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Trisura Group Outline

Executive Summary
Trisura (TSE:TSU) is a Canadian specialty insurance business recently spun out from Brookfield Asset
Management (BAM), a real estate asset manager. Trisura was a tiny portion of Brookfield, with CAD
$112MM in book value, 5.8MM shares outstanding, and a 93% 5-year average combined ratio.

TSU could be worth 3x its current price in roughly 5 years time because book value can double and P/B
can increase 50%. TSU is worth at least $29 today, valued based on a 1.5x P/B ratio. Over time, as the
company demonstrates that it can profitably grow premiums and book value, the business should be
worth roughly 2x book value, in line with other specialty insurers such as AMSF, RLI, MKL, WRB.

Business Description and History


Brookfield started up Trisura Guarantee (TG) in 2005 as part of its private equity business. While the
business grew steadily, Brookfield spun off its private equity business, Brookfield Business Partners
(BBU), into a separate publicly-traded vehicle in late 2016. Brookfield did not believe insurance fit within
the scope of BBUs activities. BAM decided to spin off Trisura and its other insurance businesses in their
entirety. Bruce Flatt of BAM had this to say about the spin-off in his 2016 Fourth Quarter Letter:

Even though this business does not fit in Brookfield, we believe it is a great business for
the shareholders of Brookfield to own as a standalone companyFor your interest, the
senior management team generally intends to keep our shares (some select people for
various reasons may not), and in the management partnership where we pool a number
of our Brookfield shares we may provide financial support to Trisura Group

Trisura group is composed of two segments which had been independently operated inside Brookfield.
The first, and core to the thesis, is Trisura Guarantee, a specialty insurer with business in surety,
corporate, and risk solutions. TG holds the #6 market position in Canada in surety bonds, which prevent
against a contractors failure to complete its project. Corporate insurance offers Directors and Officers,
Professional, Cyber, and Fidelity Liability coverages. Risk solutions offers a fronting solution to captive
companies or MGAs and offers reinsurance to companies offering warranties in the event those
companies cannot pay their warranties.

The business is split roughly evenly among the three lines of business.

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The below table shows how profitable the overall business has been. TG has doubled its underwriting
profit in the last 5 years, the combined ratio has stayed in the low-90s, and its most recent ROE was
14.6%. The bull case essentially rests on this trend continuing in the future.

TG recently received approval to expand into the US insurance market, is awaiting an A.M. Best rating,
and plans to issue risk solutions contracts and reinsure 90-100% of the risk, in essence collecting a fee
for its work. This business model resembles that of State National Companies (SNC), another small
insurer trading at 2.7x book value (Since I began writing this pitch, State National was acquired by
Markel at 2.8x book value). Eventually, as it grows and accumulates capital, Trisura may begin to write
surety and corporate policies and retain some of the business it underwrites in the U.S. In either case,
Trisura should be capable of growing premium profitably which should warrant an above-average
valuation.

The second segment, Trisura International (TI), is a reinsurer in run-off that stopped writing premiums in
2008. Its remaining reinsurance contracts are winding down, with a particularly large Irish life
reinsurance contract representing $54.2MM in reserves, or 75% of TIs total claims reserves. Trisura
states they intend to begin writing reinsurance again, primarily to reinsure premiums TG writes, but
perhaps for other insurers over time.

Industry Characteristics
I intend to focus on the companys surety and risk solutions businesses because both lines of business
are relatively niche, compared to the Corporate Insurance segment.
Surety

To answer the question, what is surety insurance?, Ill defer to another interesting little company,
Boston Omaha, who had this to say:

First, the nature of surety is a little different than other lines of insurance, in that surety
is designed to prevent a loss rather than cover a loss. Surety is a tri-party agreement,
meaning that a surety company is generally guaranteeing a specific performance of the
insured, (Principal), for a third party.

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In many cases, the ability of the Principal to stay in business demands that there are no
claims outstanding on a required surety bond. The Principal often has a real incentive to
minimize any claims for which they are bonded. In addition to this incentive, the surety
company has a number of tools at its disposal, from taking collateral to replacing the
work done by the Principal. These help the surety keep the dollar cost of losses down.

