THE YARMOUTH MUTUAL FIRE INSURANCE COMPANY Financial Statements For the year ended December 31, 2014

Transcription

1 Financial Statements For the year ended

2 Financial Statements For the year ended Table of Contents Page Independent Auditor's Report 2 Statement of Financial Position 3 Statement of Comprehensive Income 4 Statement of Members Surplus 5 Statement of Cash Flows 6 Notes to the Financial Statements 1. Nature of operations and summary of significant accounting policies 7 2. Critical accounting estimates and judgements Financial instrument classification Investments Property, plant & equipment and intangible assets Insurance contracts Other provisions and contingent liabilities Pension plans Income taxes Gross claims and adjustment expenses Fees, commissions and other acquisition expenses Other operating and administrative expenses Salaries, benefits and directors fees Investment and other income Related party transactions Capital management Financial instrument and insurance risk management 32

3 Tel: Fax: BDO Canada LLP 94 Graham Street Woodstock Ontario N4S 6J7 Canada Independent Auditor s Report To the Policyholders of THE YARMOUTH MUTUAL FIRE INSURANCE COMPANY We have audited the accompanying financial statements of THE YARMOUTH MUTUAL FIRE INSURANCE COMPANY, which comprise the statement of financial position as at, and the statements of comprehensive income, members' surplus and cash flows for the years ended December 31, 2014, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of 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 financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the 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 financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of THE YARMOUTH MUTUAL FIRE INSURANCE COMPANY as at, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants Woodstock, Ontario February 17, BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

4 Statement of Financial Position As at December Assets Cash $ 1,995,108 $ 2,924,963 Investments (Note 4) 13,016,286 12,172,902 Investment income accrued 85,297 89,742 Income taxes recoverable 186,943 72,036 Due from policyholders 2,732,577 2,623,666 Reinsurer's share of provision for unpaid claims (Note 6) 4,787,695 3,187,243 Deferred policy acquisition expenses (Note 6) 561, ,950 Property, plant & equipment (Note 5) 954, ,919 Deferred income taxes (Note 9) 54,940 48,960 Other assets 196, ,664 Liabilities $ 24,570,719 $ 22,822,045 Accounts payable and accrued liabilities $ 335,550 $ 562,755 Unearned premiums (Note 6) 4,381,305 4,534,119 Provision for unpaid claims (Note 6) 8,571,723 5,907,184 Members' Surplus 13,288,578 11,004,058 Unappropriated members' surplus 10,144,705 11,054,556 Accumulated other comprehensive income 1,137, ,431 11,282,141 11,817,987 $ 24,570,719 $ 22,822,045 Signed on behalf of the Board by:, Director, Director The accompanying notes are an integral part of these financial statements. 3

5 Statement of Comprehensive Income For the year ended December Underwriting income Gross premiums written $ 8,827,738 $ 9,148,564 Less reinsurance ceded 2,547,698 2,458,637 Net premiums written 6,280,040 6,689,927 Less change in unearned premiums (152,814) 138,665 Net premiums earned 6,432,854 6,551,262 Service charge income 163, ,694 6,596,211 6,727,956 Direct losses incurred Gross claims and adjustment expenses (Note 10) 9,117,043 4,140,400 Less reinsurer's share of claims and adjustment expenses 3,585, ,672 5,531,221 3,548,728 1,064,990 3,179,228 Expenses Fees, commissions and other acquisition expenses (Note 11) 1,328,577 1,405,802 Other operating and administrative expenses (Note 12) 1,461,725 1,590,334 2,790,302 2,996,136 Net underwriting (loss) income before refund (1,725,312) 183,092 Refund of premium from reinsurer - 130,101 Net underwriting (loss) income (1,725,312) 313,193 Investment and other income (Note 14) 557, ,199 (Loss) income before taxes (1,167,743) 788,392 Provision for income taxes (Note 9) (257,892) 148,432 Net (loss) income (909,851) 639,960 Other comprehensive income (net of tax) Change in unrealized gains / (losses) on available-for-sale investments 459,433 (42,847) Reclassification of realized (gains) / losses on available-for-sale investments (85,428) (19,733) Total other comprehensive income (net of tax) 374,005 (62,580) Total comprehensive (loss) income for the year $ (535,846) $ 577,380 The accompanying notes are an integral part of these financial statements. 4

