurance contracts, and FCF represents the unbiased probability weighted estimate of future cash flows related to losses and expenses required to fulfil the insurance contract, plus a risk adjustment for non-financial risk. This risk adjustment is generally calibrated so that the sum of the future expected losses and expenses equate to the 80th to 90th percentile cashflows depending on the estimated level of economic uncertainty. Any changes in the estimate of FCF that relate to future services are adjusted against the CSM and recognized prospectively in current and subsequent periods, for example, an increase in FCF decreases CSM, or a decrease in FCF increases CSM.

FCF is discounted at the current discount rate at the end of the reporting period. Insurance finance expense in the statement of income represents the interest accretion calculated using the locked-in discount rate for each group of contracts related to future cash flows, risk adjustment and CSM. Insurance finance expense increases the LRC.

When discount rates change, the cumulative change in the present value of future cash flows and risk adjustment related to the change in discount rates is recognized as insurance finance expense in Other Comprehensive Income ("OCI"). The Insurance Finance Reserve, a component of Accumulated Other Comprehensive Income ("AOCI"), represents the cumulative impact of changes in discount rates to be recycled through Insurance Revenue when the related future cash flows and risk adjustment are released to Insurance Revenue.

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Insurance Revenue reflects the release of the LRC components as described below:

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The following are the Company's observations on the key implications from the adoption of IFRS 17:

• IFRS 17 only impacts the timing and presentation of revenue and earnings. The total amount of revenue and earnings are unchanged over the life of the applicable group of insurance contracts.
• The Company expects that its revenue recognition under IFRS 17 will diverge from the historical loss emergence patteunder IFRS
  4 for the following reasons:
  o It is more sensitive to macroeconomic conditions, including home price changes and mortgage lapse rates, which can result in more variability in revenue.
  o It will generally be slower than the previous IFRS 4 premium recognition pattederived from the loss emergence pattern, except in periods of rapidly rising house prices.
  o It will likely be faster in periods of significant increases in house prices and slower in periods of declining house prices.
• All else being equal, the Company anticipates that slower revenue recognition will result in a higher LRC and lower shareholders' equity. However, total assets available to pay claims are effectively unchanged.
• The Company expects that losses on claims will largely be unchanged with the adoption of IFRS 17, but the loss ratio will likely be higher and have more variability given the lower and more variable Net Insurance Revenue.

Overall, while the adoption of IFRS 17 has had a material impact on the Company's reported financial results, including increased variability in Insurance Revenue, the Company's business model and related risks are not affected by the adoption of IFRS 17.

Adoption of IFRS 9:

IFRS 9, which replaces IAS 39: Financial instruments: recognition and measurement ("IAS 39") includes guidance on the classification and measurement of financial instruments, impairment of financial assets, and a new general hedge accounting model. Financial asset classification is based on the cash flow characteristics and the business model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also introduces a single impairment model for financial instruments not measured at Fair Value Through Profit and Loss ("FVTPL") that requires recognition of expected credit losses ("ECL") at initial recognition of a financial instrument and the recognition of lifetime ECL if certain criteria are met. The new model for hedge accounting aligns hedge accounting with risk management activities.

Changes to non-GAAP and other financial measures as a result of application of IFRS 17 and IFRS 9:

As a result of the adoption of IFRS 17 and IFRS 9, the definitions of a number of non-GAAP and other financial measures used by the Company have been revised and a number of new non-GAAP and other financial measures have been added by the Company to supplement the evaluation of business performance. New or amended non-GAAP and other financial measures included in this MD&A are indicated below.

• Net Insurance Revenue which equals Insurance Revenue net of Finance Expense for the period.
• Expense ratio which equals the total of insurance and other expenses expressed as a percentage of Net Insurance Revenue for the period.
• Loss ratio which equals losses on claims expressed as a percentage of Net Insurance Revenue for the period.
• Net Insurance Service Result which equals Insurance Service Result net of Insurance Finance Expense for the period.
• CSM ratio which equals CSM expressed as a percentage of total LRC.
• Operating investment income has been adjusted for inclusion of the Allowance for ECL.
• Investment yield has been adjusted for inclusion of the ECL.

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Sagen MI Canada Inc.Q4 2023 MD&A

Overview

Fourth quarter financial highlights

Table 1: Selected financial information after adoption of IFRS 17 and IFRS 9

Note: Amounts may not total due to rounding. 1 Non-GAAP financial measure. 2 Includes realized and unrealized gains and losses from derivatives and foreign exchange, excluding realized income and expense from the interest rate hedging program. 3 This estimate is based on the amounts reported by lenders to the Company which represents the vast majority of outstanding insured mortgage balances. 4 Supplementary financial measure. 5 Company estimate as at December 31, 2023. The Company calculated its MICAT ratio in accordance with OSFI's Mortgage Insurer Capital Adequacy Test Guideline dated January 1, 2019 for the restated 2022 reporting period and the updated Guideline dated January 1, 2023 for the 2023 reporting period. The OSFI supervisory MICAT target ratio and minimum MICAT ratio under PRMHIA is 150% and the Company's internal target ratio under the MICAT is 157%. See the Non-GAAPand other financial measures section at the end of this MD&A for additional information.

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