Boston Omaha Corporation, 2016 Letter

Additionally, the surety business is a tiny fraction of the overall insurance market. As you can see below,
if you want to get really big, really fast in insurance, you dont waste your time on surety.

It would be a mistake to assume that surety business experiences no losses. The surety business can and
does experience losses, sometimes in large chunks and for multiple years. However, loss ratios on
average are low, in the 30-40% range. While Trisura is only licensed in Canada today, they may begin
writing premiums in the U.S. Loss ratios in the U.S. seem to show the same general trend of cyclicality as
in Canada.

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Risk Solutions

From the prospectus, Risk solutions uses four different insurance structures, sometimes in
combination, to address clients insurance requirements:

Surety structure, where we stand behind the obligations of a warranty program administrator.
In the event of the administrators financial failure, we will step in to ensure consumers
warranty coverages remain intact;
Fronting structure, where we permit our licensed status to be used by captive insurance
companies to issue insurance policies or warranties in exchange for a fronting fee;
Retrospectively rated policy structure, where we assume the insurance risk on a program, and
the actual claims experience is used to determine the ultimate premium. The initial premium
incorporates a margin over the expected claims to provide for adverse results; and
Risk transfer structure, where we assume the risk of the underlying warranty program
completely, partially (co-insuring, or sharing, the risk with the administrator), or when losses
exceed a specified amount (as in excess of loss insurance).

In short, most of the risk solutions business earns a fee and takes minimal underwriting risk. This is quite
similar to State National Companies model, which recently sold itself for 2.8x book value to Markel.

A typical relationship looks like this:

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According to Trisura, Within risk solutions, our Company aggregates business from MGAs and provides
access to that business to captive insurance companies or reinsurers that require licensed insurance
company paper in exchange for a ceding fee. We maintain a small risk position, aligning our interests
with distribution partners and reinsurers, while limiting underwriting risk. In this way, our business can
generate attractive, stable fee income. As Trisura USs business grows, this business model will become
a more significant component of our Company.

Competition
Surety

Competition and insurance are synonymous. There are few barriers to entry in the insurance business in
general. Nevertheless, in Canadian surety, Trisura is #6 in 2015 Direct Written Premiums, representing
6.7% of the total $589MM Canadian surety market. Frankly, there is not much more room for Trisura to
grow in Canada above the overall surety market. The largest underwriter has only 19.1% of the market,
so Trisura will need to work hard to profitably grow in Canada.

In the U.S., market share looks similar to Canada, with 63% of the market in the top 10 insurers,
compared to 83% in Canada. This actually indicates the U.S. market is a bit more competitive, but that
market share is likely somewhat easier to attain in the U.S. market. The relevant question is whether
Trisura can earn market share that is profitable and I believe Trisura is likely to be successful.

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Risk Solutions

The risk solutions business is fairly concentrated, as the below chart shows. Trisura could benefit from
the increasing demand from alternative capital providers who view insurance as a diversifying risk.
These providers are typically offshore entities who do not have direct access to underwriting insurance
contracts. Companies such as State National (and potentially Trisura) can write traditional insurance
business, retain a small portion of the risk to align interests with the capital provider, and then the
capital provider assumes the economic risk of loss on the pool of insurance contracts.

Active Fronting Carriers


Fortune 500 Specialized
AIG Companion
AmTrust Hudson
QBE Old American
The Hartford SPART
Travelers State National
Zurich
Source: Old American

Fronting arrangements have typically existed in reinsurance catastrophe markets. Recently, the fronting
market for traditional P&C insurance in alternative capital markets has been growing at high rates.
Trisura is considering entering a very interesting, and capital-light part of the insurance marketplace.

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Trisura has highlighted soft reinsurance markets as providing a great opportunity to reinsure more of
their exposure than they would traditionally because the cost is so low today. This is a great insight,
although it is certainly not unique. What is unique is that Trisura retains less insurance risk than many
competitor companies, which should produce steadier results relatively to companies who use less
reinsurance. As the chart below shows, catastrophe pricing has been in a prolonged soft market.