6 Statement of Members' Surplus Accumulated Unappropriated Other Members Comprehensive Surplus Income Total Balance at January 1, 2013 $ 10,414,596 $ 826,011 $ 11,240,607 Net income 639, ,960 Change in unrealized gains / (losses) on available-for-sale investments - (42,847) (42,847) Reclassification of realized (gains) / losses on available-for-sale investments - (19,733) (19,733) Balance on December 31, 2013 $ 11,054,556 $ 763,431 $ 11,817,987 Net loss (909,851) - (909,851) Change in unrealized gains / (losses) on available-for-sale investments - 459, ,433 Reclassification of realized (gains) / losses on available-for-sale investments - (85,428) (85,428) Balance on $10,144,705 $1,137,436 $11,282,141 The accompanying notes are an integral part of these financial statements. 5

7 Statement of Cash Flows For the year ended December Operating activities Net (loss) income $ (909,851) $ 639,960 Adjustments for: Depreciation 74,652 67,307 Interest and dividend income (453,070) (423,565) Provision for income taxes (257,892) 148,432 Realized gain from disposal of investments (120,722) (68,943) (1,666,883) 363,191 Changes in working capital Change in due from policyholders (108,911) (127,181) Change in other assets (41,660) 7,623 Change in accounts payable and other liabilities (210,117) (27,719) (360,688) (147,277) Changes in insurance contract related balances Change in reinsurer's share of provision for unpaid claims (1,600,452) 334,466 Change in deferred policy acquisition expenses 18,643 (31,670) Change in unearned premiums (152,814) 138,665 Change in provision for unpaid claims 2,664,539 20, , ,293 Cash flows related to interest, dividends and income taxes Interest and dividends received 457, ,421 Income taxes paid 72,057 (267,334) 529, ,087 Total cash (outflows) inflows from operating activities (568,083) 833,294 Investing activities Sale of investments 2,325,373 1,254,992 Purchase of investments (2,626,169) (2,052,317) Purchase of property plant & equipment (60,976) (30,409) Total cash outflows from investing activities (361,772) (827,734) Net (decrease) increase in cash and cash equivalents (929,855) 5,560 Cash and cash equivalents, beginning of year 2,924,963 2,919,403 Cash and cash equivalents, end of year $ 1,995,108 $ 2,924,963 The accompanying notes are an integral part of these financial statements. 6

8 1. Nature of operations and summary of significant accounting policies Reporting entity THE YARMOUTH MUTUAL FIRE INSURANCE COMPANY (the Company) is incorporated under the laws of Ontario and is subject to the Ontario Insurance Act. It is licensed to write property, liability and automobile insurance in Ontario. The Company's head office is located at 1229 Talbot Street in St. Thomas, Ontario. The Company is subject to rate regulation in the automobile business that it writes. Before automobile insurance rates can be changed, a combined rate filing is prepared for most Ontario Farm Mutual Insurance Companies by the Farm Mutual Reinsurance Plan Inc. The rate filing must include actuarial justification for rate increases or decreases. All rate filings are approved or denied by the Financial Services Commission of Ontario. Rate regulation may affect the automobile revenues that are earned by the Company. The actual impact of rate regulation would depend on the competitive environment at the time. These financial statements have been authorized for issue by the Board of Directors on February 17, Basis of presentation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These financial statements were prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets. The financial statements are presented in Canadian dollars ("CDN"), which is also the Company s functional currency. The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgement in applying the Company s accounting policies. The areas involving a higher degree of judgement of complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. 7

9 1. Nature of operations and summary of significant accounting policies (cont'd) Significant accounting policies Insurance contracts Balances arising from insurance contracts include the following: (a) Premiums and unearned premiums Premiums written comprise the premiums on contracts incepting in the financial year. Premiums written are stated gross of commissions payable to agents and brokers and exclusive of taxes levied on premiums. The Company earns premium income evenly over the term of the insurance policy generally using the pro rata method. The portion of the premium related to the unexpired portion of the policy at the end of the fiscal year is reflected in unearned premiums. (b) Deferred policy acquisition expenses Acquisition costs are comprised of agents' and brokers' commissions. These costs are deferred and amortized over the terms of the related policies to the extent that they are considered to be recoverable from unearned premiums, after considering the related anticipated claims and expenses. (c) Provisions for unpaid claims and adjustment expenses Individual loss estimates are provided on each claim reported. In addition, provisions are made for adjustment expenses, changes in reported claims and for claims incurred but not reported, based on past experience and business in force. The estimates are regularly reviewed and updated, and any resulting adjustments are included in current income. Claim liabilities not including Facility Association and other pools are carried on an undiscounted basis. (d) Liability adequacy test At each reporting date the Company performs a liability adequacy test on its insurance liabilities less deferred policy acquisition expenses to ensure the carrying value is adequate, using current estimates of future cash flows, taking into account the relevant investment return. If that assessment shows that the carrying amount of the liabilities is inadequate, any deficiency is recognized as an expense initially by writing off the deferred policy acquisition expense and subsequently by recognizing any additional claims liability for claims provisions. 8