Financial History
Trisuras biggest shortcoming is that the company does not have a long history. Ideally, Trisura would
have multiple hard and soft markets under its belt. Nevertheless, the below table from Trisuras
prospectus gives me 1) some indication how conservative their reserve estimates are, and 2) claims
estimates growth rates, which indicates premium growth. Based on the table below, Trisuras initial
estimate of claims declined significantly over time. Additionally, the estimate of net ultimate claims
grew from $4.1MM in 2007 to $28.4MM in 2016. Reserving has been conservative, and growth has been
strong (and likely profitable due to conservative reserving).

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Trisuras current combined ratio may understate its steady-state combined ratio. The expense ratio has
come down significantly from 2014-2016. Surety has structurally higher expense ratios, but Trisura
grows its premiums, it should be able to more effectively leverage its fixed costs. As a result, normalized
combined ratios could be a few points lower, roughly in the 85-90% range.

Ratios: 2014 2015 2016


Growth Rate 15.2% 14.3% 19.8%
Loss Ratio 17.5% 20.5% 31.1%
Expense Ratio 72.5% 69.8% 65.8%
Combined Ratio 90.0% 90.3% 96.9%

Investments
Another pitch on TSU speculated that Trisura could be Brookfields attempt at re-creating Markel, a very
successful clone of Berkshire Hathaway. While certainly possible, few insurers have the financial
strength to make equity allocations as high as Markel. Markel, for reference, had 58% of its
shareholders equity invested in equities as of March 31, 2017.

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Trisura has imposed a limit of no more than 45% allocation to equities. This does not indicate a more
aggressive posture towards equity allocation, though I expect even a relatively miniscule total return of
3-4% when leveraged at 2-4x, will result in 6-16% book value growth, excluding any underwriting profits.
Over time, Markel has earned long-term investment returns of 7%, so my estimates take into account
the possibility that investments will never again earn the returns they have historically generated.

Maybe it is my bias as an American, but Canadian equities have a much stronger sector concentration in
financials and commodity-based businesses than I am generally comfortable with. Fully 66% of the TSE
index includes financials (34.5%), energy (20%), and materials (11.5%), with an additional industrial
contribution of 9.6%. With Canada experiencing a huge housing boom, Canadian banks might not be
profitable investments when housing slows. Similarly, one wonders whether Canadian energy
investments, while battered by the oil price bust, are competitive with U.S. shale formations.

In time, as the company diversifies into writing more U.S.-based premiums, its investment policy may
shift towards a greater focus on U.S. equities, which would be welcome if for no other reason than the
U.S. market is more diversified, albeit at lofty current valuations. Given the size of the U.S. market
opportunity, Trisuras liability profile will almost surely skew more to U.S. dollar-based liabilities, which
as a result should skew the companys bond and potentially equity allocation towards U.S. investments.

Growth Strategy
Growth and insurance usually dont mix well. Generally, a discussion of growth in the mature P&C
insurance industry should be considered a red flag because the industry is mature and growth usually

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comes as a result of price competitiveness. Nevertheless, a small, disciplined insurer with good
relationships can make a profitable dent in insurance markets. Trisura is capable of doing this, and the
opportunity set in U.S. surety business is massive relative to its Canadian home market. In Canada, 2015
surety premiums amounted to CAD $547MM. By comparison, the US surety market is roughly 11x
larger, over $5 billion in size.

Canadian Surety

Ownership
Trisuras ownership structure deserves some attention, more so than normal, because the TG
management team owns 40% of that segments equity and owns a put right that they can exercise
starting 18 months from the date of the spin, essentially year-end 2018. A big red flag will start waving if
TG management decides to cash out significantly in 18 months. It would not be surprising to see
management take some chips off the table after building a business for over 10 years, but if
management sold out, say, 50% of their stake, it would indicate a different assessment of TGs ultimate
value than my own.