10 1. Nature of operations and summary of significant accounting policies (cont'd) (e) Reinsurer's share of provisions for unpaid claims and adjustment expenses The Company enters into reinsurance contracts in the normal course of business in order to limit potential losses arising from certain exposures. Reinsurance premiums are accounted for in the same period as the related premiums for the direct insurance business being reinsured. Reinsurance liabilities, comprised of premiums payable for the purchase of reinsurance contracts, are included in accounts payable and accrued liabilities and are recognized as an expense when due. Expected reinsurance recoveries on unpaid claims and adjustment expenses are recognized as assets at the same time and using principles consistent with the Company's method for establishing the related liability. (f) Salvage and subrogation recoverable In the normal course of business, the Company obtains the ownership of damaged property, which they resell to various salvage operations. Unsold property is valued at its estimated net realizable value. Where the Company indemnifies policyholders against a liability claim, it acquires rights to subrogate its claim against other parties. Structured settlements, Fire Mutuals Guarantee Fund and financial guarantee contracts The Company enters into annuity agreements with various life insurance companies to provide for fixed and recurring payments to claimants. Under such arrangements, the Company s liability to its claimants is substantially transferred, although the Company remains exposed to the credit risk that life insurers will fail to fulfil their obligations. The Company is a member of the Fire Mutuals Guarantee Fund ("the Fund"). The Fund was established to provide payment of outstanding policyholders' claims if a member company becomes bankrupt. As a result, the Company may be required to contribute assets to their proportionate share in meeting this objective. The Company is a member of the Farm Mutual Reinsurance Plan Inc. ("the Plan"), which is a general reinsurer that shares in the insurance risks originally accepted by member insurance companies. As a member of the Plan, the Company may be required to contribute additional capital to the Plan in the form of subordinated debt should the Plan's capital fall below a prescribed minimum. These exposures represent financial guarantee contracts. The Company accounts for financial guarantee contracts in accordance with IFRS 4, Insurance Contracts. 9

11 1. Nature of operations and summary of significant accounting policies (cont'd) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, deposits at call with banks, other short-term highly liquid investments with original maturities of three months or less. For cash flow statement presentation purposes, cash and cash equivalents includes bank overdrafts. Financial instruments The Company classifies its financial instruments into one of the following categories based on the purpose for which the asset was acquired or liability incurred. All transactions related to financial instruments are recorded on a trade date basis. The Company's accounting policy for each category is as follows: Designated fair value through profit and loss The Company does not have any instruments that are held for trading purposes. However, management has designated to voluntarily classify its cash and cash equivalents as fair value through profit and loss. These instruments are carried at fair value with changes in fair value recognized in net income. Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, using the effective interest rate method, less any impairment losses. Impairment provisions are recognized when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Company will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For amounts due from policyholders and the reinsurer, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognized in net income. On confirmation that the amounts receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Available-for-sale investments Financial assets that do not meet the definition of loans and receivables are classified as available-for-sale and comprise investments in equity instruments and debt securities. These instruments are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition. Subsequently they are carried at fair value, unless they do not have a quoted market price in an active market and fair value is not reliably determinable. When they do not have a quoted market price in an active market and fair value is not reliably determinable, they are carried at cost. 10

12 1. Nature of operations and summary of significant accounting policies (cont'd) Changes in fair value are recognized as a separate component of other comprehensive income. Where there is a significant or prolonged decline in the fair value of an available-for-sale financial asset, which constitutes objective evidence of impairment, the full amount of the impairment, including any amount previously recognized in other comprehensive income, is recognized in net income. Purchases and sales of equity instruments are recognized on settlement date with any change in fair value between trade date and settlement date being recognized in accumulated other comprehensive income. On sale, the amount held in accumulated other comprehensive income associated with that asset is removed from members' surplus and recognized in net income. Interest on debt securities classified as available-for-sale is calculated using the effective interest method and is included in net income. Other financial liabilities Other financial liabilities include all financial liabilities and comprise accounts payables and accrued liabilities, and other short-term monetary liabilities. These liabilities are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the statement of financial position. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Property, plant & equipment Property, plant & equipment is initially recorded at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment losses, with the exception of land which is not depreciated. Depreciation is recognized in other operating and administrative expenses in the statement of comprehensive income and is provided for using the following rates and methods: Building Computer hardware Furniture and fixtures 4% straight-line 20% straight-line 20% declining balance Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. Intangible assets Intangible assets consist of computer software which is not integral to the computer hardware owned by the Company. Software is initially recorded at cost and subsequently measured at cost less accumulated depreciation and accumulated impairment losses. Software is amortized on a 50% straight-line basis. 11

13 1. Nature of operations and summary of significant accounting policies (cont'd) Impairment of non-financial assets Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. For the purpose of assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. Impairment charges are included in net income, except to the extent they reverse gains previously recognized in other comprehensive income. Income taxes Income tax expense includes current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in unappropriated members' surplus or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date and are expected to apply when the liabilities are settled or assets are recovered. 12

14 1. Nature of operations and summary of significant accounting policies (cont'd) Pension plans The Company participates in a defined benefit pension plan and a defined contribution pension plan, however, sufficient information is not available to use defined benefit accounting for the defined benefit plan. Therefore, the Company accounts for this plan as if it were a defined contribution plan, recognizing contributions as an expense in the year to which they relate. Provisions Provisions are recognized for liabilities of uncertain timing or amounts that have arisen as a result of past transactions, including legal, equitable or constructive obligations. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date. Leased assets Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Company (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognized as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analyzed between capital and interest. The interest element is charged to the statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Company (an "operating lease"), the total rentals payable under the lease are charged to the statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognized as a reduction of the rental expense over the lease term on a straight-line basis. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements for invested assets are categorized into levels within a fair value hierarchy based on the nature of valuation inputs (Level 1, 2 or 3). The fair value of other financial assets and financial liabilities is considered to be the carrying value when they are of short duration or when the instrument's interest rate approximates current observable market rates. New standards, interpretations and amendments effective from January 1, 2014 There were no new standards, interpretations and amendments, effective for the first time from January 1, 2014 that have had a material effect on the financial statements. 13

15 1. Nature of operations and summary of significant accounting policies (cont'd) New standards, interpretations and amendments not yet effective At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB but are not yet effective, and have not been early adopted by the Company. Information on new standards, amendments and interpretations that are expected to be relevant to the Company s financial statements is provided below. Certain other new standards, amendments, and interpretations have been issued but are not expected to have a material impact on the Company s financial statements. IFRS 9 Financial Instruments IFRS 9 amends the requirements for classification and measurement of financial assets, impairment, and hedge accounting. IFRS 9 introduces an expected loss model of impairment and retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through profit or loss, and fair value through other comprehensive income. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. The effective date for IFRS 9 is January 1, The Company is in the process of evaluating the impact of the new standard. IFRS 15 Revenue from Contracts with Customers IFRS 15 is based on the core principle to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 focuses on the transfer of control. IFRS 15 replaces all of the revenue guidance that previously existed in IFRSs. The effective date for IFRS 15 is January 1, The Company is in the process of evaluating the impact of the new standard. Amendments to IAS 1 Presentation of Financial Statements The amendments to IAS 1 are a part of a major initiative to improve disclosure requirements in IFRS financial statements. The amendments clarify the application of materiality to note disclosure and the presentation of line items in the primary statements provide options on the ordering of financial statements and additional guidance on the presentation of other comprehensive income related to equity accounted investments. The effective date for these amendments is January 1, The Company is in the process of evaluating the impact of these amendments. Amendments to IAS 19 Defined Benefit Plans Employee Contributions has been amended to clarify how an entity should account for contributions made by employees or third parties to defined benefit plans, based on whether those contributions are dependent on the number of years of service provided by the employee. The amendments are effective for annual periods beginning on or after July 1, The amendments are not expected to have a material impact on the Company's financial statements. 14