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Additionally, Brookfield insiders and Partners Value Investments (PVI) shareholders own 21% of the
entire Trisura Group entity. As a reminder, PVI is a publicly-traded investment vehicles primarily owned
by Brookfield executives and directors whose main asset is Brookfield Asset Management stock, but also
includes several other smaller investments.

Given their commentary in the prospectus, Brookfield clearly sees potential in the business:

In advance of the spin-off, and in anticipation of our U.S. initiative, Brookfield Asset
Management will subscribe for additional Common Shares in an amount of $41.1
million... PVI is a partnership listed on the TSX Venture Exchange whose limited
partnership units are owned approximately 49.0% by Partners Limited and approximately
40.0% by the shareholders of Partners Limited, which include, directly and indirectly,
current directors and senior executives of Brookfield Asset Management and its
affiliatesPVI has confirmed that it is willing to provide financial support to our
Company, if necessary, and may increase its ownership interest over time.

Why would Brookfield and PVI invest $41.1MM in the business pre-spin and offer to provide
additional financial support in the future if they didnt see potential? Reading between the lines,
PVIs offer of future support may be in anticipation of TG Managements exercising its put right in
18 months, but thats speculation.

Incentives

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Limited information on management incentives exists. The company states only that TGs CEO, Mike
George, will likely be paid annual cash bonuses based on underwriting income. This is a good metric, but
there should be more details forthcoming on this.

Pro-Forma Financials and Valuation


One of the big challenges that some investors may have in evaluating this opportunity is putting
together the pro-forma balance sheet and projecting earnings based off that. Right now, Trisura appears
that it earns only a middling ROE, but much of that is due to the additional capital and the reinsurance
business, which will run off over the next several years.

I have provided 1) consolidated income statements and balance sheets for Trisura Group, and 2) income
statements and balance sheets for each of Trisura Guarantee and the start-up Trisura Specialty business.

This should provide more granularity on how and why Trisura can be a great compounding investment
over the next several years.

Trisura Guarantee

Trisura Guarantee 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Gross Premiums Written 91,143 104,142 124,802 101,123 96,981 102,882 121,262 142,976
Net Premiums Written 62,947 71,849 86,902 70,786 67,887 72,017 90,947 114,381
Change in Unearned Premiums (7,921) (7,564) (14,809) (10,618) (10,183) (10,803) (13,642) (17,157)
Net premiums earned 55,026 64,285 72,093 60,168 57,704 61,215 77,305 97,224
Fee income 2,353 3,149 3,352 3,352 3,352 3,353 3,354 3,355
57,379 67,434 75,445 63,520 61,056 64,568 80,659 100,579
Claims and LAE 15,647 24,871 35,338 24,067 23,082 24,486 30,922 38,890
Reinsurers' share of claims and LAE (5,994) (11,694) (12,942) (9,025) (8,656) (9,182) (11,596) (14,584)
Commissions 23,321 27,398 30,661 25,571 24,524 26,016 32,855 41,320
Reinsurance commissions (5,995) (6,838) (8,314) (6,618) (6,347) (6,734) (8,504) (10,695)
Premium Taxes 2,663 3,083 3,591 3,008 2,885 3,061 3,865 4,861
Operating Expenses 19,910 21,207 21,480 16,847 15,580 15,916 20,099 24,306
49,552 58,027 69,814 53,850 51,068 53,563 67,642 84,099
Net Underwriting Income 7,827 9,407 5,631 9,670 9,988 11,005 13,017 16,480
Net investment income 3,067 2,570 1,137 2,587 3,858 5,079 6,370 7,983
Interest Expense - - (481) (1,705) (1,705) (1,705) (1,705) (1,705)
Change in liabilities to participating shareholders 993 (3,540) (155) (155)
Income tax expense (2,678) (2,936) (1,564) (3,119) (3,642) (4,314) (5,305) (6,827)
Net Income 9,209 5,501 4,568 7,278 8,498 10,065 12,377 15,931
Other comprehensive income 1,027 (3,656) 5,037 2,587 3,858 5,079 6,370 7,983
Comprehensive income 10,236 1,845 9,605 9,865 12,356 15,144 18,747 23,914