16 2. Critical accounting estimates and judgements The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. Estimates The effect of a change in an accounting estimate is recognized prospectively by including it in net income in the period of the change. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Provision for unpaid claims The estimation of the provision for unpaid claims and the related reinsurer's share are the Company s most critical accounting estimates. There are several sources of uncertainty that need to be considered by the Company in estimating the amount that will ultimately be paid on these claims. The uncertainty arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Changes in the estimate of the provision can be caused by receipt of additional claim information, changes in judicial interpretation of contracts, or significant changes in severity or frequency of claims from historical trends. The estimates are based on the Company's historical experience and industry experience. More details are included in Note 6. Income taxes The Company periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. Judgements Impairment of available-for-sale investments The Company determines that available-for-sale investments are impaired when there has been a significant or prolonged decline in fair value below its cost. The determination of what is significant or prolonged requires judgement. In making this judgement the Company considers among other factors, the normal volatility in market price, the financial health of the investee and industry and sector performance. Had the Company considered all declines in fair value to be significant or prolonged, the Company would have suffered additional losses of $146,112 in its 2014 financial statements. 15

17 3. Financial instrument classification The carrying amount of the Company's financial instruments by classification is as follows: Fair value through Other profit and Available- Loans and financial loss for-sale receivables liabilities Total Cash $ 1,995,108 $ - $ - $ - $ 1,995,108 Investments - 13,016, ,016,286 Investment income accrued ,297-85,297 Due from policyholders - - 2,732,577-2,732,577 Accounts payable and accrued liabilities (335,550) (335,550) $ 1,995,108 $13,016,286 $ 2,817,874 $ (335,550) $17,493,718 December 31, 2013 Cash $ 2,924,963 $ - $ - $ - $ 2,924,963 Investments - 12,172, ,172,902 Investment income accrued ,742-89,742 Due from policyholders - - 2,623,666-2,623,666 Accounts payable and accrued liabilities (562,755) (562,755) $ 2,924,963 $ 12,172,902 $ 2,713,408 $ (562,755) $ 17,248,518 16

18 4. Investments The following table provides cost and fair value information of investments by type of security and issuer. The maximum exposure to credit risk would be the fair value as shown below. December 31, 2013 Fair Fair Cost value Cost value GICs $ 600,000 $ 600,000 $ - $ - Bonds issued by Federal 293, ,419 1,103,544 1,091,827 Provincial 3,298,296 3,560,808 3,319,907 3,502,674 Municipal 74,488 74, , ,218 Corporate A or better 4,431,844 4,559,545 4,006,743 4,098,125 8,098,143 8,490,260 8,534,412 8,796,844 Equity investments Canadian 2,038,619 2,939,882 1,811,193 2,476,909 Farm mutual pooled funds Canadian fixed income 462, , , ,293 Canadian equity 357, , , , , , , ,728 Other investments Fire Mutuals Guarantee Fund 19,706 19,866 19,264 19,421 Total investments $11,576,511 $13,016,286 $ 11,154,994 $ 12,172,902 17

19 4. Investments (cont d) The following table provides an analysis of investments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: - Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities using the last bid price; - Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and - Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Level 1 Level 2 Level 3 Total GICs $ 600,000 $ - $ - $ 600,000 Bonds 8,490, ,490,260 Equities 2,939, ,939,882 Farm mutual pooled funds - 966, ,278 Other investments - 19,866-19,866 Total $12,030,142 $ 986,144 $ - $13,016,286 December 31, 2013 Bonds $ 8,796,844 $ - $ - $ 8,796,844 Equities 2,476, ,476,909 Farm mutual pooled funds - 879, ,728 Other investments - 19,421-19,421 Total $ 11,273,753 $ 899,149 $ - $ 12,172,902 There were no transfers between Level 1 and Level 2 for the years ended December 31, 2013 and

20 4. Investments (cont d) Maturity profile of available for sale debt securities held is as follows: Within 2 to 5 6 to 10 Over 10 Fair 1 year years years years value GICs $ - $ 600,000 $ - $ - $ 600,000 Bonds 103,869 3,576,835 4,809,556-8,490,260 $ 103,869 $4,176,835 $4,809,556 $ - $9,090,260 Percent of Total 1 % 46 % 53 % - % December 31, 2013 Bonds $ 687,636 $ 3,235,628 $ 4,873,580 $ - $ 8,796,844 Percent of Total 8 % 37 % 55 % - % The effective interest rate of the debt securities held is 3.58% ( %) 19

21 Notes to Financial Statement 5. Property, plant & equipment and intangible assets Intangible Property, plant and equipment assets Furniture Computer and Computer Land Building hardware fixtures Total software Cost Balance - January 1, 2013 $ 100,000 $ 1,207,825 $ 199,186 $ 175,589 $ 1,682,600 $ 77,297 Additions - 9,522 3,640 17,247 30,409 - Balance - December 31, 2013 $ 100,000 $ 1,217,347 $ 202,826 $ 192,836 $ 1,713,009 $ 77,297 Additions - 9,995 41,721 9,260 60,976 - Balance - $ 100,000 $ 1,227,342 $ 244,547 $ 202,096 $ 1,773,985 $ 77,297 Accumulated depreciation Balance - January 1, 2013 $ - $ 356,075 $ 182,227 $ 139,481 $ 677,783 $ 77,297 Depreciation expense 48,681 7,955 10,671 67,307 - Balance - December 31, 2013 $ - $ 404,756 $ 190,182 $ 150,152 $ 745,090 $ 77,297 Depreciation expense 49,094 15,170 10,389 74,653 - Balance - $ - $ 453,850 $ 205,352 $ 160,541 $ 819,743 $ 77,297 Net book value December 31, 2013 $ 100,000 $ 812,591 $ 12,644 $ 42,684 $ 967,919 $ - $ 100,000 $ 773,492 $ 39,195 $ 41,555 $ 954,242 $ - 20

22 6. Insurance contracts Reinsurer's share of provision for unpaid claims Balance, beginning of the year $ 3,187,243 $ 3,521,709 New claims reserve 663,581 48,240 Change in prior year's reserve 3,112, ,432 Submitted to reinsurer (2,175,531) (926,138) Balance, end of the year $ 4,787,695 $ 3,187,243 Expected settlement Within one year $ 664,739 $ 319,125 More than one year $ 4,122,956 $ 2,868,118 Deferred policy acquisition expenses Balance, beginning of the year $ 579,950 $ 548,280 Acquisition costs incurred 1,309,934 1,437,472 Expensed during the year (Note 11) (1,328,577) (1,405,802) Balance, end of the year $ 561,307 $ 579,950 Deferred policy acquisition expenses will be recognized as an expense within one year. Unearned premiums Balance, beginning of the year $ 4,534,119 $ 4,395,454 Premiums written 8,827,738 9,148,564 Premiums earned during year (8,980,552) (9,009,899) Balance, end of the year $ 4,381,305 $ 4,534,119 21

23 Notes to Financial Statement 6. Insurance contracts (cont d) The following is a summary of the insurance contract provisions and related reinsurance assets. December 31, 2013 Gross Reinsurance Net Gross Reinsurance Net Outstanding claims provision Long term $ 3,234,079 $ 1,817,956 $ 1,416,123 $ 1,124,095 $ 563,118 $ 560,977 Short term 1,843, ,739 1,178,507 1,285, , ,718 Facility Association and other pools 344, , , ,246 5,421,723 2,482,695 2,939,028 2,757, ,243 1,874,941 Provision for claims incurred but not reported 3,150,000 2,305, ,000 3,150,000 2,305, ,000 $ 8,571,723 $ 4,787,695 $ 3,784,028 $ 5,907,184 $ 3,187,243 $ 2,719,941 22

24 6. Insurance contracts (cont d) Comments and assumptions for specific claims categories The Company must participate in industry automobile residual pools of business, and recognizes a share of this business based on its automobile market share. The Company records its share of the liabilities provided by the actuaries of the pools. Claims and adjustment expenses Changes in claim liabilities recorded in the balance sheet for the years ended and 2013 and their impact on claims and adjustment expenses for the two years follow: Unpaid claims - beginning of year net of reinsurance $ 2,719,941 $ 2,364,643 Increase in estimated losses and expenses, for losses occurring in prior years 1,233, ,458 Provision for losses and expenses on claims occurring in the current year 3,927,922 2,250,876 Payment on claims: Current year (2,400,164) (1,821,108) Prior years (1,696,988) (961,928) Unpaid claims end of year - net of reinsurance 3,784,028 2,719,941 Reinsurer s share 4,787,695 3,187,243 $ 8,571,723 $ 5,907,184 The change in estimate of losses occurring in prior years is due to changes arising from new information received. 23