Balance Sheet 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021


Cash and equivalents 18,596 29,378 29,378 29,378 29,378 29,378 29,378
Investments 108,702 129,360 192,880 253,936 318,504 399,163 499,742
Other Assets 82,943 101,118 84,943 81,464 86,421 109,136 137,257
Total Assets 210,241 259,856 307,201 364,778 434,303 537,677 666,377
Unearned premiums 71,480 90,612 101,230 111,413 122,216 135,858 153,015
Unpaid claims and LAE 49,475 67,465 91,532 114,614 139,100 170,022 208,911
Liabilities to participating shareholders 15,812 16,008 16,008 16,008 16,008 16,008 16,008
Other Liabilities 24,992 66,386 53,090 50,915 54,013 68,210 85,786
Total Liabilities 161,759 240,471 261,860 292,950 331,336 390,097 463,720
Shareholders' equity 48,482 19,385 29,250 41,606 56,749 75,497 99,411
Liabilities + Equity 210,241 259,856 291,110 334,556 388,086 465,594 563,131

Comprehensive ROE 27.9% 27.3% 26.3% 25.8% 26.1%

What youll learn from Trisura Guarantee is that with so little equity invested in the business and
maintaining premium volume, the business earns really high ROEs, which does not seem out-of-whack

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when comparing premiums written to equity. What is astounding is how quickly net investment income
and comprehensive income grow. Combined I assume a 4% total return on the investment portfolio.

Trisura Specialty (US)


Pro Forma for
Trisura Specialty Equity Infusion 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Gross Premiums Written - 20,550 41,819 86,515 162,519 210,707
Net Premiums Written - 2,055 4,182 8,652 16,252 21,071
Change in Unearned Premiums - - (627) (1,298) (2,438) (3,161)
Net premiums earned - 2,055 3,555 7,354 13,814 17,910
Fee Income - - - - - -
2,055 3,555 7,354 13,814 17,910
Claims and LAE - 103 178 368 691 896
Reinsurers' share of claims and LAE - (92) (160) (331) (622) (806)
Commissions - 925 1,600 3,309 6,216 8,060
Reinsurance commissions - (832) (1,440) (2,978) (5,595) (7,254)
Premium Taxes - 103 178 368 691 896
Operating Expenses - 822 1,244 2,353 4,144 4,836
1,028 1,600 3,089 5,526 6,627
Net Underwriting Income - 1,028 1,955 4,265 8,288 11,283
Net investment income - - 41 112 259 536
Interest Expense - - - - - -
Change in liabilities to participating shareholders - - - - - -
Income tax expense - (308) (599) (1,313) (2,564) (3,546)
Net Income - 719 1,397 3,064 5,983 8,273
Other comprehensive income - - 41 112 259 536
Comprehensive income - 719 1,438 3,176 6,243 8,809

Pro Forma for


Balance Sheet Equity Infusion 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Cash and equivalents 41,100 41,100 41,100 41,100 41,100 41,100
Investments - 2,055 5,610 12,963 26,778 44,688
Other Assets - - - - -
Total Assets 41,100 43,155 46,710 54,063 67,878 85,788
Unearned premiums - - 627 1,925 4,363 7,523
Unpaid claims and LAE - 103 280 648 1,339 2,234
Liabilities to participating shareholders - - - - - -
Other Liabilities 1,541 3,136 6,489 12,189 15,803
Total Liabilities - 1,644 4,044 9,062 17,891 25,561
Shareholders' equity 41,100 41,819 43,258 46,434 52,677 61,485
Liabilities + Equity 41,100 43,463 47,302 55,496 70,567 87,046

Comprehensive ROE 1.8% 3.4% 7.3% 13.4% 16.7%

Some key points to make about Trisura Specialty, TSUs US start-up, is that there is a ramp-up period
reflected, and that 2021 economics are very similar to State National (SNC), whose model Trisura is
largely emulating in the U.S. A hallmark of this model is very high premium to equity ratios, which are
allowable because Trisura is laying off 90-100% of the risk on reinsurers, and earns a small fee. It goes
without saying that the above is at best a rough guess of how Trisuras US business will develop, but
based on the information available, it seems reasonable.