25 6. Insurance contracts (cont d) Provision for unpaid claims and adjustment expenses The determination of the provision for unpaid claims and adjustment expenses and the related reinsurer's share requires the estimation of certain variables which include the development of claims and reinsurance recoveries. Claim development The estimation of claim development involves assessing the future behaviour of claims, taking into consideration the consistency of the Company's claim handling procedures, the amount of information available, the characteristics of the line of business from which the claim arises and historical delays in reporting claims. In general, the longer the term required for the settlement of a group of claims the more variable the estimates. Short settlement term claims are those which are expected to be substantially paid within a year of being reported. The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the claim year 2007 to The tables show the cumulative amounts paid or estimated to be paid during successive years related to each claim year. The original estimates will be increased or decreased, as more information becomes known about the original claims and overall claim frequency and severity. In 2011, the year of adoption of IFRS, only information from periods beginning on or after January 1, 2007 was required to be disclosed. This is being increased in each subsequent year, until ten years of information is included. 24

26 Notes to Financial Statement 6. Insurance contracts (cont d) Gross claims Total Gross estimate of cumulative claims cost At the end year of claim $ 3,009,670 $ 2,490,689 $ 2,219,802 $ 2,507,177 $ 2,704,787 $ 2,245,049 $ 2,299,116 $ 4,591,503 One year later 3,473,693 2,203,507 2,521,575 2,644,336 2,992,276 3,218,263 3,303,750 Two years later 3,971,105 2,648,755 2,441,559 2,529,476 3,341,661 4,048,629 Three years later 4,573,301 3,034,679 2,737,905 2,690,234 4,995,129 Four years later 4,526,685 3,530,779 2,853,068 3,218,369 Five years later 5,680,072 3,268,388 3,117,307 Six years later 5,691,699 3,251,022 Seven years later 5,691,699 Current estimate of cumulative claims cost 5,691,699 3,251,022 3,117,307 3,218,369 4,995,129 4,048,629 3,303,750 4,591,503 32,217,408 Cumulative payments 5,691,699 3,251,022 2,982,198 3,176,788 3,974,261 3,436,516 2,227,435 2,400,164 27,140,083 Outstanding claims $ - $ - $ 135,109 $ 41,581 $ 1,020,868 $ 612,113 $ 1,076,315 $ 2,191,339 5,077,325 Facility reserves and all other residual pools 344,398 Incurred but not reported 3,150,000 Total gross outstanding claims and claims handling expense $ 8,571,723 Net of Reinsurance Total Net estimate of cumulative claims cost At the end year of claim $ 2,047,281 $ 2,419,605 $ 1,871,011 $ 2,400,180 $ 2,612,394 $ 2,236,049 $ 2,250,876 $ 3,927,922 One year later 2,119,067 2,039,243 1,982,036 2,468,555 2,884,574 2,908,826 2,680,848 Two years later 2,231,607 2,169,391 1,881,320 2,413,110 3,042,678 3,318,900 Three years later 2,247,862 2,312,260 1,962,882 2,420,046 3,250,042 Four years later 2,243,230 2,362,684 2,000,860 2,505,741 Five years later 2,302,198 2,340,280 2,026,985 Six years later 2,253,131 2,322,914 Seven years later 2,253,131 Current estimate of cumulative claims cost 2,253,131 2,322,914 2,026,985 2,505,741 3,250,042 3,318,900 2,680,848 3,927,922 22,286,483 Cumulative payments 2,253,131 2,322,914 1,986,910 2,464,160 2,992,658 3,094,521 2,177,395 2,400,164 19,691,853 Outstanding claims $ - $ - $ 40,075 $ 41,581 $ 257,384 $ 224,379 $ 503,453 $ 1,527,758 2,594,630 Facility reserves and all other residual pools 344,398 Incurred but not reported 845,000 Total net outstanding claims and claims handling expense $ 3,784,028 25

27 7. Other provisions and contingent liabilities In common with the insurance industry in general, the Company is subject to litigation arising in the normal course of conducting its insurance business which is taken into account in establishing the provision for unpaid claims and adjustment expenses. There are no outstanding provisions in the current year related to litigation arising outside the normal course of the Company's insurance business. 8. Pension Plans The Company makes contributions to the Ontario Mutual Insurance Association (OMIA) Pension Plan. The pension plan is accounted for as a multi-employer pension plan as defined by IAS 19 Employee Benefits. Eligible employees participate in the defined benefit plan. The defined benefit plan specifies the amount of the retirement benefit to be received by the employee based on the number of years the employee has contributed and the employees final average earnings. Under the terms of the OMIA Pension Plan, the Company is liable for the obligations of other companies participating in the pension should they be unable to satisfy their respective funding requirements. The Company is one of a number of employers who have pooled the assets and liabilities of the pension plan to take advantage of economies of scale in making investment decisions and in minimizing expenses. The information to account for the plan as a defined benefit plan is not readily available for each company to determine its share of the assets and liabilities of the plan. In the event of a wind-up or withdrawal from the plan, the Company is responsible for its portion of the deficit and all expenses as determined by the plan actuary. The amount contributed to the plan for 2014 was $124,018 ( $95,216). The contributions were made for current service and these have been recognized in net income. The current service amount is determined by the plan actuary using the projected accrued benefit actuarial cost method. The Company had a 2.25% ( %) share of the total contributions to the plan in Expected contributions to the plan for the next annual reporting period amount to $132,477. The defined benefit pension plan was closed to future eligible employees effective July 1, The Company and all current employees who are accruing benefits under the defined benefit plan will continue to contribute to the defined benefit plan according to the existing terms of the agreement. Future eligible employees will become part of the defined contribution plan. 26

28 9. Income taxes The significant components of tax expense included in net income are composed of: Current tax expense Based on current year taxable income $ - $ 135,712 Loss carry-back (203,343) - Adjustments for over provision in prior periods (709) - (204,052) 135,712 Deferred tax expense Origination and reversal of temporary differences (53,840) 12,720 Total income tax (recovery) expense $ (257,892) $ 148,432 The significant components of the tax effect of the amounts recognized in other comprehensive income are composed of: Deferred tax Change in unrealized (gains) / losses on availablefor-sale investments $ 58,767 $ 14,290 Reclassification of realized gains / (losses) on available-for-sale investments (10,907) 6,570 Total tax affect of amounts recorded in other comprehensive income $ 47,860 $ 20,860 27

29 9. Income taxes (cont'd) Reasons for the difference between tax expense for the year and the expected income taxes based on the statutory tax rate of 26.5% are as follows: Income before taxes $ (1,167,743) $ 788,392 Expected taxes based on the statutory rate of 26.5% ( %) (309,452) 208,924 Small business deduction - (45,684) Income from dividends (23,036) (19,280) Other non deductible expenses 3,831 5,233 Deferred tax rate variance on temporary differences 26,818 (761) Over provision in prior years (709) - Change in future tax rate 44,656 - Total income tax expense $ (257,892) $ 148,432 28

30 9. Income taxes (cont'd) The movement in 2014 deferred tax liabilities and assets are: Opening Closing balance Recognize Balance at Jan 1, in net Recognize at Dec 31, 2014 income in OCI 2014 Deferred tax liabilities Investments $ 20 $ (47,880) $ 47,860 $ - Deferred tax assets Property, plant & equipment 13, ,950 Claims liabilities 35,500 5,490-40,990 48,980 5,960-54,940 Net deferred tax asset $ 48,960 $ 53,840 $ (47,860) $ 54,940 The movement in 2013 deferred tax liabilities and assets are: Opening Closing balance Recognize Balance at Jan 1, in net Recognize at Dec 31, 2013 income in OCI 2013 Deferred tax liabilities Investments $ 260 $ 20,620 $ (20,860) $ 20 Deferred tax assets Property, plant & equipment 10,020 3,460-13,480 Claims liabilities 31,060 4,440-35,500 41,080 7,900-48,980 Net deferred tax asset $ 40,820 $ (12,720) $ 20,860 $ 48,960 29

31 10. Gross claims and adjustment expenses Included in claims expenses are wages and benefits of $190,912 ( $212,548). 11. Fees, commissions and other acquisition expenses Agents commissions $ 417,809 $ 458,028 Brokers commissions 845, ,779 Other, including change in deferred policy acquisition expenses 64,977 20,995 $ 1,328,577 $ 1,405, Other operating and administrative expenses Computer costs $ 125,457 $ 90,223 Depreciation 74,652 67,307 Licenses, fees and dues 110, ,551 Postage and office supplies 123,316 99,235 Professional fees 50,124 48,950 Repairs and maintenance 26,864 27,702 Salaries, benefits and directors fees 886,989 1,058,969 Utilities 9,000 8,528 Other 54,949 82,869 $ 1,461,725 $ 1,590, Salaries, benefits and directors fees Adjusting salaries and benefits (Note 10) $ 190,912 $ 212,548 Agents commissions (Note 11) 417, ,028 Other salaries, benefits and directors fees (Note 12) 886,989 1,058,969 $ 1,495,710 $ 1,729,545 30