Trisura (Consolidated)

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Trisura Group (Consolidated) 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
Gross Premiums Written 91,143 104,142 124,802 121,673 138,801 189,397 283,782 353,683
Net Premiums Written 62,947 71,849 86,902 72,841 72,069 80,669 107,199 135,452
Change in Unearned Premiums (7,921) (7,564) (14,809) (10,618) (10,810) (12,100) (16,080) (20,318)
Net premiums earned 55,026 64,285 72,093 62,223 61,259 68,569 91,119 115,134
Fee income 2,353 3,149 3,352 3,352 3,352 3,353 3,354 3,355
57,379 67,434 75,445 65,575 64,611 71,922 94,473 118,489
Claims and LAE 15,647 24,871 35,338 24,170 23,259 24,854 31,613 39,785
Reinsurers' share of claims and LAE (5,994) (11,694) (12,942) (9,118) (8,816) (9,513) (12,217) (15,390)
Commissions 23,321 27,398 30,661 26,496 26,124 29,325 39,071 49,380
Reinsurance commissions (5,995) (6,838) (8,314) (7,451) (7,787) (9,712) (14,098) (17,948)
Premium Taxes 2,663 3,083 3,591 3,111 3,063 3,428 4,556 5,757
Operating Expenses 19,910 21,207 21,480 17,669 16,824 18,269 24,243 29,142
49,552 58,027 69,814 54,878 52,668 56,651 73,167 90,725
Net Underwriting Income 7,827 9,407 5,631 10,697 11,943 15,270 21,306 27,764
Net investment income 3,067 2,570 1,137 2,587 3,899 5,191 6,629 8,519
Interest Expense - - (481) (1,705) (1,705) (1,705) (1,705) (1,705)
Change in liabilities to participating shareholders 993 (3,540) (155) (155) - - - -
Income tax expense (2,678) (2,936) (1,564) (3,427) (4,241) (5,627) (7,869) (10,373)
Net Income 9,209 5,501 4,568 7,997 9,896 13,129 18,361 24,204
Other comprehensive income 1,027 (3,656) 5,037 2,587 3,899 5,191 6,629 8,519
Comprehensive income 10,236 1,845 9,605 10,584 13,794 18,320 24,990 32,723

On a consolidated basis, the business performs very well, earning high-teens ROEs. As my valuation
math in the above shows, 2.0x P/B is not a crazy valuation to assign a business with these
characteristics. Compared to todays 1.3x book value multiple, significant book value growth and a
multiple re-rating could lead to returns approaching 20% annualized.

Risks
Underwriting deteriorates apart from any macro event
Canadian building implodes, contractor bankruptcies increase, losses increase
Irish life reinsurance contract destroys equity
U.S. business becomes very costly to start business in
TG Mgmt Group Put Option exercises in 18 months, which reduces company liquidity
Brookfield and PVI withhold financial support when its needed

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Conclusion
Trisura is a conservatively-run, growing insurer with financial backing from a strong, well-capitalized
investor base. While growth wont occur in a straight line and the surety market will experience losses at
some point, odds are in Trisuras favor that it will continue to profitably grow in the future. Its valuation
suggests it is a mature business, but my research demonstrates that Trisura has a strong business with
ample opportunities for prudent expansion.

Article on Surety from Trisura Guarantee CEO


http://citopbroker.com/magazine-archives/a-surety-thing-1245

Explanation of Surety

http://www.schuettlaw.com/course/CCDC/ccdc22e%20-
%20A%20Guide%20To%20Construction%20Surety%20Bonds.pdf

http://www.diamond-hill.com/capital-flows-into-insurance-are-we-at-a-tipping-point

http://www.casact.org/community/affiliates/canw/0416/WillisRe.pdf

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